Besides from your native tongue, there is one other language everybody should learn and that is the money language.
Read the full post The Language of Money - a language for life or watch in YouTube.
Money will be part of your life all your life and not being able to speak nor understand the language of money significantly increases the odds of you and your family living under financial stress and with poor money mindsets.
I want you to live your life on your terms and understanding the money language will absolutely help you accomplish that. Earners are learners and learners are earners. I bet you are or want to become one of those and this is the key!
Do you know any millionaires who know nothing about money? No? Maybe there is a reason why they are millionaires... They understand the language of money and use it to their advantage instead of being taken advantage off!
By learning the money language you can completely transform your life to a life on your terms and here we have collected some of the most important ones based on our own as well as others experience.
Be a learner and become an earner!
Administrative fees
A fee you might (most likely will) be charged when investing in a mutual fund. This is on top of the fund management fee. Keep it low!
Amortize
When you are paying off part of your loan or mortgage, you are making an amortization.
Appreciate in value
When an asset increases in value.
Arbitrage
Taking advantage of price discrepancies to make a risk-free profit. This term is also used when people think they are making a risk-free profit even if they are indeed taking risk.
Asset
Something of valuable quality. It could be a physical asset like a property but also intangible like knowledge.
Asset Allocation
How an investor divides their investments into different assets like stocks, bonds, real estate, private equity etc. This should be based on each investor's personal investment and risk profile.
Asset Manager
Either an individual or institution who manages money (or other assets) on behalf of someone else. Vanguard Asset Management is an example of one of the biggest asset managers in the world. They offer a variety of ETFs as well as mutual funds for their customers, both retail and institutions.
Bear Market
A bear market is a falling market (prices going down). You would normally say you enter a bear market when the market has fallen with -20% (the bear swipes down when attacking).
Benchmark (index)
Is something fund managers often refer to when discussing their own performance. Often this is a broad, non manged, index like the S&P500. A US fund manager might use this index as his "benchmark" and hence compare his performance against this index to determine if he is performing better than the index (outperforming) or worse (underperforming).
Beta
How well a specific stock follows the general market (an index). If the general market (say S&P500) goes up 1% and your stock goes up the same, the Beta is 1. If half the movement it's 0,5 and if twice the movement it's 2.
Blue Chip
A big and stable company with long history, reputation and profitability. Sometimes also called Value stocks.
Bond
A security issued by an institution or a government in order to raise money. As an investor you can buy this security and receive a coupon (interest) periodically for lending the money. You take counter party risk because if the institution who issued the bond can't pay, you might lose part or all of your money.
Broker
A middleman between a buyer and a seller. A Stock Broker used to be a common term and that would be someone who executed an order on behalf of someone else and took a Commission for that in return. These days we mostly see online investors placing the order with their online bank or using an Online Broker to execute the trades (much cheaper and more transparent).
Bull Market
A bull market is a rising market, prices going up (the bull swipes up when attacking). Most people love bull markets because that is when they make money (only sophisticated or institutional investors take positions to make money in falling markets and many are unsuccessful).
Business Cycle
Is an expression used to decide how well the economy is doing and what stage we are at. The stages in the cycle normally referred to are:
Expansion - the economy is doing well, new jobs are created and people and businesses are optimistic about the future.
Peak - late in the expansion stage, most numbers are looking great but people and businesses are becoming too optimistic about the future.
Recession - is what follows a Peak. The recession is when the numbers are looking worse and worse, people and businesses are pessimistic about the future. Maybe the world is coming to an end after all...
Trough - The pessimistic views are disappearing and some are becoming more optimistic. Investments are taking place again and numbers are starting to look better for each day. A turn for the better is (hopefully) around the corner.
You (yes you!), should always have a view of where in the cycle we are so that you know what is coming and make sure you are prepared. If you are, your family will not suffer even if winter is coming and you get fired! Always be ready and prepared so that nothing and especially not a poor business cycle, impacts your quality of life.
