Wake up, millennials! The world isn’t what it used to be.
Maybe you’re up to your ears in student loan debt. Maybe you’re worried about where the job market’s going — the automation, the offshoring. Maybe you’re reluctant to take risks.
WTH are you going to do?
The best advice I’d give to anyone younger than me (hey, I’m in my late 30s; I’m getting up there) is to start building wealth.
Getting started trading stocks when I was young was probably the best decision I’ve ever made. It’s given me a life I never thought I’d have**, and I want you to experience the same.
Before you get into any trading tactics, you’ve gotta learn what everyone is talking about, so make sure you read this whole post.
Table of Contents
- 1 What Are Financial Terms?
- 2 26 Key Financial Terms for Millennial Traders
- 2.1 1. ROI
- 2.2 2. Compound Interest
- 2.3 3. 401(k)
- 2.4 4. Roth IRA
- 2.5 5. Certificate of Deposit (CD)
- 2.6 6. Money Market Account
- 2.7 7. Liquidity
- 2.8 8. Stocks
- 2.9 9. Bonds
- 2.10 10. Bear or Bull Market
- 2.11 11. Diversification
- 2.12 12. Buy and Hold
- 2.13 13. Mutual Funds
- 2.14 14. Initial Public Offering (IPO)
- 2.15 15. Dividends
- 2.16 16. Inflation
- 2.17 17. Expense Ratio
- 2.18 18. Capital
- 2.19 19. Debt
- 2.20 20. Equity
- 2.21 21. Primary Issuance
- 2.22 22. Secondary Trading
- 2.23 23. ETFs
- 2.24 24. Volatility
- 2.25 25. Profit/Loss Ratio
- 2.26 26. Breakeven
- 3 The Bottom Line
What Are Financial Terms?
The financial world has its own language and it can be pretty confusing if you’re new to the markets. But don’t worry, none of this is rocket science.
Understanding financial terms is one of the first steps toward getting started trading and investing. No one’s expecting you to be able to sit down and speak intelligently with Warren Buffett, but learning the basics is definitely a prerequisite.
Wrapping your head around a few basic financial terms and concepts can open the door to all kinds of exciting opportunities you can use to start building wealth.
So if you have a bit of anxiety over the terms you hear when you watch Bloomberg, this post is for you …
26 Key Financial Terms for Millennial Traders
While I could write an entire book on financial terms, if you’re young and just getting started trading and investing, you don’t need to understand every financial term that you read in The Wall Street Journal.
Here, I’ve gathered 26 key terms that can help you get started on your journey to get ahead. Enjoy!
Short for “return on investment,” ROI is a measurement that refers to the gain or loss experienced relative to the amount invested and is often expressed as a percentage. 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).
All good business, trading, and investing (and perhaps life in general) revolve around thinking in terms of pursuing a good ROI.
2. Compound Interest
Compounding means that when interest is initially calculated on the principal amount invested, the added interest can then also earn interest.
Compound interest is a fundamental component of wealth creation. Imagine earning profits, on top of profits, on top of profits as you let your capital grow. Einstein called it the eighth wonder of the world and Warren Buffet constantly praises the concept.
If you want to get rich, trust me, learn about the power of compounding.**
A retirement-savings account that takes advantage of a specific tax code to allow deductions (i.e. deposits) to be made 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. Some employers will also make contributions on behalf of employees (called “matching contributions”). There’s a limit set each year to how much can be deposited. Earnings and deposits grow on a tax-free basis until withdrawn.
4. Roth IRA
A Roth individual retirement account (IRA) is a type of retirement savings vehicle. Unlike a traditional IRA, contributions to a Roth IRA don’t receive an upfront tax deduction. Therefore, you can withdraw your funds tax-free in retirement since you already paid taxes when you put the money in. Another important thing to note is that you can withdraw your contributions at any time (just not the gain).
You should know the difference between a 401(k) and Roth IRA!
5. Certificate of Deposit (CD)
No, I’m not talking about those compact discs I bought in high school (yes, this ages me). 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.). Often, a higher interest rate is given than you would earn on your savings account.
6. Money Market Account
A type of savings account offered through many banks and credit unions that pay higher interest, but also may require higher account balances or other restrictions, like the number of withdrawals you can make each month.
The ability to cash out of an investment easily. Cash in your checking or savings account is the easiest to access. Money in investments needs to be sold before it can be accessed and it takes a few days for trades to settle and the cash to become available.
