10 financial terms every investor should know

The world of finance and investing can be intimidating. It’s a complicated mash-up of business principles, human psychology, mathematical calculations, geopolitical influences — and a lot of jargon. The lingo includes a menagerie of animals — bulls and bears, wolves and sheep, ostriches and pigs, killer bees and dead cat bounces, all words at least you’ve heard before — but there’s also mumbo-jumbo such as “backwardation” and “garbatrage,” “DSCR” and “RTGS,” “Muppet bait” and “gazump.”

If you can’t define most of these terms, you’re not alone. More to the point, as an average investor, you don’t actually need to know all of them. By illustration, consider that the English language contains more than a million words. The average English speaker knows roughly 50,000. Just as most of us are able to converse and write effectively by mastering only a fraction of the lexicon, most of us can understand the basics of investing with a rudimentary financial vocabulary. Here are few terms worth being familiar with:

• A bull market is a positive stock market environment in which stock prices are increasing generally and investors who have high confidence are buying stocks. Bull markets can be powerful creators of wealth for both average and expert investors.
• A bear market in one marked by negative sentiment, pessimism and declines — typically of at least 15-20 percent and lasting more than two months. The Great Depression of 1929-39 is the most famous bear market in history. While investors quite obviously can and do lose money in bear markets, most advisers and market watchers consider them part of the normal economic and business cycle. To put a positive spin on it, the bottom of a bear market can be considered the ideal buying opportunity.
• Asset allocation is how you have your investments distributed across asset classes — equities (stock), fixed income (most commonly bonds) and cash (and cash equivalents) are the three main ones. Each poses different levels of risk and return over time, and consequently the apportioning to each reflects an individual’s goals, tolerance for risk and investment horizon (the length of time you expect to hold an investment). Thus, asset allocation is essentially your investment strategy.
• Equities, fixed income and cash are three general categories in which most investors put their money. When you buy an equity — also called stock or shares — you are purchasing fractional ownership of a company. The better the company performs, the more your share of stock is worth. The worse it performs, the less your stock is worth. Fixed-income investing offers return rates or periodic income at regular intervals, at predicted levels. The most common type is bonds, which are essentially IOUs issued by governments and corporations. The investor loans money to the entity and on the maturity date receives the principal and some interest back. Cash is just what you expect — money — and cash equivalents are certificates of deposits (CDs), Treasury bills and money market accounts.
• EPS stands for “earnings per share” and is a tool for measuring a company’s profitability. EPS represents the portion of a company’s earnings, net of taxes and preferred stock dividends, that’s allocated to each share of common stock. It’s calculated by dividing net income earned in a given period by the total number of shares outstanding in the same period. Let’s say that Widgets Inc. reported net income of $50 million in the first quarter and a total of 25 million shares outstanding. Its quarterly EPS would be $2.
• P/E, or the price-to-earnings ratio, is a method of evaluating stocks. To determine a stock’s P/E, divide its price by its annual earnings per share (EPS). Let’s say that the current stock price (also called market value per share) of Widget Inc. is $130. Its EPS, as we determined above, is $2. $130 divided by $2 is 65, the company’s P/E ratio.
• In honor of the Fed and interest rates: monetary policy doves and hawks. Doves advocate low interest rates as a way to encourage economic growth, believing that it stimulates consumer borrowing and spending. For doves, the effects of inflation are secondary. Hawks, on the other hand, are focused on inflation and favor higher interest rates to keep it at bay; they are less concerned about economic growth.

These 10 terms are just a start. There are plenty of great websites for learning the lingo and expanding your understanding of finance and investing. To help you put all the pieces together for your own financial future, consider talking to a financial adviser.

Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other Saturday in The Tennessean. For more information, visit www.capwealthadvisors.com.