The world of investments may seem overwhelming due to all the technical terms and complicated jargon. Here is a list of some key concepts you may want to master to make wise decisions when it comes to managing your investment portfolio.
An asset is a resource that provides an economic benefit for a person or a company. The assets a person can own are stock investments, bonds, real estate, cash, certificates of deposit, etc.
Bear and Bull markets
Bear and Bull markets
A bull market is a financial market in which prices rise continuously by 20%. It gets its name from the upward movement a bull makes when thrusting its horns up into the air.
A bear market is a financial market in which prices drop continuously by 20%. It gets its name from the downward movement a bear makes when attacking prey with its claw.
A bond is a financial instrument that represents a loan made by an investor to a borrower. When you buy a bond, you are basically lending money to the company (or government) in exchange for periodic interest payments.
A budget is an estimated plan of income and expenses over a specific future period of time. Budgets can be used by individuals and companies to keep better control of their finances.
Buying power is the amount of cash an investor has available to purchase stocks or other investments.
A cryptocurrency is a digital asset that is based on a blockchain instead of being backed by a government or central bank. Nowadays, cryptocurrency is used for investments and payments.
Diversification is the strategy of investing in a variety of assets. Having a diversified portfolio lets you reduce the risk of losing the value of your investments. It is basically ‘not placing all your eggs in the same basket'.
A dividend is a compensation paid to shareholders in exchange for their investments. When a company earns profits, it distributes a portion back to shareholders as a reward for trusting their money in their business.
The dividend yield is a ratio of a company’s annual dividend compared to the price of its stock, represented as a percentage. It is an estimate of the dividend-only return of a stock investment.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and it refers to the gross earnings of a company. It is a metric of corporate profitability used in most earnings announcements and financial statements.
Earnings Per Share (EPS)
Earnings Per Share (EPS)
Earnings Per Share (EPS) is a ratio that shows how much money a company makes for each share of its stock. It is calculated as a company’s net income divided by the number of outstanding shares.
An Exchange-Traded Fund is a bundle of stocks from different companies or industries. It is a type of investment fund that can be traded just like a stock and offers benefits such as diversification and liquidity.
Fractional shares are small portions of a whole stock. They represent ownership of a company just like a whole share and provide the same benefits proportionally. They were created to help small investors access top stocks at a lower price.
When talking about financial markets, an index is a small sample of a market that is used to represent the whole stock market or one of its segments. There are several indices for the markets including:
Dow Jones Industrial Average: The Dow Jones Industrial Average is a market index that tracks the 30 most important companies in the US economy.
Nasdaq: The Nasdaq Composite, or simply Nasdaq, is a market index that tracks more than 3,700 stocks listed on the Nasdaq stock exchange.
S&P 500: The Standard & Purse 500, or S&P 500, is a market index that tracks the 500 largest publicly traded companies in the US.
Inflation is a measure of how prices in an economy increase over time. Inversely, it is the rate at which the purchasing power of a given currency gradually decreases.
The interest rate is a percentage of the total principal amount of a loan that the lender charges the borrower in exchange for such a loan. An interest rate can also be the amount earned for the money in a savings account, for example.
Compound interest is the addition of interest returns you’ve already earned over time to the original principal every period. In simple words, it is the result of reinvesting interest instead of cashing it out.
An IPO, or Initial Public Offering, is the offering of shares from a private company to the public for the first time. A company has its IPO when it becomes a public-traded company when its shares are offered through a stock exchange.
A limit order is a specific instruction to buy or sell a stock at a set price or better. This grants investors the ability to execute trades at their desired prices without the need to constantly monitor market fluctuations.
Market hours are the period of time at which the stock market is open to execute buying and selling transactions. For example, market hours for US markets run from 9:30 AM ET until 4 PM ET during normal trading sessions.
A market order is an order that will be executed at the next price in the market.
Margin is the money an investor borrows from a broker to purchase more stock than they would normally be able to afford.
A margin call is a warning that your portfolio value is below your margin maintenance requirement.
Margin maintenance is the minimum portfolio value you need to prevent a margin call.
The market cap (short for "market capitalization") of a company is the total market value of such a company. It can help understand how much the company is worth. It is calculated by multiplying the total number of shares of the company by the market price of one share.
The price-to-earnings ratio is an indicator that compares a company’s stock price with its earnings per share. The P/E ratio is calculated by dividing the market value price per share by the company’s earnings per share.
An investment portfolio is the collection of financial assets an investor owns, such as stocks, bonds, ETFs, cash equivalents, etc.
Risk refers to the probability an investment’s actual return will differ from the expected return.
Unique risk: Risk calculated by company-specific factors such as the loss of a major customer, a legal battle, any major regulatory action, etc.
Systemic risk: Risk from broad economy-wide shocks, such as a change in the central bank policy rate, change in taxes, a global pandemic, or war.
The Return On Investment (ROI) is a measure to evaluate the efficiency of an investment or to compare it to other options. It is calculated as a percentage by dividing the net profit of an investment by the initial amount invested.
A stock is a share of ownership in a public company. When you buy a stock (or a fraction of a stock), you become a shareholder of the issuing company.
A stock market is a venue where stocks of public companies and other financial securities are bought and sold.
A stock split is the division of a company’s shares. A company may increase the number of outstanding stocks to make their price lower for the average investor. Even if the number of stocks and the price per share change, the value of a certain amount of stocks won’t change.
Reverse stock split
A reverse stock split is a process in which the number of shares a company has in the market is reduced, elevating the price of each stock. It usually happens when the price of a stock has dropped drastically.
A stop-limit order is a type of trade that uses both stop-loss and limit orders to manage and reduce risk. It is commonly used by traders to limit losses and secure profits.
A stop-loss order is a tool that allows investors to set a price at which they want to buy or sell a security automatically. While it can't guarantee zero negative returns, it can often prevent devastating losses
Technical analysis is a trading discipline that looks into past stock market data to predict future price moves.
Value investing is an investment strategy that picks stocks that appear to be trading for less than their intrinsic value. Its long-term orientation usually results in gains because these investments tend to yield greater returns despite short-term volatility.
Volatility is a measure of price movements of the assets in a market. For example, when the price of a stock rises and falls frequently, it is called a ‘volatile’ asset. Volatility is commonly related to risk. In most cases, the greater the volatility is, the greater the risk of the investment.