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A beginner's guide to Investing terms

Gauri Chandra
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September 13, 2022
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A beginner's guide to Investing terms

New to investing? You've probably heard some crazy terms being thrown around and have no idea what they mean. Here are a few common ones that you might come across!

52 week high/low

It refers to the highest or lowest price of a security observed within the past year. It is based on the daily price at close of the market. It is used as a technical indicator to predict future prices.

Annual Percentage Yield (APY)

It is the amount you earn on your money. APY is the rate of return on savings and certificates of deposit. It usually is the compounded interest you’ll get on your interest earnings.

Asset Allocation

Refers to the mix of assets in your investment account. It is the mixture of stocks, bonds and other investments that you have chosen in order to meet your goals. This could change over time.

Balance Sheet

It is a financial statement that displays a company’s assets and liabilities, alone with their shareholder equity. It is also known as the company’s “statement of financial position”.

Bear market

Refers to a period of sustained price declines in the stock market. It generally refers to a drop of around 20% or more, and is an indication of economic events like a recession.

Brokerage account

Investors can open an account with a licensed brokerage where they pay deposits to the brokerage who purchase investments on behalf of the investors. The investor still owns the asset, and they must claim any taxable income or capital gains.

Bull market

Opposite of Bear markets, and refers to sustained price rise in the stock market. They are highly profitable for investors, and are usually periods of strong economic growth and low unemployment.

Capital Gains tax

It is a tax placed on the sale of any asset. The amount you gain in the transaction (profit) is the amount you are taxed on.

Diversification

Refers to opting for a variety of different assets in your portfolio. It is considered an essential part of investing as it reduces your overall risk. It's good to not put all your eggs in one basket.

Dividends

It is a share of company profits that is passed on to the investors. Not all companies offer dividends as some choose to reinvest their profits into the business. As an investor you can also choose to reinvest your dividends.

ESG

Environmental, social, and governance are non-financial factors involved in an investor’s decision while analysing material risks and growth opportunities.

Exchange Traded Fund (ETF)

ETFs are a basket of securities that involve stocks, bonds, other asset classes or a combination of all of them. They are traded on the exchange the same way as stocks.

Expense ratio

It is the fee that is charged on investments like mutual funds and ETFs. the expense ratio depends on the company that offers the fund, and how much management the fund will require. It is good to go for investments with lower fees.

FTSE 100

The Financial Times Stock Exchange 100 index is a share index of the 100 companies listed in the London Stock Exchange with the highest market capitalisation.

Forex

The foreign exchange (forex, fx) is the global marketplace for exchanging foreign currencies with each other. It is a platform for buying, selling and exchanging currencies at current or determined exchange rates.

Index Fund

It is an ETF or mutual fund that follows the performance of a particular index such as the S&P 500. They are considered good strategies for building wealth.

Market Capitalisation

Market Capitalisation is the total value of all of a company's shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares.

Mutual Fund

It is a collective investment that holds many underlying assets. Investors pool their money together into the fund that buys the assets, and each one owns a share of each asset. 

NASDAQ

It is a stock exchange where investors can buy and sell securities. It is the second largest stock exchange after the New York Stock Exchange. It holds all kinds of stocks but mainly those of tech companies.

Net asset value (NAV)

It is the net value of an investment (usually a mutual fund), found by subtracting the fund’s liabilities from its assets. You can also find the Net Asset Value per share (per share NAV) which is the fund’s total NAV divided by the number of shares outstanding.

P&L Statement

A profit and loss statement is also known as an income statement. It is a financial statement that shows a company’s revenues and expenses for a given period.

Portfolio

It is your collection of stocks, bonds, funds and more. It is made up of all your holdings across all accounts, and it can help you determine your own net worth.

Price to Earnings Ratio - PE

It is a measure of a company’s value. It is found by dividing the company’s stock price to their earnings per share. This is usually compared between similar companies to help an investor decide where to invest.

S&P 500

Standard and Poor’s 500 index is an index tracking the performance of 500 big companies listed on exchanges in the United States. It is the most popular stock market index and is usually seen as a proxy for the market overall.

Stock Split

This is where a company splits its shares into two or more separate shares. For example, a 2-for-1 split on a £200 stock would mean there are now 2 stocks worth £100 each. Companies usually do this after a stock price rise to make their stocks more accessible.

Stocks & Shares ISA

It is an account you can open for investing that is exempt from tax in the UK. The limit per year for an ISA is £20,000.

Illustration by Roicons

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