Active investing is an approach to investing where an investment manager will “actively manage” investments using their knowledge and understanding of the financial markets. They will change the stocks that invested in on a regular basis. (Opposite = PASSIVE INVESTING)
This is the price at which you can buy for. This can sometime be referred to as OFFER. You will often see this with BID, which is the price you can sell at.
An asset is something that you invest in for example stocks, commodities, property and bonds. Asset allocation is simply the term given to how you are spreading your investments. For example you might have half of your investments in stocks, a quarter in bonds and another quarter in gold – this would be your Asset Allocation.
An asset class is a type of asset or investment. There are a number of asset classes for example the main 5 are Shares, Bonds, Property, Commodities and Cash.
This is a term used when someone purchases more shares in a stock they already own, but buy the stock at a lower price than their current average – therefore averaging down.
A bear market is where the value or price of a market declines by 20% or more from it’s peak, and lasts for two months or more. (Opposite = BULL MARKET)
BETA is a measure of volatility of a single stock compared to the market on a whole. A stock with a BETA of 1 means the stock activity roughly correlates with the market. A BETA of less than 1 means it is less volatile than the overall market and above 1 means this it is more volatile than the market.
The BID Price is the price at which you can sell at. You will often see the BID and OFFER or ASK price together, with the OFFER or ASK price being the price you can buy at.
BID -OFFER SPREAD:
This is the difference between the BID price and the OFFER. If the BID is £10 and the the OFFER is £10.05, then the spread is 5p.
Blue Chip is a name given to a well established company with solid financials. They are usually a well known name with a recognized product or service. Blue Chip companies are regarded as a safer investment due to their ability to usually deliver profits even in tough economic conditions.
BONDS (CORPORATE BONDS / GOVERNMENT BONDS):
A bond is a load to a company or government from an investor for a specific time period (CORPORATE BOND and GOVERNMENT BOND). The company or government offering the bond will pay a fixed rate for the period of time stated, so the investor receives the interest in payments and their money back at when the bond matures.
A bull market is where the value or price of a market increases over a sustained period of time. Some definitions describe a 20% increase following a recent decline. Unlike a bear market, where it is described as a 20% reduction for a period of at least 2 months, there is no consensus to the length of time for an increase to be classed as a bull market.
CONTRACT FOR DIFFERENCE (CFD):
A contract for difference is a contract between two parties, usually a buyer and a seller or a client and broker. Rather than actually purchasing and selling a stocks, Forex or commodities for example, you simply trade on the price move of the asset – you have a contract for the difference in the price. CFD’s are usually traded on margin, therefore come with the added risk of being able to lose more than your initial investment.
A commission is a fee you pay for executing a specific trade. This can sometimes be a flat fee, for example £5 per trade or it can be a % of a trade. Sometimes there are no commission fees, and a broker will make their money through other routes.
A commodity is a raw material such as gold, silver, copper, oil, wheat, sugar, cocoa. The most common way to invest in commodities is through futures trading, but you can also trade commodities ETFs and CFDs .
A common stock are shares of a company that represent ownership. Common stocks give the owner a right to vote on corporate issues, and also receive dividends if that company pays them. Can also be known as ORDINARY SHARES in the UK (See also PREFERRED STOCK)
Compounding is reinvesting your interest or earnings, so that they then return interest or earnings. It is a well used strategy especially in with people who invest in dividend stocks. Compounding over a long period of time can have a substantial impact on your return.
A derivative is a financial contract between two or more parties. You can get derivatives for a number of asset classes such as stocks, bonds, commodities, currencies etc. The value of the derivative is reliant on an the underlying asset. Derivatives can be traded for a profit or are often used to hedge against other investments.
A dividend is the payment a company makes to it’s shareholders, which is usually a proportion of the companies profits. Not all companies pay a dividend, and the amount a company pays varies significantly. A company often declares the amount it will pay per share prior to the payment. They can be paid, annually, bi-annually, quarterly and even monthly in some circumstances. A company may also decided to pay a special dividend, which is a payment not part of the usually payment calendar.
The dividend yield is the the ratio of the dividend (annual total) compared to the share price. It is a value shown as a percentage.
Dividend yield = Annual dividend / share price
Income investors will look for companies providing a high or increasing dividend yield.
Diversification is allocating your capital across more than one asset. This is down to reduce your risk. This is done through investing in different sectors, or across different assets such as stocks, bonds, commodities.
DOW JONES INDUSTRIAL AVERAGE (DOW):
This is mostly referred to as the DOW and it is a market index that measures the performance of 30 large companies listed on the Us stock exchanges (NYSE / NASDAQ).
