Financial news seems to dominate the air waves and with that comes a lot of terminology that seems to be thrown around with the assumption that these terms are common knowledge. For example, a PBMares Wealth Management client recently asked, “What is the SNP?”  This begs the question, how many of the below terms are most investors actually familiar with?

Even if an investor trusts a firm or broker with managing their accounts, a foundational knowledge of financial terms and concepts is still important. The ability to understand financial and investing language, even at a basic level, puts investors in control of their financial future and gives them the confidence to make informed decisions.

Allocation

Allocation refers to a ratio of stocks to bonds; for example, a 60/40 Portfolio. This is 60 percent equities/stocks to 40 percent fixed income/bonds. Over time, this ratio tends to change based on market fluctuations. An advisor may rebalance the account, which simply means they will sell or buy to get this ratio back in line.

Basis Point

This is one hundredth of one percent. Investors may also hear ‘bps’ (pronounced bips) to refer to a basis point.

Bonds

Bonds are a type of investment in which the holder (investor) is owed interest from the issuer (think: company) because the holder provided liquidity (cash) with the promise of a larger return in the future. Some bonds are guaranteed to provide a positive return while others are not.

ETF

Exchange Traded Funds are also baskets of stocks and/or bonds with key differences. For the context of this article, the big difference is the way in which they are traded. They are priced similar to a stock (with the price fluctuating all day) as opposed to a mutual fund (which is priced at the end of the day).

Equities

This is another word for stocks. Stocks are issued by companies and shareholders purchase them as a way to own a small percentage of the company. In exchange, the shareholder receives an equal percentage of any profits in the future. Investors may also hear their advisor or commentator mention “the risk in your portfolio.” They are often referring to stock exposure.

Fixed Income

This is another term for an investment that has a guaranteed (to some extent) return. A pension would be considered fixed income as well as bonds.

Index

This is a measure of a basket of stocks or bonds that are compiled together and used by the public to better sense how the market is doing. The most popular are the S&P 500, which is a basket of the largest 500 companies in the U.S. The Dow is a basket of 30 companies (which can change) that are believed to measure the overall tendency of the market. And the NASDAQ composite (National Association of Securities Dealers Automated Quotations) are the 3,700 stocks that make up their exchange. Investors can follow these indices as well as purchase a mutual fund or exchange traded fund (ETF) that represents them. This is known as indexing and is a popular form of investing.

IRA

This is an Individual Retirement Account. Investors use these to save for retirement and there are rules and consequences to removing money before age 59 1/2, with some exceptions.

(The) Market

Traditionally speaking, this is the exchange of goods and services; for a more nuanced definition, consider instances where someone said “The market is up/down today.” When this term is used in finance, it is often used to describe the movement of an index (more on that to come) such as the S&P 500 (Standard & Poor’s) or the Dow Industrial Average (Dow for short).

Mutual Fund

This is a basket of stocks and/or bonds that are typically managed by a team. Unless they follow an index, the team selects the best stocks/bonds that they believe are prudent in the fund. This provides investors with a means of diversification without having to purchase each individual stock.

Bonus: ESG Investing

This is somewhat newer and represents a more holistic way for investors to find value in a company. Environmental, social, and governance (ESG) investing refers to a non-financial, socially conscious framework of criteria that investors can use to evaluate risks and opportunities related to a company’s stock. ESG frameworks aren’t currently required on financial reports, though adding disclosures is becoming more common.

Are there financial terms you hear that you are unfamiliar with? Ask! Advisors may sometimes gloss over acronyms because it’s like a second language. Everyone has a different level of investing knowledge and comfort around financial terms, and it’s always better to ask than not know, especially when it comes to your assets or long-term wealth.

Your financial advisor at PBMares Wealth Management is ready to discuss any financial terms and their impact on your retirement portfolio at any time. Schedule a call today.

About the Author:


Shelly Braden - PBMares WealthShelly Braden, CFP®
Wealth Advisor

As a Certified Financial Planner™, Shelly specializes in coupling comprehensive financial planning with an estate planning focus. She holds a Master’s in Financial Planning & Taxation with a concentration in Estate Planning.