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The world of investing is complex and extensive. There are tons of concepts such as stocks, bonds, leverage, bear markets, and such.
Today, I want to provide you with a glossary of all these investing terms. This glossary has been requested several times by some of my readers. Hopefully, this will help you navigate the investing world easily.
If you think I should include some other terms in the glossary, let me know in the comments below.
As a preface, it is important to remind you that Investing involves risks of losses. Make sure you are aware of that before you start investing.
Active investing is contrary to passive investing. When you are actively investing, you are picking stocks in which to invest. For instance, you may decide that the price of Microsoft shares will increase and invest in MSFT shares.
Active investors are generally investing in less than 25 shares. Active Investing is also called stock-picking.
A bear market is a condition in which the stock market falls at least 20% from its recent highs. It is generally related to high investor pessimism or a recession.
The market will continue to be in a bear market until it reaches new highs. For instance, if a stock index is at 2000 USD, falling to 1600 USD would make it a bear market. It would have to come back to 2000 USD to exit the bear market.
An entire index can be in a bear market. But people also use this term for single stocks. And indexes enter a bear market at different times. For instance, in December 2018, the Nasdaq index entered a bear market. But the Dow Jones and the S&P 500 did not enter it.
A simple definition would be a stock market that goes down significantly.
A bond is a debt issued by a company or a government. Every government is issuing bonds to its people. A bond coming from a company is also called a corporate bond.
A bond has a duration to maturity. It is the duration of the bond. At the end of the bond, you will get back the principal you paid for the bond. During the duration of the bonds, you will receive interests based on the principal. The interests are fixed, based on a specific rate of return. They are not reinvested into the bound, so they will not compound.
Generally speaking, a bond is considered safer than a share of stock. However, they are not entirely safe. Bonds are only as safe as the issuer of the bond is. If you get a bond from a company that is not safe, you will not have made a safe investment. Government bonds are more reliable than company bonds. But even governments can default on their debts.
A stock market broker is an intermediary between buyers and sellers. These are the companies that are responsible for executing stock exchange orders.
Generally, a company that provides broker accounts is called a brokerage firm. For instance, I am using Interactive Brokers. And in the past, I have used DEGIRO as well. Both brokers are great. These are brokerage firms. And these are the ones that offer the best broker accounts.
A Bull Market is a condition in which the stock market is rising. It is the opposite of a bear market.
Unfortunately, there is no universal definition of a bull market. Some people use the opposite definition of a bear market. It means that a bull market starts when prices rise 20% from their previous low. Some other people say that there is a bull market when there is not a bear market.
Simply put, a bull market is a stock market in which prices go up significantly.
When you sell a share of a stock at a price higher than what you paid for it, you get a capital gain. It is the realized increased value when you sell a share. You only get capital gains if you sell your shares.
It is essential to know this term because the taxes on capital gains are different between different countries. For instance, in the United States, you pay some taxes on capital gains, but this is not the case in Switzerland.
Usually, banks are loaning money to people with the money of other people. In Peer-To-Peer (P2P) lending, people are lending money directly to other people.
It lets people get more returns for their money. And they can choose themselves in what loans they want to invest in. However, this is not without risks. The borrower can default. In which case, you will lose the money you lent.
Generally, people are not directly loaning money to people they know. They are using a crowdlending platform like Mintos that acts as an intermediary. It makes it much easier to reach thousands of people. It also sometimes makes it safer since some of these platforms are offering some guarantees. However, this introduces yet another risk, if the platform itself defaults.
To learn more, you can find out how I started investing in P2P Lending.
Compound Interest is a form of interest where interests are generated not only from the principal but also from the interests. If you get 1% interest for several years and it compounds yearly, you will get 1% the first year, 1.01% the second year, and so on.
Compound interest can make a very significant difference compared to standard interest. It is why some people consider compound interest as magic. But in the end, this is just math.
If you are interested, you can learn all about compound interest.
We say that the stock market is in a correction territory when it is 10% lower than its recent highs. It is quite similar to the definition of a bear market. A correction will happen before a bear market occurs. But not all corrections are followed by a bear market.
Again, a single stock could be in a correction. Or an entire index could be in correction as well.
Simply put, a correction is a time when stocks go down but not too significantly.
A cryptocurrency is a form of digital currency based on cryptography. It is generally not a currency tied to a country, although there are some countries developing cryptocurrencies.
