A bond is basically another term for a loan that companies, governments, and similar entities offer as a way to earn capital. Think of it as a fancy “IOU” between you and whoever you purchase the bond from. You’re indebted to the owner of the bond until the end date, by which you have to pay back the principal balance of the loan plus interest.
Example: One of the best examples of a bond is a federal government bond. They’re called treasury bonds, and they earn periodic interest until the end of their term (between 10 and 30 years). If you own a treasury bond, it’ll pay out at a coupon rate, which can be around 1.25%. Depending on how much you purchased the bond for, you’d receive 1.25% for every $1,000 of the bond that you own.
If you think bonds sound like a good investment for you, you can invest in a bond fund. It’s a mutual fund that only invests in bonds. If you plan on investing in multiple bonds, it’s a more convenient way to do so than by buying individual bonds. Bond funds also don’t have maturity dates.
Example: If you want to invest in a bond fund, you’d find a bond fund manager who would research the fixed income market for you to find the best bonds. They’ll purchase and sell those bonds on your behalf, likely forming a portfolio with a mix of different bonds, including corporate bonds, foreign government bonds, and treasury bonds.
If you’ve invested in mutual funds, you’ll likely eventually hear the term breakpoint, which is a dollar amount that you need to reach to qualify for reduced sales charges. It’s good for you but not great for brokers or investment firms as it means they earn less commission if you reach the breakpoint.
Example: Let’s say a mutual fund has a breakpoint of $25,000 with a standard sales charge (load) of 5%. When you reach the breakpoint, the sales charge drops to 4.5%. It benefits you to invest $25,000 instead of $22,000 in this case as you’ll save .5% on sales charges for the entire initial investment.
Whereas a bear market is a financial market in which prices are in a prolonged period of decline, a bull market means that, in general terms, prices are rising. More specifically, it’s reserved for a market in which security prices are rising for an extended period. Bull markets can last for months or years and tend to last longer than bear markets.
Example: The last bull market ended in 2019 and was one of the longest bull markets in history. It lasted from about 2009 to 2019, meaning that it was a 10-year bull market (the second-longest bull market started in October of 1990).
In finance and investing terms, capital is just another word for assets. These can be funds that you have in a deposit account, a company’s assets, or even physical assets such as property. There are different types of capital (working, equity, and debt) in business, but in general terms, it refers to financial assets.
Example: If you’re starting certain businesses from scratch and you need to form a capital structure, you’ll choose from different types of capital, such as debt, equity, or working capital. If you take out a loan and acquire debt, you’ll have debt capital. This means that the business has the capital (financial assets, in this case, cash) to grow and acquire more capital, but it’s debt capital, meaning that you’ll have to pay it back.
This is when an asset decreases in value. The loss is calculated when you sell it, meaning that if you purchased a stock or bought a rental property two years ago and want to sell it now for less than the price you paid for it, it’ll be counted as a capital loss.
Example: Let’s say you invest $150,000 in a fixer-upper rental property you want to flip and rent out. If something horrible happens, you find that you can’t fix it up, and you have to sell it for $120,000, you’ll have a capital loss of $30,000.
If you invest in common stock, you’re investing in the ownership of a corporation. It means that you also get to help elect the board of directors and vote when the company makes corporate decisions (as long as you have a voting share and not a non-voting share). In short, each share of common stock that a company owns represents a portion of ownership for that company.
Example: A company must declare a dividend first, which is the amount of money that the shares they’re selling are worth. Suppose they set this dividend to $5 million and sell a million shares. Each shareholder of one common stock would get $5. If you have ten shares, you’d get $50.
Be sure to check out the definition of a bond first. Bonds are types of loans that companies, governments, and similar entities offer as a way to earn capital. A corporate bond, then, is issued by a company and sold to investors.
Example: Corporate bonds work like other bonds in that a company will sell a debt security to investors in order to raise capital (aka cash). They’ll set a pre-determined interest rate and a term for the bond. If you purchased the bond at a 3% interest rate with a 10-year term, you’d receive 3% of whatever you purchased the bond for during those ten years.
Daily dividend factor
When investing, you’ll want to understand the annual yield (or return, as in what you earn off of it) of whatever you’re investing in. To understand this, you’ll need to take a look at the daily dividend factor, which is a quote of that bond’s daily yield. It’s like a mini snapshot of the annual yield you can expect to earn.
