If you’re new to investing, you’ve definitely come across many unfamiliar terms and acronyms. Reading articles that are cluttered with jargon can be confusing and frustrating, but don’t give up just yet! This post contains a glossary of more than 50 common investing terms (layman’s style) for your easy reference.
I got interested in investing in 2012. As I had no prior knowledge whatsoever of investing, it was a steep learning curve for me. I threw myself into reading, absorbing information like a sponge. There were two main hurdles.
First, the jargon was rather overwhelming and I found myself googling for definitions all the time. Second, I am a retard when it comes to graphs and charts. It’s just the way I am wired. I have no problem understanding something that is explained to me in words, but I will be lost if the information is translated into a chart.
I shall talk more about graphs and charts another time. To kick off our Newbie Investing series, here’s a useful glossary in layman’s terms to help shorten your learning curve:
Imagine you want to sell some stocks (or any other security) you own. The ask price is the lowest price you are willing to let the shares go. (See Bid Price)
An asset class comprises investments that share similar features. Examples of asset classes include equities (stocks), fixed-income (bonds), as well as cash and equivalents. (To deepen your understanding, read 4 Main Asset Classes: A Beginner’s Guide.)
Assuming you have $1 million. Asset allocation (aka portfolio allocation) is the process of deciding where to put that sum of money and how much to put in each asset class based on your goals, risk tolerance and time horizon. (How do you maintain a diversified pool of assets for passive income and capital growth? Read The Retirement Bucket Strategy Demystified to find out.)
Asset Under Management (AUM)
Assets under management (AUM) refers to the amount of money a hedge fund or financial institution is managing for its clients. It is the total market value of all the investments managed. (See Hedge Fund)
A bear market is a market condition where the prices of securities fall for an extended period of time, usually by 20% or more from the most recent peak. It is often caused by negative sentiments of the economy such as high inflation and rising unemployment. (See Bull Market. Learn how to reduce risk and maximise returns in hard economic times. Read Investing During a Recession: What You Need to Know.)
Imagine you want to buy some stocks (or any other security). The bid price is the highest price you are willing to pay to purchase them. (See Ask Price)
What do MacDonald’s and Coca-Cola have in common besides the fact that people can’t stop eating and drinking them? They are both blue chips — defined as well-established and financially strong companies that sell quality products and services that are widely accepted. Blue chips are pretty much recession-proof, so their stocks are considered to be good investments.
A bond is a debt security similar to an IOU. It represents a loan made by an investor to a borrower (typically a government body or company). For example, if you buy a Singapore Government Securities (SGS) bond, you are essentially lending money to the Singapore government (to finance its projects, operations, etc.). Bonds are known as fixed-income as they make regular interest payments (known as coupons) to investors. They are more stable than stocks as dividend payments are at the company’s discretion. Also, should a company go bankrupt, its bondholders would take priority over its shareholders and therefore stand a better chance of getting some of their investments back. (See Coupon and Dividend)
A brokerage account is an investment account that you open in order to buy and sell securities. Brokerage firms make money by charging you fees and commissions when they execute your trade orders. (To deepen your understanding, read What to Know Before Opening Your First Brokerage Account.)
A bull market is the exact opposite of a bear market. It occurs when the prices of securities are on the rise. It is fuelled by optimism and can last for months or years. Investors are usually eager to buy or hold securities during this period of time. (See Bear Market)
Imagine you own an asset, e.g. an investment property. A capital gain refers to an increase in the value of that property. That means the selling price is higher than the purchase price. It is an unrealised gain until the property is sold. Once sold, the profit is your realised gain. A capital loss, in contrast, is the loss incurred from the sale of an asset. That means the selling price is lower than the purchase price.
Chicago Board Option Exchange Volatility Index (VIX)
The Chicago Board Options Exchange Volatility Index (VIX) is a market index that measures the expected volatility of the US stock market for the coming 30 days. It is based on the option prices of the S&P 500 index. You can see it as a ‘fear gauge’. Generally speaking, VIX values of more than 30 signals heightened volatility due to increased uncertainty, risk and fear. (See Volatility)
Compound Annual Growth Rate (CAGR)
Compound annual growth rate or CAGR, is the average annual growth rate, taking into account the compounding effect of an investment over a period of time longer than one year. It is often used to calculate the returns for assets, investment portfolios or anything that goes up or down in value over time. The formula is: CAGR (%) = (Ending Value ÷ Beginning Value) ^ (1 ÷ Number of Years) – 1. So for instance, if your portfolio has a starting market value of $1 million and 5 years later it increases to $1.5 million, your CAGR would be ($1.5 million ÷ $1 million) ^ (1 ÷ 5) – 1 = 8.45%.