The idea of cryptocurrencies is based on mining cryptocurrencies. You use a computer to do some advanced computations. These computations are what make the cryptocurrency works. It is what processes all the transactions. And these computations are rewarded with some cryptocurrencies.
If you want to go more in-depth, I have an article about how cryptocurrencies work.
Some companies, when they have extra money, decide to distribute some of this money to their shareholders. They will do that regularly: monthly, quarterly, or annually.
If you hold shares of a company that pays a dividend, you will receive some cash in your broker account for each of your shares. The company will decide on some amount of money per share. And at a given date, they will distribute this cash based on the number of shares of each shareholder.
Some people invest solely in dividend stocks, based on building passive income.
To learn more, read this article about Dividend Investing.
Dollar-Cost Averaging (DCA) is a technique to invest a large sum of money into the stock market. Instead of investing the lump sum at once, the technique relies on investing it several times at regular intervals.
The idea of this technique is that you will average out the price. It avoids the big risk of the market tanking just after you invest your lump-sum. On the other hand, this introduces a large opportunity cost since you are keeping cash instead of investing it.
To learn more, read about DCA in detail and why you should not use it.
Exchange-Traded Fund (ETF)
An Exchange Traded Fund (ETF) is a mutual fund traded on the stock market. It means you can buy and sell shares of an ETF just as if you were buying or selling shares of any other stock.
Compared to mutual funds, ETFs have a few advantages. First, they are much more liquid. You can sell an ETF at any time when the market is open, and you will get your shares directly. And you can sell your shares and get your money on the same day. Another advantage is that ETFs have generally slightly lower TER than their equivalent mutual funds. But this is not really significant.
One more significant advantage is that they are much more available. For instance, Vanguard does not offer its funds in Switzerland. But their ETFs are accessible through the stock market. It means we can invest in ETF from Vanguard.
The disadvantage of ETFs is that they are a bit more complicated to use. You need a broker account. And you need to issue stock market orders to buy shares of ETF. Many people avoid ETFs because of that.
Contrary to what some people believe, not all ETFs are passive. There are some active ETFs, as well. But the majority of ETF are indeed passive.
Good-Till-Cancel (GTC) is one of the possible duration of a stock market order. It means that the order you made will be valid until it is canceled. For most brokers, they are canceling unexecuted orders after 60 days.
If you know at which price you want to buy a sell a stock, this is a good duration. It is a form of market timing, so be aware of what you are doing.
Growth is a category of stocks. A Growth Stock is a stock for which the stock price is increasing at an increased speed. The idea is that investing in growth stocks will return higher than average returns.
Companies that are growing at a faster rate are also generally less stable. So it is considered riskier to invest in growth stocks. But the returns can be higher.
The idea is contrary to value investing and to value stocks.
An index is like a collection of stocks. Generally, there will be a formula to decide which stocks belong or not to the index. But sometimes, the decision is taken by humans, based on some loose condition or their judgment.
For instance, the S&P 500 is an index listing the 500 biggest United States companies by market capitalization. And the S&P 500 Value index is a subpart of the S&P 500, where they take only the value stocks.
There are many indexes. You have indexes for each country. And then, you have indexes for several sections. They also have indexes for different sizes of companies. Finally, types of companies are also cut into indexes.
You cannot directly invest in an index. You can only invest in the stocks that the index contains. But you can invest in index funds of this index. There are often many index funds for the same index.
You can learn more about indexes by learning how to choose an index to invest.
An index fund is a fund investing in a single stock market index. It is also often called a passive fund. Many people mix up index funds and indexes. An index fund does not decide in which stocks it will invest. If the index changes because of the index provider, the fund must rebalance accordingly.
An index fund can be either a mutual fund or an Exchange Traded Fund (ETFs). In the end, they will invest in the same stocks. There is not much difference between good mutual funds and good ETFs.
You can learn more about index funds by learning how to choose an index fund to invest.
When you are working in a company, you sometimes have access to information that is not public. Using this information to trade is called Insider Trading.
Insider Trading is illegal! You should never use information that is not public to trade.
For instance, if you know that the company is going to publish awful results in advance, you could sell all your stocks. Or if you know that your company will purchase another company and this will the stock jump, you could buy a lot of stocks in advance.
You should never do any of that! You are likely to get fired if your company finds out. And you are likely to get fined as well.
A load fee is an upfront fee charged by some banks for investing in their funds. You should avoid this fee as much as possible. This fee is taken out of your invested money before it hit the fund.
