5 Minute Read
06 May 2021
By Shane Monks O'Byrne
We at Aikido know that entering the investment world also means hearing lots of industry-specific investment terms.
It can be confusing and even off-putting at first, but mastering them is crucial to becoming a bonafide investor.
Think of this blog as your investment terms “cheat sheet.” We’re going to break down basic investment terms and financial terms that all need to know to make smart investment decisions.
These basic investment terms will help you understand some of the jargon thrown around when making investments. These are very important financial terms to know because they describe types of stocks, markets and more – all of which can influence your investment decisions.
Common stock is basic investment terminology that refers to a type of stock. Common stock refers to ownership in a legally formed corporation that gives the stockholder a form of equity ownership. This allows stockholders to vote on corporate policies and elect a board of directors.
Unlike common stock, preferred stock gives stockholders a higher claim to dividends or asset distribution. If the company becomes bankrupt, preferred stockholders are paid from company assets before common stockholders. However, preferred stockholders typically have little to no say in corporate governance. Understanding the difference between common stock and preferred stock are key finance terms to know when deciding which type of stock to invest in.
This basic investment term refers to large companies that are leading in their respective industry. Blue-chip stocks are typically low risk because they are well-established companies with a reputation for sound financial management. An example of a blue-chip company is Apple.
Dividends are a very comment financial term that all need to know. A dividend is an allocation of a company’s profits that is paid to shareholders. Dividends are typically paid yearly or quarterly. Not all companies pay dividends, and not all types of stocks result in dividends for the stockholder. For example, Adobe Systems Inc. does not pay dividends. Penny stocks do not often pay dividends because penny stock companies are often small and have little revenue.
An excellent financial term to know is ‘bear market.’ This simply refers to a market in which prices have declined long term. Price declines can be the result of pessimism from investors. It is still possible to make money in a bear market, and stocks can often be acquired at lower prices in a bear market.
The financial term ‘bull market’ refers to a market in which prices are expected to rise. Bull markets occur when investor confidence is high and rising. Stocks typically become more expensive in a bull market. Investors will often try to buy stocks early in a bull market to avoid high prices.
This basic investment term refers to how much of a company’s profit is allocated per outstanding share of common stock. This is an excellent way to understand how profitable a company is. The EPS is calculated by dividing a company’s quarterly or annual earnings and dividing it by the number of shares of stock outstanding—the higher to EPS, the more profitable the company.
This investing terminology refers to the price that the buyer is willing to pay and the price the seller is willing to sell at. Therefore, the bid and ask indicate the best price a stock can be sold and bought for at that time. Investors will need to look at the ask price to determine how much someone is willing to share a stock for, and sellers will need to look at the bid to determine how much people are willing to pay for their stocks. Bid and ask can also be applied to assets, securities, bonds or commodities.
The spread refers to the difference between the bid and ask. For example, if an investor wishes to buy a stock for $10 and a seller wishes to sell the stock for $15, the spread is $5. It’s essential to know and understand this investment terminology because it can refer to different types of investment such as assets, securities, bonds or commodities.
Close simply refers to when the stock markets close for the day, although after-hours trading does continue, so the term shouldn’t be taken too literally. The price of stocks often increases after hours. The close can also refer to the final transaction in an investment when documents are signed and the deal is officially closed. The investing terminology ‘close’ can therefore be context-dependent.
When entering the world of investment, it’s imperative to be aware of basic investment terms because they determine which investment strategy you may wish to follow, how much money you can make from investments and which kinds of stocks you wish to invest in.
Here at Aikido, we offer fantastic guidance on starting your investment journey if you’re new to the world of finance and investment. We use a data-driven approach to help you make intelligent and evidence-based investment decisions.