I’m what most would call a moderate car enthusiast. I love muscle cars, sports cars, and the incredible technology found in today’s hybrids.
But, when I recently opened an issue of Car and Driver magazine, I found myself drifting off as the same foreign terms littered the article, casually mentioned as if every reader obviously is as familiar with them as spaghetti and meatballs… naturally aspirated or turbocharged, 9.2 liter V8 crate engine versus 3 cylinder with just 100 lb/feet of torque, cross drilled rotor and ceramic pads, blah, blah, blah.
After fielding some questions from my latest podcast episode, I began to realize that most people who don’t live in the world of finance can get tripped up by verbiage just like I do with cars.
I often tell clients that if a plan doesn’t make sense it will never make cents. It’s hard to progress in any relationship or strategy if there’s a language barrier.
Brace yourself for an abbreviated dictionary on the 12 must-know financial terms:
- Stock - a portion of ownership in a company, often referred to as a “share”.
- The Stock Market - an aggregation of buyers and sellers of stocks. Most commonly referred to in America as the NYSE, benchmarked against the Dow or SP500 (keep reading).
- NYSE - The New York Stock Exchange, created in 1792, is based in New York City and is the largest exchange in the world, it’s also known as “The Big Board”. Trading occurs Monday-Friday from 9:30AM-4:00PM and closes on all federal holidays. The Intercontinental Exchange bought the NYSE in 2013. It’s market cap is over $28.5 trillion, as explained by Investopedia.
- The Dow - The Dow Jones Industrial Average is a price weighted index created by Charles Dow and his business partner, Edward Jones, in 1896. Since 1928, it has been made up of 30 companies. Contrary to popular belief, it is not made up of the 30 largest companies, but rather 30 large-cap stocks selected by the S&P Dow Jones Indices LLC. In June of 2018, GE, the only original member remaining in the Dow, was replaced by Walgreens.
- S&P 500 - An capitalization weighted index of 500 large US based companies.
- Blue Chip Stocks - “Blue chips” were a nickname given to the most valuable poker chips in the standard red, white, and blue set. It’s now a loose term given to very large, high quality companies typically found in the above two indices.
- Bull Market - A market in which stocks are rising, typically defined as a 20% increase following a 20% decrease and preceding another 20% decrease. We are currently in the longest bull market in history, March 2009- current.
- Bear Market - A market in which stocks are falling, typically defined as a 20% drop from highs. The worst bear market was in the great depression in 1929, lasting almost 3 years and slicing off 83.4% of the S&P 500, Investopedia reports.
- Mutual Fund - A financial vehicle of pooled money operated by a professional money manager, offering an individual investor greater diversification than could be achieved on one’s own. Massachusetts Investors Fund was the first modern day mutual fund, founded in 1924. Now, there are 9,599 mutual funds, with Blackrock being the largest asset manager in the world, Statista says.
- Exchange Traded Fund - This is a similar concept of pooled money that began in the 1990’s, often tracking an underlying index. Unlike mutual funds, they are listed as a security on an exchange and trade throughout the day like stocks. These funds typically have lower fees than mutual funds due to their passive nature.
- Long - An investor has a positive amount of the investment, expecting the financial instrument to increase in value.
- Short - An investor borrows shares and immediately sells them, hoping to repurchase them in the future at a lower price to return to the lender for a profit.
Please share these interpretations with all of your friends and colleagues so they can have a seat at the table and understand the industry’s talking heads. You can sound smart at the next cocktail party.
This article was first published by CentSai.
Please tune into “The Kuderna Podcast” for more insight.
Bryan Kuderna is a Certified Financial Planner™, Life Underwriter Training Council Fellow, and Investment Adviser Representative with Kuderna Financial Team. He is also the author of the best-seller "Millennial Millionaire."
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