EARNINGS PER SHARE (EPS):
This is the company’s profit divided by the outstanding common shares. It is a measures of profitability for the company. The higher the EPS the higher the profitability of the company. EPS is often used when comparing similar company’s, but they must be similar. A strong EPS of a company in one sector can be very different to a strong EPS of a company in another sector.
Equities are stocks or shares of a company. Equities are a type of asset, if you are purchasing equities you are purchase ownership in a company, shares.
EXCHANGE-TRADED FUNDS (ETFs):
ETFs are are investment funds that are traded on the stock exchanges just like stocks are. They aim to track the performance of a specific index like the FTSE 100. You can however get ETFs that reflect all sorts of combinations of assets such as gold ETFs or ETFs for specific types of stocks like Cannabis or small cap stocks etc.
EX-DIVIDEND (EX-DIVIDEND DATE):
Ex-dividend is the time between the dividend announcement and the payment date. The ex-dividend date is the first date when purchases of a stock will not be registered for the next dividend payment. If you purchase a stock before the ex-dividend date then you will be entitled to receive the next dividend payment, but if you purchase on or after the ex-dividend date you will not be entitled to the next payment.
FTSE (FTSE 100):
FTSE stands for Financial Times Stock Exchange also known as Footsie. The FTSE 100 is an index of the top 100 companies on the London Stock Exchange with the highest Market Cap. There is also the FTSE 250 and FTSE 350 which are the same but with 250 or 350 top market cap companies.
FUND / FUND MANAGER:
A fund is a pool of money from multiple sources put together for a specific purpose such as investing. A larger pool of money allows investments across a diverse portfolio. You can get funds with different purposes and risk levels. Funds are generally managed professionally by a Fund Manager.
Fundamentals are the information available to understand the quality of a business such as it’s financial statements, it’s operational health, it’s competitors etc. Fundamental Analysis is key to long term investing, but the level of detail in the analysis flexes between investors – you can spend a long time reviewing all the fundamentals of a company – and some of it you need a financial qualification to understand.
GROSS DOMESTIC PRODUCT (GDP):
This measures a country’s economic activity. It is the value of the goods and services produced in that specific period. It is regular used as a measures of the country’s economic strength.
A Gilt is a government bond, the term is usually used in the UK and other commonwealth countries but the US would refer to them as US Treasury Securities.
Growth investing is as style of investing where you focus is on capital appreciation. This would mean investing in stocks that you feel have a high growth potential. These might not pay a dividend yet or if they do it might only be a small dividend as the company is usually reinvesting for the future growth.
Growth stocks are stocks that are generating positive cash flow but revenues and earnings are expected to increase faster than the average within it’s industry.
INDEX / INDICES:
An index measures the performance or the price movement of a something such as a group of stocks or a specific commodity. There are many indices all reflecting the price movement of different assets or groups of assets. Example is FTSE 100 of S&P 500 or the FTSE Small Cap Index
INDIVIDUAL RETIREMENT ACCOUNT (IRA):
An IRA is a tax-advantage investing too for individuals to save for retirement. It is a term often used but is only for US citizens.
A large cap is a company that has a market capitalization of more than $10 billion.
Leverage is the ability to use borrow money in trading to increase the potential return and minimize the amount of capital being used. It is a good way for traders to increase the size of their trades without having to tie up all their money, so giving them a much bigger return on their investment. It can also have the reverse affect though and result in losses bigger than the original investment.
A limit order is a order place with your broker to buy or sell but only at a specific price. If you are buying and set a price it will only execute at that price or lower, and if you are selling it will only execute at that price or higher.
When people refer to liquidity in the market they are referring to the cash that is available and being used to buy or sell assets or security. The more liquid an asset or security is the easier it will be to buy or sell and also the less chance to slippage. Trading in on an asset or security with low liquidity can increase your risk.
The market price is the current price of an asset or security. It is the most recent price at which the asset or security was traded for, and it is often between the BID and OFFER price.
Margin is trading terms is the money you put up when buying or selling on leverage. This is were you will borrow money from the broker to purchase securities but you will put a certain % of the value towards it. It is the difference between the total value of the securities held in your account and the amount you have borrowed from the broker.
A margin call is where your margin account (an account that allows the borrowing of money from the broker) falls below the amount which is owed to the broker. A margin call is when the broker requires you to add more money to your account to cover the borrowed funds you still have outstanding. This is the risk of margin accounts and trading with leverage. Make sure you fully understand margin and leverage before you open any margin accounts.
Mid Cap is short for middle capitalisation. A company is a mid cap if their capitalisation between $1 billion and $5 billion. The mid cap company’s are smaller than the large caps and bigger than the small caps (obviously).
