A New Year brings new goals.
If investing is on your list of resolutions…
A good place to start is with some basics.
If you’ve ever scanned the business headlines…
You’ll be familiar with terms like the S&P 500, ETFs and bull markets.
(Or more recently, bear markets).
But do you actually know what they mean?
Or how they compare to related investing lingo like the Dow, mutual funds and bear markets?
There is no shame in admitting you don’t.
You’ve got plenty of company.
Like many of my clients…
You probably lack the time…
Or the inclination… (which is where I come in).
So, I’ve rounded up 13 common investing terms you’ve probably heard of, but may not really understand…
And briefly explained each.
Bear vs. bull market
Simply put, a bull market is when everything is just wonderful.
Markets are on the rise and investors are confident that strong results will continue.
Though the market can have “bullish” days, technically, a bull market is when the market increases in value at least 20%.
Hint: Bull market means “up” because real-life bulls attack by driving their horns up in the air.
A bear market is the opposite.
Market—and investor confidence—is declining.
The job and housing markets may also be down.
The upside, however is that bear markets are a great opportunity for savvy investors, as prices have recovered historically (and then some) after every bear market.
You can remember that it means “down” because bears attack their victims by swiping their paws downward.
Stock vs. bond
Stocks, or shares of a publicly traded company, are a fundamental element of most investment portfolios.
The value goes up and down with the company’s financial well-being—and with shareholders’ perception of that company’s well-being.
They’re risky, but potentially rewarding.
Bonds are basically loans that you give to the issuer, which can be a corporation, municipality or the federal government.
When you buy, you do so with the expectation of getting paid back, with interest, in a certain amount of time.
This makes bonds a low-risk investment.
ETFs vs. mutual funds
An ETF is a stock, bond or commodity fund that usually tracks an index.
Because they’re more passively run, they tend to charge lower fees.
They’re also traded like common stocks at varying prices throughout the day.
We’ve written a whole e-book on active vs passive investing.
A mutual fund—which pools your money with other investors to purchase stocks, bonds and other assets—is professionally managed and therefore tends to come with higher fees.
Shares are priced once based on their net asset value (NAV) at the end of the trading day.
Growth vs. value stocks
Growth or value?
Both, if you want a balanced investment portfolio.
Growth stocks have a recent history of above-average performance.
While all signs suggest these investments (think Uber and Airbnb) will continue growing, they’re risky because you’re solely relying on the company’s success for your investment to appreciate.
Value stocks are investments that trade at a lower price than their fundamentals, like high dividend payments and company earnings, might indicate.
That effectively puts these stocks in the bargain bin, and savvy investors may be able to capitalise.
Investing vs. trading
Both investing and trading are means to the same goal: making money from the financial markets.
Yet they represent different functions.
Investing typically refers to “buy and hold”.
This means investors create a balanced portfolio of stocks and bonds and hold on to them for the long-term.
In doing so, you gain from the power of compound interest and weathering the natural up-and-down market cycles.
Trading, by contrast, is a much more active effort to profit, requiring a trader to frequently buy and sell investments with the aim of beating out buy-and-hold investors.
It also comes with more risks.
S&P 500 vs. Dow vs. Nasdaq
The Dow Jones Industrial Average, aka “the Dow,” is an index that tracks 30 large, established, U.S.-based companies across all sectors.
Today, these include companies like 3M, Coca-Cola, Apple, Nike and Walmart.
As such, the state of the Dow often serves as a general pulse of the economy in the minds of the media, investors and general public.
When people refer to “The Nasdaq,” they’re typically talking about the Nasdaq Composite—a price-weighted index of more than 3,000 companies listed on the exchange of the same name.
Because it’s so much bigger than the Dow, a glance at the day’s Nasdaq can give a broader view of the economy, though it’s skewed toward the tech sector.
The S&P 500 refers to the Standard & Poor’s 500 index, which includes, yes, 500 primarily large-cap stocks selected by a team of analysts and economists at Standard & Poor’s.
It’s often used as a benchmark for the stock market because it includes a significant portion of the market’s total value.
So, there you have it.
13 common investing terms explained for you to kick off your investment journey in 2019.
Are there other terms you would like clarity on?
Leave me a comment below.
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