Example: How do you calculate the daily dividend factor? If you’re looking to invest in a corporate bond, for example, you’d take the interest of that bond and divide it by the market price. That’s your annual percentage yield. Now, divide that (remember to convert it to a number, don’t use the percentage) by 365. That’s the daily dividend factor!
Diversification refers to the act of investing in a variety of investments. If you’ve ever heard someone use the term “diversify your portfolio,” this is what they’re talking about. The point of this is to reduce risk by investing in various assets; if one performs poorly, you’ve got the other investments to help boost your portfolio.
Example: When diversifying, the goal is to diversify with investments with similar characteristics and behaviors on the market (while also ensuring that you’re investing in different asset classes). If you already have an investment property, purchasing another one won’t help you diversify. Instead, look into a different asset class like shares or bonds.
A dividend is when a company distributes a portion of its earnings to shareholders. Depending on the agreement, dividends can be paid out in cash or more stock for each shareholder.
Example: Let’s say you own 100 shares of stock for a particular company. At the end of each quarter, the company will calculate how much it earned to figure out how much of a dividend they’ll pay out. If they decide that they’ll pay $0.50 per share and you have 100 of them, you’ll earn $50 (100 x 0.50).
Dow Jones Industrial Average
When most people hear about Dow Jones, they immediately think of the stock market. It’s not the stock market, rather a group of stocks. More specifically, it’s the average price of the 30 most-traded stocks on the New York Stock Exchange and Nasdaq. What’s the point of that? It helps investors determine the general trend of stock prices.
Example: As of the end of 2020, companies such as Apple, Chevron, IBM, and Walmart were among the 30 businesses on the Dow Jones. Critics of the Dow Jones Industrial Average argue that taking a look at the prices of these kinds of stocks doesn’t accurately depict the state of the broader US economy. On November 24th, 2020, the Dow broke the 30,000 mark for the first time despite unemployment rising above 6%.
In investing, equities refer to a type of investment. When you invest in equity securities, you’re investing in shares of a company (and therefore gaining equity, which translates here to mean pure value or ownership).
Example: The most common form of an equity investment is the investment in common stock (defined here). You purchase a common stock, which is a share of the company, and in return, you have equity in that company.
Because stocks are a form of equity, an equity fund is a mutual fund primarily made up of stocks. In fact, you might even hear them referred to as stock funds. You’ll invest in stocks (whether actively or passively) and categorize your stock investments according to company or investment style.
Example: There are a few main types of equity funds, and growth funds are one of them. When investing in growth funds, you’re still investing in stocks, but you’re specifically targeting larger, established, and growing companies. Amazon, Tesla, and Google, all count as growth companies.
Federal funds rate
The federal funds rate is an interest rate that banks charge each other to borrow and lend money. Who sets this rate? The Federal Open Market Committee, which is a decision-making body of the Federal Reserve System. They meet eight times a year to set the federal funds rate.
Example: When the federal funds rate drops, banks can borrow money at a lower interest rate. This is great for you! When they borrow at lower rates, banks are able to pass on these savings to consumers when giving out mortgage loans and lines of credit.
Federal Reserve Board
The Federal Reserve Board is a part of the Federal Reserve System. There are seven members on the board, and they’re the ones in charge of making decisions on behalf of the Federal Reserve System, actually. The goal is to provide fair representation to the American people when making decisions regarding financial regulations and monetary policies.
Example: Whenever there’s an opening on the Federal Reserve Board, new members are nominated by the sitting president and confirmed by the US Senate. As of January 2021, the most recent appointed board member was Chris Waller on December 18th, 2020. Judy Shelton was nominated on January 4th, 2021, for a vacant position.
Fixed income fund
Fixed income funds are mutual funds where you invest in debt securities. They’re called fixed-income funds because debt securities pay fixed interest or dividend payments. In most cases, the debt securities are government or corporate bonds.
Example: Let’s say the fixed income fund is made up of corporate bonds. One of those corporate bonds costs $2,000 and has a 3% interest rate. For the length of the bond, you’ll receive 3% per year for whatever you paid for it (in this case, that’s 3% of $2,000). You’d receive $60 per year.
Fixed-income security is an investment that earns money in the form of fixed interest payments. Also, at the end of maturity (which is basically the “term” or “length” of the investment), you receive your initial investment back.
Example: Bonds and money markets are some of the two most common types of fixed income securities. Check out our definition of a bond first. Then, understand that a federal government bond is a type of fixed-income security. They’re called treasury bonds, and they earn periodic interest until the end of their term (between 10 and 30 years).
