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Glossary of terms

Discussion in 'What is Investing? (START HERE)' started by InvestOpen, Jul 4, 2018.

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  1. InvestOpen

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    Glossary of terms

    Compound Interest: Compound interest refers to the gains you receive from an investment that are then put back into the investment to generate higher returns. Mathematically, if you earn 5% on $100, you would have $105 at the end of the first year, but $110.25 at the end of the second year because you got 5% on your initial $100 plus 5% on the gained $5.

    Common Stock: The most basic form of ownership in a company. They have shareholder rights, and are entitled to a proportionate share of company earnings. However, they are also last in line when a company goes bankrupt.

    Preferred Stock: While they don’t have voting rights, preferred stock holders receive a dividend from a company that is generally much higher than the regular dividend or bond payments, and usually guaranteed.

    Bonds: Bonds are debt contracts, or more simply loans. They can take a variety of forms in how they are paid out, if they can be prepaid, and more. Unbeknownst to most investors, the global bond market is astronomically larger than the equity market. Furthermore, bonds aren’t regularly traded in many cases, making the price arbitrage on them much higher.

    Mutual Funds: As noted earlier, mutual funds are pools of money managed by a group of individuals. They can utilize a simple strategy, such as following the S&P 500, or run entirely on the decisions of the management team. These funds can be open to new investors, or limited in their participation. They can only be purchased at the close of business.

    Exchange Traded Funds: ETFs are basically mutual funds that are traded like stocks during the regular trading sessions. They generally offer exposure to indexes or subsectors of a larger index, such as technology or healthcare.

    Exchange Traded Notes: ETNs look like ETFs but have a significant difference. ETNs don’t actually own the underlying assets while ETFs do. ETNs are essentially guarantee contracts by the issuing institution to follow a particular index or strategy. What most investors don’t realize is that there generally aren’t assets backing up the ETN, and thus they are exposed to additional risk.

    Hedge Fund: Although hedge Funds initial purpose was to provide lower risk ways to invest in the market, most hedge funds today are actively managed by a person or a group of individuals that engage in leveraged and high risk investing. These funds are usually more exclusive, less scrutinized than mutual funds, and less liquid.

    Index: An index refers to a basket of assets that are weighted in a particular way to give an overall value for those assets. Common indexes include the FTSE, Dow Jones, S&P 500, Russell 2000, and more. As the price of the assets within the basket changes, so to do the indexes themselves.

    Trust Fund: Trusts are special types of funds, normally set up by families for their decedents that holds assets or investments with the intention of giving those to another.

    Real Estate Investment Trust (REIT): Investors who can’t afford to invest in real estate themselves often use REITs as an investment vehicle. REITs are pooled funds that invest in real estate, and generally receive special tax treatment. In many cases REITs have special governance structures that require them to pay out 90% or more of their profits continuously in the form of dividends.

    Short Selling: Known as one of the few ways to bet against an asset, short selling involves borrowing an asset, such as stock or bond, and selling it with the intention of repurchasing that asset at a lower price at a future date. During that time the short seller is responsible for all dividend and coupon payments, and only makes money if the price of the asset goes down.

    Margin: Made famous in the financial crisis, margin simply means investing that is backed up by borrowed funds. When you short a stock you must do so on margin because in theory the stock could go do infinity. Many hedge funds use margin, which is essentially a loan, to purchase more shares of a company than they can do so outright.

    Bull Market: This ubiquitous term describes when a market is in an uptrend or is increasing in value.

    Bear Market: The opposite of a bull market, a bear market is a downtrend or market that is decreasing in value.

    Earnings Per Share (EPS): The total profits of a company divided by the number of shares outstanding. This incorporates non-cash items such as depreciation.

    Price to Earnings Ratio (P/E): The price of a stock divided by the earnings of a stock on a per share basis.

    Free Cash Flow: The amount of cash generated by a company after all operating and capital expenditures.

    Return on Investment: The rate of return (interest rate) that one receives on a defined period basis (usually annually).

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