Have you ever traveled to a country where you don't speak the language? The same thing happens in the investing world, and it often leaves aspiring investors feeling, well, just plain awkward. Unfortunately, while a secret decoder ring for deciphering trading talk would be advantageous, there is no such thing...yet. And the truth is, you can't become a savvy investor without talking the talk - or at least understanding the basic terminology. What to do? It's time to get your geek on and bone up on a few key terms.
Bull: You probably think of bulls as aggressive, and that image isn't far off from the behaviour that's often associated with them on Wall Street (just add a business suit). But there's no bull about it; this term is frequently used to refer to an investor who believes a stock, or the market as a whole, is on its way up. True to their name, bulls tend to be the first to run down the best stocks before they start rising.
Bear: Unlike the bulls who charge at stocks they believe will rise, bears prefer a more defensive approach. That's because they believe a particular stock - or even the whole market - is on the decline. But while bears may be pessimistic, they're still out to make a killing by profiting from market declines.
Securities: Securities don't include cash - but they can be exchanged for it. This means stocks, bonds, options, mutual funds and any other contract that's assigned value and can be traded. Think of securities as a tool for building security - for your financial future that is.
Stocks/Equities: Owning a stock doesn't mean you can march into company headquarters and demand major changes (although sometimes you'll want to), but it does mean that you have a stake in how that company performs. That's because each share of stock represents a (tiny) portion of ownership in that company. If the company performs well, the value of your investment will increase. If the company sinks, your investment will go down with it.
Liquidity: For most investments, there's only one way to make money: sell. The term liquidity applies to stocks and other securities that can easily be sold because there are many other people who want to buy them. In the markets, liquidity can be a factor in how much you can profit from an investment, and how quickly you can dispose of it if you need the cash. Think of it as the difference between trying to sell a condo in downtown Toronto or a house in rural Saskatchewan - one will have a lot more potential buyers than the other.
Book Value: Book value means different things in different contexts, but it has a very simple meaning for investors: it's the amount you paid for an investment. This figure used to be recorded in an accounting book or ledger, which is how it got its name, but now you're likely to find it above a column of figures in your online brokerage account.
If you hold investments for the long term, be sure to record book value. If you don't have the numbers to accurately calculate your portfolio's returns, you won't be able to properly gauge the overall performance of your investments.
Market Value: This is an investment's value in the market. It's also the number that makes or breaks an investor's heart . When market value is more than book value, you can sell your investment for a profit. When it's less, there are few desirable options, although the most common course of action involves obsessively checking the stock's price until it climbs above book value again - or doesn't.
Limit Order: There are two basic orders used for buying stocks. A market order basically tells your broker to buy or sell a security you own at any price. You wouldn't do this at the supermarket - "I'll buy this vanilla soy milk. Any price will do!" - and many experts don't recommend it for your portfolio either. The solution here is to use limit orders instead. Tell your broker the highest price you're willing to pay if you're buying a stock, or the lowest price you'll take if you're selling one. That way the trade won't happen unless the price is right.
Earnings: Earnings may be the most scrutinized number in a company's financial statements, probably because they can often have such a dramatic effect on a stock's price. This often-heard figure usually refers to a company's after-tax net income, which is reported on a quarterly basis. But while earnings can tell us a lot about how a company will fare over the long run, what often matters most in the short term is how those earnings compare to estimates prepared by market analysts. When a company's earnings fall below estimates, the stock often plunges, sometimes much more dramatically than is warranted by the company's financial position. When earnings exceed estimates, the opposite occurs.
Companies with earnings momentum are the most likely to pay off for investors, but getting carried away with the hype that comes with earnings season is like buying into celebrity gossip. It's a fun ride, but it's best not to let yourself get too carried away.
Price/Earnings Ratio (P/E Ratio): P/E ratio provides a measure of how expensive a stock is relative to what it's expected to produce for investors. When it comes to investing, potential is everything. The higher the P/E ratio, the more investors are paying for each dollar of annual earnings, so a high P/E ratio means high expectations - and therefore a riskier stock. That said, investors should compare P/E ratios within industries, as what's considered "good" varies based on the type of business a company is in.
Diversification: Diversification involves setting up a portfolio of carefully chosen assets to help ensure that an unexpected economic storm won't ruin everything. Think of it like packing for an extended trip. You don't necessarily need a huge, overstuffed suitcase, but you'll probably want more than a sun dress and a pair of flip flops. Whether you're globetrotting or working to grow your investments, it's best to be prepared for anything.
Ten Bagger: This is one term (coined by famous Wall Street stock investor Peter Lynch) you might not hear that often, but we're including it here in the hope that some of you will get the chance to use it someday. That's because a ten bagger is a stock that has increased to more than 10 times its purchase price. Ten baggers are rare and wonderful, and generally represent the investment of a lifetime. But they do happen. So here's hoping you're the savvy investor who picks out one of these elusive market gems - and knows what to call it when you do.
Suddenly, it's not so foreign anymore...
The investing world may speak a foreign language, but don't let it intimidate you. The best way to learn the lingo is to immerse yourself like the locals do. And while the learning curve might be a little embarrassing at times, investing isn't about prestige - it's about profit. Now there's a word everyone can relate to.