Liquidity in stocks means there are ample buyers or sellers where if you try to enter or exit a stock, you’ll be able to get the order matched without getting a bad price.
When you own a stock, you own a piece of that company. A company offers ‘stocks’ of their corporation so you can take partial ownership and profit off of the company’s earnings.
If you own a few shares of Facebook, maybe you can’t roll into Zuckerberg’s office and boss him around, but you do own a very tiny percentage of the company.
This is a debt security, where investors loan money to the government or corporate entities. In exchange, companies provide interest payments at predetermined intervals to pay back the loan in full.
This allows an investor to earn a return on their capital, without taking the risk involved in the ownership of the company by owning stocks.
10. Bear or Bull Market
A metaphor used to describe the investor environment primarily related to the stock market. A bear swiping its paws downward indicates a downward market, lowering of stock prices, investor pessimism, and lack of confidence. A bull with its horns pointing upward indicates investor optimism and confidence as well as a rise in stock prices.
An investment strategy that in effect avoids “putting all of your eggs in one basket.” Using this strategy, investors have a variety of investments such as stocks, bonds, money market funds to minimize risk.
The downside to diversification is that often the bulk of your capital won’t be placed in the highest-performing assets. Instead, you’ll own a little bit of everything.
12. Buy and Hold
A type of investment strategy where investors buy stocks and hold onto them, using the philosophy that long-term gains will provide a nice return if they’ve invested in a good company.
Buy and hold investors generally disregard short-term market volatility and are often looking to buy bargain stocks in market crashes and declines.
13. Mutual Funds
Mutual funds pull funds together from several investors and are then used to buy stocks, bonds or other securities which are managed by a professional fund manager.
When investing in a mutual fund, you’re basically paying an investment company to make most of the decisions and activities involved in investing your capital.
When selecting a mutual fund to invest in, you really have to think hard about whether the fund managers know what they’re doing. (Hint: Many don’t. Be skeptical!)
14. Initial Public Offering (IPO)
An IPO occurs when a private company transforms into a public company and starts to sell shares of stocks to outside investors and start trading on a stock exchange.
The IPO is where many of the initial owners and investors in a company can start to cash out and enjoy their profits. You always need to do solid research to determine if an IPO is a good investment — some can potentially create some killer short-term trading opportunities.
A payment of profits, typically on a regular schedule such as quarterly or annually, to shareholders who invest in a company.
For example, if a company makes a profit in a certain year, if they don’t need that cash to further grow the business, they may choose to pay those funds out to shareholders in the form of dividends.
An increase in the price and value of goods and services often represented as an annual percentage.
Maybe you remember when $5 would get you a feast at McDonald’s? Those were the days. Since then, the prices of everything have generally gone up, as they normally do. This is called inflation and can be caused by a number of economic factors such as energy prices or Federal Reserve policy.
17. Expense Ratio
Expressed as a percentage, the expense ratio is the annual operating expenses for a fund for such things as administrative, operating and management fees divided by the value of assets under management.
The expense ratio is something to consider when you’re picking a fund to invest in. If you’re getting lame returns on a fund, but they’re charging high management and admin fees, you may be better off going to another fund with lame returns that simply has lower fees.
Capital is one of the most common financial terms and has a few meanings, depending on what we’re speaking about. Here’s what it means when analyzing a stock …
Capital is a term for money or a tangible asset that is used to conduct business and generate a profit. These could be factories, buildings or money held in a bank account.
While most people think of money as something they hold onto until they need to buy something to consume (food, clothes, car, etc.), capital is where money is viewed as a tool for building wealth and pursuing business opportunities.
Debt is a word that scares many people, but it’s just a word we find in basic financial terminology — it’s not necessarily good or bad.
Debt is money owed from one party to another, often with the requirement that it’s repaid on specific dates with interest. While you may be familiar with debt in the form of a home loan or credit card, companies use debt as well.
A company will often use debt to fund its business operations when cash flow falls short or to help grow the company by putting those funds into opportunities that generate more profit than it costs to borrow the money.
Equity is the overall financial situation when you take assets and debts into account. For example, if you have a house worth $500,000 with a $400,000 mortgage, you have $100,000 in equity … at the end of the day, if you were to sell up and clear your debt, you’d have $100,000
This works the same way with shareholders’ equity in a company. For example, a company may have $100 million in assets and $20 million in debt, meaning there’s a total of $80 million in equity.
