No, I’m Not a Day Trader: The Basic Terms of Investing

My dad still works in his seventies. He works because he wants to work and because he can. He’s a smart guy with a law degree and a successful 50-year law practice.

He doesn’t get investing, though. Neither does my stepmother or my brother.

I spent part of the weekend with my family this weekend, and I’m beginning to see what a strange world Jon and I inhabit. 

When I mentioned that we control most of our own investing decisions, the response was “Oh, you’re a day trader.”

No. I am a buy-and-hold investor. I pick out an investment I like, buy it, hold it until something happens to make me not like it anymore. In the meantime, I keep plowing any dividends back into the same stock or index funds. My holdings get bigger because I keep reinvesting and because they become more valuable over time as the market goes up.

In all my years of investing, I’ve sold stock on average twice a year. The average is only that high because last year I realized I was paying too much in mutual fund fees and switched to lower-cost index funds. Most years, I sell nothing and only buy to increase existing holdings.

That’s pretty much the opposite of a day trader. A day trader buys and sells stocks and derivatives the same day, trying to make money on price fluctuations on thousands of transactions.

I realized, though, as I tried to explain that difference, that I was speaking Klingon to them

(I’d say Greek, but Greek would have been more understandable. They looked at me like I was an alien.)

So in honor of my Dad, I give you my only slightly tongue-in-cheek basic terms of investing.

Basic Terms of Investing

The Market: The “place” where people buy and sell investments. Only not really one place for all investments, or even for all of one kind of investment. Usually, the market means the overall performance of all stocks, but there are bond markets, futures markets, derivative markets, etc., just to make things confusing.

Stock: Ownership of a portion of a company. Usually, one share is a tiny, tiny portion of the company.

Bond: Ownership of a portion of an institution’s loan. (Not all loans, just one loan.) The debtor is usually a government (national, state or city/county) or a company. Usually, one bond is a tiny, tiny portion of the total loan, and the debtor can have more than one loan.

Share: A standard piece. One share of stock is equal to one portion of a company’s worth, equal to that portion divided by the total number of stocks. There are over 5 billion Apple Shares outstanding. If you have 1 share of Apple stock, you own 1/5,000,000,000 of Apple.

 

Okay, no more math.

Shares Outstanding: Shares of stock that are conceivably available to be bought or sold. Not just really good stock.

Shareholder: Someone who owns at least 1 share of stock in a particular company.

Bondholder: Someone who owns at least 1 bond of a particular debt.

Derivative, future, option, short: the quick answer is that these are all side bets on investments. Nothing most investors need to concern themselves about or touch with a 40-foot mouse click, but go ahead and watch The Big Short if you want a better idea.

Stock Market 101:

Index: A list of investments and their prices, used to measure a market’s performance.

Dow Jones Industrial Average (or just The Dow or Dow Jones): An Index of 30 of the biggest companies in the US. Since they make up such a large part of the market, a move in the Dow is usually reflected by the total stock market.

S&P 500: The Standard and Poor’s 500 Index, is an index of the 500 largest companies on the New York Stock Exchange or Nasdaq. Like the Dow, a move on the S&P usually indicates a move of the total stock market.

NASDAQ: Second largest stock exchange in the US after the New York Stock Exchange. Where trades are made, particularly for technology stocks.

Large Cap/Mid Cap/Small Cap: Cap means capitalization or the amount of money invested in a company’s outstanding shares of stock. Large Cap companies are the big dogs (Think Apple, Coca-Cola) and have more than $10 billion in shares outstanding. Small Cap companies tend toward start-ups, but basically any company with less than $2 billion in shares outstanding. That leaves mid-cap stocks….in the middle.

Earnings: How a company did in the previous financial reporting period. If earnings were good, the company made money, probably more than expected, and stock prices will go up. Like in school, performing below expectations will ground your stock for a while.

The Funds:

Mutual Fund: An investment that is structured so that a single share includes a group of stocks and/or bonds. A good way of diversifying your portfolio even if you don’t have a ton of money to invest.

Diversification: Holding multiple investments to reduce your risk. The idea is that if you are diversified, some of your investments might lose money but not all of them at the same time. Hopefully.

Actively Managed Fund: A mutual fund where the managers buy and sell investments to try to maximize profits.

Index Fund: A mutual fund where managers buy and sell investments proportionately to reflect the performance of an index. Usually cheaper to run and to hold than an actively managed fund, and usually performs better than actively managed funds.

Vanguard: King of index funds. Even Warren Buffett loves Vanguard.

Fees: The money that a brokerage or mutual fund company charges you to a) manage your money b) hold your investments c) make trades.

No, I'm Not a Day Trader: The Basic Terms of Investing

Investment Income:

Dividends: The portion of profits paid to shareholders for being owners. Taxable income to shareholders, regardless of what they do with it.

Qualified Dividends: Dividends on stock a shareholder has owned for at least 60 days prior to getting paid. Taxed, but at a lower rate than regular income.

Interest: Money paid to bondholders for lending their money to the institution.Taxable income to shareholders

Principal: The original amount of the loan. When it’s paid back, the return of the principal is not taxed.

Capital Gain/Loss: The difference between what an investor sells an investment for and what they paid for it. If positive, it’s a gain, and it’s taxable. If negative, it’s a loss, and can be used to offset gains.

Long Term Gain: Gains from investments you’ve held for more than a year. Taxed at lower rates.

Short Term Gain: Gains from investments you’ve held for less than a year. Taxed at normal rates.

Capital Gain Distribution: Proceeds from capital gains from a mutual fund. They function more like a dividend, in that the investor does nothing but receive them.. Always considered long-term for tax purposes.

Basis: The amount an investor paid for their investment.

Wrapping Up

The terms of investing can seem a little arcane, particularly to those who are new to it. And it’s great for those of us who’ve learned a bit to be able to share, but sometimes we have to remember that we may very well be speaking gibberish. Both sides need to be able to share language to communicate.

Maybe next time, I’ll be a little better prepared to explain what I mean, Dad.

 

Do you ever feel like the alien from planet Investing? What words need to be added to the list?

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

26 Responses to “No, I’m Not a Day Trader: The Basic Terms of Investing”
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