Investors have their own language. Bears and bulls aren’t animals in the stock market; they’re people. Splits have nothing to do with gymnastics or ice cream, and resistance is not a physical force. When you decide to start investing, it’s best to learn the lingo as quickly as possible.
That’s why we’ve put together this handy glossary to help you get up to speed.
Key Terms Every Investor Needs To Know
Learning the terms below will give you the tools that you need to understand market news and analysis articles and posts on investing message boards.
Acquisitions are also commonly referred to as buyouts, takeovers, or take-private transactions. An acquisition takes place when a publicly traded company buys all outstanding shares of another publicly traded company. When a privately held company acquires a publicly traded company, it’s generally called a take-private transaction.
Some investors purposely look for stock in companies that are considered takeover targets. These are often companies that are struggling financially but own intellectual property other companies in their sector will find valuable.
Investors look for these opportunities because acquisitions usually happen at a premium. The purchasing company pays more than the total value of all outstanding shares in order to purchase the company.
For example, Company A trades at $3 per share. Company B wants Company A’s technology and decides to move forward with an acquisition. In order to make the deal, they make an offer that;s hard to refuse: Company B offers Company A $3.50 per share to move forward with a takeover transaction.
In the example above, the premium in the transaction would be $0.50 per share. That works out to a 16.67% premium. If you hold shares of Company A at the time the acquisition takes place, the deal will yield you a 16.67% return.
2. Annualized Returns
Annualized returns are used by investors to compare investments within their portfolios and investment opportunities they’re considering. Annualized returns are the overall returns that are rescaled to an average over the course of one year.
Use the following formula to calculate your annualized return:
(Ending Balance – Beginning Balance)/Beginning Balance = X
((1+X)(1/years Of Investment)-1)*100 = Annualized Returns
For example, an investor invested $1,250 into XYZ stock eight years ago. Today, his shares of XYZ stock are worth $4,000. Using the formula above, the annualized returns calculate to 15.65%.
When purchasing shares of stock, the ask is the lowest price an investor is willing to accept to sell their shares. When purchasing over-the-counter stocks, the ask is the lowest price the market maker is willing to accept to sell shares.
4. Asset Allocation
Asset allocation is a strategy used to balance a portfolio in terms of risk vs. reward. The idea is to diversify a portfolio including both high-risk and low-risk assets in order to reach long-term goals.
Beginning investors generally invest in asset classes known as stocks and bonds. Stocks are the higher risk of the two. Generally, taking on greater risks comes with greater rewards.
According to CNN Money, the average return in the stock market is 10% per year, while the average return on bonds ranges between 5% and 6%.
A good rule of thumb when it comes to choosing your asset allocation for your portfolio is to use your age to determine what percentage of your portfolio will be allocated to bonds. For example, if you’re 28 years old, 28% of your assets should be in the bond class and 72% of your assets in the stock class.
This strategy is based on the idea that younger investors have more time to recover any losses that occur, so a higher percentage of assets should be in the higher-risk category. You then adjust your asset allocation more into the lower risk categories as you get closer to retirement.
Pro tip: If you’re investing in a 401(k), IRA, or a different type of retirement account, sign up for a free portfolio analysis from Blooom. One of the many things they’ll do for you is to make sure you have the proper asset allocation based on the amount of risk you’re willing to take.
An asset is anything of value. Your home, car, and money in the bank are all assets. In terms of the stock market, assets are investment vehicles. Stocks, bonds, mutual funds, ETFs, and options are all types of assets.
When analyzing a potential investment opportunity, assets held by a company include cash, property, investments, prepaid service expenses, inventory, and anything else of value the company owns.
6. Balance Sheet
A company’s balance sheet outlines the financial picture for investors. The balance sheet gives investors an inside look at how much money a company has on hand, the assets the company holds, and the debts it owes.
Keep in mind that balance sheets are always delayed. Balance sheets are usually updated quarterly and are released with the company’s quarterly report weeks or months after the close of each quarter.
The United States Securities and Exchange Commission (SEC) requires publicly traded companies to report financial results within 45 days following each quarter. However, annual reports may be delayed by up to 90 days.