Not all companies have equity value though, especially plenty of penny stocks. Companies can at times have close to zero real assets and be mired in debt, so it’s a good idea to calculate the equity figures before investing in a stock.
21. Primary Issuance
Also known as a ‘primary offering,’ this is where a private company offers stocks or bonds for sale to the public for the first time.
Primary offerings are usually done when a company needs funds to continue growing. The owners of the company will then go to outside investors and offer shares of the company or bonds to those investors.
22. Secondary Trading
Secondary trading basically means the trading of stocks on exchanges that you hear about on the news each night.
To wrap your head around this term, you have to understand the difference between the primary market and the secondary market.
For example, a startup company may at first sell shares of their firm to a venture capital fund to get their initial capital to grow. These shares aren’t traded on exchanges. This is called the primary market.
As the company grows and lists on a stock exchange, shares will begin being traded on the exchange. This is called the secondary market, and that’s why we call it secondary trading.
Exchange-traded funds (ETFs) are a type of fund that owns underlying assets (stocks, bonds, oil, art, or anything you can invest in). ETFs can be bought and sold on an exchange in the same way you trade an individual stock.
ETFs generally mirror the movement of prices in the assets they hold.
For example, if you believed the commodity markets were about to boom, one option would be to purchase a basket of various commodity futures — a very complicated and expensive process. A simpler way could be to simply purchase shares in a commodity ETF, which is a simple as clicking a few buttons on your stock brokerage platform.
There are all kinds of niches for ETFs, so if you’ve ever looking to get broader exposure to any area of the market (oil, tech stocks, gold, etc.), consider finding the right ETF.
If you’re going to actively trade stocks, ‘volatility’ is one of the most important financial terms to know, so learn this now!
Volatility is a statistical measure of the movement in the price of an asset. Sound complicated? It doesn’t have to be.
Volatility in a stock basically refers to the swings in price up or down.
Depending on how you approach the market, volatility can be a good or bad thing.
If you’re a long-term investor, a volatile stock could mean you see it as risky, as the price may drop sharply.
If you’re an active trader, a volatile stock could be exactly what you’re looking for. For example, say you purchase a stock and the price rises by 20% in a week. You’ve just made 20% on the capital you invested in the stock — so you’re loving that volatility.
25. Profit/Loss Ratio
The profit/loss ratio refers to the difference in the size of traders’ profits compared to the size of their losses. This is one of the most important ratios traders look at when analyzing their performance and designing their trading systems.
For example, a trader may find a pattern that offers trades with $100 in profits on winning trades, while risking $50 when the trade is a loser. This is a 2:1 profit/loss ratio
At the heart of good, profitable trading, it’s all about simple math like this.
The above example of a 2:1 ratio may sound like a system to print money, but you’re only halfway there — you still need to consider how many times a trade will be a winner compared to a loser.
With a 2:1 risk/reward ratio, you’ll need to reach profit on more than 33% of trades to turn a profit before commissions, so be wary of how likely the trade is to succeed and combine this knowledge with the risk/reward ratio.
Breakeven is a term that has a whole bunch of different meanings in the financial jargon universe. Here, let’s look at how it applies to the stock market trading niche.
Breaking even in trading is where, in the end, you haven’t made any money but you also haven’t lost any money.
Having a result like this after some time in the markets isn’t a necessarily a bad thing; it often just means you need to improve on a few things before you start making profits.
If you’re struggling as a breakeven trader or even as a losing trader, don’t despair — there are plenty of educational opportunities out there for you. Check out my massive vault of blog posts and videos where I share the tips and tricks I’ve learned as a penny stock trader over the past 20+ years.
The Bottom Line
I hope that now that you’ve read all of this, you start feeling confident enough to read the business pages of a newspaper without needing to google every other term.
If you’re an absolute newbie, it might seem like all the financial people are geniuses with PhDs. Let me assure you, there are tons of idiots in finance. Now they won’t be able to trick you with their fancy-sounding terms — now you’ll know what they mean.
If you’re serious about the stock market and its potential impact on your finances, join my Trading Challenge. It’s my way of nurturing the new generation of traders — hungry, eager people who have specific goals and dreams.
When you go it alone, you risk making small but critical mistakes that deplete your profits.
Through the Challenge, you’ll get access to all my resources, trades, commentaries, webinars, and more. Plus, you’ll get the chance to learn from my top students.
Are you a millennial trader just getting started? What has your journey been like so far? Comment below. I’d love to learn your story.