If boring and confusing people with nebulous acronyms were a sport, the finance industry would be Usain Bolt, Roger Federer and Serena Williams rolled into one. Unfortunately, that’s not an excuse to plug our ears.
For one, not understanding what we’re signing up for is exactly how we end up paying unnecessarily high management fees, putting money into risky investment products or buying stocks that end up tanking. What we don’t know really can cost us.
That’s why understanding financial terms is vital to our success as investors. (Bonus: It also makes us sound smart.) Here are 12 basic acronyms to start.
Like a batting average in baseball, return on investment might be the most important stat in the game: How much money did we make per dollar invested?
Find out by subtracting the original investment from profits, then dividing by the original investment. For example, if we invested $1,000 (original investment) and later sold our shares for $1,300, our ROI is 30 percent. (For a more complete picture, consider how long it took to earn that profit, too, and any fees you paid. And don’t forget to figure in taxes.)
Earnings per share tells shareholders how profitable a company is by dividing its profits by the number of company shares. Generally speaking, a company with a high EPS, compared to past EPS or similar companies, is doing well.
Not to be confused with the Irish Republican Army, investments in our Individual Retirement Account can supercharge our retirement savings. In a Traditional IRA, our money is taxed only upon withdrawal; in a Roth IRA, we contribute post-tax dollars that grow tax-free and we’re not taxed when we withdraw them in retirement.
Certificates of Deposit are a low-risk investment that typically offers higher interest than what we’d earn from a regular bank account, but lower than what we could probably earn in the market. We also have to agree to lock in our money for a certain timeframe—usually three months to five years—or pay a penalty.
An exchange-traded fund is a stock, bond or commodity fund that typically tracks an index, like the S&P 500, though they can also focus on themes like health care or sustainable energy. Instead of investing in just one stock, leaving us vulnerable to market swings, ETFs expose us to hundreds at once, providing broad diversification.
Pronounced like reet, a real estate investment trust is like a mutual fund that invests in income-producing real estate, so we don’t have to put all of our eggs into one basket with a single property.
The New York Stock Exchange is what we’re probably thinking about when we envision stressed-out traders yelling and waving paper in the air till the bell rings. Around since 1792, it’s located on Wall Street and is the world’s largest stock exchange. (And traders don’t really wave tickets around anymore—much of it is done electronically these days.)
The National Association of Securities Dealers Automated Quotations—see why we abbreviate?—can mean two things: First, it’s the world’s largest electronic stock change, best known for having lots of tech stocks like Apple and Microsoft.
It could also refer to the NASDAQ Composite Index—a price-weighted index of more than 3,000 companies—which is sometimes looked at for a broader view of how the economy is doing.
Salt-n-Pepa? Um, nope—it’s another double-meaning acronym that has nothing to do with hip hop. There’s the ratings agency, Standard & Poor’s, which assesses companies’ and government entities’ short- and long-term creditworthiness.
Or it could refer to the Standard & Poor’s 500 index, which tracks 500 big companies and is a favorite tool for analysts trying to understand how the U.S. market is performing.
The Dow Jones Industrial Average—a.k.a. the Dow—is another closely watched index and benchmark indicator of the U.S. economy’s health. It is composed of 30 important stocks, including companies like American Express and Coca-Cola.
The first time a company sells its shares to the general public—in an effort to raise money and expand the business—is known as an initial public offering. Because the stock price can’t be fixed in advance, IPOs can be high drama for everyone involved, from founders and early investors to the investment bankers who advise on how to value the company and how many shares to sell.
The Securities & Exchange Commission is the cop that polices Wall Street, making sure that people working in business and finance don’t defraud shareholders or cheat the market. Sometimes the FBI gets involved, à la “Wolf of Wall Street,” but they’re still fighting over who’s Batman and who’s sidekick Robin.
February 1, 2017