WallStreet Words | Before You Buy Stocks, Learn These Words S&P 500SPCFD:SPXmoonyptoEvery successful trader speaks the language of the market. Understanding these essential investing terms helps you analyze opportunities, manage risk and make smarter decisions instead of relying on guesswork..Whether you're trading stocks, crypto or ETFs, mastering this vocabulary will help you read market analysis with confidence, communicate like a professional, and make better informed investment decisions Alpha Generally refers to an asset or portfolio’s return (profit) above and beyond what you’d get by investing in the market. If Standard & Poor’s 500 index aka the S&P500 provides an annual return of 10 percent and your portfolio hauls in 15 percent, that 5 percent spread is your alpha Bears and bulls A pair of investing archetypes reflecting the health of and perspectives on markets. Bears think prices will go down; bulls think they’ll go up. Likewise, a “bull market” is an optimistic period of growth and a “bear market” is a glum period of falling prices. If the stock market keeps running up? A bull run Beta A measure of price volatility. Specifically, it looks at how much the price of a stock goes up or down in relation to the market. If a stock goes up 3 percent whenever the S&P500 goes up 1 percent, that has a higher beta than a stock that goes up 2 percent when the S&P goes up 1 percent Buy and hold An investing style with no particular “sell date” in mind. The goal here is to buy a strong stock or asset you believe in and hold it for years, knowing there will be bumps along the way. American mega investor Warren Buffett is known for his buy and hold method of investing Capital A squishy word that can mean different things in different financial areas; in an investing context, capital refers to assets that can be deployed to get more assets, as opposed to cash for day to day operations. Any shares of stock you own are capital. If you have a 401(k) plan, that’s capital. Cash in a savings account you plan to spend on stocks: capital. The cash in your checking account that’s used for rent and groceries: not capital Capital gains If you sold a share of stock for more than you paid for it, that’s a capital gain. (Selling for less is a capital loss.) If you’ve held the stock for a year or more, this is considered a long-term capital gain and is taxed at a special rate 0 percent, 15 percent, or 20 percent, depending upon your income level, which for many investors is a lower rate than their normal tax bracket. This is one reason that wealthy individuals often pay a lower effective tax rate than you might expect: Much of their income comes from capital gains Cash flow All kinds of accounting trickery (such as the arcane minutiae of how assets are depreciated) can make the reported “profits” of a company open to interpretation and debate, but at the end of the day, the actual cash that a company receives and spends is a cold, hard truth. So by analyzing a company’s cash flow over time, you can get a better sense of its true value Commodities Raw materials such as corn, wheat, and crude oil. Typically investors use financial instruments like “futures contracts” (the agreement to buy an asset in the future at a set price) to gain exposure to a commodity without having to actually store bushels of corn in their garage. Commodities are an additional way to diversify a portfolio Compound returns and interest The happy state of earning interest income on existing interest income. Let’s say your “rate of return” is 10 percent, meaning that each year your portfolio grows by 10 percent. (If you own a bond that pays you 10 percent interest, it works the same way.) After one year, $100 becomes $110. And after two years it becomes $121 ($100 initial + $10 year one interest + $11 year two interest), as you’re also earning interest on the $10 gains from year one. At 40 years, that hum- ble $100 is worth $4,525.93. This is why many financial advisors stress the importance of saving for retirement as early as possible Concentrated portfolio A portfolio whose assets reside mostly or entirely in one industry or niche. This can be riskier than a diversified portfolio (see: Diversification), as a single setback for the industry like a plunge in oil prices, if you’re invested in that industry will dent the entire bunch. Day trading The act of buying and selling stocks with the intention of holding them for an extremely short duration, sometimes minutes or seconds. Also called “scalping.” Diversification The concept of reducing risk by investing in a wide range of assets. A portfolio that has a mix of stocks, bonds, and real estate would be more diversified than a portfolio with a single stock or multiple stocks representing the same industry Dividends Cash payments that companies make to the shareholders. Not all companies pay dividends: Larger and more established companies are more likely to do so; companies in “growth mode” often do not. Increases in a company’s dividend payouts are often seen as a sign of financial health Discount rate This term has two meanings. In the context of banking, it refers to the interest rate that the U.S. Federal Reserve charges commercial banks for short term loans. So whenever you see in the news that the Fed will “raise the rates” or “lower the rates” (usually to combat inflation or stimulate economic growth, respectively), that refers to the discount rate. But in the context of investing analysis, the discount rate refers to how much a future amount of money