Cost of Debt
Cost of debt is the effective interest rate that a company pays on its debts, e.g. bank loans. As an investor, you should note that when a company has too much debt financing, it could result in creditworthiness issues and increase the risk of default or even bankruptcy. An example is troubled Chinese property giant Evergrande, whose liabilities exceeds $300 billion.
A coupon or coupon payment is the annual interest rate paid on a bond to bondholders. Typically, these interest payments are made biannually. For instance, a $50,000 bond with a coupon rate of 5% pays $2,500 a year or $1,250 twice a year. (See Bond)
Distribution Per Unit (DPU)
Distribution per unit (DPU) is the dividend paid out to a REIT investor for every unit he or she has in the REIT. (See Real Estate Investment Trust)
Diversification is a risk management strategy that involves buying different types of investments so that your exposure to any one type of asset is limited.
Many public listed companies regularly distribute a portion of their profits to their shareholders in the form of dividends. For example, DBS, the largest bank in Southeast Asian by total assets, makes four dividend payments a year. A dividend is paid per share of stock, so the more shares you own, the bigger your payout. When a company pays dividends, it incentivises investors to buy and hold its stocks for passive income. Nonetheless, do note that companies that pay attractive dividends now may not do so in future. (See Equity. To deepen your understanding, read Why We Love Dividend Investing but It’s Not For Everyone.)
Dividend yield is a financial ratio that shows the percentage of a company’s share price that is paid to its shareholders in dividends each year. Here’s how to calculate dividend yield: (Dividend Per Share / Market Value Per Share) x 100. For instance, if a company’s share price is $30 and it pays an annual dividend of $1.80, its dividend yield will be ($1.80 / $30) x 100 = 6%.
Dollar Cost Averaging (DCA)
Dollar cost averaging (DCA) is the strategy of investing a fixed dollar amount at regular intervals, regardless of the share price. This spreads the risk of investing and maximises your chances of paying a low average price over time. It is is a good way to develop a disciplined investing habit. (See Lump Sum Investing)
Dow Jones Industrial Average
The Dow Jones Industrial Average, or simply the Dow is a stock market index that tracks the stock performance of 30 leading publicly traded companies in the US. As it only tracks 30 companies, the Dow is price-weighted, unlike other stock indices (e.g. the S&P 500 and Hang Seng Index) which use market capitalisation. Many professionals think it does not adequately represent the overall US equity market performance. (See Standard & Poor’s 500)
Earnings Per Share (EPS)
Earnings per share (EPS) is a metric used to estimate a company’s value. It indicates how profitable a company is on a per-share basis. Here’s how to calculate EPS: (Net Income — Dividend to Preferred Shareholders) / Average Outstanding Shares of the Company.
In the stock market context, equities are shares in a company. That means when you buy the stocks of a company, you have partial ownership in it. Advantages of investing in equities include potential capital gains and dividends. (See Dividend)
The ex-dividend date determines which shareholders will receive the announced dividend of a company on the payment date. As a general rule, you must hold the shares of the company before the ex-dividend date to be eligible for the dividend. If you only buy the shares after the ex-dividend date, you will not receive the dividend. Instead, it will be paid to the previous shareholder. You will only be eligible for the next scheduled dividend payment, provided that you do not sell your shares before that.
An expense ratio measures the cost of owning a mutual fund or exchange-traded fund (ETF). Think of it as paying management fee. It is expressed in percentage. For instance, the SPDR STI ETF has an expense ratio of 0.3% per annum. That means for every $1,000 you invest in the fund, you will be paying $3 every year. (See Exchange-traded Fund and Mutual Fund)
Exchange-traded Fund (ETF)
An exchange-traded fund (ETF) is a basket of securities that operates much like a mutual fund. But unlike mutual funds, ETFs can be bought and sold on stock exchanges. ETFs typically track a particular index. (See Index, Index Fund and Mutual Fund)
The gearing ratio is a measurement to establish a company’s financial leverage. A high gearing ratio represents a high proportion of debt to equity. Investors might see this as a risk since excessive debt could lead to financial difficulties. In Singapore, Real Estate Investment Trusts (S-REITs) have a gearing limit of 50%. As of November 2022, their average gearing ratio is a healthy 36.5%, ranging between 33% to 39% across different sectors. (See Real Estate Investment Trust)
A growth stock is one that is expected to grow at a rate that is significantly above the average business in its industry or the market broadly, e.g. Alibaba and Tesla.
