21 Complex terms experienced investors use - that you don't need to be intimidated by
Do you walk into a room full of investors and struggle to understand what's going on around you?
Are you lost in the jargon and anxious that someone is going to ask you a question, you just can't answer?
Well, if that sounds like you then I have some good news.
You don't need to play second fiddle to your investment advisor, your broker or even your smarty-pants friends. You don't need to be intimidated when they throw big words at you anymore.
I've found 20 of the most annoying terms that investors use to sound smarter and listed them below.
I don't want you to read this just to sound smarter, you should understand these terms because they really can give you a better chance at successful investing.
21 complex investment terms made simple
1. Asset Allocation – It’s not just about spreading stuff around
Asset allocation is really just a fancy way of explaining a popular investment strategy. Assets refer to the stocks, bonds or cash you’re investing with. Allocation refers to the location of your assets – where it is kept.
Asset Allocation is used to spread your risk across various industries, sectors and investments. The idea of asset allocation is to protect your money. For example, if your investments in property fall, your investment in bonds will help you to offset the losses.
2. Bonds – Government’s way of lending money from you and paying you back with interest
A bond is a contract that allows you to give a set amount of money over to a party who then promises to pay that money back with interest on a certain date. Bonds are extremely safe investments because you are guaranteed to get your money back when your contract matures.
3. Stocks – Your opportunity to own small pieces of a company
A stock is what you by when you invest your money in a company listed on the Johannesburg Stock Exchange (JSE). You buy and own a tiny part of the company itself. When the company does well, your investment does well. If the company does badly, your investment in the stock does badly.
4. Mutual Funds – A pile of money from a bunch of investors
A mutual fund is a collection of hundreds of stocks carefully selected by a fund manager to help you, the investor, spread your risk across the investment markets. These stocks are bought with contributions of many investors. So essentially, it’s a big pile of money invested across the stock market.
5. Index Funds – Betting on the success of a basket of companies
To explain an Index fund, you need to understand what an Index is. An Index is a group of stocks that make up a portion of the economy. Indexes help you to get a feeling about how that part of the stock market is performing in that specific sector. Now, when you invest in an index fund, you’re investing in group of stocks (A basket of companies) and betting on the Index going up.
6. Expense Ratio – What you pay to mutual fund managers for managing your money
There are costs involved in managing mutual fund. So, when you invest in one, you must expect to pay an annual fee to the fund managers for managing the investments. This fee you are paying is also used to cover administrative, marketing and general fees.
Tip: when you’re looking at the expense ratio of a mutual fund, remember that the higher the expense ratio, the less money you’re going to earn from your investments.
7. Price to earnings ratio (PE) – The relationship between price and earnings
The price to earnings ratio (PE) shows you the relationship between the price of the stock and the company’s earnings. You can use the PE to find out if your investments are overvalued or not. It shows.
A low PE shows that a company could be undervalued. Where as a high PE shows that a company could be overvalued. You’d have to confirm this by taking a deeper look at the company’s performance figures, operations and future projects.
However, if the PE is above 25, the company may have exceptional growth in the future or that’s it’s operating in an industry where there’s been booming growth and a bubble is about to pop.
The bottom line is, never rely on the PE ratio alone to assess the value of a stock.
8. Prospectus – Everything you need to know about a stock in a neat package
Before you decide to invest, ask your financial advisor for a prospectus. This legal document has all the details on the stock, mutual fund, index fund or any investment that you’re interested in. If you're wondering, for instance, what the expense ratio is on your mutual fund, or you would like a list of all the fund's holdings, you'd find it in the prospectus.
9. Stop loss – Built in protection from massive losses
The stop loss is a strategy that you can use to limit your losses when buying shares. The level of the stop loss is based on your risk preference. When your buy a share the stop loss is set a certain percentage below the price you paid for the share. If the share falls to this level it is sold. If the share price rises you can move your stop loss up. Your stop should be set between 10% and 25%.
10. Suspended shares – Poor performing rule breakers
The JSE can suspend a share if the company breaks the listing requirements or some aspect of the Securities Exchange Act. If a share is suspended it means that nobody can buy and sell shares in that company anymore. The company will have to comply with all the rules before the suspension will be lifted.