In Switzerland, there are still many banks that charge load fees. For instance, they may charge a 1% load fee. If you invest 10’000 CHF into their funds, you will have to pay 100 CHF directly.
There are so many options for funds today. You should never pay a load fee anymore.
A loan is some amount of money that someone lends to a particular or a company.
The borrower wants the loan to get some amount of money and repay it in a longer time. And the lender will get some interest every month (or another period) for its money. At the end of the loan, the borrower pays back the principal.
People invest in loans to get regular interests (passive income). And you can have some interesting returns depending on the loans you are using. However, there are risks. If the borrower defaults, you are likely never to see your money again.
A bond is a loan. And so is a mortgage.
The Market Capitalization of a company is the value of all the shares of the stock of the company. This metric is generally used by index funds to weigh company by size.
If a company has 1’000 shares at 15 a share, its market capitalization is 15’000. As I am writing this article, here are the three biggest companies in the world by Market Capitalization:
- Microsoft with 1’141 billion dollars
- Apple with 1’123 billion dollars
- Amazon with 865 billion dollars
For reference, the biggest Swiss company in the world is Roche, with currently worth 260 billion dollars.
Market Timing is the process of trying to time the market. It means that you are trying to predict the direction in which the market is going.
If you know where the market is going, you can get higher than average returns on your investment. For instance, if you predict that Microsoft is going to return 10% over a year and the market only 8%, you are better off investing in Microsoft only.
Market timing does not have to be with single stocks. You can also time the market with a single sector. For instance, investing heavily in tech stocks is a form of market timing.
The problem with market timing is that you cannot reliably predict the direction of the market over a long period. It does not work for long-term investment. It has been shown many times that people were not able to time the market in the long run. It is the reason why passive investing has become more and more popular over the years. For instance, John Bogle insists that passive investing is the best way to invest.
There is a famous quote about market timing: “Time in the markets beats timing the market”. This quote is the motto of many personal finance blogs.
A mortgage is a special kind of debt to purchase a house. It is a debt provided by a bank to buy or build a house.
One thing that is special with a mortgage is that the bank uses the house as collateral. Your house does not belong to you, but your bank. If you could not pay your mortgage payments, the bank could seize your home.
With a mortgage, you will get interest payments monthly. And your bank will also ask you to amortize over time. Amortization means paying back the debt. Once you have entirely paid back your mortgage, your house is really yours.
People are using mortgages as leverage to invest in real estate. You can invest a small amount of money to get a house. And the rent that you can perceive can be higher than the interest payments. It means that your tenants will repay your house.
Month To Date (MTD) indicates a metric for the period between the start of the month and now. It is used a lot to indicate returns of stocks and indexes. For instance, you often find MTD Returns as the returns since the start of the month.
A mutual fund is a fund managed by an institution such as a bank or an investment company. This fund is investing in a set of different stocks.
Many investors can invest in the fund. Instead of buying shares of the stocks held by the fund, they are buying shares of the fund itself. It is easy to have diversification in a portfolio.
Generally, there are some constraints to invest in a mutual fund. There is generally a minimum you can invest in. Many funds have a minimum of several thousand dollars.
Then, you can only invest during the opening hours of the fund company. Your new shares will generally take one day to get bought. And when you want to take your money out, it generally takes one day.
To manage the fund, the fund provider will take some money out of it. These are the fees you will have to pay for investing with this fund. You can look at the Total Expense Ratio (TER) for more information.
Passive investing is the contrary of active investing. Instead of picking stocks, you are choosing indexes in which to invest. It is also called index investing.
By investing in an entire stock market index, passive investors are betting on the entire stock market, not on particular stocks. By doing so, they will get the returns of the stock market. If the stock market does well, their portfolio will do well. And if the market does not do well, so will their portfolio.
The rationale for passive investing is that it is much safer. You are not trying to guess which stock will perform better than others. You are betting on the entire stock market. And over the last 150 years, the market has been going up on average. It is an excellent strategy for long-term investors.
An investment portfolio is a collection of assets. For instance, your stock market portfolio is simply the list of the stocks you own. If you invest in index funds, your portfolio could be a collection of Exchange Traded Funds (ETFs).
If you do not know where to start with your portfolio, I have a guide on how to design an index portfolio from scratch.
