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If the jargon is putting you off investing, here’s an easy guide to the investing terminology all beginners should know.
These terms are the basis for making sense of everything else.
Stocks, shares, bonds and equities
While these are used interchangeably, they’re slightly different. The exact difference can be contentious.
When a company wants to raise money, it can sell stock or bonds. If you buy shares on the stock exchange, you own stock in the company. As the value of the company goes up – or down – so does the value of your shares.
When you buy bonds, you lend the company (or government) money. In the future, the borrower will pay your money back with interest.
Equity is a catch-all term for the amount of something that you own. If you own stocks or shares, you have equity in a company. You could also have equity in a building or a trust without owning either stocks or shares.
Funds are an easy way to invest, and there’s not much extra terminology involved. They’re based on the mutual fund, where investors pool their money. The fund manager uses the money to buy a portfolio of investments, which are owned by the fund. Investors pay fees to the manager and own shares in the fund.
Index funds are mutual funds that track a specific part of the stock market, known as a market index. They provide investors with broad diversification for low fees. Hedge funds are mutual funds for high-income investors, while exchange-traded funds (ETFs) are mutual funds that trade as if they were stocks.
Dividends and growth
Some companies pay out part of their profits to their shareholders as cash or shares. These are dividends. Companies that do not pay dividends often reinvest their profits in the company, leading to growth.
When you reinvest your earnings, they can earn more money. The process of continually reinvesting earnings is compounding. Compounding investments can grow much faster than if you withdraw your earnings.
Diversification and asset allocation
An asset is a type of investment, for instance cash, stocks or real estate, that has value. Asset allocation is how we describe the division of different types of investments in your portfolio. A portfolio that’s diversified has a variety of investment types across a range of industries and countries.
Regardless of your currency, dollar-cost averaging is regularly putting a set amount of money into a given stock, regardless of the price per share at the time. It spreads your risk.
Margin of safety
The margin of safety is your allowance for error. Work out what a share in a business is worth (find out here), and buy it for less than that. For a 50% margin of safety, you’ll only buy a share for less than 50% of what you think it’s worth.
This describes how much risk you’re willing to take with your money. High-risk investments have more chance of higher returns or bigger losses. Low-risk investments generally have a lower return, but also lower losses. Cash and bonds are low risk, while stocks are generally higher risk.
Technical investing terminology
Ask and bid
In buying and selling, the ask is what the owner wants, while the bid is what the buyer is willing to pay.
Balance sheet and book value
A balance sheet shows the value of everything the company owns, its liabilities, and how much the shareholders own. The difference between the company’s assets and liabilities is its book value.
Bear and bull markets
When stock prices drop, investors call it a bear market; when prices rise, it’s a bull market.
Capital gain (or loss)
The money you made (or lost) between buying and selling an investment is your capital gain (or loss).
For an investment fund, the expense ratio is the ratio of the fund’s expenses to the average value of its assets. A low expense ratio is good for investors.
Any money you borrowed to buy an investment is your margin. Hopefully, you’ll earn enough to pay it back. Buying on margin is a high-risk strategy.
Market capitalisation (market cap)
Market cap is a measure of value. It’s the current share price multiplied by the number of outstanding shares.
Price/earnings (P/E) ratio is the ratio of a share’s price to the company’s earnings. This is also called the earnings per share or profits per share. The smaller the P/E ratio or the higher the earnings per share, the more chance you have of higher earnings.
Return on invested capital (ROIC)
ROIC is the percentage you get back from the amount you’ve invested. A higher ROIC is better.
The more you learn, the more there is to learn, but we all have to start somewhere. This list of investing terminology will get you started, and you can look up other words in our investment glossary or on Investopedia. Have fun!
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