Investment Terminology

If you are a new investor, you are likely to encounter terms that you do not understand. It may seem overwhelming at first, but once you become familiar with them, you will realize, it is simpler than it sounds. This is an introduction to some of the more common investing terms you may encounter.

Basic Terms 

  1. Asset Allocation - an approach for managing capital that involves setting parameters for different asset classes, such as equities (e.g., ownership or stocks), fixed-income (e.g., bonds), real estate, cash, or commodities (e.g., gold or silver).

  2. Bond - A debt instrument in which an investor loans money to an entity (e.g Governments or Corporations) that borrows the funds at a specified interest rate for a specific period of time.

  3. Commodities - Raw materials or primary agricultural products that are used as a medium of exchange (ie: investment), such as wheat, copper or coffee. The most traded commodities are gold, silver and oil.

  4. Comparison Benchmark - A standard by which the performance of a security, fund or other assets can be measured against. Typically an unmanaged basket of stocks or bonds, an ‘index’ portfolio, is used for comparison. 

  5. Derivative -  A derivative is an asset that derives its value from another source.

  6. Diversification - The distribution of assets among a variety of asset classes/investments, for example, geographic regions, instruments, investment styles and strategies, and sectors to reduce the risk characteristics of a portfolio. 

  7. Equities/Stock -  A type of security that indicates ownership in a company and represents a claim on that company’s earnings and assets. 

  • Common Stock: A share of common stock represents ownership in a legally formed corporation.  Owners of common stock are entitled to their proportionate share of a company's earnings, if any, some of which may be distributed as cash dividends. Most companies have a single class of stock that represents the entire company. However, some companies have multiple stock classes.  Common stocks holder has voting rights.

  • Preferred Stock: Preferred stock is a class of ownership that allows shareholders of a company to get a larger dividend, and that dividend is often guaranteed. Holders of such stock do not have voting rights, but they can receive special status if a company heads into insolvency. If a company is being liquidated and creditors need to be paid, preferred stock shareholders must be paid before common stock shareholders. In some cases, companies can repurchase shares of preferred stock from shareholders, often at a premium. It is also possible to convert shares of preferred stock into common stock, but not vice versa.2 

  • Convertible Preferred Stock: Convertible preferred stocks are preferred shares that include an option for the holder to convert the shares into a fixed number of common shares after a predetermined date.

  1. Fixed Income - A type of investing for which real return rates or periodic income is received in regular intervals at a reasonably predictable level. The most typical fixed-income security is the bond.

  2. Futures - An exchange-traded transaction that provides for the sale or purchase of a specific amount of a financial instrument, currency or commodity at a given price, at a designated time in the future. 

  3. Investment Manager - A financial professional or team of professionals hired to oversee the selection of investments within a portfolio. The terms ‘Fund Manager’ or simply ‘Manager’ will also be used.

  4. Investment Mandate - An investment mandate is a set of guidelines, rules, and objectives used to manage a specific portfolio or pool of capital. For example, a capital preservation investment mandate is meant for a portfolio that cannot risk meaningful volatility; even if it means accepting lower returns.

  5. Liquidity - The concept of liquidity refers to how quickly an investment can be converted back into spending cash without affecting the investment's price. Most stocks and bonds can be sold for cash settlement in 3 business days

  6. Portfolio - A collection of stocks and/or bonds. Portfolios are held directly by investors and/or managed by financial professionals.

  7. Real Estate - Tangible property, such as land or buildings, that the owner can use or allow others to use in exchange for payment. When you own a house, you own real estate. When you own a plot of land, you own real estate. 

  8. Risk - The possibility of occurrence of losses relative to the expected return on any particular investment. A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for this is that investors need to be compensated for taking on additional risk. 

  9. Stock Exchange -  An institution, organization, or association that hosts a market for buyers and sellers of equities. 

  10. Volatility - Volatility refers to the degree to which a traded security fluctuates in price.

Investment Term

  1. Annualized Return - The constant rate of return that, compounded annually, would yield the same overall return for a multi-year period as the actual return observed. Annualized return is the preferred quoted return rate for multi-year periods.

  2. Dividend Yield -  The dividend yield is the current yield of a common stock at its present dividend rate.64 If a stock is trading at $100 per share and pays out $5 in annual dividends, the dividend yield would be 5%.

  3. Gross Rates of Return - The rate of return before the deduction of investment management fees. 

  4. Market Capitalization - Market capitalization refers to the value of all outstanding shares of a company's stock if you could buy them at the current stock price.

  5. Net Rates of Return - The rate of return after the deduction of investment management fees.

  6. Price-to-Book Ratio - A measure used to compare a stock’s market value to its net asset value, or book value. It can be calculated by dividing the current market price of a stock by the current book value per share. This ratio gives an investor an idea of how much they are paying for the stock relative to the company’s underlying assets.

Price to Book Ratio = Stock Price / (Total Asset - Intangible Assets - Liabilities)

  1. Price-to-Earnings Ratio - A measure of a company’s price per share as compared to its earnings per share. The P/E ratio shows how much an investor would be paying for every $1 of earnings. For example, a company with a P/E of 20 would be paying $20 for every $1 of earnings. 

Price to Earning Ratio =   Stock Price / Earning per Share

  1. Rate of Return - Measure indicating investment performance, including appreciation (or depreciation), realized gains (or losses), and income. 

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