After what happened with Game Stop (and the stock market in general) in January and Early February of 2021, and the role that social media and popular content aggregators like Reddit played in the story, many people undoubtedly got their first introduction to investing and its terminology. Many more, no doubt, decided they would take the opportunity to improve their financial literacy and vocabulary.
Whether you are wading into investing for the first time or simply trying to get your bearings, the below terms are ones you definitely need to know.
Let’s start with a more sophisticated concept, but one which many of us should know, as we are helping fund them every month. A REIT is a common word if you are investing in real estate stocks. It stands for Real Estate Investment Trust and they are companies that are set up to give investors exposure to income-producing properties–apartment buildings, housing, commercial real estate–without having to own the real estate itself.
If you live in a large apartment building in a big city in North America, you probably get rent receipts with the name of the building owner and/or property management on them. If the name of the company contains the letters “r-e-i-t” there is a good chance the building is part of a large portfolio of investments producing income for real estate investors.
An exchange is a place where “financial instruments” (equities, debt, commodities etc.) are traded by individuals (“retail investors”), banks, and institutions (e.g., hedge funds, pension funds, university endowments etc.). Countries and even regions of countries around the world have their own exchanges that often specialize in different securities.
The largest exchanges, and the names you are most likely to come across if you are scrolling through the business section of prominent newspapers, are the New York Stock Exchange (NYSE), the Toronto Stock Exchange (TSE), the London Stock Exchange (LSE) the Japanese Stock Exchange (the Nikkei) and several others.
Equity is another word that, if you haven’t encountered it directly in financial and business literature or business-related conversations, you likely have some understanding of what it is referring to. “Equity” is used to describe, for instance, the extent to which a homeowner owns their home (i.e., what amount is not financed with debt).
What it means, basically, is “ownership.” Companies raise money in many different ways. The two primary ways are to borrow money by issuing debt or by issuing new shares (equities) that give buyers an ownership stake in the company.
If you paid any attention to the 2020 Gamestop fiasco, you likely heard or read the term “short” being thrown around. It was used to describe the trading behaviour of many of the investors, but mainly the hedge funds, involved in this story and it is akin to betting. To “short” a stock or to have a “short position” in a company or stock means that you are betting the price of that stock is going to go down.
“Short” sellers borrow the stock right now and immediately sell it at the current market price, agreeing to buy it back at the market price at some agreed-upon point in the future. They are betting (based on their knowledge of the market and their intuition) that the price will be lower in the future, allowing them to buy back the shares at a cheaper price than they initially sold them for, return them to the lender, and pocket the difference.
Another term you may have heard or read in passing, or perhaps even used in a different, though related context is “dividend”–e.g., if you go to school, it will “pay dividends” in the future. Dividends are paid to shareholders of a company and they are a proportionate percentage of a certain amount of a company’s revenue.
When you buy a share in a company, it will indicate whether or not it includes a dividend payment. Dividends are paid per share, so the more shares in a company you own, the larger your overall dividend payment.
To be “long” on a stock or to have a “long” position means that you have invested in the stock of a company believing that the share price will go up or that the company will continue to provide you with a return on your investment long-term in the form of dividend or interest payments. Long investors are often referred to as “passive investors” (as opposed to “active investors”) because they are invested for the long haul and are therefor less concerned with short-term fluctuations.
Investors are “long” on stocks based on their understanding of the company, its industry, the market and a number of other factors, but the risk and rewards, particularly if it is a stable, storied company with many years of consistent revenue and profits to its name, are typically much lower, though far more predictable.
Another commonly used word in the world of finance and investing is “market cap” (short for market capitalization) which refers to the value of all of a company’s outstanding common shares. This is the amount of money that the market has invested into the company in the form of equity. A company with a market cap of one billion dollars, for instance, has issued, and had purchased, one billion dollars worth of its common shares.
Investors and financial publications often talk of “small cap” and “large cap” companies to distinguish those publicly traded companies that have raised a large amount of money from investors versus those that have raised smaller amounts. Certain stock exchanges require companies to meet specific market capitalization thresholds in order to be listed there.
Improving your financial literacy and your ability to manage your money wisely involves a lot of things, but it definitely involves being able to use and understand the language involved in these kinds of conversations. If you haven’t already, add the above terms to your financial vocabulary. The more you know, the more you’ll learn.