We’ve all been through this before. You’re standing around at a cocktail party nursing an Old Fashion, chuckling and nodding your head in agreement, as the pompous guy in the well-tailored suit spits out words like FOREX and MUTUAL FUNDS. You seem engaged, you’re acting engaged, but in reality you have no idea what the hell he’s talking about.
Lucky for you WSS is here to help. We’ve put together a list of financial terms and jargon that will have you sounding like an expert in no time! You may even fool people into thinking you’re a real adult.
- BINARY OPTIONS: Binary options are form of options trading based on a yes or no question. You’re either right or you’re wrong in this all or nothing scenario.
2. TIME VALUE OF MONEY: Over time your money actually makes money. This is the key to understanding the time value of money.
3. BANKRUPCY: When your bills become to much for a person to handle. When your expenses exceed your income, you may be forced to declare bankruptcy.
4. INTEREST RATES: Interest rates are important to understand because of their profound effects on your stock portfolio and your ability to buy a house. Interest rates generally refer to the general level of interest that a borrower has to pay a lender to borrow a certain amount of money for a certain amount of time.
5. CREDIT SCORE: A credit score is a three digit number that is derived from a variety of factors on a credit report. Credit scores range from 300 to 850: the higher the score, the lower the perceived risk. Anything over 700 usually suggests good credit management.
Credit scores often play an integral role when banks decide whether or not you will be approved for a loan. The scores will also affect your interest rate. Usually the lower the credit score, the higher the interest.
6. MORTGAGE: A mortgage is just a type of loan, pure and simple. Most people want to buy their own home, but a house costs hundreds of thousands of dollars, and you likely don’t have that kind of cash lying around in the crevices of your sofa. If the house you want to buy costs $100,000, then you could pay $10,000 from your savings (that’s called the downpayment), and borrow the remaining $90,000 from the bank. So to enable people to buy a house before they are too old to remember why they wanted it in the first place, we have the mortgage system.
7. MARKET CAP: Market Cap, or market capitalization, gives investors an idea how big a company is. It is calculated by multiplying outstanding shares by the current market price.
8. 401k: A 401k is a workplace savings plan that allows you to build wealth by investing a portion of your pay check in assets such as stocks, mutual funds, or real estate investment trusts (REITs). It is also the primary way employers help their employees prepare for retirement, and has the added benefit of allowing an employee to invest part of their salary before taxes are taken out.
9. IRA: IRAs, or Individual Retirement Accounts, are a great way to save for retirement and to receive a tax deduction. IRAs have the advantage of not being tied to a person’s employer so, if you quit your job, you won’t have to worry about moving your plan like you do with a 401(k).
10. CASH FLOW STATEMENT: A cash flow statement records how much money flowed into the company over a given period and how much money flowed out. Inflows can be from anything—usually a company’s regular sales provide the biggest source, but it can also bring money in from things like selling assets it owns. A company can be in great shape on its balance sheet and doing fine on its revenues. But if its cash flow is hurting, it will have to do a lot of healing in order to pull on through. Cash can really make or break a company. The flow statement tells it as it is: cash in – cash out = net cash.
11. INCOME STATEMENTS: The income statement tells the story of the business. Performance is measured by how much money the company earned compared to how much it spent. In mathematical terms: revenues – expenses = net income.
To understand why an income statement is important, think of an internet startup that’s run out of the basement of the founder’s parents. Its assets consist of a computer, a desk and fold-out couch—as well as a few pens, some Post-it notes and a coffee cup. Not a very impressive company, and based on its “balance sheet” you wouldn’t give it a second look.
But look again. The company has no real expenses other than pizza and beer, as well as the cost of renting internet server space every month. The site is beginning to generate cash. Each month the hits it gets on its website triple—so its growth prospects are phenomenal. And it has also started to sell its first ads, which could bring in millions.
12. PENNY STOCK: Penny stocks are often misunderstood. They’re almost always thought of as a scam or a great way to make easy cash.
