As we speed towards the end of the year, I thought it would be helpful to give some definitions of some of the terms I may use in my articles. Below is a list of some of the most used investment terms you might see when reading an article about investing. If I don’t cover a term you are confused about, send a comment and I will do my best to get you an answer.
American Depository Receipt (ADR): A negotiable certificate issued by a US bank representing a specified number of shares – usually one share – of a foreign company’s stock. These let you trade foreign stocks as easily as you would trade US stocks.
Assets Under Management (AUM): The total market value of the investments that a person or entity manages on behalf of clients. Higher AUM is usually a positive indicator of quality and management experience.
Bear Market: A condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. A bear market has been around most of 2022 it seems.
Bull Market: A term used in the financial markets when asset prices have risen or are expected to rise. I hope we have a bull market in 2023.
Dividend: A distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors.
Dividend Yield: The dividend per share divided by the price per share, expressed as an annual rate, such as 4.0%. Most US companies that pay dividends pay quarterly. Some pay monthly. Most foreign companies that pay dividends pay annually or semi-annually.
Exchange Traded Fund (ETF): A type of pooled investment security that typically tracks a particular index, sector, commodity, or other assets that can be traded the same way a stock can be traded.
High Net Worth Individual: A financial industry designation for an individual with over $1 million in highly liquid assets. Congratulations if you qualify!
Index Fund: A type of mutual fund or ETF with a portfolio designed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P500). These are generally considered good core portfolio holdings for retirement accounts.
Junk Bond: A bond that carries a higher risk of default than most bonds issued by corporations or governments. Also called high-yield bonds because the higher yield is needed to help offset the risk of default.
Leverage: An investment strategy of using borrowed money to increase the potential return of an investment. Leverage can also refer to the amount of debt a first uses to finance assets.
Mutual Fund: A managed fund that poos money from shareholders to invest in securities.
Net Asset Value (NAV): Represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. The term is most commonly used with mutual funds or exchange-traded funds (ETFs).
Preferred Stock: A class of stock that is granted superior rights to common stock, such as higher dividend payments and a higher claim to assets in the event of liquidation (bankruptcy). Companies must pay dividends on preferred stock before they can pay dividends on the common stock.
Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-generating real estate. Most, but not all, REITs are publicly traded like stocks which makes them highly liquid (unlike physical real estate).
Short Selling: The investor borrows securities (stocks usually) and sells them in the hopes of purchasing the securities at a lower price in the future.
Value Investing: An investment strategy that involves buying stocks that appear underpriced relative to their intrinsic value. Value investors typically use financial analysis, don’t follow the herd, and are long-term investors of quality companies.
These definitions and many others can be found on Investopedia.com. If there is a term you want defined, just let me know or refer to Investopedia.
(Intentional Investing is a weekly column written by Kyle Smith from Floyd County, TX, based upon his investment knowledge and does not represent the views or opinions of the Floyd County Record. You can reach Mr. Smith via email at insureddividends@gmail.com)
