Some Investing Lingo: Part 1

It’s easy to take occupational words and acronyms for granted, assuming everyone else knows them too. But, of course, that’s not the case. People don’t know specialty phrases in every type of business or walk of life.

I was recently confronted by phrases I don’t normally deal with, so I appreciate how an occupational outsider feels. My Johnson City Chamber of Commerce’s leadership program visited the county courthouse. The tour was good, and the staff was professional. However, I (fortunately) have little experience with legal proceedings. The meaning of terms like “chancery,” “general sessions,” and “circuit” were and still are fuzzy to me.

Below are short definitions to eight terms that our industry uses daily. (We’ll write about more terms in a future blog post.) Perhaps you’re a seasoned investor, and you know the definition of all of these words. If not, hopefully the following makes for an interesting and informative read!

Security: A security is an investment instrument. Most simply put, a security represents either an ownership stake in a company, a debt stake in a company or governmental body, or the rights to ownership represented by an option.

Equity: With regards to investments, this is another word for stock.

Fixed income: With regards to investments, this is another word for bonds.

Index: An index is a measurement of a market’s change. An index is calculated using an imaginary, representative portfolio (e.g. the Dow Jones Industrial Average and the S&P 500 stock indices).

Mutual fund: Technically considered an open-end investment company, a mutual fund is an investment whose shares represent ownership in a portfolio of securities. They are typically meant for longer term investing. The range of different mutual funds’ investment portfolios is wide.

Exchange traded fund (ETF): ETFs are investments similar to mutual funds in many respects, but they have the ability to be traded on an exchange unlike a mutual fund. ETFs generally, though not always, attempt to mirror the performance of an index.

Net asset value (NAV): NAV is the calculation of a mutual fund’s or ETF’s share value on a specific date or time. NAV is usually based on the previous trading day’s closing market price for each security in the fund’s portfolio, less any fund liabilities, divided by the number of shares outstanding.

Long; Short: Long refers to owning a security in the traditional sense (hoping that the security’s value rises). Short or “shorting” refers to selling a borrowed security (hoping that the security’s value falls before having to purchase it to deliver it back). Similarly, a “long” investor believes an investment will deliver positive returns. A “short” investor doesn’t believe an investment will deliver positive returns.

We hope this list was informative. Like I discovered at the courthouse, understanding basic terms makes a big difference. Stay tuned for more definitions of common investing verbiage.

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