Buy the Market
Investing broadly just to follow "the market". The market can refer to a specific market like the US stock market but can also be on more global level. To "buy the market" is an expression for just taking part by investing broadly, for example in Exchange Traded Funds (ETFs) that track different markets.
Central Bank
A central bank of which the most famous is The Federal Reserve (the FED) in the US, is in charge of the countries' (or regions') monetary policy and this is done by modifying the interest rate.
Most central banks have an inflation target of around 2% and a focus on financial stability and growth. Hence they are closely monitoring the local as much as global economy and business sentiment as well as unemployment rates to be ready to act when they feel they need to.
When they think the economy is growing too much (inflation is high) they tend to increase the interest rate in order to "cool down" the economy as it would then become more expensive to borrow money.
When they think the economy is in for a recession or already in a recession, they will lower the interest rate to make it cheaper to borrow money and hence stimulate the economy so that it starts expanding again.
You should have a view of what the central bank in your country or region is about to do next as it will impact your personal finances! Higher rates = more expensive if you have loans but also higher interest on your savings. Lower rates and the opposite will happen.
Commission
The fee you pay to buy or sell a stock. It is either a fixed amount or a percentage of the transaction. One should always make sure to keep the costs as low as possible.
Commodity
A raw material or product which can be bought or sold. In the financial world the common ones are Gold, Silver and other base metals, Oil and gas (sometimes called hard commodities) and soft commodities like grains. Most investors view commodities as alternative investments and might see them as a hedge in their portfolio.
Compounding (returns)
The effect of interest or return being reinvested so that the next return is now being calculated on that higher value (original value + return).
Example: Let's say you have 100 USD and make 10% yearly return. 10% of 100 USD is 10 USD so one might think that after five years one would have 150 USD but that is not the case IF the return is reinvested.
After year 1: 100 + 10 = 110 USD
After year 2: 110 + (110*0.1) = 121 USD (not 120)
After year 3: 121 + (121*0.1) = 133.1 USD (not 130)
After year 4: 133.1 + (133.1*0.1) = 146.41 USD (not 140)
After year 5: 146.41 + (146.41*0.1) = 161.051 USD (not 150)
Compounding is the eighth wonder of the world according to Einstein and many great investors credit the effect of compounding for their tremendous returns (Warren Buffett, Peter Lynch etc).
The longer you stay invested for the better, compounding return on investment is your best friend in the world of investing.
Consumer Price Index (CPI)
CPI is a measurement of the inflation, i.e. how much prices have changed. When inflation is high (above 2%) for a period, the central banks normally tend to start raising interest rates. This in turn will affect the cost of borrowed money, like the interest on your mortgage if you are on floating rate.
Contracts For Difference (CFD)
Do not use! These contracts are extremely leveraged investments so small movements will mean you either make a lot or you lose a lot, if not all of your money. The average investor should not use these instruments as more than 90% of people buying these tend to lose all their money within months! I strongly recommend you to stay away from CFDs.
Counterparty Risk
The risk a party takes when entering into a contract or an agreement. When buying a security you take counterparty risk on the issuing entity. If you for example by a bond issued by Coca-Cola you face the risk that Coca-Cola can't or won't pay according to the terms of the bond. Hence you have counterparty risk towards Coca-Cola.
Currency Risk
When you invest in an asset in a different currency than your home currency, you are taking a currency risk. You might live in the US but buy a European stock in EUR (your bank or online broker will do the currency conversion for you for a fee so you don't have to think about that), hence you are taking a risk on the EUR.
If you buy a stock for 10 EUR when the EUR/USD is 1:1, you would pay 10 USD (ex commission and currency conversion fee).
The stock might rise to 12 EUR which is plus 20% BUT if at the same time the EUR loses the equivalent value compared to the USD, when you convert those 12 EUR back to USD, you only get 10 USD and you have not made any money.
The currency risk can work against you or in your favor depending on the development of the currencies.
Deflation
When prices are falling in value we are experiencing Deflation. This is the opposite of Inflation. Deflation to most people means no growth. If everyone is expecting things to become cheaper (deflate) in the future, they will postpone their purchases and that will be bad for the economy and the business cycle.
