Investing & Retirement Vocabulary

• Risk Tolerance - Amount of uncertainty a person is willing to handle.

• Dividend - Portion of a company’s earnings paid to stockholders.

• Return - Amount earned on investment for a given period.

• Volatility - Quick and unexpected changes in value or price.

• Diversification - Spreading out your stocks, bonds, and other investments to distribute the risk.

• Investment portfolio - Collection of investments you have made.

• Brokerage Firm - Financial institution that facilitates the purchase and sale of financial securities by buyers/sellers.

• Inflation - The rising level of prices and the decline of the value of the currency.

• Appreciation - Increase in value (of an investment).

• Depreciation - Decrease in value (of an investment).

Ethics

• Insider Trading - When an employee uses private company information to purchase stock or other securities for personal gain.

Stocks: Part Ownership of a Company

• Dividends - When you receive a cut % of the profits from that company.

• IPO - Initial Public Offering – when stocks first debut on the market.

• Secondary Markets - Like the NYSE – these are markets where you can buy and resell stocks and bonds.

Bonds: Certificate of Debt

• Issued by a corporation or government.

• Maturity Date - Date the bond is fully repaid to the bondholder.

• Face Value - Amount for which a bond is issued.

• Yield - The percentage return on the investment.

Bonds, Part 2

• Treasury Bonds - Long term investments of 30 years by the government (treasury).

• EE Bonds - Earn fixed interest rates for up to 30 years.

• I Bonds - Earn interest based on inflation rates.

Mutual Funds: Investment Created by Pooling Money

• Investment created by pooling the money of many people and investing it in a collection of securities.

• Advantages / Pros:

  • Professional management

  • Diversification

  • Liquidity

• Disadvantages / Cons:

  • Management fees

  • Sales commissions

  • Lack of personal control

  • Minimum investment amounts

Index Funds: Investment Following a Stock Market Index

• Investment created by following a collective stock market index, like the S&P 500, Russell 2000, or DJI.

• Advantages / Pros:

  • Little or no cost

  • Diversification

  • Easy to get into

• Disadvantages / Cons:

  • Lack of personal control

  • Can NEVER beat market average

Alternative Assets

• Real Estate

• Valuable Goods

• Gemstones & Precious Metals

What Percentage of 18-29 Year Olds are Investing in the Stock Market?

• 41%

• At what age do you plan to invest in the stock market?

Simple Interest vs Compound Interest

• Simple interest is a one-time payment of interest (a fee) for things like borrowing or lending money.

• Compound interest is when you make interest on your interest. Your interest gets reinvested and makes you more money.

• Because of compound interest, TIME becomes your friend… the earlier you start investing, the longer you can use compound interest and therefore make more money.

• Remember, it isn’t about timing the market, it is about your time in the market.

Bulls & Bears

• Bull market – nickname slang for when the market is expected to go up… 20% rise from the lowest point. A period of rising stock prices.

• Bear market – nickname slang for when the market is expected to go down… 20% decline from the highest point. A period of falling stock prices.

Economic Indicators

• Business Cycle Fluctuations (recession & expansion)

• Interest Rates in society (cost of loans)

• Bull or Bear markets

Business Cycle

• Short-term fluctuations in the economy relative to the long-term trend in output.

• Phases: Peak, Contraction, Trough, Expansion, Recession, Recovery

Technical Trading

• Trading using charts, signals, and trends.

• Used commonly for active traders.

Foundational or Value Investing

• Investing using financial statements, company information, and long-term growth potential of the company.

• Commonly used for long term investments as well as passive investors.

• Looking for long-term value or long-term growth

Key Vocabulary Part 3

• Penny stocks – shares/stocks that trade for less than $1 or around that.

• OTC market – Over –The– Counter – a market where individuals conduct trades without a central exchange or broker. Ironically, no physical locations, only electronically.

• Dividend – portion of a company’s earnings paid to stockholders.

• Capital Gain (Loss) – income (or loss) that results from selling an asset for more than the purchase price (or for less than the purchase price).

• Blue-Chip Stocks – large companies’ stocks/shares with strong brands and financially sound businesses. Super reputable.

Investment Strategies

• Dollar-Cost Averaging – making regular investments in the market over time… like $250$ a month forever. Goal is to put in a little over time into good companies regardless of price.

• Day Trading – the buying and selling of stocks within a day, sometimes within seconds, to exploit the up- and-down price movements of a security.

• Buy and Hold – passive, long-term investment strategy that creates a stable portfolio. The goal is to hold your stock until you’ve hit you targeted return (like 2x the investment) or until retirement.

