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

  1. Great encyclopedia of all the terms, Emily! I’m bookmarking it to pass it along.

    I’m still laughing at the day trader response. That’s like someone calling me a professional chef when I say I’m making dinner. Perhaps they don’t want to understand. At least here in this community, people thirst for knowledge.
    Mrs Groovy recently posted…Early Retirement Highs and Lows: Eight Top Bloggers Weigh InMy Profile

    • Those were both great comments (day trader and chef from Mrs. G!) I think those of us in this community thirst for knowledge and ask questions rather than throw out terms too. How did you do that? Why are you doing it that way? What worked for you? It’s the inquiry approach to life. Thanks for the great explanations Emily. Passing on to my kids – who are both starting investing too (and hoping they avoid day trading!)
      Vicki@MakeSmarterDecisions recently posted…Building My Habits – A Four Month Check-InMy Profile

      • My stepmom (who actually made that particular comment) and my dad were trying to understand, and I was doing a not-so-great job of explaining. And so far, their examples are my grandad and grandmother, who were investing in the 70s and 80’s (when almost no one did DIY investing), my stepmom’s brother-in-law (who is pretty close to being a day trader) and Jon and me. Most others they know work with brokers, have pensions and/or annuities, or don’t talk about investing with them.

        Working with a good broker (and they’re working with the same one my mom used and that I have been using) may be the best solution for them even if it’s more expensive, just because of their level of comfort with investing.

    • Or saying Jon’s a NASCAR racer when I say he has a Model T Speedster. Yeah, it’s a race car, but it’s 100 years old and might go 40 MPH max, and is intended to just look cool at car shows.

      My dad and stepmom have never really focused much on investing, and I respect the fact that their foci have been different than mine. Mom was the investor, and I’m still kicking myself for not learning the lessons she had to teach and talking more about it before she was gone. Her retire at 60, have time to concentrate on doing fun stuff and volunteer work is far closer to the model I’m trying to follow than Dad’s work forever motto, but Dad also loves his work.

    • Those are good ideas, Erik, although I think they may work better for a follow-up post that covers intermediate-level vocabulary.

    • I hope my dad reads it, but a lack of investing isn’t why he keeps working. He works because he loves it and because he can. His dad was the same way and worked up until almost the end of his life.

    • Thanks, Amanda. I felt so inadequate not being able to explain clearly what Jon and I were doing and why it was different, and I wish I’d had more time to think about how to explain things.

  2. I’m guessing that I really AM, compared to others in the family, but we don’t discuss it. It’s a shame, there are some folks in the older generation who would actually really enjoy having a chat about it but the younger ones have zero attention span and change the subject as soon as it comes up.
    Revanche @ A Gai Shan Life recently posted…File this under: 2017 is trolling meMy Profile

    • Obviously, it isn’t something we talk about too much in my family either, although we’ve talked more since I started the blog than we did beforehand. My family’s attention is definitely on other things right now. If anything, the investing talk was probably a good distraction.

    • Growth, value, and income funds probably should be on the list, Gary, since they tend to be among the choices you have to make on basic 401(k) enrollments. I’ll have to add them.

  3. Great article! You did a thorough job. And I appreciate the reminder that we’re often in our own world when it comes to DIY investing.

    I think I mentioned it before but great decision on going to the low-cost index fund. It’s amazing what a difference the compounding of those fees can do. I hope others follow in your foot steps! 🙂

    Thanks again for the article!
    Jay recently posted…How to Track Your Stock Trades with Google Spreadsheets (Free Template)My Profile

  4. This is a good reminder. It is easy to get caught up in our little circle and think that everyone sees how easy it is. Truth is, most people that I talk to are overwhelmed by investing and think it is far too difficult to do on your own. Getting the basics down would go a long way towards making those conversations easier.
    Matt @ Optimize Your Life recently posted…Do More in Less TimeMy Profile

    • Yes, I was really surprised about the comments for some reason, because certain things we’ve explained before. And then I realized we probably weren’t doing a good job of explaining because we had drifted into jargon.

  5. I’ll admit to being a beginner when it comes to investing. Of course, I would at least know the difference between investing and being a day trader, so I guess I’ve got that going for me! haha!

    I’m so focused on getting out of debt (my hair’s on fire!) that I am not quite ready to learn the ins and outs of investing yet. But I can’t wait to get there!
    Jamie @ Medium Sized Family recently posted…Love to Travel? Better Get a Vacation Savings Account!My Profile

    • And you will get there, Jamie. I think it’s a good time to start investing. There’s a lot of good information available, and a lot of good inexpensive options to avoid high fees and find good products.

  6. This is a great reference. I have dabbled in dividend funds, but didn’t know what the difference between long term and short term gains were. I know I’ll be referring back to this.

    • The gains distinction does seem to confuse a lot of folks because the rules are so complicated. Like “You can use losses to offset other income on your tax return, but only $3000 worth of losses per year. After that, you have to carry the loss into the next year and then maybe you’ll get to use it and maybe not.” Oh, and “If your other income’s low enough, you don’t actually have to pay taxes on long-term gains.”

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