When I first stumbled upon the world of personal finances, I had no clue what some of these words even meant! Who is this IRA person everyone keeps mentioning and what the heck does it mean to be on FIRE?
Below, I have gathered some of the most common terms I’ve come across along with a simple explanation of what the heck they mean.
Common Terms On Financial Reports and COmpany Websites
- Net Income – This shows you how a company performed over a period of time. Essentially, did they finish their year with a gain or a loss? This is usually the last item at the bottom of the income statement. To calculate this number, get the total revenue and then minus taxes, depreciation and expenses.
- Earnings and earnings per share – You can get this number by dividing the total earnings by the number of available shares. All in all, this number can show you how profitable a company is. This, in turn, allows you to easily make comparisons between companies.
- Price to earnings (P/E) ratio – Each year, companies report their profits to shareholders as earnings per share. To calculate the price-to-earnings (P/E) ratio, you divide the company’s share price by their annual per-share earnings.
- Dividends – Ahh, this is my absolute favorite thing about investing in the stock market. Dividends are essentially money that investors get for owning shares of a company or index.
Common Terms In The World Of Investing
- Stocks – These are considered slices of the company and are often divided up in the form of shares. It is owned in part by different shareholders of a company. Stocks are widely considered to be “risky” so it is never a good idea to have all your money tied up in just one stock. For example, consider how badly it turned out for those who had invested all their money in a company like Enron or Blockbuster. Companies can skyrocket, just as much as they can burn to the ground.
- Mutual Funds – These funds can be passively managed or actively managed. They can also hold stocks, bonds or any combination. Thinking of buying mutual funds like entering and exiting a train station. You can only buy into the fund or sell out of it at the end of the trading day.
- ETFs – An exchange traded fund (ETF) is like the love child of a mutual fund and stock. ETFs are traded on stock exchanges around the world just like stocks. An ETF, unlike stocks, tracks multiple components such as bonds, a commodity, or an index. Since an ETF holds a basket of different options i.e. companies, it is considered to be less risky than stocks.
- Bonds – Both government entities and companies can issue out bonds. It is basically an “IOU” in which you lend the company (or the government) money so they can use those funds in the way they so please. You are promised your principal (what you lent out in the first place), plus some interest.
- Asset Allocations – Basically, think of this like “what is in your cookie”? This is the mix of what makes up your investment portfolio. A lot of people think of this in terms of what percentage is held in mutual funds, stocks, ETFs. Others go down another level deeper and refer to this like which sectors are you in (tech, healthcare, etc.) or which types of funds (small cap, mid cap, large cap, etc.)
- Taxable Accounts – This is also called a brokerage account. Basically, you do not get any tax benefits by contributing to a taxable account. However, you do get flexibility in terms of what you want to buy and when you want to use your money. I myself have a taxable account and plan to withdraw from this FIRST once I hit my FIRE number and retire early.
- Tax Advantaged Accounts – These are your accounts like your 401K, 403B, TSP and IRAs. The government wants people to save for retirement and thus incentives people via deferment or exemptions.
What It Boils Down To
So, there you have it! A quick explanation of some of the common terms you will find in many finance spaces.
This is by no means a complete list. Heck, I did not even do a top 20 list. These are simply the most common terms you are bound to hear. Knowing these investing terms should help you as you get started on your financial journey.
Did you learn anything new? Let me know down below.