If you’ve ever participated in a fundraiser then you probably understand what a fund is and just don’t know it. It’s a sum of money that gets collected and used for a specific purpose. In investing, a fund is created by pooling your money plus other investors’ money into, well, a fund. Usually, a fund manager will hold the cash in the fund and use it to buy and sell investments.
Example: A mutual fund is a type of fund. In that mutual fund are securities such as stocks and bonds. You invest in the fund along with tons of other people and in return, depending on how much you invested, you are part owner. This means that if the fund generates cash, part of it’s yours.
Growth investing is an investment strategy where you invest in growing companies. Usually, investors scope out these types of companies by looking at their actual growth compared to similar companies in the same industry, not only the share price.
Example: Investing in Tesla or Amazon would be considered a growth investment. Why? They’re companies that continue to focus on innovation and new customer acquisition through unique growth strategies.
Growth investors invest in growth stocks, which are shares in any particular company that is projected to grow at an above-average pace. The goal here is to invest in a growth stock that will yield a higher return over time instead of in the near future.
Example: If you want to invest in a growth stock, you might take a look at industries that are currently growing as well as metrics such as the three-year sales growth to determine whether or not the company is growing. During the pandemic, for example, online marketplaces were popular growth stocks, including Alibaba and Amazon.
In investing, an index is a measure of performance of assets on the market. The Dow Jones Industrial Average is a type of index, for example, as it’s used to gauge the performance of the market as a whole by looking at a select group of 30 stocks.
Individual Retirement Account (IRA)
An IRA (individual retirement account) is an account that you are able to pay into in order to save for retirement. While that might sound like the exact same thing as a savings account, it’s different in that the money you put into an IRA allows you to enjoy tax-free or tax-deferred growth.
Example: There are many different types of IRAs, including traditional IRAs and Roth IRAs, but all allow you to save for retirement. If you invest in a Roth IRA, your contributions aren’t tax-deductible like they are with a traditional IRA, but you’re not taxed when you withdrawl the cash eventually (you are taxed when you withdrawal from a traditional IRA).
The easiest way to define and understand inflation is to think of it as a decline in purchasing power due to the increase in prices over time. Basically, it’s the gradual decline in the value of money. This happens for a variety of reasons, including an increase in production costs and an increase in demand. Both lead to an increase in prices, which is inflation.
Example: If we’re using “the gradual decline in the value of money” as the definition of inflation here, then it helps to think of the price of certain food products like bread and milk as an example. The average price of movie tickets have also increased over the years due to inflation, which is a response to either demand for those goods and services, or a response to the increase in wages (with an increase in wages, people can now pay more for those services, and workers at the theatre also need to be compensated according to the increase in wages).
Interest is the cost of borrowing money. The interest rate is the rate at which you’ll be charged for that money. Because you borrowed the money, they want to earn a bit of cash for loaning it to you, so they’ll charge you interest. That rate can be a fixed rate (let’s say 3% over the length of your loan) or a variable rate.
Example: If you take out a loan from a bank for $1,000 at a simple 3% interest rate and the length of the loan is one year, you’d owe them the $1,000 back at the end of the year plus $30 in interest.
You might hear investment advisors described as stockbrokers or financial advisors. Basically, they’re people who advise you what to do with your investments based on their professional analyses.
Example: Banks have personal investment managers/advisors you can speak to if you’re looking to grow your wealth or manage your investments. You can also find an independent investment advisor via the National Association of Personal Financial Advisors. They’ll take a look at your current investment capabilities and figure out where best to invest your money.
If you’re investing in a mutual fund with others who have also pooled their cash to invest in portions of financial securities, you’ll likely be working with an investment company. Ensure it’s registered with the Securities and Exchange Commission (SEC) to make sure it’s legit.
Example: The Vanguard Group and Fidelity are two top examples of investment companies. They earn money by buying and selling things like bonds, shares, property, and other investments.
Liquid assets are assets that can easily be converted into cash whenever you need them. Cash or a savings account are both good examples of liquid assets. However, in investing terms, market liquidity refers to whether or not assets can be easily sold or purchased. Basically, you’re looking for high market liquidity if you need to buy and sell fast.
Example: Ford Motor has been known to trade hundreds of millions of stocks on the market daily, meaning that those who buy and sell Ford stocks are able to easily convert them into cash without affecting the overall market value too much.
Example: Usually, investment advisors charge a fee equal to about 1% of the assets you’re going to invest in. Sometimes, they’ll charge a flat fee of $1,500 to $2,500 for the work that they do in creating your investment plan.