should be “discounted” to translate it into today’s dollars. Imagine someone saying they will give you $1,000 today or $1,100 one year from now, and you are fine with either option. This implies a discount rate of roughly 10 percent it translates future value to present value EBITA / Earnings An awkward acronym that stands for Earnings Before Interest, Taxes, and Amortization, and a measure of a company’s profits. The idea is that the “ITA” chunk of this term is less relevant than the cash a company generates from its operation, so this is a way to filter out the accounting noise and focus on the essence of the business Edge An advantage that you have over other market participants. If you have a PhD in quantum physics and understand a company’s tech products better than Wall Street, this could be your edge Efficient market hypothesis The idea that financial markets have already absorbed, or “priced in,” all relevant trends and data. If you suspect a company will have a banner year, the odds are that many others believe this, too, and the company’s stock price already reflects your optimism; therefore it is very difficult to “beat the market,” as the market knows what you know (and then some). Some value investors argue that this theory does not reflect real life market performance, which can be influenced by irrational choices Equity On a technical level, equity refers to how much of a company’s assets would be returned to shareholders in the event of liquidation. Conversationally, equity is often used as a shorthand for stocks. (As in, “my portfolio is half bonds, half equity.”) Exchange traded fund (ETF) These funds allow you to invest in indexes such as the S&P 500 and the Nasdaq 100 Index; there are also ETFs for specific industries and geographies. ETFs can be a way to add diversification to your portfolio without having to buy dozens of individual stocks Fixed income asset Generally any kind of asset that pays you a predetermined amount of interest or dividend. A government bond or corporate bond is a fixed income asset Fundamental analysis A way of analyzing stocks or other assets by researching the “fundamentals” of the company, such as its products and profit margins. This is distinct from technical analysis, which takes into account only the chart patterns of prices Hedging / Hedge fund The practice of reducing risk by balancing one asset class against another: If you take a position in one asset (such as buying a stock) that offsets the risk of another asset (such as short selling a stock), then you have just hedged. The term has broadened to include funds that are actively managed by financial experts and designed for wealthy investors Index fund A financial instrument that aims to perfectly track the overall performance of a market or industry. The most famous index fund is the S&P 500, a collection of 500 stocks representing the largest companies 7 in the United States. Buying shares of an index fund like the S&P 500 is generally considered to be less risky than buying shares of just one stock, as the risk is spread across the entire market. Initial public offering (IPO) The first appearance of a company’s publicly traded shares on an exchange such as the New York Stock Exchange or the National Association of Securities Dealers Automated Quotations (aka the Nasdaq).Intrinsic value What an asset is actually worth, even if no one is willing to buy it. A speculative asset like Bitcoin might have no intrinsic value (outside of transactions, you can’t do much with it), but a snowmobile company has the intrinsic value of the snowmobiles themselves, plus any future earnings from renting them out Investment thesis The underlying theory for why you want to invest in an asset. If you believe semiconductor companies are a smart play because the growth of artificial intelligence will require the world to have more computing horsepower, you have an investment thesis Leverage A way of borrowing capital to invest more; you could amplify potential returns—but also potential risk. Think of a home loan: A house costs $300,000 and you pay $60,000 cash as a down payment, meaning the bank loans you $240,000 for the balance. Then the neighborhood becomes more desirable and the value of your house rises to $360,000. This is a 20 percent increase on the home, but a 100 percent increase of your cash investment ($60,000) and that’s the power of leverage. Of course, if the home plunges in value to $200,000 and you are forced to sell, you’d be on the dark side of leverage Macro environment The broader state of the economy or an industry, as opposed to the “micro environment” of a specific entity. Rising inflation concerns the macro environment; a company struggling to ship orders does not Margin The profit margin, or gross margin, is a straightforward measure of how much money a company is making after subtracting costs. This term can also refer to investing “on margin,” meaning you effectively borrow money to buy an asset. This can both supersize returns and add risk Margin call If you go on margin to increase your investment size, the brokerage will generally require that you have a certain amount of collateral in the account to back up the loan. If that balance dips too low, you might get a margin call from the broker warning you to increase your collateral or your investment might be liquidated Margin of safety The concept of paying less than what a stock (or any asset) is truly worth, giving you a buffer in case your calculations are a bit off. Also the title of Seth