This is a mini-glossary of investment terminologies you will come across frequently on your investing journey. They are basic terms you should know if you want to become a successful participant in the financial/stock markets and have a handle on your investments in general.
I attempt to define these investment terms using less technical language and in a way that hopefully conveys some meaning to the beginner who is just starting on the “Investing 101” journey. Breaking down financial/investment jargon to “layman” language is tough as you stand to lose some of the more intricate and subtle meanings the terms are intended to convey. Thankfully, we do not have to submit this piece of work to Professors of Finance to grade anytime soon. 😉
Here are some important investment terms and what they mean:
Is a measure of how an active fund manager has performed compared to a benchmark index. For example, if a mutual fund outperforms its benchmark index by 1%, the Alpha is said to be “1.”
Is anything you own that is of value, such as home, land, car, boat. For investing purposes, assets include stocks, bonds, cash, commodities, and more.
This refers to the proportion of each asset in your overall portfolio i.e. how much of each investment do you own in the context of the overall value of your investments. Each asset carries its own risks, and good money management requires that you allocate each asset in a way that fits your risk tolerance, expected returns, and investment time horizon.
This is the lowest price a seller is willing to accept per unit of a stock or other financial security. It’s also known as the offer price.
Is a financial statement showing a company’s assets (what they own), liabilities (what they owe), and shareholders’ equity. A balance sheet is a snapshot of a company’s financial position at a specific point in time.
Shareholders’ equity = company’s total asset – total liabilities
A market in which most investors are selling because they expect asset prices to fall. The price trend in a bear market is downwards.
You are considered to be ‘bearish” (a bear) on a stock if you are pessimistic about its prospects and intend to sell your holdings.
Is a measure of the volatility of a stock or other security compared to the general market. A beta greater than 1 infers that an investment is more volatile than the market, and if it’s less than 1, it is less volatile than the market.
For example, say a stock traded on the S&P/TSX exchange has a Beta of 1.50. This means that the stock is 50% more volatile than the S&P/TSX Composite as a whole (i.e. more volatile than the market).
This is the highest price that a buyer is willing to pay per share of a stock or other financial security.
Is the difference between the bid and ask price for a stock. For a very liquid stock, the spread between the bid and ask price is narrow.
Blue Chip Stocks
Refers to the stocks (shares) of well established companies that are known to consistently pay dividends and have withstood the test of time. Blue chip stocks generally have a large market capitalization.
Is a debt instrument in which an investor loans money to a company, government, or other entity for a period of time in exchange for interest payments and a return of principal on specified dates.
A market in which most investors are buying because they expect asset prices to rise. The price trend in a bull market is upwards. You are considered to be “bullish” (a bull) on a stock if you are optimistic about its prospects and intend to buy.
Capital Gain or Loss
This is the profit or loss you realize after selling an investment. For example, when you sell a stock/ETF/property for a higher price than you paid for it, you realize a capital gain and vice versa. Capital gains are taxed more favourably than interest income or dividends, since only 50% of a capital gain is taxable.
Capital losses can be used to offset or eliminate capital gains from three preceding years, or it can be carried forward to the future indefinitely.
Canadian Investor Protection Fund (CIPF)
Is a not-for-profit organization that insures member firms (financial institutions) and protects investors funds/assets up to $1 million if the member firm goes bankrupt.
The CIPF does not insure investors against losses resulting from normal trading activity or fraud.
Is a generic product or material which is interchangeable with another product of its kind and which can be traded on a commodities exchange. Commodities include agricultural products like wheat, corn, soybeans; and precious metals such as gold and silver.
A trading order that is only good for the day it is placed. If trade execution does not occur by close of day, it is automatically cancelled.
Is a measure of the rate of change in the price of a derivative (futures, options) relative to the price of the underlying asset (stocks, bonds, commodities).
A security whose value is derived from the performance of other underlying assets. Derivatives are complicated financial instruments (assets) that are packaged on the back of other financial instruments, such as stocks, commodities, mortgages, bonds, and interest rates.
Examples of derivatives include futures, options and swap contracts.
Is the practice of making a portfolio less risky by holding more than one type of security. For example, when you combine stocks with bonds in your portfolio.
Is a portion of a company’s profits (net income) that is paid to shareholders. Dividends may be paid periodically such as monthly, quarterly, semi-annually, or annually.
Dividend Payout Ratio
This is the percentage of a company’s earnings that is paid out as dividends to shareholders.The higher the payout ratio, the more attractive a stock is to dividend investors.
After paying out dividends from net income, a company is left with what is referred to as “Retained Earnings.”