Central banks would most likely lower the interest rate when deflation occurs, to stimulate more borrowing and hence purchases and investments in order to get the economy growing again.
Depreciation
The decrease in value of an asset or product. If you own a machine it is very likely to depreciate in value and the more you use it the more it depreciates. Even if you do not use it, it will still depreciate in value.
Diversification
Spreading your risks. Within investments the word diversification is often used and referred to as how you spread your investments within an asset class, like stocks. If you only buy one stock you have all your stock market risk linked to the performance of that specific stock. If you buy the S&P500 (index), you have spread your risk amongst 500 companies so if one stock falls massively, it is not the end of the world. Often though, this word is used interchangeably with Asset Allocation.
Dividend
Part of a company's profits that are being paid out to the investors. Dividends are not guaranteed to be paid even if the company makes a profit.
Dividend Yield
The dividend paid out divided by the stock price. If the stock price is 100 and they pay 5 in dividend, the dividend yield is 5%.
Dovish
This phrase is sometimes used when talking about the Central Bank and what is expected from them. When the central bank is dovish, they are potentially lowering the interest rate as they think the economy is weak (or will be). They want to stimulate the economy, improve employment and increase inflation. The opposite is when they are Hawkish.
Earnings Per Share (EPS)
The profit the company makes per share. Total profit divided with the number of outstanding shares.
Equity
An equity (or Stock or Share) is a fraction of ownership in a (listed) company. It is normally held in dematerialized form in an investment account.
Exchange
This is the place where stocks are traded. The most well known are the New York Stock Exchange (NYSE) and Nasdaq. You use your bank or online broker to buy stocks via the exchange.
Exchange Traded Fund (ETF)
An ETF is a security with multiple investments (holdings). It is traded on the exchange. It does not have a fund manager who is actively buying and selling holdings (like a mutual fund). The investments in the ETF are based on the rules of this ETF and often they are "tracking" an index and hence the holdings should be a replica of the index it is tracking and so should the performance. ETF's have low fees 0.0% - 0.5% per year as they are computerized. Buying "the market" could mean buying an ETF tracking the global stock market.
Fee
A cost you as an investor pay to be part of the investment. Fees are extremely important as the impact on your money can be significant. Always try to keep your fees as low as possible!
Financial Jargon
Terms and phrases commonly used in discussions around money, finance and investing (like the words and phrases in this section :))
Fund management fee
A yearly cost you as an investor pay to be part of the investment and for the management of the investment. Mutual funds have fund managers who manage the investments and hence investors are charged a management fee. Remember that you pay this fee regardless of the performance! Fees are extremely important as the impact on your money can be significant, always try to keep your fees as low as possible!
Fund manager
The person who manages a mutual fund and its investments. Basically the person who is choosing what to buy and when to buy and sell the holdings of a mutual fund. It is "because" of the fund manager the fund management fee of mutual funds are much higher than for example in an ETF (not sure it is justified to pay those high fees but that is up to every investor to decide).
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within the borders of a country during a specific time period. It is the most commonly used indicator of how an economy is doing.
You should just know that when someone says the GDP is 2.5%, they are basically indicating how the economy is doing and this is important for you to know!
The rule of thumb is that if the GDP level is above 2%, the economy is doing pretty well. If much higher, the Central Banks will probably start increasing interest rates to "cool off" the economy. If they are much lower, they might lower interest rates to get the economy back on track (decent growth).
When you hear GDP and its percentage, you should know whether the business cycle is good, bad or ok. By knowing this, you know what to do to take advantage of the situation.
Hawkish
This phrase is sometimes used when talking about the Central Bank and what is expected from them. When the central bank is hawkish, they are potentially increasing the interest rate as they think the economy is doing well (maybe too well). They want to cool off the economy and potentially the Inflation. The opposite is when they are Dovish.