7. Basis Point
A basis point is one-hundredth of 1%. For example, if an investor says “Apple moved up 125 basis points,” it means that the price of Apple gained 1.25%. Basis points are often used in reference to changes in interest rates.
The stock market’s bell is rung at the open and close of each trading session. The bell was important when trading happened on a trading floor. It’s more of a symbolic reminder of history today, as most trading takes place electronically.
If someone says “The stock ran just after the opening bell,” it means the stock moved up when the trading session opened.
The bid is the highest price an investor is willing to pay to buy a stock. The bid is always lower than the ask (the lowest price at which investors are willing to sell).
10. Blue Chip
Blue chip stocks are considered to be the least risky investment opportunities in the stock market. These are generally established companies worth billions of dollars that rank among the top three in their sector.
Blue chip stocks are also commonly household names. Stock in companies like Google, Facebook, and Walmart are considered to be blue chips.
Bonds are a low-risk investment vehicle. Essentially, they’re loans from investors to companies. Each bond comes with a par value, or the amount of money the investor has lent to the company.
The return on bonds comes by way of interest, which is called a coupon. Coupons are paid to investors monthly, quarterly, semiannually, or annually, depending on the bond term.
Bubbles take place in the market when investors drive values of an asset higher than they should be. This irrational buying leads to unrealistic growth in prices with trades in the sector taking place at high volumes.
Much like a soap bubble, bubbles in the stock market always pop. When a bubble in the market pops, prices of assets within the bubbling sector collapse, bringing them down to more realistic valuations.
13. Bull Market
A bull market is a market in which the vast majority of assets are heading up in value. Bull markets differ from market bubbles because the movement takes place in a more rational way.
Bull markets generally take place when economic activity is moving in a positive direction and consumer spending is up. Bull markets can also take place in specific sectors. For example, a particularly cold winter might push oil and energy stocks into a bull market because cold winters lead to higher demand for heat energy.
14. Capital Gains or Losses
Capital gains or losses are the profits or losses experienced through the sale of assets. Both individuals and the companies they invest in experience capital gains and losses.
- For Investors: Capital gains or losses take place when an individual sells a stock, bond, or other financial instrument. It’s important to track capital gains and losses for tax purposes.
- For Companies: Capital gains and losses also take place when a company sells a financial instrument. When investors analyze a company for a potential investment opportunity, it’s important to look at capital gains and losses experienced by the company in recent transactions to get an idea of its financial health. Companies that are struggling financially will often sell assets at a loss to make ends meet, so watch for capital losses on a company’s balance sheet when making investment decisions.
15. Cash Equivalent
Cash equivalents are any asset that is highly liquid. These include stocks and bonds, as well as other financial instruments that can be sold or accessed immediately. Cash and cash equivalents are outlined on any publicly traded company’s balance sheet.
Pay close attention to cash and cash equivalents when investing in companies that are producing losses rather than earnings. Comparing cash and cash equivalents to the amount of money the company spends each quarter gives you an idea of how long a company can survive without having to access more funding through transactions that lead to a loss of value for existing investors.
Every company has only a predetermined number of shares available to purchase. Dilution happens when a publicly traded company issues more shares. These new shares are added to the total number of outstanding shares. When a transaction like this takes place, more shares are available, but the actual value of the company has not changed.
After a dilutive transaction, investors who already owned shares before the transaction suddenly own shares that have less value. It’s like cutting more pieces of cake because more people showed up to a party than expected. Everyone gets a smaller piece.
Although there are many vehicles to raise funds, struggling companies tend to use dilutive transactions to pay debts or raise money. To do so, these companies issue new shares and sell them to the public or give them to lenders.
Diversity is the mix of assets that you have in your portfolio. There is diversity in asset classes and diversity of asset classes.
- Diversity in Asset Classes: Diversity within an asset class relates to the mix of investments you have within that class. For example, diversity in stocks means you own stock in multiple companies across different sectors.
- Diversity of Asset Classes: Diversity of asset classes relates to the mix of asset classes within your portfolio. For example, a portfolio with a diversity of asset classes might include a mix of stocks, bonds, real estate, precious metals, and other asset classes.
