The stock market has extreme revenue-generating potential. Of course, you can lose. But you can die walking across the street.
Just like with anything else, play smart and increase your chances of winning. But, how could you know how to lay down a royal flush if you don’t know what the cards symbolize to begin with? Still not convinced? How about this: Keeping all of your money liquid throughout your career will leave you with cash that’s less valuable in the future than it was when you put it into savings. That’s due to something called inflation (Don’t worry. We’ll cover it.), and investing wisely can help you avoid being at the mercy of its wrath.
Without further ado, here are some terms that will help you conquer your stock market fears, grow the courage to start making baby investments, and perhaps even make you some, I’m guessing, much-needed money.
1. Inflation
Inflation is defined as “an increase in the price and value of goods and services, often represented as an annual percentage.” Inflation just happens. Prices go up and it’s natural, so don’t fight it. *Sad face* You should probably go ahead and hate inflation. So if anybody ever asks…
2. ROI
That’s the cool way to say/write “return on investment.” Basically, it’s what you “see” for investing all that money (“see” is the cool way of saying “receive”). Here’s the dictionary definition though: “A measurement that refers to the gain or loss experienced relative to the amount invested and is often expressed as a percent.”
ROI is calculated by dividing the gain (or loss) by the cost of the investment.
Example: An investment of $1,000 that grows to $1,100 would generate an ROI of 10% ($100/$1,000 x 100).
Got it? Good.
3. Compound Interest
Money making money! Compound interest allows your initial investment’s interest to also gain interest.
4. 401(k)
A 401(k) is certainly an important term to be aware of. It is a kind of retirement savings account, and it takes advantage of deduction-allowing sections of our tax bill. These deductions (“deposits”) are then taken from your paycheck on a before-tax basis.
Example: If your gross pay is $900 and your 401(k) deduction is $100, your taxes for that paycheck are calculated on $800 instead of $900.
Note: Some employers will also make contributions on behalf of employees (called “matching contributions”). The money is tax-free until it is withdrawn from the account.
5. Roth IRA
IRA stands for “individual retirement account,” which is clear enough. But what the heck does Roth have to do with it? Well, a Roth Individual Retirement Account, unlike a traditional IRA, doesn’t get any upfront tax deductions. With this strategy, you can withdraw your funds tax-free when that day comes because you already paid your taxes on the cash.
6. Certificate of Deposit
The cool kids call it a CD (not to be confused with Will Smith’s raps). A CD is a type of savings account offered by a financial institution in exchange for keeping savings in the account for a specified period of time (i.e. 1 year, 5 years, etc.).
Note: Oftentimes, a higher interest rate is given than you would earn on your savings account.
7. Money Market Account
MMAs (again, not the fighters) are a particular kind of savings account that banks and credit unions offer. While they pay higher interest, they also may require higher account balances to not be penalized, or other restrictions, such as the number of withdrawals you can make each month.
8. Liquidity
Have you heard people say “I’m cash-poor. I’m not liquid” in movies? No? Then you should be watching more movies. What liquidity really means is just that you can get cold, smooth paper money in your hand from your investment A-freakin’-S-A-P. Though checking and savings accounts are easy to access, the money that is tied up in investments first must be sold. Only then can it be retrieved in cash form. Plus, it will usually take a few days for trades to settle. This is also needed before you can receive any cash.
9. Stocks
If you own stock, you own the entire company. Just kidding, but it does mean that, symbolically, you now own a part of a company — its worth. A stock offers investors “shares” of a public corporation so that they can take partial ownership and profit off of the company’s earnings.
10. Bonds
Investors will pay a company, and in return for that payment, the invested-in company will provide interest payments at predetermined intervals and pay back the loan in full this way.
Note: Government bonds are tax-free!
11. Bear or Bull market
First off, if you are at a market, and there is either a bear or a bull loose — run. If you are playing the stock market though, a Bear Market is a stock market environment that is a downward market for an investor. It entails lowered stock prices, investor pessimism and lots of crying. (Fact: bear market comes from the downward swipe of an actual bear when it mauls somebody). A Bull Market entails an upward market: Things like rising stock prices, investor optimism, and increased confidence. It gets its name from a bull thrusting its horns upward … as it impales somebody. Nature is rough.
12. Diversification
Don’t put all your eggs in one basket. Diversify! Invest in many sectors of the market: stocks, bonds, money market funds. It helps minimize risk.
13. Buy and Hold
This is a strategy where investors buy stock in a company and hold onto that stock. These investors are operating on the theory that long-term stocks will mature and earn despite short-term volatility or ebbs and flows in the market.
14. Mutual Fund
Investors pool their funds together to buy stocks, bonds or other securities. The fund usually is managed by a professional fund manager.
15. Dividends
Payment of profits to people who invest in a company. That’s about it … Wait! It’s usually doled out quarterly.
16. Expense Ratio
Last but not least. An expense ratio is operational. In other words, it calculates costs for things such as administrative, operating and management fees. This number is divided by the value of assets under management.
Takeaway
Hopefully, this list helps you grow more confident with the stock market, or at least in understanding it. Ever seen Nat Geo? The gorilla never ever grabs a banana from a human until he understands the human. Or at least understands that the human is safe.
The point is, now that you understand some of the operational features of the stock market, perhaps you might make your first baby investment, or further your research on the topic. Sooner or later, just like that gorilla with the banana, you’re going to need to eat. The stock market can make you those bucks needed to do so!
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