13. MUTUAL FUND: A mutual fund is a professionally managed investment vehicle that pools money from many investors to purchase securities (stocks, bonds, money market instruments etc.). A money manager then decides how the funds are invested so you don’t have to – but you pay for it. A mutual fund’s management and operational fees, known as the management expense ration (MER), are deducted from the return on your investment.
While it is tempting to think that a mutual fund is a hedge fund…it’s also incorrect. Mutual funds aren’t hedge funds because mutual funds can be sold to the general public – unlike hedge funds.
14. BOND: A bond is a debt investment in which an investor loans money to a corporate entity or government. The funds are borrowed for a defined period of time at either a variable or fixed interest rate. If you want a guaranteed money-maker, bonds are a much safer option than most. There are many times of bonds, however, and each type has a different risk level.
15. IPO: An IPO is the first offer of a company’s stock on the public market. “Going public” is the sought-after destination of many emerging companies. Traditionally, the IPO has been used as a financing vehicle. Today, it’s a little more complex than that. An IPO can cost hundreds of thousands of dollars — and there’s no guarantee it’ll even become a reality.
16. P/E RATIO:P/E, or price-to-earnings ratio, is probably the most popular analytical tool provided in the stock quote. At a glimpse, it lets you know how the market values a company in relation to its earnings. A higher P/E ratio tends to mean that a company’s stock price is relatively expensive. A lower P/E ratio means the price is relatively inexpensive.
17. FOREX: Forex refers to the currency exchange market. Basically it’s an over the counter way to trade currency. Not only is the Forex market the largest in terms of the money involved (over $4 trillion traded every day) it’s also the largest in terms of participants.
Currencies come in pairs, that investors buy and sell at the same time. A currency pair consists of a “base currency” and a “quote currency” and a pair tells you how much of the quote currency is needed to buy one unit of the base currency.
The forex world is fast passed and volatile, making it difficult for new traders in the market.
18. ETFs (exchange traded funds): Like a mutual fund, an ETF represents a mix of underlying securities. Unlike a mutual fund, an ETF is traded on the stock market, meaning investors can purchase shares of an ETF to buy and sell at will throughout the day. The most popular ETFs are index ETFs, which track a market index, sector, or commodity (like gold). The value of an ETF increases or decreases in tandem with the index or security selection it tracks. ETFs enable the diversification of mutual funds but cost less to own, and are becoming increasingly popular.
19. INFLATION: What is Inflation? Inflation is the overall rise in prices of goods and services in the economy. Inflation is THE reason you need to be investing; inflation causes the value of your cash to decrease
21. STOCK MARKET INDEX: An index, like the DOW, the S&P500 or the NASDAQ, is a sample of stocks that provide insight into the broader market. When someone says “the market is up 10 points today”, they are referring to an index.
By measuring the compilation of similar stocks instead of just one or two stocks, a stock index provides information about that particular market or segment. One of the most talked about and popular indexes is The Dow Jones Industrial Average (DJIA) which consists of 30 of the biggest companies in the U.S.
22. CALL OPTIONS: What are Call Options? Call Options are contracts to buy an underlying asset (stock, house, anything) for a certain price by a certain date. If you are new to options or to the stock market, this video is the perfect place to start.
23. BUYING ON MARGINS: Opening a margin account allows you to trade on borrowed money. You have to open up a margin account when shorting stocks because you’re borrowing the stock rather than purchasing it. In order to maintain a margin account, you must have collateral to assure the broker that he’ll get his money back. Collateral is something (in this case money) that the borrower gives the lender as protection in case he fails to pay back what he owes.
24. DIVIDENDS: A dividend occurs when a company redistributes its profits. A corporation who earns a profit or surplus can choose to make a payment to its shareholders: this payment is known as a dividend. These payments are generally allocated a fixed amount per share.
There you have it, 24 terms and definition that will have you sounding like the well put together adult we know you can be!