Real Estate means properties and lands. It is called real because it is a tangible asset. Contrary to shares of stock, there is a real asset somewhere that you own.
Some people invest principally in Real Estate. By buying a property and renting it, you can get some somehow passive income. This income will let you repay your debt and reinvest later into another property. The more property you have, the faster you can buy the next one.
For instance, investing in real estate is how Eric Duneau became financially independent.
A recession is a period of economic decline. Generally, a recession is defined as a period of two consecutive quarters where the Gross Domestic Product (GDP) of a country declined. A recession is typically local to a country. But some recessions have been global all around the world.
I have an entire article about recessions to learn more.
A share is a part of the ownership of the stock of a company. You can own 100 shares of Apple stock, for instance. It means you have 100 parts of the Apple company.
A lot of the time, people misuse the words shares and stocks. But their meaning is very close. And it is very easy to mistake them. It is something I did myself.
The stock of a company is the set of all the shares they emitted on the stock market. Large companies have millions of shares of their stock. Each owner of a single share is also an owner of the entire stock and of the company itself.
You can look at the definition of a share to understand why these two concepts often get mixed up.
The Stock Market is a market where you can buy and sell shares of stocks of publicly listed companies. There are many such markets, and they are called stock exchanges.
A stock exchange is where you can buy and sell the shares of the stock listed on this exchange. Some exchanges have a physical place where stockbrokers buy and sell directly. But today, most of the exchanges are made electronically from various platforms.
Total Expense Ratio (TER)
The Total Expense Ratio (TER) is the measure of how much fees there is for a fund. It is the sum of all the expenses of the fund: marketing expenses, employee salaries, management fees, transaction fees…
The TER is expressed as a percentage. It is the amount of money that is taken out of the fund every year. For instance, if the TER of a fund is 1%, you will lose 1% of your investments every year only for fees. If the market made 6% returns, you would only get 5%. If the market lost 5%, you would lose 6%. It is money you are are going to lose regardless of the market.
It is a critical metric to compare two different funds. It is especially true if you are comparing two index funds. If the two funds are investing in the same index, the most important metric is the TER. You want it to be as small as possible.
The tracking error is a metric to compare different index funds. It shows how much the fund failed to represent the performance of the index.
For instance, if the index returned 10% and the index fund only return 9%, there is an absolute tracking error of 1%. It is also possible that the index fund returns more than the index, resulting in a positive tracking error.
Generally, the tracking error is computed as the standard deviation of the tracking errors for the last years. You can compute it by computing the differences for these years and then take the standard deviation (square root of the sum of the squared differences divided by N – 1) of them.
Generally, you want an index fund with a low tracking error. It will give you higher confidence that the fund will match the performance of the index.
Value is a category of stocks. It is related to Value Investing. A Value Stock is a stock for which the stock price is lower than the estimated value of the company. Value companies are generally quite stable and well established.
Warren Buffett is one of the famous Value Investors. He becomes very rich by investing in value stocks. It sounds simple, but in practice, it is very difficult to estimate the true value of a stock.
A Value stock is in direct opposition to Growth Stocks.
The volatility is a measure of how much a stock price moves. You can compute the volatility of any investment.
The more the price moves up and down, the higher the asset is volatile. Generally speaking, assets with higher volatility have higher risks but also higher returns.
You can also use this term to define the stock market. During some periods, it can be more volatile than during others.
For the stock market, people generally compute the volatility of a stock compared to the volatility of the market. This measure is called the beta of a stock. A stock with a beta of 1 is exactly as volatile as the stock market. A stock with a beta of 2 is twice more volatile than the stock market. For instance, in the last three months, compared to the S&P 5000, MSFT had a beta of 1.23, and NVDA had a beta of 2.06. So NVDA was much more volatile.
Year To Date (YTD) indicates a metric for the period between the start of the year and now. It is used a lot to indicate returns of stocks and indexes. For instance, you often find YTD Returns as the returns since the start of the year.
With this glossary, you should now know all the terms related to investing. This glossary can help if you read a lot of investing articles, and you do not know all the lingua.
You do not need to learn all these terms! But if you do not know one of these, you can always come back to this glossary to take a look. It will help you understand some articles using complicated vocabulary.
If you are a beginner in investing, the best way to start is to go through my Investing Guide for Beginners.
Since next week is Christmas and the week after is New Year, I will not post on my blog during these times. So, I wish you all a happy holiday!
What do you think of this glossary? What did I forget?