I remember one of my very first Finance classes at Louisiana Tech the professor came in the first day and said “90 percent of finance is learning the terms.” He was not wrong. I quickly learned that people in finance have named financial tools in such a way to make us sound smart. Most people outside of the finance bubble that the financial people live in are confused by these words. In fact, sometimes it even scares some people away from putting themselves in the best financial position. I hate that this is the case but it is true.
I put together a short list of words that will help you understand that financial lingo so the next time your coworkers are trying to sound smart with their water cooler talk you know exactly what they’re talking about.
Stock – stocks are denoted in “shares” which represent a “share” of that company or partial ownership. People Invest in companies that they think will be profitable so that the value of their shares (or ownership) will increase.
Bond – it is basically a loan. Unlike stock a bond does not represent ownership of a company, it represents a loan given to the company to repay. Companies choose the amount of interest they want to pay and the time period in which they are going to pay it then they receive investors who want to buy the bonds to be paid back in the future.
Mutual Funds – mutual funds take individual stocks or bonds and bundle them together to make a package. When you invest in a mutual fund you invest in the package built of many different companies.
ETF- this is a relatively new term in the financial world this is a mixture of a stock and mutual fund. An ETF is a basket of assets like a mutual fund but is sold like stock. They typically follow a certain index which is the S&P 500, Dow Jones Industrial Average, Russell 2000, and many more.
Annuity – This is basically contract between the investor and an insurance company. The investor pays into the annuity with the promise that the insurance will in return give a fixed income stream to the investor at a later date.
IRA – or otherwise known as an Individual Retirement account. This is a type of investment account that helps an investor save for retirement while also being tax efficient. Different types of IRAs provide different tax efficiency options.
Most people see people on TV or on the internet places like CNBC, Yahoo Finance, and other places and see these terms. This can be overwhelming for people but knowing the basic definitions of these words will help make sense of all the financial jargon. I hope these few terms helped you learn a little bit more about the financial world. If there are any terms that you want to know about that I didn’t cover leave a comment and I will add it in the future.
If you’ve read this far I applaud you and thank you for hanging in there. We don’t usually use these blog posts for advertisement and we will continue not to in the future but this is an opportunity that I cannot pass up. We will be having an Investing Basics workshop at a local brewery in Shreveport on August 2nd. This is meant to be a laid back chance to allow people to find the answers to those questions they have when looking at their company 401(K) or wondering what they should do to put themselves and their family in the best position. Follow our Facebook page or contact us for more information. Thanks again and until next time,
Rob Harper
Financial Advisor