Market price refers to the price of an asset on, well, the market. It’s the price that you’d buy or sell the asset for, and it’s largely determined by supply and demand.
Example: Let’s say there are five traders wanting to purchase shares of a company on the New York Stock Exchange. One trader makes a $50 bid per share and another one bids $49.50 per share. Sellers of that specific stock would list their offers per share. If the trader bidding $49.50 per share won, the market price of that stock would now be $49.50.
Market risk refers to the possibility that an investor will lose money due to poor market performance or volatility. There’s no way to eliminate market risk perse, but there are ways that you can learn to reduce risk by how you invest.
Example: Political unrest or even elections can be a source of increased market risks ask investors worldwide wait to see how the outcome will affect local and global economies. Other factors that can increase market risk include terrorist attacks, natural disasters, rapid changes in interest rates, and a major recession.
Money market mutual fund
A money market mutual fund is a fund that invests in highly liquid assets such as cash, debt-based securities, and cash-equivalent securities. The goal when investing in a money market mutual fund is often to invest in assets that are highly liquid and have lower levels of overall risk.
A fund is a sum of money that gets collected and used for a specific purpose. When investing in a mutual fund, you’re investing in the fund mutually along with tons of other people and in return, depending on how much you invested, you are part owner.
Example: There are different types of mutual funds, including growth funds and income funds. If you invest in an income mutual fund, for example, you’ll be investing in stocks that pay out regular dividends (i.e. generating you income) rather than aiming for the long-term growth that growth stocks provide.
Think of NASDAQ (National Association of Securities Dealers) like Amazon for buying and selling securities. It’s a large marketplace for buyers and sellers that’s computerized and transparent (as opposed to the old ways of buying and selling securities). You might also hear the general term Nasdaq used to describe the Nasdaq Composite, which is an index of the stocks that trade on the Nasdaq exchange (think: Amazon, Google, Apple, Microsoft, etc.).
Example: Depending on the security you want to buy or sell, you have to look for it on the Nasdaq or the New York Stock Exchange. The New York Stock Exchange ranks No. 1 in terms of the amount of shares traded.
New York Stock Exchange
The New York Stock Exchange is a marketplace just like NASDAQ. When companies transition from private to public, they open on one of the markets for public trading of their stock. However, the difference between the two is that the New York Stock Exchange works like an auction marketplace for bidders whereas NASDAQ utilizes dealers to make trades. This means that on the NYSE, buyers submit bids and sellers submit offers.
Example: If you want to purchase stock in a publicly-traded company on the New York Stock Exchange, your broker would have to submit a bid. That bid will compete with other bids and another broker will purchase it at the highest bid price.
The suffix – onomy means “management” or “measurement.” The same suffix can be found in economy (managing money), agronomy (managing land), gastronomy (the art and science of food), etc.
As an investor, you’ll have a portfolio that is made up of all of your investments, including cash, exchange-traded funds (ETFs), bonds, stocks, and more. Generally, a portfolio is diverse, meaning that it includes a variety of different types of investments across different investment classes.
Example: If you have an appointment with an investment advisor, they might ask you what kind of portfolio you want to create. There are different kinds, including hands-off aggressive investing portfolios and a classic portfolio, which is made up of 60% stocks and 40% bonds.
Yay, you’ve got an investment portfolio! Look at you. Now, who manages it? Likely a portfolio manager, which can be one person or a group of people at an investment firm. They’ll be the person or people managing the day-to-day stuff regarding your portfolio, including the trading.
Example: Because you probably don’t know much about equity trading strategies (why would you?), your portfolio manager does the work for you. Based on the assets in your portfolio, they’ll look at the best investments for your goals and buy and sell accordingly for as long as they’re managing your account.
In general terms, a recession can be any period where there’s a decline in economic activity. For a period to qualify as a real recession, however, it typically has to be marked by sustained negative growth in GDP along with an increase in unemployment.
Example: In February of 2020, due to the rise of COVID cases and impending lockdowns, the United States officially entered a recession following a 5% drop in GDP and an increase in the unemployment rate up to nearly 15%.
Securities and Exchange Commission (SEC)
The SEC is an independent federal government regulatory agency that works to protect investors. The agency regulates the securities market, as the name suggests, and they monitor corporations and traders that aren’t being fully honest with the goal of protecting investors from fraud and other types of manipulation while trading securities.
Example: Brokers and dealers that trade on the securities market have to pay an SEC fee. This fee supports the SEC and offsets the costs of having them regular the market and enforce rules.