Every day, it seems, a new financial term is coined, like collateralized debt obligation (CDO), Mortgage backed security (MBS), derivative; each intended to make the average American’s head spin…believing that only a “financial wizard” could ever really manage your finances…..Not True…. knowing some basic terms is all anyone needs, to begin to handle their own finances. We’re now having to be responsible for administering our own 401k plans, the retirement we hope one day to enjoy, heck, even the Government hopes to privatize Social Security (your “old age pension”) making all financial decisions the business of each individual. And so, I offer this glossary of terms, commonly used, when talking about finances, as you make decisions about your hard earned money.
First, the exchanges (places to buy/sell/trade), the oldest being the New York Stock Exchange, now combined with the smaller American Exchange is listed as NYSE. And, since its inception in 1971, the NASDAQ or National Association of Securities Dealers Automated Quotations, is primarily made up of newer companies (many of them Tech). The difference being, the trading at NYSE takes place primarily on the trading floor on Wall Street by “specialists” at an “auction”; whereas trading on the NASDAQ primarily takes place via computer, hence the name “Automated”. A publicly owned company is listed on an exchange where it sells Shares or “ownership” in the company .to the public. You now have Stock in that company or Equity as it is also referred to, and you are called a Stockholder. The price per share or (PPS) is listed on the exchange and will rise and fall daily as the company conducts its’ business. Some companies will also declare a Dividend (a % bonus per each share owned), in addition to the share price.
Bonds, on the other hand, are different. A Bond is a security one invests in primarily for the Interest it will pay (a loan made for a specific return); like owning U.S. Savings Bonds, but on a larger scale. Corporations and Governments (local as well as national) borrow money for a defined term (years), at a certain % return by issuing a Bond for purchase. Bonds are designed to produce a steady flow of Income or earned interest for the bondholder, whereas Stocks are designed to reflect the growth of a company (increasing Stockholder value).
Each can be purchased through a Broker or Investment firm and even on-line, after establishing an account. However they can also be purchased bundled with others, in a Mutual Fund (buying small amounts of several Stocks, Bonds or combination of the two having a common purpose), but all in one Fund. *read: What’s This Mutual Fund
At last is watching or charting the performance of the investments…certainly you’ve heard of the Dow (Dow Jones Industrial Average) and the S&P 500 (Standard & Poors) and others, these are called Indexes. The Dow represents 30 companies (most household names), the S&P represents 500 companies (a much wider view of the market). An Index therefore, is a compiling of the value of select stocks found within, and is published daily.
Now, as for the CDO, the MBS or others terms you may hear……. steer clear! To invest successfully, you must understand the basics to manage your financial affairs. Leave the rest to the “wizards”……
Regards……….Cents Maker