Diversification is important because it protects you from excessive loss. A single investment within a portfolio may fall, but if the portfolio is diverse, gains in other assets or asset classes can ease the loss burden.
Dividends are distributions of profits to shareholders. Not all companies pay dividends, but if they do, they generally pay them on a quarterly basis. Dividends are declared prior to being paid.
For example, a company may declare that it will pay a quarterly dividend of $0.07 per share. That means that every quarter, shareholders will receive a payment of $0.07 for each share owned.
An index is a tool that allows investors to compare current price levels with past prices in an effort to gauge performance. Indexes are based on the entire market or subsectors within the market.
For example, the NASDAQ Composite is a tech-heavy index that tracks the common stocks of mostly U.S. technology companies. Therefore, investors use the NASDAQ as a way to gauge the technology market’s performance.
The term ETF is an acronym for exchange-traded fund. ETFs are traded on stock exchanges just like common stocks. Often considered to be bucket investments, ETFs are funds that can hold a mix of various assets including stocks, commodities, and bonds.
In the stock market, equity is a bit different from home equity. In this arena, stocks and equities mean the same thing. If you own stock, you own a percentage of the company, or equity in the company. This is why you may read about an investment in “equities” when reading an article about the stock market.
Stock exchanges are essentially stock markets. These are markets where shares of companies are bought and sold. One of the most popular stock exchanges in the world is the New York Stock Exchange, or NYSE.
23. GAAP and Non-GAAP
GAAP is an acronym that stands for Generally Accepted Accounting Principles. Most figures reported on financial results from publicly traded companies are GAAP figures, as they follow general accounting practices.
However, when it comes to earnings, you will often see non-GAAP earnings reported. Non-GAAP earnings are figures based on alternative accounting practices used widely by publicly traded companies. Non-GAAP figures often include data from one-time transactions and other details not used in GAAP practices, resulting in a more accurate understanding of all earnings involved.
When a halt happens in the stock market, it means that shares of a company cannot be bought or sold. Trading halts can happen for multiple reasons. The most common halts in the stock market include:
- T1. A T1 halt is a news-pending halt. This is when there is a pause in trading of a particular stock because the company is expected to release news that may significantly impact the price of shares. This halt stops speculative trading from leading to out-of-control prices before news is released.
- T2. A T2 halt is a news-released halt. This halt takes place when the trading of shares are paused for a short period to allow investors to digest news that’s expected to have a significant impact on share prices.
- T6. A T6 halt is an extraordinary-market-activity halt. The T6 halt takes place when a stock experiences unreasonable gains or declines in a single trading session. This halt is designed to stop the momentum so the stock goes back to a more reasonable trading pattern.
There are several other halt types that are less common. You’ll find a full list of these halt codes on the NASDAQ website.
25. Hostile Takeover
A hostile takeover is a form of acquisition. In a hostile takeover, the buyer is not in agreement with the seller. For one reason or another, management of the company targeted to be taken over doesn’t want the acquisition to happen. In most cases, the target company turns down multiple offers from the buyer before a hostile takeover occurs.
After multiple takeover offers, the buyer bypasses the target’s management and goes directly to shareholders. At this point, the buyer pushes for shareholders to vote to replace management to achieve the takeover.
Should the buyer have a compelling argument and offer a premium that gets shareholders excited, the hostile takeover has a strong chance of succeeding.
A margin is essentially a loan to an investor from a broker. Buying on margin means the investor only pays a percentage of the share value in order to buy shares. This is only advisable for experienced investors, as it can lead to higher than expected losses.
If a share purchase on margin goes well, the investor reaps the rewards of the total overall investment without having to lay out the total amount of investing dollars that went into the trade. However, if a trade on margin goes bad, not only can the investor lose all of the money they put into the investment, but they can also end up owing the broker any losses that exceed the original investment, putting the investor in debt.
27. Market Capitalization
Market capitalization, also commonly referred to as market cap, is the total value of a publicly traded company. To find the market capitalization of a publicly traded company, simply multiply the total number of shares outstanding for that company by the price of shares.
Market cap is an effective way to gauge risk when making an investment. Companies with market capitalizations under $5 million are considered penny stocks. Those with market caps between $5 million and $300 million are considered to be micro-cap stocks.