A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers. Hedge funds charge higher fees than conventional investment funds and their clients are usually institutional investors, insurance companies and wealthy individuals. The largest hedge fund in the world is Bridgewater Associates, founded by Ray Dalio, with more than $150 billion in assets.
An income stock is one that pays regular dividends, e.g. Microsoft and 3M Company. (See Dividend)
An index is a basket of securities that represents and tracks the performance of a specific market, asset class or market sector. Perhaps the most well-known index is the Standard & Poor’s 500 (S&P 500), which represents the large-cap segment of the US equity market. (See Standard & Poor’s 500 and Large-cap Stock)
An index fund is a type of mutual fund or ETF that seeks to track the returns of a market index. John Bogle, the late founder of the Vanguard Group, was the creator of the world’s first index fund — Vanguard S&P 500 Index Fund — in 1975. Index funds are low-cost, passive investment products. As they are diversified, they are less risky than individual stocks. Not only that, they often outperform active funds over the long-term. That’s why many in the FIRE community invest in index funds. (See Exchange-traded Fund, Mutual Fund and Passive Investing. To deepen your understanding, read Why Index Funds are Perfect for Do-Nothing Investors.)
Initial Public Offering (IPO)
An initial public offering (IPO) takes place when a privately owned company lists its shares on a stock exchange, making them available for purchase by investors. There is usually a lot of hype surrounding an IPO, but do take note that it is not uncommon for companies to fall short of expectations upon their debut.
Junk bonds (aka high-yield bonds) are bonds issued by companies that are financially struggling. They have low credit rating and have a higher chance of defaulting or not repaying the principal to investors than other bonds. Investors should note that junk bonds are considered risky investments.
Large cap stocks are shares of big companies such as Amazon, American Express and Walmart. In the US, a company is considered a large-cap if it has a market capitalisation of $10 billion or more. Large-caps are considered safe investments and many give steady dividends to shareholders. However, they have less growth potential compared to mid-caps and small-caps. (See Market Capitalisation, Mid-cap Stock and Small-cap Stock)
Liquidity refers to how much cash is readily available, or how quickly an asset can be converted into cash. For instance, an investment property is considered illiquid as it takes time to sell. (To deepen your understanding, read The Importance of Liquidity in Personal Finance and Investing.)
Lump Sum Investing
When you take all or a large chunk of your investable money and invest it all at once, it is called lump sum investing. Compared to dollar cost averaging, lump sum investing gives you exposure to the markets sooner. You also save on fees and commissions. (See Dollar Cost Averaging)
If you open a margin account with a broker (e.g. Interactive Brokers LLC), it means that you will be able to buy securities using a combination of your own money and money borrowed from the broker. The borrowed money is known as margin. A margin call refers to the broker’s demand that you deposit more money or securities into your account. This happens when the value of securities in your account falls below a certain level, known as the maintenance margin.
Market capitalisation (aka market cap) measures the total market value of a public listed company. It is calculated by multiplying the price per share by the number of shares outstanding. Companies are generally classified based on their market cap: large-, mid- and small-caps.
Mid-cap stocks have a market capitalisation of about $2 to $10 billion. They appeal to investors as they provide a balance of stability and growth potential.
Mutual funds are actively managed by professional fund managers. When you buy a mutual fund, you are pooling your money together with other investors who share a common investment objective to buy a basket of equities, bonds and other securities. (See Unit Trust)
Net Asset Value (NAV)
Net asset value (NAV) is important as it shows the per share value of a mutual fund or an ETF. It is calculated at the end of each trading day based on the closing prices of the portfolio’s securities. Here’s how to calculate NAV: (Assets — Liabilities) / Total Number of Outstanding Shares.
Options trading is the buying and selling of options. An option is a financial contract that gives you the right to buy or sell the underlying asset (e.g. GameStop stocks) at a specific price (known as premium) on or before a certain date. Options are highly speculative, but they are versatile in that you can make a profit when the market goes up, goes down or even sideways. You also have the advantage of leveraging the value of the underlying asset by 100 times (1:100 leverage). That means if you have $5,000 in your account, you can trade up to $500,000. But do note that although leverage can give you huge gains, it can also amplify your losses if prices move in a direction that is unfavourable to you. When you buy an option, you are essentially betting on the movement of the underlying asset.
Passive investing is a buy-and-hold strategy for wealth building. It is embraced by many in the FIRE community. The most common form of passive investing is low-cost index investing, which has proven to produce excellent results, often outperforming actively managed portfolios over medium to long time horizons. (See Index Fund)
Penny stocks are stocks of small companies traded at very low prices. Although you could potentially make sizeable gains by investing in penny stocks, you should note that these stocks are speculative in nature and you could lose all your money. Compared to established stocks, they carry more risks in that they are more illiquid and volatile due to their low volume.
