How do you make money on the side while preparing to start a business? One way is through investments. The stock market is great way to grow your funds in preparation to launching your company. In fact, some people invest in stocks to earn the money they need to bootstrap their business.
If you are planning to go through the same route, here some stock market terms that you need to know before you dive into the world of stock investments.
Overview of Stock Market Terms
1) Stocks and Shares are two words that could be used interchangeably. Both Stocks and Shares are used to describe an ownership of a corporation. Stock is usually used as a general term. As an example, one could have stocks in the mining industry. Shares, on the other hand, are used in more specific ways such as shares in company X.
2) Market is a venue, whether actual or virtual, where goods or services are bought and sold. From this definition, a Stock Market is a venue where publicly listed stocks are bought and sold.
Bullish and Bearish Market are two opposite terms that describes the overall condition of the market.
In a bullish stock market, stock prices are rising, the overall economic outlook is strong, and everyone is optimistic on the economic conditions. In a bearish market, stock prices are falling, the overall economic outlook is weak, and everyone is pessimistic on the economic conditions.
3) Diversification in layman’s term, is not putting all eggs in one basket. It is investing in more than one stock, industry, or country. This is a strategy used to reduce risk in case the investment in a particular stock, industry, or country fails.
4) Benchmark is a standard point of reference to determine the performance or quality of the particular thing being evaluated.
5) Trading comprises of buying and selling of goods. Buying is the exchange of buyer’s cash for goods or services while selling is the exchange of seller’s goods or services for cash. This is with the assumption that both the buyer and the seller have agreed on the price of such an exchange.
6) Bond is a debt instrument issued by the borrower (usually a corporation or the government) to the investor. A bond is a loan that has an indicated variable or fixed interest rate and a maturity date. Some bonds can be traded publicly.
7) Capital Assets are types of assets that are not easily convertible to cash such as but not limited to land, buildings, equipment. Except for land, which usually appreciates in value over time, these assets are depreciated over a period of more than a year. These assets usually contribute to a company’s revenue.
8) Appreciation is the increase in value of a thing. Depreciation is the decrease in value of a thing.
9) Mutual Fund vs. Exchange Traded Fund (ETF)
The similarity between a Mutual Fund and an Exchange Traded Fund (ETF) is that investing in either fund means investing in a diversified portfolio. There are also differences between the two funds.
Mutual Funds require a certain minimum investment. The price of the Mutual Funds is determined by the Net Asset Value (NAV) which is determined at the end of the trading day.
ETFs on the other hand, do not require a minimum investment. It is traded within the trading day and its price fluctuates during the trading day, just like publicly listed stocks.
10) Money Market Securities are short term debt securities issued by big institutions that mature in a year or less.
11) Asset Allocation is the portioning of one’s investment. It is setting aside different percentages of your asset in different investment instruments depending on one’s risk tolerance, time horizon, and purpose of investing.
12) Cost Averaging is an investment strategy wherein an investor invests a fixed amount of money on a particular investment on a regular basis regardless of the price of the type of investment chosen.
13) When the investment is not yet cashed out, an investment may incur a Capital Gain/loss. Capital gain, also known as paper gain, is the unrealized appreciation of the investment while capital loss, also known as paper loss, is the unrealized depreciation of the investment.
An investment will only be considered as an actual gain/loss when the investment is converted into cash.