Financial Terms Millennials NEED to Know…
Dear Penny Stock Millionaire,
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 would 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.
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.
For this two-part issue, I’ve gathered 26 key terms that can help you get started on your journey to get ahead. Let’s begin with #1 to #13!
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
This is a common 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!)
The Bottom Line
The financial world has its own language and it can be pretty confusing if you’re new to the markets.
Jumping into the stock market as a millennial investor can be a bit intimidating these days. But understanding these 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.
Start with these, but don’t stop there. Join me for the next issue, where I will review #14 to #26 of the 26 key terms every millennial should know before investing.
Editor, Penny Stock Millionaires