Penny stocks and micro-cap stocks tend to be high-risk stocks that should only be traded or invested in by seasoned market participants. If you’re new to investing, look for market caps in the billions to keep risk at a minimum.
Mergers are often called stock-for-stock transactions. In these transactions, one company is absorbed by another. Instead of paying cash or a mix of cash and stock as we see in acquisitions, shareholders receive shares of the buying company’s stock in exchange for the shares they own in the company being merged into the buyer. These shares are equal to the negotiated value the two companies decide the merger target is worth.
In the end, shareholders of the target company will own a predetermined percentage of the combined company.
29. Money Market
Money market accounts have some characteristics of a checking account and some characteristics of a savings account. These accounts have historically yielded higher interest rates than traditional savings accounts, but they also come with higher minimum deposit and balance requirements.
Money market accounts usually come with checks and allow a limited number of transactions per month, as long as you don’t drain the balance of the account lower than the minimum required balance.
30. Mutual Fund
A mutual fund is a lot like an ETF. But in the case of mutual funds, the money used to invest comes from a pool of many investors. These funds are then invested in a variety of assets in order to meet the goals of the mutual fund laid out in its prospectus.
Mutual funds allow each individual investor to diversify their holdings into a range of investment vehicles without having to manually select each holding in the portfolio.
31. Quarterly Report
Quarterly reports, also known as earnings reports, are documents required by the SEC that provide investors with a look into the financial position of a publicly traded company. As the name suggests, these reports are released every three months.
In general, quarterly reports are accompanied by a 10-Q filing with the SEC. These filings are also required by the SEC on a quarterly basis. The 10-Q report provides more financial and operational details to investors than the standard earnings report.
32. P/E Ratio
The price-to-earnings ratio, or P/E ratio, is a fundamental measure of the veracity of an investment. The P/E ratio compares the price of a single share of stock in a company to the earnings per share in the most recent quarterly report filed by the company.
Different sectors have different average P/E ratios. For example, the average P/E ratio in the Internet sector varies wildly but is generally well above 30. By contrast, the P/E ratio in the oil and energy sector stays relatively stagnant at around 15 to 16. This means that in the Internet sector, investors generally pay more than 30 times earnings per share to purchase each share, while in the oil and energy sector, they pay on average between 15 and 16 times earnings to purchase each share.
The term premium is generally used when talking about an acquisition of a whole company or assets within the company. The term relates to the amount the buyer pays for the asset above its current market value.
For example, if a company currently trades with a market cap of $500 million but is acquired at a price of $600 million, the premium on the transaction comes to $100 million, or 20%.
A prospectus is a financial document that acts as an advertisement for the purchase of stocks, ETFs, mutual funds, and other investment types. The prospectus for an investment is a detailed document outlining the potential risks and rewards associated with the investment. Using this document, investors can get a clear picture of what they’re investing in and the value proposition involved.
A recession is a financial event in which businesses contract due to a decline in economic activity. Recessions are often accompanied by reduced consumer spending, leading to a slowing of growth or decrease in product pricing.
From a technical standpoint, a recession takes place when there are two consecutive quarters of declining economic activity. Recessions are often caused by major underlying economic events. For example, the COVID-19 pandemic is currently leading to a dramatic decline in spending across the United States, creating what many believe to be the beginning of an economic recession.
This is an important term to keep in mind when investing because the market has a tendency to be strongly correlated to economic activity. Therefore, when an economic recession takes place, values of stocks generally decline. At this point, investors look for safe-haven investing options like gold and silver.
36. Registered Investment Advisor (RIA)
Registered investment advisors are professionals who are registered with the SEC or a state securities agency. To receive the RIA title, advisors must pass a difficult financial exam known as the Series 65 exam. This designation gives investors the peace of mind of knowing the professional they’re paying to handle their investments knows the market well enough to do so.
Resistance is a theoretical point at which investors believe that a stock moving upward will shift directions and start to decline. This is an important technical indicator for two reasons:
- It Tells You When to Sell. When a stock nears a resistance point, it’s time to sell unless there’s compelling news that’s likely to send the stock higher. This gives you the ability to cash in while prices are high and avoid losses on the reversal.