11. Tightly held – Nobody wants to sell their shares
If the owners of a particular share don’t want to part with them the share is tightly held. This is particularly prevalent where the owners hold a large percentage of all the issued shares in a company. These shares usually trade in very small volumes and are difficult to get your hands on.
12. Alternative Investments – What you can invest in outside of the stock exchange
Alternative investments refer to everything you buy outside of the normal trades offered on the stock market. This could be property, livestock, gold coins, art or even funds. These alternative investments allow you to keep some of your investment capital out of the markets and give you a level of protection from volatile market swings.
13. Headwinds – Investments struggling to make money
When investments come under pressure from volatility in the economy or the industry it operates, you’ll often hear people say, “The share is facing strong headwinds.” The phrase comes from the airline industry. When pilots are flying into the wind, the plane struggles and flies a little slower.
14. Tailwinds – Helping the share rocket forward
Tailwinds are the opposite of headwinds. It means that certain factors in the market are driving your investments forward into positive territory. It is important to look at the reasons behind tailwinds. Brokers live to use these terms to make shares more exciting than they actually are, so remember to look at the reasons behind tailwinds to get a clearer understanding of why the share price is moving up so quickly.
15. Fundamentals – Fancy speak for the building blocks of a business
Before you buy a share, it is important to do your fundamental analysis. This is where you look at the company’s operations, future projects, debt levels, revenue earnings and future growth prospects. A stock’s fundamentals can tell you what you can expect to achieve from the share price in the next few years. It can help you spot a losing share before you waste your money on it.
16. Technical Analysis – What do the graphs have to say about the company?
While fundamental analysis focuses on the company itself, technical analysis looks at the charts related to the company’s share price. Technical analysis is used to assess future movements of a share price – if it will go up or down. It looks at important information including, price movement and the volume of shares traded in the stock.
17. Intrinsic value – The real value of company you might invest in
The intrinsic value of a stock tells you exactly what the share is worth. It eliminates general market evaluation (what people think it’s worth) by looking at the businesses actually assets. The intrinsic value of a share won’t always match what the share is trading at. In some cases, investors buying action will push up the price of a share and you could pay more for a share that’s intrinsic value is worth less.
18. Current market value – What you can actually get if you sell a share
Current market value is the actual price the share is trading at on the JSE. It is based on the closing price of a share on a particular trading day. The closing price of a share is the final price the share was trading at when the stock market closes on any given day. It’s what you can expect to pay for a share when you buy it.
19. Liquidate – Turning physical assets into hard cash
When companies are struggling to pay off debts, they usually need to sell off some of the assets they own to meet their debt obligations. Liquidate means, turning assets into cash. In most cases, companies that are liquidating their assets are in trouble. But there are cases where companies liquidate unused assets to increase its spending and expand the business operations.
20. Bankruptcy – A huge red flag for any investor
When a company files for bankruptcy, it is heading into a legal process that forces it to pay off its outstanding debts. Obviously, you don’t want to invest your money in a company that has filed for bankruptcy.
It is possible companies to start fresh and recover from bankruptcy. But very often these companies struggle to regain investor confidence and trades as much lower levels.
21. Economic Value Vs Market Value – What the general market thinks something is worth
When you hear an investor refer to the economic value of a product or stock, they are referring to the maximum price that consumer like you and I are willing to pay for a product. Market value is the exact opposite. This refers to the minimum amount consumers are willing to pay for a product or a service.
Now that you understand these important investment terms, you can engage with expert investors with more confidence.
Remember, it’s never too late to start learning about the stock market. While it might sound like a complex market with difficult investment terms, it’s actually quite easy to wrap your mind around.
The FSPInvest.co.za team understands how important it is for you to understand this investment jargon, that’s why we go out of our way to write all our communications to you in a way that you can understand, invest and profit from the investment market.
Don’t allow yourself to miss out on the exceptional investment opportunities in the market because you don’t understand what investors are speaking about. You can still build a lifetime of wealth even if you have zero experience and limited funds.
Let’s build your wealth together,