Hedge fund
A hedge fund operates differently to a normal fund. Most hedge funds have much more flexible fund rules and can use sophisticated investments and leverage compared to a normal fund. They have been popular among institutional investors as many of them have aimed at delivering positive returns regardless of the market conditions. The last decade(s) has been hard for many of them due to high fees and poor performance. A common fee structure used to be 2 and 20, meaning 2% fixed annual fund management fees (regardless of performance) and 20% performance fee.
Hedging
Making an investment with the purpose of lowering the risk in the portfolio. Some see gold as a hedge to stocks as it is ”expected” to rise in falling markets.
High Net Worth Individuals (HNWI)
Wealthy individuals who normally would qualify as private banking customers.
Hiking
In the financial jargon, this means that the central bank is increasing the interest rate. It then becomes more expensive to borrow money and they do this to cool down the economy.
Advisory fee
The fee you pay your financial adviser (if you have one). This might be a fixed fee but often it is a running fee, i.e. a percentage of the value of your portfolio. This is on top of any administrative and fund management fees so keep them to a bare minimum!
Historical Performance
The performance (change in value) of a specific asset over a period of time. Always remember that even if an investment has a great historical performance (great returns looking at the history of the investment), it does not mean nor guarantee anything about the future performance and it should not be used as an indicator.
Alternative investment
An investment that is "expected" to perform differently to the rest of the market. For example if an investor buys gold they might hope that gold increases in value when the stock market falls, i.e. performs differently than other investments. In this case gold could also be seen as a hedge to that portfolio.
Index
A combination of stocks, often used as a benchmark. The index has certain rules as to how it is being calculated and there are numerous indices. The most well-known indexes are: S&P500, FTSE100, Eurostoxx and DAX.
Index Hugger
A performance which is identical to its benchmark (index). For example, a US fund manager might use the S&P500 as his "benchmark" and if his returns are identical to the index, he is an index hugger. If you want the index, invest in a low cost ETF instead. You don't want to pay high annual fund management fees to a mutual fund manager for him to deliver index returns. Then you are better off just buying the index at a fraction of the cost.
Also see: outperformance and underperformance.
Index Tracking
When a specific investment is following an index performance very closely it is called index tracking. If the performance of a mutual fund manager is very similar to an index, one could say that the fund manager is an index tracker. As an investor you can also track an index by buying an Exchange Traded Fund (ETF) which is designed to do just that, track an index like the S&P500.
Inflation
Inflation is the price change of a product (or basket of products) from one year to another. Consumer Price Index or CPI is the commonly quoted term.
Inflation tends to be high (prices go up) when the economy is doing well (expansion or peak phase of the business cycle) and vice versa.
The Central banks are following the inflation closely to try and keep it within their target range. They do this by increasing or decreasing the central bank interest rate.
Inflation is the opposite of Deflation.
Initial Public
Offering (IPO)
When a company decides to sell their stocks publicly and list it on an exchange, they do an IPO with the help of some investment banks. Investors can sign up for shares via their bank or brokers (most of the time).
Institutional
investor
An institutional investor could be an insurance company, a pension fund etc. Basically a large and sophisticated (hopefully) investor.
Interest
A percentage amount you pay to borrow money or that you receive if you are lending money.
I sincerely encourage you to learn about interest and how to calculate it, because having different loans (car, credit, home etc.) can be devastating for your finances and will for sure mean it will take much much longer to become financially free. Avoid any credit which does not put cash in your pocket and you will most likely never have to worry about money.
Investment Account
An account in which you hold your investments (Securities). You should try to make sure you keep the costs of this account to a bare minimum (use on Online Broker) and make sure you have a tax-efficient setup based on your personal situation.
Leverage
A way to try and amplify the returns. One way is to borrow money to invest and another way is to use financial derivatives. With no or small amounts of money you can make a lot BUT you can also lose a lot very very fast. I would not recommend anyone who is not a sophisticated investor to use leverage when investing.
Long the Market
Being long the market means that you are invested in the market (normally the stock market). The opposite would be to be short the market.
Market
Capitalization
The current value of the company. Calculated by taking the number of outstanding shares and multiply by the current stock price.
