The Advantages of Being a Millennial Trader
Dear Penny Stock Millionaire,
I find it simply amazing how many young people have gravitated to the trading world. The internet and social media have made it easier than ever to learn and share knowledge.
In my opinion, millennial investors have a major leg up on the newbies from the past. But with all of the information out there, it can be difficult for a novice to get up to speed.
Understanding financial terms is one of the first steps toward getting started trading and investing. But don’t worry, none of this is rocket science.
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.
In the last issue of Penny Stock Millionaires, we began my list of 26 key terms every millennial should know before investing. Today we will be finishing things off with #14 to #26.
So if you have a bit of anxiety over the terms you hear when you watch Bloomberg, this issue is for you …
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.
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.
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.
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.
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.
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.
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.
Volatility is what I hunt for every single day when trading penny stocks.
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.
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 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.
The Bottom Line
Now that you’ve read all of this, I hope 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.
When you go it alone, you risk making small but critical mistakes that deplete your profits. By utilizing the enormous amount of knowledge out there, millennial traders have a unique advantage over those who came before them.
No matter how young or old, it’s important for every investor to study hard and take advantage of the information available to them. The more you know, the better chance you have for success.
Editor, Penny Stock Millionaires