Confused by Investing Jargon? Don’t Be.
The other day, I was playing Apex Legends, and some toxic smurfs were ganking n00bs.
If you know what I just said, then I'd like to thank you for putting your controller down for a minute to read our letter.
If you don't, well, that's because I was using gaming jargon—really specific language that's only really used within a particular niche. And jargon can make it difficult for newcomers to learn about that niche.
Why do we bring this up? Because some jargon might slow you down on your quest to build wealth—and we'd rather not see that happen. So today, we'll help you grind through some of what an online trading company calls the most baffling investment jargon.
Investing interest tends to spike and fade depending on what the stock market and other assets are doing. In 2020 and 2021, people signed up for new brokerage accounts in record numbers as they tried to buy the huge COVID stock-market dip and later rushed into "meme stocks" (think AMC and GME) trying to chase their great returns.
That interest has waned amid a brutal bear market that's well into its second year. But stock prices will rise again, and when they do, new investors will be drawn in.
Whether you're already one of those newer investors, or you plan on making the jump sometime in the future, you're going to come across a bunch of terms you haven't heard before—so many, in fact, that you might have second thoughts.
Stick with it. We'll give you a hand.
"A lot of people find financial markets terminology baffling," says Michael Hewson, Chief Market Analyst at U.K.-based online trading firm CMC Markets. "[But] if you're looking to hone your interest in financial markets, it's a huge benefit if you can understand the language."
Hundreds of thousands of monthly searches are dedicated to figuring out what the heck investors are talking about. So, CMC Markets used Google search data to analyze the most searched stock market terms so they could help new investors understand their meanings.
Let's take a quick look at the 15 most "baffling" investment terms. Then, with the help of CMC, we'll quickly explain what each of them means.
#15. Margin Account: In a margin account, you can borrow money from your broker-dealer to buy even more securities (like stocks, bonds, and other investments). Your account funds are collateral. This gives you more purchasing power, but it exposes you to greater losses if your investment goes the wrong way. It's not free, either: You must pay interest to the stock broker while you're borrowing.
#14. Day Trading: Buying and selling shares of the same stock within the same day, hoping to profit from price movements within hours, maybe even minutes.
#13. Whales: "The term 'whale' is a nickname given to investors who have the potential to manipulate the market," CMC Markets says. "A whale can be an individual or company with enough money or power to influence the price of a stock. These individuals usually make huge investments, with their actions causing a huge 'splash.'"
#12. Averaging Down: "Averaging down" is a common strategy that involves buying more shares after they fall in price, lowering the average cost per share of the entire position. If you bought a stock at $10 and it goes down to $5, the stock would have to go up 100% (back to $10) to recoup your money. If you bought a stock at $10, it went down to $5, and you bought another share at $5, you'd only need a 50% gain (to $7.50 per share) to be "breakeven," and if the share price doubled, you'd have $20 worth of stock that you bought for only $15—a 33% gain! (The risk, of course, is that the price goes lower and you lose even more money.)
#11. Tanking: Tanking is used to describe either a stock price going down, or their portfolio losing value. "Crap, my investments are tanking right now."
#10. Dead Cat Bounce: This grim term comes from the famous Wall Street phrase, "Even a dead cat will bounce if it falls from a great height." Sometimes, once a stock has declined significantly, speculative investors have to buy shares to cover their trading positions. This causes a temporary recovery in the share price. But generally, "dead cat bounce" refers to any brief price bounce after a severe decline. This is also called a "sucker rally."
#9. Dividend Yield: A financial ratio that tells you the percentage of a company's share price that it pays out in dividends each year. For instance, a $100 stock with a 3% yield pays out $3 per share worth of dividends each year. Some investors, such as those who are retired, rely on dividends for their income, so dividend yield is very important to some people.
#8. To The Moon: "Often used by stocks and cryptocurrency traders, the phrase 'to the moon' essentially means the price of an asset is continuously growing," CMC Markets says.
#7. Bull Market: The technical definition actually varies from one financial institution to another, but in short, a bull market is a period of rising prices in a broad-market index, like the S&P 500 or Nasdaq Composite. Most definitions require at least a 20% rise in the index from a low point to qualify.
#6. Bear Market: Unfortunately, you've probably heard this one a lot in 2022. This is a prolonged drop in asset prices, typically when a broad market index falls by 20% or more from its most recent high. (From CMC Markets: "It's believed that the term originates with pioneer bearskin traders. As the traders hoped to buy the fur from trappers at a lower price than what they'd sold it for, 'bears' became associated with a declining market.")
#5. ADR: American Depositary Receipts (ADRs) are shares of foreign companies that are listed on U.S. stock exchanges, like the New York Stock Exchange (NYSE) or Nasdaq, and you can buy and sell them just like you would a regular U.S. stock. An ADR allows investors the chance "to gain investment exposure to non-U.S. stocks without the complex task of dealing with foreign stock markets," CMC Markets says. BP, AstraZeneca, and Alibaba are just a few "stocks" that are actually ADRs.
#4. Arbitrage: Arbitrage is when you simultaneously buy an asset from one market and sell it in another to make a small profit off the difference in that asset's price on each market. In arbitrage, that profit might just be one or two cents, so it's typically done in large batches to produce a big windfall.
#3. Broker: Says CMC Markets: "In layman's terms, a broker is an individual or firm that acts as a middleman between an investor and a securities exchange. They facilitate trades between individuals or companies and may provide investors with research, investment plans, and market intelligence." Investing appslike TD Ameritrade and Robinhood do just that, making it easy for you to buy and sell stocks from investors from all over the world—whether you're making several swing trades each day, or buying a few long-term stocks you plan on holding for years.
#2. IPO: In second place, with 95,000 searches, is IPO—short for "initial public offering." This is when a private company becomes public by selling its shares on a stock exchange. "Companies often issue an IPO to raise capital to fund growth initiatives, raise their public profile, or to pay off debts," CMC Markets says.
#1. ETF: Taking the taco with more than 100,000 monthly searches is “ETF,” which is short for "exchange-traded fund." A fund is a pool of money that's invested in stocks, bonds, and/or other assets (called the fund's "holdings"). When you buy a share of that fund, you share in the rise and fall of those holdings. Exchange-traded funds, as the name suggests, trades throughout the day on a stock exchange, just like an individual stock would. CMC Markets adds that "ETFs are often less volatile than individual stocks, meaning your investment shouldn't swing in value as much; however, there is still a risk in loss of value."
GG. We're going AFK now.
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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On the date of publication, Kyle Woodley did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.