Dividend Reinvestment Plan (DRIP)
Is an investing strategy that allows investors to automatically reinvest their dividends by buying more units of the assets/security instead of receiving cash. The plan gives investors an opportunity to save on transaction fees or commissions.
Dow Jones Industrial Average (DJIA)
Is a stock index of 30 major and publicly traded companies in the U.S. The price of company stocks is used as weighting for the DJIA, after adjusting for stock splits and dividends.
Earnings Per Share (EPS)
Is calculated by dividing a company’s net income by the number of its outstanding ‘common’ shares.
Also commonly known as “Stock” or”Share,” and represents ownership in a company. Equity in a company may be in the form of common or preferred shares.
Further Reading: All You Need To Know About Equities
Exchange Traded Funds (ETFs)
Is similar to an index fund, but trades on a stock exchange like a stock, with prices reacting to supply and demand throughout a trading day. ETFs are usually passively managed and have lower MERs than mutual/index funds.
Further Reading: All You Need To Know About ETFs
Fixed income Securities
Refers to investments that pay investors fixed periodic payments (interest) on specified dates. At the end of the investing term (at maturity), the principal investment is also paid back to the investor.
Examples of fixed-income securities include: bonds, T-bills, and GICs.
Further Reading: Understanding Fixed income Securities
Uses a company’s financial information as made available through its financial statements; business operations, relationship with suppliers, creditors and competitors, and other economic parameters, to evaluate its stock’s value.
Are contracts to buy or sell an asset at a future date and at a pre-determined price, as agreed upon by both buyer and seller. The physical product may be exchanged or parties may choose to settle in cash.
Futures are used to manage risk i.e. serve as an “hedge”. Day traders speculate on futures contracts with the aim of making money from price fluctuations.
Good Till Cancelled Order (GTC)
This order stays open until the defined trading conditions are met or till it is cancelled.
Is an investing risk management technique in which an investor protects an investment against loss by making a secondary investment. In other words, the investor wants to avoid a scenario where they lose all and so buy some level of insurance (hedging) to ensure that in the event the original investment fails, losses will be limited.
Is a financial statement that shows a company’s profitability over a period of time – usually one year. It is also referred to as a “profit and loss statement.”
Index is a statistical measurement of the value of a security market. The security market being measured may be a national, regional or global collection of stocks, bonds, or commodities. An index may also represent specific sectors of the market, such as industry sectors like Financials, Energy, Health Care, and Real Estate.
Examples of some popular indices (indexes) include S&P 500, DJIA, and Nasdaq (U.S.), S&P/TSX Composite (Canada), Nikkei 225 (Japan), FTSE 100 (U.K.). The plural form of index is “indexes” or “indices.”
Further Reading: Index Investing For Beginners
Is a type of mutual fund that tracks a specific index and attempts to replicate the performance of a benchmark index by holding all the securities (stocks, bonds) in that benchmark index. Index funds are passively managed and generally have lower management expense ratios (MERs) than mutual funds.
Examples of index funds and the benchmark index they track include:
- TD Canadian Index Fund (TDB216): tracks the performance of the S&P/TSX Composite
- Scotia Canadian Index Fund (BNS381): tracks the S&P/TSX Composite
- RBC Canadian Index Fund (RBF556): tracks the FTSE All Cap Domestic Index
Initial Public Offering
Is the initial price that shares of a company are sold when they move from being a “private” company to becoming a “publicly-traded” company.
An order to buy or sell a security (stock) at a specified price. A limit order ensures that the trade is only executed at either the exact price specified or better.
Refers to how easy it is to buy or sell a particular security. A liquid stock can easily be bought or sold on a stock exchange without significantly affecting its price.
Liquidity encourages investors to trade a security since they know they can easily acquire and/or dispose of it. An illiquid security is not easily traded.
Is a sales charge or fee that is levied when investors buy or sell mutual funds. When the fee is charged on purchase of units of the mutual fund, it is known as “Front-end load.” If charged when you sell, it is referred to as “Back-end load.”
Loads are an additional expense and increase your transaction costs. No-load funds have become more and more popular.
Further Reading: Investment Fees in Canada
A long position refers to the ownership of a stock. For example, if you own 1,000 shares of a certain stock, you are said to be long that stock.
Going “long” means that you anticipate a stock’s price will rise in the future and you are bullish on it.
Continue Reading: Basic Investment Terms Every Investor Should Know (Part 2)
- Mutual Funds for Beginners: How To Start Investing
- The 10 Strategies That Guarantee Your Investing Success
- Investment Risks All Investors Should Understand
- Understanding Stocks and Their Place in Your Portfolio
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