May 18, 2016
Learn are a few of the important terms you need to know as an investor.
1. What is a stock?
Shares in a company. A way to raise capital.
It creates wealth. Increases in value if growing earnings. Risk is limited to amount invested.
Example of Tory Burch - wants to open boutiques worldwide and sells stock in an IPO - Initial Public Offering - to do it and raise capital for boutiques, inventory, etc.
2. What is a bond?
An IOU; debt from a corporation, government or municipality. Supposed to be less risky than stocks.
Considered more conservative investments.
Moves inversely to interest rates.
Cycles in interest rates run about 30 years.
3. What is asset allocation?
The percentage allocated to stocks and bonds, a virtual pie chart.
The most important factor in Modern Portfolio Theory; a finding by Henry Markowitz, Nobel Prize Winner.
Asset allocation is where the majority of returns come from. A rising tide lifts all boats. It’s not from stock picking or timing the market. It’s from the choices you make about where to invest.
In theory, should have more stocks when younger and more bonds
Used to be 100 - (your age) = % in stocks, ex. 100 - 20 = 80% stocks.
That’s harder to do today since bonds may have a headwind of rising rates, which means lower bond valuations. Asset allocation today requires some creativity how you receive income and reduce risk in your portfolio.
4. What is a dividend?
Net profits paid on stock shares or can be kept as retained earnings. The yield on a stock.
Usually paid quarterly, but can be a one-time dividend or a regular dividend. It's not guaranteed. Check the track record.
Can reinvest dividends or take in cash.
High growth companies typically reinvest rather than pay dividends, so dividend paying companies tend to be large, established companies.
5. What is the S & P 500 Index?
Standard and Poor’s 500 largest companies in US.
Many people don’t realize it’s a market-value-weighted index - a stock market index whose components are weighted according to the total market value of their outstanding shares. The larger the company, the more weight it has in the index. If you want all the companies to be equally weighted, that’s a different index fund, but they do exist.
An index is a form of measurement -
compare competing large cap funds to it’s performance.
Every manager is paid to outperform an index. Large cap US funds are typically measured against the S & P and how it’s performed.
6. What is the Dow Jones Industrial Average?
Also called “the Dow”, it is an index made up of 30 industrial companies. Invented by Charles Dow back in 1896.
An industrial company used to be more steel, railroads, cotton, tobacco, oil, etc. now includes technology companies like Microsoft. It also has companies like Walt Disney, Exxon, GE, Coca Cola, Proctor & Gamble and Apple.
Here’s some trivia for you: what is the only company in the Dow that is original to the index? General Electric.
When people say “the market is up today” they typically mean the Dow.
Small number of companies, not as indicative of the broad market. It also is market weighted, so the largest companies carry more weight in the performance of the Dow.
7. What is Nasdaq?
Nasdaq stands for the National Association of Securities Dealers automated quotes.
Started out as an electronic market in 1971 vs. an open outcry, auction market that the NYSE is. That is humans vs. computers for trading.
It began with smaller companies, but now is better known as a technology index because companies like Microsoft and Intel went public there then rather than migrating to NYSE, they stayed in NASDAQ, probably due to electronic nature and seeing the future being more electronic than with human specialists.
The term "Nasdaq" is used to refer to the Nasdaq Composite, which has over 3,000 companies that are part of the Nasdaq and includes the world’s foremost technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, Intel and Amgen.
8. What is MSCI EAFE Index?
The index founded in 1969 includes a selection of stocks from 21 developed markets, but excludes those from the U.S. and Canada.
MSCI EAFE stands for Morgan Stanley Capital Index, Europe Australia Far East. Ranks the largest companies outside of the US and Canada.
Outside of US only - international or foreign stocks.
9. What are Emerging Markets?
Emerging markets are developing economies, many of which are experiencing rapid growth and industrialization. These countries possess securities markets that are progressing toward, but have not yet reached, the standards of developed nations.
They are international stock markets that are not as well
developed or mature as developed countries. They are loosely
defined as having completed certain reforms and economic
development programs to open up their economies and emerge onto the
global scene and are considered to be fast growing.
You tend to hear about the BRICS - Brazil, Russia, India, China, South Africa.
10. What are REITs?
Real Estate Investment Trusts
A company that owns or finances income producing real estate.
A diversified group of real estate and mortgage companies.
Commercial real estate, apartment complexes, retail buildings, hospitals, hotels, shopping malls, timber land, etc.
Provide income streams in a dividend
Must pay out all taxable income as dividends to shareholders.
These are a few of the important terms you need to know as an investor. Don’t let jargon get between you and your wealth building.
Your action step is to research one of these terms even more and find out all the details about it. Whether that’s the S & P 500, REITs or dividend paying stocks, take some time to do your own research.