A mutual fund is where a range of retail investors and institutions pool money together to invest in a range of investments. A mutual fund is professionally managed so you invest your money in the fund, but the Fund manager manages where the money is invested and what in.
The NASDAQ is an American stock exchange similar to the NYSE. At the time of writing it is the second largest stock exchange by value (market cap) behind the NYSE.
Passive Investing is a strategy that has minimal trades. For example you are intending to buy now and hold for a long term, without having to be concerned with the short term peaks and troughs. A lot of passive investing can involve the investment of an investment index such as the FTSE or S&P 500.
A Portfolio is the name given to a group or your total range of investments. People might refer to their portfolio being diverse, meaning their range of investments is spread across different sectors or assets.
PRICE TO BOOK RATIO (P/B):
This is the ratio used to compare the current market price of a company to it’s actual book value (in it’s financial records). It is calculated by dividing the price per share by the book value per share. It can also be referred to as the price-equity ratio. If the P/B is low (or lower than comparable companies) it could mean the stock is undervalued (it could also mean the company is under performing!). And so if the P/B is high (or higher than comparable companies) it could be a sign that the market price is becoming over priced.
PRICE TO EARNINGS (P/E) RATIO:
This ratio is comparing the share price to the company’s earnings. The P/E ration is calculated by dividing the Market value per share by the earnings per share (EPS) and is used by investors to compare with other comparable companies or to see if the individual company’s P/E is rising or declining.
PRICE TO EARNINGS (P/E) RATIO – 1YR TRAILING:
This is the same calculation as the Price to Earnings ratio but using the past 12 months actual earnings.
PRICE TO EARNINGS (P/E) RATIO – 1YR FORECAST or FORWARD:
This is the same calculation as the Price to Earnings ratio but using the following 12 months projected earnings.
Preferred stocks are shares of a company that represent ownership similar to Common stocks. Preferred stocks can receive dividends similar to common stocks but the do not provide a voting right. (See also COMMON STOCK)
A recession is a period of economic decline shown by a fall in GDP in two successive quarters. This can have an impact on the stocks located or listed in that particular country.
A sector is how the market or economy is broken down. It splits out the businesses that have related products or services. For example Healthcare, Energy, Financial etc.
A security is any financial asset that can be traded. So a companies stock is an equity security, but debt is also a security as it can also be bought or sold.
Slippage is the difference between the price the client submitted the buy or sell execution and the price it actually executed. Because prices are moving constantly sometimes there is a lag between pressing the button and it actually confirming on the exchange – this is known as slippage. The more volatile an assets price is, the more chance of slippage and the higher the slippage can be.
A small cap is a company with a market capitalisation of less than $1 billion.
STANDARDS & POORS INDEX (S&P 500):
This is a stock market index that is measuring the performance of 500 large companies that are listed on the US stock exchanges. It is recognised as one of the best representations of how the US stock markets are performing in general.
STOCKS / SHARES:
Stocks and shares are pretty much the same things, the difference is more to do with how we use them in language. You would tend to say I bought a share or shares of a company. But if referring a to a group you would say the energy stocks are good value at the moment. So stocks and shares are generally referring to the same thing.
A stockholder is just someone who owns shares in a company.
A stop loss is a type of order placed with a broker. A stop loss order is a way to limit your loss. If you are currently holding some shares you can set a stop loss at a certain price or certain percentage so that if the price drops to that level it will trigger the order to sell and so cut your losses at that point. These are a key tool especially to traders and especially for volatile stocks.
TRACKER FUND / INDEX FUND:
A tracker fund or an index fund is a mutual fund or exchange traded fund (ETF) that tracks a specific set of investments. An example of this would be the FTSE 100 or the S&P 500.
Valuation is a calculation of how much an asset is currently or projected to be worth.
Value investing is an investment strategy that is aimed at trying to find securities that are under valued. This requires fundamental research to understand the companies current and future performance vs it’s current share price.
A value stock is a stock that has a relatively low share price when comparing to the companies fundamentals such as it’s earnings (or potential earnings) or it’s current dividend. Value stocks are what people are looking for when using the strategy of value investing.
Volatility is the amount of variation in the price of a particular stock. Price volatility can be linked to a number of factors, for example a fully establish large cap company earning consistent profits will generally have a lower volatility compare to a new start up company that is showing potential but is yet to return a profit. When investing you can use volatility to help you judge the risk, if you have a low risk tolerance, you probably want to invest in something with less volatility.
52 WEEK HIGH:
If a stock hits it’s 52 week high, it simply means the stock price is at the highest it has been in the last 52 weeks. This does not however mean it is at it’s all time high.
52 WEEK LOW:
If a stock hits it’s 52 week low, it simply means the stock prices is the lowest it has been in the last 52 weeks, but not always it’s all time low.