Price-to-book (P/B) Ratio
If your goal is to be a value investor, you need to know what the price-to-book (P/B) ratio is. Basically, it measures the market’s valuation of a company relative to its book value. A low P/B ratio indicates that a stock is undervalued. If a stocks’s book value is less than one, it means that it is trading for less that the value of its assets. Here’s how to calculate P/B ratio: Market Price Per Share / Book Value Per Share.
Price-to-earnings (P/E) Ratio
As an investor, you can use the price-to-earnings ratio to determines whether a stock is overvalued or undervalued. A high P/E ratio could mean that a company’s stock is expensive or that investors are expecting high growth rates. A low P/E ratio could mean that a stock is cheap and that its price may rise in the future. Here’s how to calculate P/E ratio: Market Value Per Share / Earnings Per Shares (EPS). (See Earnings Per Share)
Rather than raise money from the public market (see Rights Issue), a company may instead choose to sell new shares to a select group of institutional or accredited (high net worth) investors via a private placement, otherwise known as a non-public offering. Private placements are less regulated compared to public offerings and will inevitably affect the stake of every existing shareholder.
Rate of Return
Rate of return (ROR) is used to measure the net profit or loss of an investment over a specified time period. Here’s how to calculate ROR: [(current value — initial value) / initial value] x 100. Assuming you invested $20,000 in a company’s stocks six months ago. You sold the stocks for $30,000 this morning. Your ROR will be [($30,000 – $20,000) / $20,000] x 100 = 50%.
Real Estate Investment Trust (REIT)
A Real Estate Investment Trust (REIT) is a company that owns, manages or finances income-generating properties such as data centres, office buildings and shopping malls. REITs are traded on stock exchanges. They are required to distribute at least 90% of their taxable income to their investors each year, so their dividends (i.e. distribution per unit) are substantial. This makes them an attractive investment for those looking for a steady stream of income. Other benefits include diversification and long-term capital appreciation. As of March 2022, the largest REIT in the world is Prologis, an industrial REIT listed on the NYSE with a market capitalisation of $116.4 billion. (See Distribution Per Unit. To deepen your understanding, read How REITs Work: Get Started on Real Estate Investing.)
Return on Investment (ROI)
Return on investment (ROI) is a used to determine the profitability of an investment. It is calculated in percentage. A high ROI means the investment’s gains compare favourably to its costs. In general, an annual ROI of around 7% is considered attractive for stocks. Here’s how to calculate ROI: (Net Profit / Cost of Investment) x 100. Let’s say you made $1,000 on a $10,000 investment. Your ROI will be ($1,000 / $10,000) x 100 = 10%.
A rights issue is a way for a company to raise money by offering new shares to its existing shareholders. These shares are usually offered at a discounted price, giving shareholders the opportunity to buy more stock if they wish to do so. A rights issue is done for various reasons, such as to fund future growth, expand operations or reduce debt obligations. (See Private Placement)
A security is a financial instrument that holds value and can be traded between parties. Examples of securities include stocks, ETFs and bonds.
Small-cap stocks have a market capitalisation of about $300 million to $2 billion. They hold the promise of bigger returns since they have more growth potential than large- and mid-caps, but they tend to experience more volatility as well. (See Volatility)
Standard & Poor’s 500 (S&P 500)
The Standard and Poor’s 500 (S&P 500) is a stock market index that tracks the stock performance of 500 prominent publicly traded companies in the US. It is regarded as one of the best indicators of the overall US equity market performance. Companies in the S&P 500 that have increased their dividends in 25 consecutive years are known as the S&P 500 Dividend Aristocrats. (See Index and Index Fund)
Trading is a short-term strategy that involves buying and selling securities (e.g. stocks and bonds) with the goal of turning a quick profit, as opposed to investing, which uses a “buy and hold” strategy. (To deepen your understanding, read Trading vs. Investing: What You Need to Know.)
Like mutual funds, unit trusts give you access to a basket of securities. However, the structure of unit trusts is different in that you are the beneficiary of the trust you buy. (See Mutual Fund)
In the securities markets, the word “volatility” is used to describe drastic price fluctuations in either direction. The bigger and more frequent the upswing or downswing, the more volatile the market is. (See Chicago Board Options Exchange Volatility Index (VIX))
The 52-week high/low of a particular security (e.g. a stock) is the highest/lowest price it has traded during the past one year. Investors and analysts use them as technical indicators to predict future price movements. (See Security)
And the list goes on as and when I think of anything else…