- It Tells You if a Dramatic Run Is Going to Take Place. When a stock that’s headed up breaks through resistance, the action is known as a bullish breakout. When a bullish breakout takes place, the stock continues up to realize significant gains.
38. Reverse Split
A reverse split is a form of stock split and a warning to investors. In a reverse split, multiple shares of stock are combined to create a single new share. So, if a company is doing a one-for-five reverse split, it means that for each five shares owned, investors will only have one share worth five times the value after the split.
Reverse splits are often carried out by struggling companies in an attempt to meet conditions to maintain listings on traditional stock exchanges. Stocks traded on the NASDAQ are required to maintain a minimum bid price of $1.00 per share. Should a stock fall below this value for a prolonged period of time, the company represented by the stock stands the chance of being booted off of the NASDAQ.
In general, when stocks fall below these key values, there are underlying conditions that cause the declines. These conditions can be financial struggles, failed products, or other issues that cause the devaluation. As such, a reverse split is a clear sign to stay away from a company.
39. Short Selling
Short selling is a type of trade investors make when they believe the value of a stock is going to fall. The investor pays a small fee to borrow shares from other investors. These shares are then sold immediately at current market values. When the price of the stock falls, the investor buys it back at a discount to return it to its original owner. The difference between the price at which the investor sold the shares and the price at which he bought them back, minus the fee to borrow shares, becomes the investor’s return.
Short selling should only be carried out by investors with substantial experience. All borrowed shares must be returned. So, if the price of the borrowed shares go up, short sellers have to pay even more to get the shares back and return them to the original investor. In these cases, short selling can lead to significant losses.
40. Short Squeeze
A short squeeze is an event that sends the value of a stock skyrocketing. Gains in excess of 50% are common when these events take place.
A short squeeze takes place when a heavily shorted stock moves in the upward direction. When this happens, short sellers must buy back shares quickly to avoid mounting losses as the stock climbs.
When there’s a high percentage of shares sold short, investors race to buy shares when the price goes up. In investing terms, this is called “race to cover.” This leads to an influx of buying, driving the price of shares up dramatically.
Publicly traded companies are divided into shares. When an investor purchases a share, they’re basically purchasing a piece of the company represented by that share. These shares, as a whole, are considered stock.
42. Stock Split
A stock split is a move made by publicly traded companies in an attempt to make it cheaper to invest in them. These companies are often represented by blue chip stocks with prices well over $100 per share.
When prices rise too high, some investors won’t make an investment into the company because of the high cost associated with doing so. Some companies may split expensive single shares into multiple shares that are more affordable.
For example, if a stock trades for $1,000 per share and the company does a 10-for-1 stock split, it means that every $1,000 share owned becomes ten $100 shares when the split becomes effective.
43. Taxable Accounts
Taxable accounts are personal investment accounts that allow investors access to financial instruments like stocks and bonds. Gains on these types of investments are taxable as income and losses on these types of investments are deductible when filing your taxes at the end of the year. These accounts can be opened with most brokers, like You Invest by JP Morgan, SoFi Invest, or M1 Finance.
44. Tax-Advantaged Accounts
Tax-advantaged accounts are investment accounts that allow you access to financial instruments for which gains are not taxable or are tax-deferred. Some of the most common tax-advantaged accounts are 401(k)s and IRAs, as well as other retirement-related investments.
Yield is the return on an investment over a period of time. For example, if you have an investment that generates 10% in profits on an annual basis, it means the annual yield for that investment is 10%.
As with many other professions, investing has its own lingo, and those who understand that lingo have the largest opportunities to make money. When you get started in the world of investing, it may seem like those in investing communities are speaking another language. But don’t worry, it’s still English. If you’re ever confused, refer back to this list of terms for help understanding what they’re saying.
As with any language, it’s a lot to take in at first glance. Nonetheless, with a little practice, you too can learn to speak the lingo and sound like a pro when talking about what’s going on in the market.
Do you know of any other terms commonly used in investing? How has understanding investing lingo helped you earn money in the stock market?