Mutual Fund
A security with a collection of investments. As an example it can be a fund investing only in stocks (stock market fund). The Fund manager picks the stocks according to the fund rules. Investors pay a yearly fund management fee to be invested in the region of 0.5% - 3% per year (in general I find mutual funds way too expensive).
Net of Fees
After fees. If you are investing in a fund, you want to know the performance after fees. If you are presented with a fact sheet with historical performance you want to know that it is net of fees. Fees are taken out from the fund and hence reduces the performance of the fund and the value of your investment. Net of fees is a very important concept to remember.
Online Broker
A company which is present online only (in contrary to a retail bank) and their core business being investments. Investors can open accounts with them to buy and sell different securities. They are often specialized within this field, which makes many of them very competitive in terms of price and user friendliness (compared to some old bank with old systems). If you intend to start investing in securities I would for sure recommend you to compare your bank with a good Online Broker. Any and all money you save on Commissions and other Fees are money in your pocket!
Outperformance
A performance which is greater than its benchmark. For example, a US fund manager might use the S&P500 as his "benchmark" and if he is performing better than the index, he it outperforming. If he is not, he is underperforming. If his performance is equal to the index (benchmark) he might be called an index hugger.
Passive Income
Money you make without spending time on it. For example receiving commission for a book or online training sessions which you have already produced. The opposite would be to trade your time for money (working for a salary).
Pension
This is money which you and/or your current or previous employer have put aside for you when you retire. It is instrumental that you know how much it is (so that you can add more if you feel you need to) and how it is being invested. Make sure it has very low costs as fees on your pension investments can eat away half you pension! To have a joyful retirement, money is a necessity and the sooner you face it the easier it will be for you to make any changes necessary. Ask your financial fiduciary or a friend who knows and have money, for help and I beg you to do it asap!
Performance fee
Is a fee that is being charged based on the returns (performance) of the investment. Sometimes there is a hurdle rate to which the performance has to be greater than, before any performance fees are being charged. This is becoming uncommon and I would say that only some hedge funds still charge performance related fees.
Portfolio
The collection of investments an investor holds, together they are called the portfolio.
Price To Earnings Ratio
This is probably the most common "ratio" investors look for to get a "feeling" for the valuation of the company. It is calculated by dividing the stock price by the company's earning per share.
Private banking
A service offered by banks or financial institutions to wealthier individuals. The service, offerings and price levels are significantly different to what is offered a retail client. Often these customers are knowledgeable and speak the language of money. Hence they are very price and quality sensitive.
Redemption fee
A fee which might be incurred when you want to sell your mutual fund. Make sure you are not charged this fee and I would personally avoid any funds that charge redemption fees.
Retail investor
A small investor, normally a private individual with limited knowledge and expertise compared to an institutional investor.
Risk
All investments have risks which mean that investors can lose their money or part of their money. Different investments have different levels of risks and an investor should always make sure they understand the investment as well as the risks associated with the investment.
Risk versus Return
This should always be on your mind. It means understanding what level of risk you will have to take in order to get an expected level of return. Normally more risk (like stocks) should equal greater returns over time compared to investments with lower risk (like bonds).
Example: A savings account pays 1% interest per year guaranteed, so you should not risk losing your money but you will not be able to make more than 1% per year in return. On the contrary, if you buy the Apple stock, there is no limit as to how much it can increase in value (yes your money could potentially double or more) but they could also go bust and you would lose everything.
The question is how you perceive the risk in your investments and if this is suitable to your investment and risk profile.
Savings Account
The most common place of saving money in a "safe" way. Most people (and institutions) have a savings account with their bank. Normally you get paid to put your money in a savings account and the money you get in return is called interest.
Sector
Stocks are divided in different sectors like: banks, telecom, utilities, consumer goods, pharmaceuticals etc. The more one diversifies amongst different sectors the lower the volatility.
Security
A transferable asset, often in dematerialized format. A stock would be an example, it can change hands electronically as there is nothing physical to exchange. The stock will be transferred from the seller to the account of the buyer after a transaction has taken place. The word security is often used for any financial instrument.
