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Stock Market Vocabulary Terms – Decoding The Language Of Finance

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Introduction

 

 

The beginning quote in the now infamous movie The Wolf Of Wall Street perfectly sums up the stock market as a whole.

“The world of investing can be a jungle. Bulls. Bears. Danger at every turn.”

      – The Wolf Of Wall Street

 

It is this fear – among many others, that are holding people back from investing. You take a look at the wall street gurus and you tell yourself that you do not have the money, the resources, or the meaningful connections in order to thrive in the stock market. But this is all false, a facade made by finance to create demand and urgency for their goods and services. Truth be told, you do not have to have a Harvard MBA or have a degree in finance in order to be successful in this enterprise. The most important thing you can do – and arguably the best thing you can do for yourself is to LEARN. Knowledge is power – the key to everything that is life itself – and learning about this will do wonders for you as invest both time and money toward this pursuit.

But before we can run, we must first be able to crawl, then walk, run, and eventually, sprint. Today, we will be discussing the very basics: Mastering Stock Market Vocabulary Terms, so at least you will be able to have a general understanding of what the stock market is, how it works, what you can invest in, and how to create an investing portfolio.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Getting The Hang Of Investing Lingo

 

The investing world can be difficult for beginners, because the lingo isn’t always self-explanatory and many terms overlap.

Learning the lingo can help you communicate with others in finance and take better control of your investments.

Let’s start with terms associated with the market. The word market, in itself, can be confusing, because it can refer to investing in general or a specific index, like the S&P 500.

market simply means a place where buyers and sellers can get together to make transactions. This might be a physical place such as the New York Stock Exchange (NYSE), or an electronic gathering spot, like NASDAQ.

 

 

People also refer to the market as being bullish or bearish. This refers to the direction the market is heading – up or down.

An easy way to remember the market direction is to picture these animals in battle. A bull in battle drives his horns upward to gorge the attacker – so a bull market means that stocks or other investment prices are going up while a bear in battle swats its paws downward – so a bear market means that prices are trending down.

 

 

In addition to market terms, its important to understand the different types of investments that can be made.

Types Of Investments

 

 

There are four main types of investments or asset classes you can invest in. These asset classes are equities, fixed income, derivatives, and cash.

 

Equities

 

 

Equities typically refer to owning shares in a company. Some common equities are stocks, mutual funds and exchange traded funds (ETFs).

Stocks are shares of ownership in a company – this means you own a small piece of this company.

Mutual funds are a pool of investment dollars that can often be professionally managed and maybe invested across several different assets. In contrast to a stock, if you own one share in a mutual fund, you have a stake in many companies.

Exchange Traded Funds are commonly called ETFs. An ETF has similar characteristics of a mutual fund, but most can be bought or sold through the trading day, similar to a stock, and typically has lower management fees. Think of ETFs as a hybrid offspring between stocks and mutual funds.

We will be learning more about this asset class in later depth, but if you are still curious about these types of investments, make sure to check out our lessons under Stocks and Mutual Funds & ETFs Category.

Fixed Income

 

 

The next asset class is fixed income. This class includes assets like bonds, treasuries, and certificates of deposits.

The name fixed income tells you a lot about the investment. Essentially, its payments are fixed – meaning they are consistent and delivered in regular intervals.

We will be learning more about this asset class in later depth, but if you are still curious about these types of investments, make sure to check out our lessons under the Bonds & Fixed Income Category.

Derivatives

The next asset class is derivatives. This class includes options, futures, and currencies.

derivative is a security with a price that is dependent on another asset. The derivative itself is a contract between at least two people.

 

 

Derivatives commonly track other investments, like a stock index. The movement in the underlying security is where the derivative derives its value – however, derivatives can be risky.

They use leverage, which controls a large asset with a small amount of money to potentially create larger returns, or to help mitigate risk. But if the asset moves in the wrong direction, you can stand to lose all of your investment.

We will be learning more about this asset class in later depth, but if you are still curious about these types of investments, make sure to check out our lessons under Binary Options, Futures, and Forex.

Cash

 

 

The final asset is cash. Cash refers to assets like savings and money market accounts.