Klarman’s 1991 book Market capitalization (or market cap) The value of a company as defined by its worth on the open market. It’s easy to calculate: Take the total number of stock shares and multiply it by the price of each share. So the market cap of a company with 10 million shares, each valued at $10, is $100 million. Market correction If a market (such as the S&P 500) loses between 10 percent and 20 percent of its value, it is said to be a “correction.” If the decline is more than 20 percent, the ensuing period is known as a bear market Net present value (NPV) A crucial concept in finance and investing, the NPV takes all the expected cash flows in the future both inflows and outflows—and then “discounts” them back to the present, using a discount rate. The upshot? The NPV reflects that $100 today is worth more than $100 tomorrow, so it effectively “translates” all future streams of income (or costs) to their present-day value, which is useful for making investment decisions P/E ratio The price (P) of a given company’s stock divided by its earnings (E) aka. its profits. The P/E ratio is commonly used as a quick gauge of how “expensive” a stock is Retail investor Most likely: you! “Retail” refers to nonprofessional individual investors, as opposed to big firms like hedge funds Return A shorthand for profit, usually represented as a percentage. If you invest $1,000 and the next year it’s worth $1,200, you just fetched a return of 20 percent. Nicely done! Secular In this context, secular has nothing to do with religion; it refers to trends that hold true for a long period of time. The growth of e commerce as a result of technological advances is an example of a secular trend. Securities A capacious term encompassing virtually any financial instrument that can hold value. Stocks and bonds are securities; cash deposits and most pension funds are not. Short selling “Going short” means borrowing shares or other assets from a brokerage firm so that you can sell them at today’s price (say, $1), ideally buy them back at a later date at a lower price (say, 50 cents), and net the difference, less any brokerage fees. When you go short, you’re taking the bet that the price of a stock will go down versus up. Small cap, mid cap, and large cap “Cap” as in market capitalization. Small cap stocks have a market capitalization between $250 million and $2 billion; mid cap between $2 billion and $10 billion; large cap more than $10 billion. One way to diversify a portfolio is to have a mix of small cap, mid cap, and large cap companies. Stock split When the price of a stock gets so high that it becomes prohibitive for smaller investors to purchase, such as the U.S. multinational retail behemoth Amazon reaching $2,785 per share in June 2022, it often splits into smaller shares (20 to 1, in Amazon’s case) to become more affordable. Crucially, no value is gained or lost in a split to current shareholders; think of it as cutting a pizza into thinner slices, or someone taking your $5 bill and giving you five $1 bills in return Swing trading Buying and selling stocks with the intention of holding them for a period of days or weeks or months; swing trading stands in contrast to day trading and long term “buy and hold” investing Technical analysis Analyzing an asset’s prices based purely on its metrics (what it looks like on a chart) while ignoring its “fundamentals,” such as the stability of the underlying entity (see: Funda- mental analysis). Some investors use technical analysis, some use fundamental analysis, and some use a combination of both. Time value The overarching concept that money is more valuable today than in the future. Terms such as discount rate, net present value, and compound interest are all in service of this larger theme, translating the future value of assets into present day estimates. (This term also refers to a component of options trading.) Timing the market Let’s say you want to invest $1,000. One of the oldest (and most debated) questions in investing is whether you should try and “time it” perfectly so that you buy at a period of relatively low prices. This is tricky: Prices can look expensive, but then they might keep going up. (If you thought that the S&P 500 looked too expensive in 2012, for example, and hoped to “time the market” to buy when prices dipped, you would have missed a decadelong bull run.) Hence the old saying: “Time in the market beats timing the market.” Valuation What a company or any asset is actually worth. There are many ways to determine valuation (and this is often the subject of debate), such as analyzing predicted cash flows, comparing the company or asset to similar ones, or calculating the market value of the company’s stock price. Value investing A financial philosophy, conceived in the early 20th century, by which investors seek out companies whose true value is potentially higher than the value reflected in the price of their shares. Instructors Joel Greenblatt and Seth Klarman are value investors Zero sum game The theory that for every “winner” in a financial transaction, there is a “loser” on the other end, so ultimately the sum of total profits across the entire game is zero. To me its more of a “talent war” and index investing is an endeavor that can benefit everyone involved The more fluent you become in the language of investing, the better equipped you'll be to spot opportunities, manage risk, and grow your portfolio over time. So next time your financial advisor calls, hit them with "What's your alpha?" and enjoy the panic