Share
A share (or stock or equity) is a fraction of ownership in a (listed) company. It is normally held in dematerialized form in an investment account.
Shorting (a stock)
Means you are selling a stock you don't own with the intention of buying it back once the price has fallen. This is something some institutional investors do to make money in falling markets. The average investor should probably not try this as timing the market is extremely difficult and most get it wrong...
Shorting the Market
Going short the market means that you are taking exposure to make money from a falling market. One way would be to go short a specific stock or an index. This is something sophisticated investors might do but for a smaller investor I would not recommend it.
Stock
A stock (or share or equity) is a fraction of ownership in a (listed) company. It is normally held in dematerialized form in an investment account.
Stock Broker
A middleman between a buyer and a seller, also called a Broker. It used to be a common term for someone who executed an order on behalf of someone else and took a Commission for that. These days this process is computerized and investors can just place the order with their bank online or use an Online Broker to execute the trades (much cheaper and more transparent).
Stock symbol or Ticker
The short name of the company used on the exchange. Apple Inc is AAPL and Johnson and Johnson is JNJ.
Stop-Loss
This refers to an order placed to sell at a certain price. Normally one would use it for protection and place an order today which is "alive" for maybe a week and the stock will be sold if it drops below the stop-loss level.
Timing the market
Is when an investor is trying to buy and sell investments at the right time. So buying before a stock increases in value and selling before it decreases. Most investors, large and small get this wrong and hence their returns are smaller than what they would have been. Historically, the market has increased 70% of the time and decreased 30% of the time, which means that it is often better to just stay invested all the time, instead of trying to "time the market". Personally I am always invested in the market and when it falls it might be the "perfect" time to buy but only time will tell.
Trading
Frequently buying and selling investments (commonly stocks) with the purpose of trying to time the market. Very few people can survive as traders on their own account. Timing the market is very difficult and most investors would be better off just being invested in the market for the long run.
Transaction cost
This is the amount you pay to make a transaction (buying or selling a security). Normally this is referred to as a commission which you pay per trade or is a percentage based on the transaction amount. If you own a mutual fund, that fund also incurs transaction costs when they are buying and selling securities within the fund.
Underperformance
A performance which is worse than its benchmark. For example, a US fund manager might use the S&P500 as his "benchmark" and if he is performing worse than the index, he is underperforming. If he is not, he is outperforming. If his performance is equal to the index (benchmark) he might be called an index hugger.
Unemployment Rate
According to the Bureu of Labour Statistics in the US, it is: People who do not have a job, have actively looked for work in the past four weeks, and are currently available for work.
This is normally presented in percentage format and as its development is closely linked to the business cycle (low in good times and high in bad times), one should understand the current situation and what to expect. In the US it is currently (Oct. 2018) 3.7% which is the lowest since 1969! So at the moment the economy is running at full steam (peak in the business cycle).
Upfront fee
A cost you might be charged when buying a mutual fund or other securities. Always make sure you know if there are any upfront fees when investing. If you pay 5% in an upfront fee, your investment will have to increase with roughly 5% before you even break-even! Personally I do not accept or invest in anything which has an up front fee.
Volatility
This refers to how much the stock or a market moves. In general, volatility is higher when markets are falling (bigger movements) as opposed to when they are rising.
Yield
The return in percentage. Normally used on dividends (stocks) or coupons. If a bond pays 10 and the price of the bond is 100, then the Yield on that bond is 10%.
Yield On Cost (YOC)
The return in percentage that one would get on the investment, based on the purchase price and not the current price of the investment. If a bond pays 10 and the purchase price of the bond was 90, then the YOC would be: 10/90 = 11.11%. The current price of the bond might be 100, which would mean that for investors buying at this price, their YOC would be 10/100 = 10%.
Disclaimer: The information on this page is true and complete to the best of our knowledge. Always talk to your financial fiduciary (investment adviser) before making any investments so that they are in line with your risk and investment profile.