They’re typically valued for two things – they are highly liquid and are low risk.

When an asset is highly liquid, it means you are able to access it easily or liquidate it. And while they won’t grow as much as other assets, it can be important to maintain a portion of your assets and cash for a rainy day.

When these asset classes are combined, they form what is known as a portfolio. Simply put, a portfolio contains all of your investments so you can see them as a whole.

Other terms associated with a portfolio are allocation and diversification – and are sometimes used interchangeably, but ultimately have different meanings.

Allocations refers to the percentage of your portfolio in each asset class. For example, an investor might allocate 50% of a portfolio to equities, 25% to fixed income, 10% to derivatives, and 15% to cash.

The allocation may change overtime based on your risk tolerance level and as you approach retirement.

Diversification refers to having varied types of individual assets within an asset class.

Let say for example, you want to diversify the equities portion of your portfolio – this means you may want to own many types of stocks, mutual funds, and ETFs in various sectors, such as health care, technology, and utilities.

Allocation and diversification are important because they prevent you from placing all of your eggs in one basket, so to speak.

And those are the basic terms related to investing. There are a lot of new terms to learn and it can feel a bit overwhelming.

But you are headed in the right direction. With these terms as a foundation, you may be able to participate more effectively in the market.

 

Quick Recap

In Review…..

Stock Market Vocabulary Terms

  • A market simply means a place where buyers and sellers can get together to make transactions. This might be a physical place such as the New York Stock Exchange (NYSE), or an electronic gathering spot, like NASDAQ.
  • People also refer to the market as being bullish or bearish. So a bull market means that stocks or other investment prices are going up and a bear market means that prices are trending down
  • There are four main types of investments or asset classes you can invest in. These asset classes are…..
  1. Equities (Stocks, Mutual Funds, and ETFs)
  2. Fixed Income (Bonds, Treasuries, and Certificates Of Deposits)
  3. Derivatives (Binary Options, Futures, and Forex)
  4. Cash (Savings and Money Market Accounts)
  • Stocks are shares of ownership in a company – this means you own a small piece of this company.
  • Mutual funds are a pool of investment dollars that can often be professionally managed and maybe invested across several different assets. In contrast to a stock, if you own one share in a mutual fund, you have a stake in many companies
  • Exchange Traded Funds are commonly called ETFs. An ETF has similar characteristics of a mutual fund, but most can be bought or sold through the trading day, similar to a stock, and typically has lower management fees. Think of ETFs as a hybrid offspring between stocks and mutual funds
  • Fixed Income includes assets like bonds, treasuries, and certificates of deposits. Essentially, its payments are fixed – meaning they are consistent and delivered in regular intervals
  • Derivatives includes options, futures, and currencies
  • A derivative is a security with a price that is dependent on another asset. The derivative itself is a contract between at least two people
  • Derivatives commonly track other investments, like a stock index. The movement in the underlying security is where the derivative derives its value – however, derivatives can be risky
  • Dervatives use leverage, which controls a large asset with a small amount of money to potentially create larger returns, or to help mitigate risk. But if the asset moves in the wrong direction, you can stand to lose all of your investment
  • Cash refers to assets like savings and money market accounts. They’re typically valued for two things – they are highly liquid and are low risk
  • When an asset is highly liquid, it means you are able to access it easily or liquidate it. And while they won’t grow as much as other assets, it can be important to maintain a portion of your assets and cash for a rainy day.
  • Allocations refers to the percentage of your portfolio in each asset class. The allocation may change overtime based on your risk tolerance level and as you approach retirement.
  • Diversification refers to having varied types of individual assets within an asset class.
  • Allocation and diversification are important because they prevent you from placing all of your eggs in one basket, so to speak.

 

 

And this is the basics in terms of learning the stock market ropes. You can officially “Talk The Talk” so to speak but you may not be able to “Walk The Walk” – at least not yet. As you continue with your investing education here at Invest In Wall Street, you will find that you will continue to gain more and more confidence to not only invest in various asset classes like the ones we discussed, but will have the assurance to reach the financial independence you deserve.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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