• DRIP – Dividend ReInvestment Plan. Automatically uses your dividend cash to repurchase more of the stock. Then investors hold the stock to get more dividends over time. Repeat the process.

• Socially Responsible Investing – SRI – goal is to generate both social and financial returns. Focuses on companies that make social impacts or positive sustainability.

• PE Ratio Investing – Looks at companies PE ratios to determine if overvalued or undervalued and make investment decisions on that. Advanced process looks at future PE potential as well.

• Growth investing – looking for the “next big thing.” Focuses on companies who will likely expand or be big in the future. Almost never invests in dividend companies.

• Fund investing (using funds), Technical Trading (using charts & patterns), Value investing (using financial statements).

Agencies

• Brokerage Firm – financial institution that facilitates the purchase and sale of financial securities by buyers/sellers.

• Securities Exchange – secondary market where securities are bought and sold through stockbrokers… like the NYSE.

• SEC – Securities & Exchange Commission – protects investors and the market by ensuring fair access, company integrity, honesty, and passing federal laws.

• NYSE – New York Stock Exchange – the largest exchange in the world.

• FINRA – Financial Industry Regulatory Authority – not for profit organization that oversees US broker-dealers and ensures fair and honest operation.

Regulation

• The Regulatory Pyramid – Congress à SEC à NYSE & other self- regulators à Individual brokerage firms. Designed to promote integrity and fairness.

• Securities Exchange Act (1934) – law designed to increase regulation of secondary financial markets to ensure transparent and fair environments for investors in response to the Great Depression.

• Sarbanes – Oxley Act (2002) – law passed to improve auditing and public disclosure in response to several accounting and investment scandals in the early 2000s.

• Dodd – Frank Act (2010) – law passed to make US financial system safer and prevent excessive risks that led to the 2008 financial crisis.

Key Retirement Vocabulary

• Vesting – the amount of time before you are required to wait before earning the right to matching investment from an employer.

• Pension Plan – employee benefit plan set up by employer or union to provide retirement income after employment is completed.

• 401(k) plan – an employer sponsored plan that matches your investment contributions up to a certain percent.

• 403(b) plan – a tax free plan offered by public schools… similar to a 401k but just for educational purposes.

• IRA – Individual Retirement Account with specific tax benefits.

• Annuity – long-term investment like insurance where you pay a portion now and receive a fixed income later (after 60 years old).

Traditional or Roth? (IRA & 401(K))

• Traditional - means that contribute now, get deductions now, and pay taxes later.

  • Good if you think you are making less money later

• Roth – means that you contribute now and pay taxes now.

  • Good if you think you are making more money later.

Defined-Benefit vs Defined-Contribution

• Defined-Benefit:

• Defined-Contribution:

Compound Interest Formula

• $A = P (1 + r/n)^{nt}$

  • A = final amount

  • P = initial principal balance

  • r = interest rate

  • n = number of times compounded

  • t = number of time elapsed (years)

Rule of 72

• Simplified formula that calculates how long it’ll take you for your investment to double based on its rate of return.

• # of years to double = $72 / rate of return$

4% Rule

• Simplified formulas that states when you add up all your investments and withdraw 4%, you can continuously live off that withdrawal and your investments indefinitely, as in, forever.

• Ex: You have $1,000,000$ in stocks/bonds, withdrawing 4% each year allows you to live off of $40K$ that year, and the stock market on average returns 6% … meaning…. as long as inflation is 2% or lower, you make back your money and start the next year with $1 million$ in stocks/bonds again.

• Problem: doesn’t account for high inflation.

How Much Do I Need to Retire?

• Ranges from $1,000,000$ to $7,000,000$ depending on desired annual retirement income (e.g., $40K$ to $250K$).

How to Retire by 35

• If you want to live at home and save 90% of your income…

• And you make $36,000$ a year (tiny bit more than min. wage)…

• You can retire by 35 with $1 million$ and live off $48K$ a year.

Estate Planning

• Will – a plan for what happens to your assets & estate after your death.

• Estate – all assets and liabilities a person leaves after death.

• Beneficiary – person or group who receives a deceased person’s assets or benefits.

• Inheritance – receiving “something” as an heir to the death of someone else.

• Power of Attorney – legal document that allows you to appoint someone to manage your assets, estate, or medical or financial choices.

• Living Will – legal document that details how you prefer to receive medical benefits when you are unable.

• Trust – arrangement that allows a third party to hold specific assets on behalf of a beneficiary.