If you are a new investor and recently started your journey in the market world, you are likely to encounter terms and concepts you do not understand. At first, this will seem overwhelming and confusing; you may even think that trading is not for you. However, once you become familiar with your surroundings, you will realize there is no reason to be intimidated.
Our team of experts has prepared a brief introduction to some of the more common investing terms you may encounter.
Types of Investments
You may have heard that there are many ways you can invest your money, mainly in bonds, property, and stocks. However, before making any type of investment decision, you need to have a clear understanding of each option and make the best decision to increase your profits.
Common Stock – A share that represents ownership in a legally formed corporation. Owners of common stock are entitled to their proportionate share of a company’s earnings, some of which may be distributed as cash dividends. Some companies have several classes of stock, which include dual-class stocks. The best stocks are usually referred to as blue-chip stocks.
Preferred Stock – These types of stocks represent a class of ownership that permits shareholders a much larger dividend. However, holders of preferred stocks do not have voting rights. If a company is being liquidated and creditors need to be paid, preferred stock shareholders must be paid before common stock shareholders. It is also possible to convert shares of preferred stock into common stock, but not vice versa.
Real Estate – Real estate refers to any substantial property. When you own a house, you own real estate. When you own a plot of land, you own real estate.
Bonds – To put it simply, a bond is like a loan. Usually, after purchasing a bond, the buyer agrees to lend money to a company or government. Afterwards, the bond issuer promises to repay the entire principal loan amount on a future date. These bonds are often used to fund government operations and capital projects. If you do not want to buy bonds individually, you can then invest in bond funds.
Some standard investment terms specific to companies
Here is a brief list of company-related investment terms, which include:
Income Statement – An income statement shows the incomes, costs, duties, taxes, and net incomes of businesses.
Balance Sheet – A balance sheet shows an organization’s advantages, financial assets, liabilities, and their investors’ equity.
Board of Directors – Stockholders elect a company’s board of directors. They are required to keep an eye out for the investors’ and stockholders’ interests, hire and fire the CEO, set the official dividend payout policy, and consider recommending or voting against proposed mergers.
Enterprise Value – Enterprise value alludes to the total expense against the total cost of acquiring all of a company’s stock and debt.
Market Capitalization – Market capitalization refers to the estimation of every share of an organization’s stock on the off chance you could get at the present stock price.
Form 10-K – This is a yearly disclosure report specific organizations are required to divulge for the Securities and Exchange Commission. It contains in-depth information about a business, including its accounts, plan of action, and much more.
Derivative – This is an asset that derives its value from another source.
Volatility – This term is quite common in everyday trading jargon. It refers to the degree to which a traded security fluctuates and its price moves.
Dividend-Adjusted PEG Ratio: This is a modified form of the PEG ratio that factors in dividends into the metric. The rate also accounts for the fact that, at times, slower growth is the result of a company paying out significant portions of its earnings in the form of cash dividends, which contribute to total return.
Other Investment Terms you might not know
Do you think this is everything? Well, no it is not, as there are other terms familiar to the investment and trading market, which would include:
Stock Exchange – The most important stock exchange in the world is the New York Stock Exchange (NYSE). A stock exchange is an institution, organization, or association that hosts a market for buyers and dealers of assets to meet during certain business hours and trade with each other. Companies that want their shares listed on “The Big Board are required to abide to strict criteria. If a company fails to continue meeting these requirements, it is de-listed accordingly.
Price-to-Earnings (PE) Ratio: The PE ratio tells you how much money you are paying for $1 of the company’s earnings. Basically, the price-to-earnings (PE) ratio tells you how many years it would take for a company to pay back its purchase price per share from after-tax profits alone at current earnings, assuming no growth.
PEG Ratio: The price-to-earnings-to-growth (PEG) ratio is a modified form of the PE ratio that factors growth into the metric. For instance, the rate shows that a company growing at 15% per annual and trading at 20x earnings can be cheaper than a company trading at 8x earnings and shrinking by 10% per annum.
Dividend Yield – This is the current yield of a joint-stock at its present dividend rate. For example: if a stock is trading at $100 per share and pays out $5 in annual dividends, the dividend yield would be 5%. Easy, isn’t it?
Final Thoughts: Why do you need to know this?
With a greater understanding of these terms, you can feel more confident researching potential investments. As you consider the various ways you can invest your money, continue using these terms and definitions as references. Don’t feel ashamed to check the list from time to time. Re-reading old material is also the best way to fundamentally memorize everything you’ll need for your trading and investment.