The Top 9 Terms that will increase your financial IQ
One important reason why people avoid investing on a personal level is that they feel intimidated by the terminology used to identify the wide range of investment opportunities that may be available to them. This list of the top 9 financial terms is designed to increase your financial IQ and prepare you to delve into the world of investing.
Stocks – The ownership in any public company is determined by who owns shares in the company’s common and preferred stock. Stock through exchanges such as the NYSE or NASDAQ. Investors who are selling stock at a stated price or a price determined by the market (market price) are referred to as sellers. Investors who are buying stock at a stated price they are willing to pay or the market price are called buyers. “Market-makers” match buyers and sellers based on price parameters.
Bonds – Bonds are defined as debt instruments with a promise to pay a principle amount plus interest (coupons) on a stated maturity date. Bonds are issued by a variety of institutions including government agencies (federal, state and city) and corporations looking to raise cash. Bondholders (investors) act as lenders. As is the case with stocks, bonds can be purchased or sold on the open market through exchanges. If investors buying or selling existing bonds, those bonds will be listed at a premium or discount to the bond’s par value based on current interest rates.
Mutual Funds – Groups of stocks/bonds that are owned and managed by professional fund managers. Investors buy or sell shares in a mutual fund from exchanges with the price based on the value of the stocks/bonds held in the portfolio divided by the number of shares outstanding in the mutual fund. When someone invests in a mutual fund, they are usually given the option to receive dividends, interest and/or capital gains in the form of distributions, or they can choose to have those earnings reinvested, which is the normal mode of operation. Fund managers do charge an annual management fee for its services.
Index Funds – Mutual funds built from a balanced portfolio of stocks and/or bonds that are designed to perform in line with a specific market index. For example, the S&P 500 Index Fund contains only stocks that are part of the S&P Index. Index funds are considered a form of passive investing because they require little management. Therefore, management fees paid to fund managers are lower.
Dividends – The distribution of a portion of a company’s profits to certain stockholders on an annual basis. The dividend is declared by the Board of Directors and is paid to certain stockholders of record on a certain date. The dividends can be declared as a specific amount per share or as a percentage of the total investment (dividend yield).
Treasury Bills – Debt instruments sold by the US Treasury to raise funds on a short-term basis. They are usually sold through a Treasury auction in denominations of $1,000. The minimum purchase is $1,000 up to a maximum of $5,000,000. Treasury Bills or T-Bills have maturities of four weeks, 13 weeks and 26 weeks. Investor earnings are determine by the auction price compared to par value.
Buying On Margin – Stocks can be bought on margin. If an investor wants to buy 100 shares of stock, they can put up 50% of the purchase price in cash and borrow the other 50% from the brokerage firm. The underlying security acts as collateral. If the price falls below the purchase price, the investor receives a “margin call” and has to pay the broker 50% of the drop as a means to keep the maintenance margin intact.
Dow Jones Industrial Average – This is the most watched barometer of how the overall stock market is performing. The Dow Jones is made up of 30 large-cap stocks representing a variety of industries. Widely held components include blue-chip stocks such:
- IBM
- McDonald’s
- American Express
- Microsoft
- Chevron
Return on Investment (ROI) – ROI is calculated by dividing total income earned by the total investment. Many brokerage firms and investors will discuss expected ROI as a means to determine what type of investment strategy should be employed to reach expectations.
Hopefully, the definitions provided above will give you enough confidence to take a look at the investment opportunities you have been missing out on. Market investing provides one of the best methods for establishing financial security towards future prosperity.