The common investing terms you need to know

When you are just getting started on your investing journey, you’ll likely come across the following terms. Here’s a quick explanation of some of the important ones that will help you get started investing with more confidence.

Active Trading - Active Trading is a specific type of active investment management that tends to involve shorter holding periods for individual investments. An active trader may buy multiple stocks in a day, and hold some for a few days, and some for a few weeks, and so on.

Asset Allocation - Asset Allocation is a very important concept. It’s one main way to adjust the risk and return characteristics of your portfolio. Very simply, asset allocation describes how all your money in your portfolio is divided into various different asset classes.

Asset Class - Asset Classes are groups of investments that behave “similarly” and are regulated in a similar way. That’s quite a wide-ranging definition, so let’s use some examples to explain. The following are all broad asset classes: Stocks, Bonds, Cash, Real Estate, and Commodities.

Bid and Ask - When you look up the price of a stock, what you are seeing is the price that the most recent trade executed at. But the Bid and Ask prices represent the highest price someone is willing to pay to buy the stock, and the lowest price someone is willing to sell the stock at that precise moment.

Bonds - Think of a bond as a loan. Except the company issuing the bond is the borrower and the investor is the lender. For example, a company can sell a bond issue for $50 million dollars. This bond might have a 10-year term, meaning that the company will buy back the bond after 10 years and repay the investors. In the meantime, the company will pay interest to the bondholders. Bonds generally tend to be lower risk than stocks, but there can be exceptions.

Book Value - This is the price paid for a security or debt investment.

Bull vs Bear Markets - A bull market is when a major index (like the S&P500) records a marketable rise. There is no official metric, but it is widely accepted that a rise of 20% would be necessary to call a bull market. At the opposite is what is called a bear market which is when a major index records a marketable decline over a longer period (usually two months). Once again, the decline needs to be over 20% to qualify for a bear market.

Buy - Stock buying is the action of investors who purchase direct ownership of shares of a publicly listed company. The purchase price is called the cost basis. The goal is to sell the stock at a higher price and realize a profit.

Capital Gains - This is the difference between the price you paid for your investment and its selling price, if the selling price is higher.

Commodities - Commodities are basic raw goods like wheat, cotton, gold, and oil. You can think of them as natural resources that come from the earth and are used in many different ways by many different businesses.

Derivative - A derivative is a contract between two parties which derives its value or price from an underlying asset. Common examples include futures and options.

Dividend Yield - This is the annual percentage of return earned by your investment.

Dollar Cost Averaging - This is investing the same amount of money at regular intervals over a certain period of time, no matter the purchase price. This may lower the average cost per share and reduce the impact of volatility.

ETF - ETF stands for Exchange-Traded Fund. A “fund” is an investment that in turns invests in a portfolio of other investments. As an example, a “Canadian equity” fund could be a fund that purchases a number of different Canadian company stocks. “Exchange-traded” just means you buy and sell this fund on an exchange, just like an individual stock.

Equities - These are shares issued by a company which represent ownership in it.

Fixed Income Investments - these are a lower-risk investment that guarantees your principal and a certain amount of interest, which is paid on a regular basis.

Holding a Stock - Investors who hold a stock for a long period of time can benefit from regular dividends and potential price appreciation over time. This is called a long position.

Margin Lending - A margin account allows you to borrow money to invest directly from your brokerage. It’s also the only account type that allows you to directly short sell a security, which means you borrow the stock from the brokerage to sell it first, and then hope to buy it back later at a lower price. This allows you to profit if a stock falls. You have to pay interest to borrow either funds or stocks.

MER - MER stands for Management Expense Ratio. With investment funds, whether they are Exchange-Traded Funds or Mutual Funds, there are ongoing costs to operating a fund. These costs can vary quite a bit. Exchange traded funds tends to have lower MERs than regular mutual funds. Costs can be as little as a fraction of one percent per year, and they can sometimes be 2% or more per year. Keep in mind that all other things being equal, a higher MER means a lower rate of return. That’s why it’s important to be mindful of costs whether they are commissions or MERs.

Mutual Fund - Mutual funds are very similar to ETFs in that they are funds, too. Again, funds allow many individual investors to pool their money together into a large fund that is managed according to a specific mandate. However, mutual funds have some differences to ETFs. Traditional mutual funds in Canada have generally been sold through financial advisors or directly to advisors without using an exchange. They often don’t have commissions to investors to buy them, but generally have higher ongoing costs than ETFs.

Options - Options are financial derivatives. A call option on stock XYZ is a contract that allows you to buy a defined number of shares of XYZ, at a certain price, for a certain period of time. There are also put options. They are similar to call options except instead of having the right to exercise an option to buy, the contract holder has the right to sell an underlying stock. Call options get their name because the contract holder has the right to “call away” the stock from the person who sold the contract. Put options get their name because the contract holder has the right to “put the stock” to the person who sold the contract.

Portfolio Management - Portfolio management includes the following: Understanding your goals, risk tolerance, and time horizon. Selecting an investment or a group of investments that is in line with those overall goals. Rebalancing your portfolio on a periodic basis. And reviewing your portfolio over time to monitor your progress towards those goals.

Price to Earnings Ratio - This is a stock’s price divided by its earnings per share.

Real Estate - Real Estate refers to property. You can invest in real estate in many different ways. There are investment funds you can purchase that in turn invest in real estate, like shopping malls, commercial office towers, and more.

Risk Tolerance - Risk Tolerance is very important. Some investments are conservative and some are aggressive. The phrase “risk vs return” is an important one to understand. Generally, if someone is looking to get higher possible returns, they will have to take on more risk. One major form of risk in investing is the volatility in your investments over time. This is a measure of how much your portfolio might fluctuate in value in the short term

Sell - Sell refers to the process of liquidating an asset in exchange for cash. Liquidation is a term used to describe the exchange of non-liquid assets, such as stocks, or bonds, into cash. This can be achieved through an exchange on the open market.

Stocks - Stocks represent shares of ownership of companies, sometimes also called “equity”. You can buy shares of publicly traded companies from a stock exchange yourself using InvestorLine Self-Directed or AdviceDirect. You could also have an investment representative buy them for you, and you could also own them by buying investment funds like mutual funds and exchange traded funds.

Term Deposits - With a term deposit, you lock away a certain amount of money for an agreed-upon length of time at a guaranteed interest rate.

Ticker Symbol - If you want to buy shares in a company, you need to know it’s ticker symbol that identifies it on an exchange. For example, if you wanted to buy BMO shares, you could look up the name of the company in a symbol search. You’ll see that the ticker symbol for BMO is conveniently the same: B M O. You’ll also see that it trades on more than one exchange. In this case you can buy the shares on a Canadian stock exchange (denoted by C A), or you can buy it on an American stock exchange (denoted by U S).

Time Horizon - A time horizon is simply the length of time you expect to keep your money invested before you may want it back. Your time horizon is generally tied to a specific goal, such as a down payment on a home, paying for your child’s education, or your retirement. But you can also have a general goal of building wealth over a long period of time, too.

Volatility - This is how frequently and how much an investment fluctuates in value.

Congratulations! You’ve taken the first steps in learning the most common terms to start investing with confidence. Whether you have already started investing but aren’t entirely sure, or you’ve been wanting to invest but just don’t know how to get started yet, check out our free 50 video courses.