What Do All These Terms Mean?

Finance, like other fields, throws around a lot of terms that alienate and scare away newcomes for no reason. Here are some of the ones that you will hear the most:

Stock (also called equity) - This means you own a percentage of the company. The company has no obligation to give you money in case of bankruptcy and there is no guarantee from failure, so this is considered riskier than bonds (debt). As a company gets larger and larger, it often performs stock buybacks or pays dividends, which are each a form of returning actual money to shareholders (dividends as a form of a check and stock buyback as reverse dilution - if this is confusing, don't worry about it; just know that stock buybacks are usually a good thing to stockholders).

Bonds (also called debt) - This refers to debt a company is taking out that they are obligated to pay back. There are many forms that this takes and the riskier the company's financials are, the lower they need to spend (because there is almost no risk for the lender). Some companies have better ratings than the US government, such as BRK.A (Berkshire Hathaway, Warren Buffet's holding company), essentially meaning bondholders believe Berkshire Hathaway becoming insolvent is rarer than the US government becoming insolvent. In the case of bankruptcy, bondholders are paid back before stockholders. There is also a fixed, forced payment schedule to return money. Because of these two reasons (largely), bonds generally are lower risk and lower return than stock.

Derivative - A financial instrument that is dependent on the price of something. For example, it is not a stock but it may depend on the price of a stock. Derivatives are used for many things, such as mitigating risk of a downside risk or for capturing upside of a very rare event.

Option - A form of derivative where the owner is saying what the price of a stock will be at a certain future date. A call is betting that the price will be above a certain threshold at a future date while a put is the opposite, betting that the price will be below a certain threshold in the future.

401(k) - A part of the American tax code. The term is usually used to refer to an employer-sponsored account where contributions have preferable tax treatment (tax benefits received today if traditional, received upon withdrawal for Roth 401(k))

IRA - meaning Individual Retirement Account, the account is similar to a 401(k), offering options to invest with preferable tax treatment but it is entirely individualistic: anybody can choose where they would like to open an IRA

Mutual Fund - A mutual fund is a way managers pool assets and purchase financial tools, such as stocks, bonds and real estate. For example, if you wanted to own the S&P 500, you could purchase every single stock in the S&P 500 (so much in fees!) or you could buy VFIAX. Mutual funds (also called closed-end funds) have one price a day and generally only offer buying and selling after trading hours. This is in contrast to ETFs (open-end funds) which have a price tracked during the day and generally have the ability to buy and sell any time throughout the day.

ETF - Exchange-traded funds are alternatives to mutual funds that are able to be bought and sold throughout the day

S&P 500 - An index that tracks the 500 largest companies in the United States. Generally viewed as a decent barometer for how the stock market as a whole is doing (People: stop tracking the DOW!)

This is just a start. I am sure to add more as time comes around as there are a lot of terms out there. Email me with questions (info@rewardbus.com) and we may respond and add to this page as time goes on.