Doing any kind of investing can be scary. You don’t want your hard-earned money going to waste – none of us do. The first rule of investing, though, is to do your research. Getting a better picture of what happens after you buy those stocks or those bonds is essential. Maybe you’re looking to make the smartest investment for your own future, or maybe you just want to learn the lingo that’ll have others thinking you read The Wall Street Journal cover to cover. Either way, these are the 5 terms you should know before you start investing. Photo by Jason Briscoe via Unsplash
Before understanding this term, we must first understand the meaning of a market index. An index, like the Nasdaq Composite or the S&P 500, is a basket of stocks that investors use to assess the movement of the market as a whole. Beta tells us how much the value of stock for a company fluctuates in relation to the entire market (estimated by an index). When the movement of the specific stock is identical to that of the market, beta is equal to 1. A stock that is more stable than the market has a beta below 1; a stock that is less stable than the market has a beta above 1.
#2 P/E Ratio
If you have an iPhone, you’ve probably seen this one on your Stocks app. On the basis of a single share, the “P” stands for “price” and the “E” stands for earnings. For a given share of a company, the price/earnings ratio effectively tells how much it will cost us to benefit $1 of said company’s income. This is a popular metric among investors, because it gives guidance about whether or not a company’s shares are valued appropriately. You might see this written alongside “TTM,” or “trailing 12 months,” which means that the “earnings” part of the measure was acquired using data from the last year. (One can also look ahead to calculate the “earnings” portion, using projected measures instead of proven ones.)
#3 Market Cap
This is the slang for “market capitalization.” This measure demonstrates the total worth of all the shares of stock issued by a company. A company’s market cap provides helpful information about an organization’s presence in the market, which investors often associate with the riskiness of their investments. We tend to find well-known companies in the large-cap category and more specialized, minor companies in the small-cap category.
#4 Trading Volume
Despite what you may have learned in science class, volume in this case is not equal to length times width times height. Here, volume represents how many shares of a stock have been purchased or sold over the course of a certain time frame, such as a day. It is important to note that volume will continue to change even when the same share is exchanged multiple times. Investors Underground even calls this the “lifeblood of any stock,” because it offers insight into how people are reacting to changes in a company or its stock.
#5 Expense Ratio
If you’re planning on putting your money into an exchange-traded fund or a mutual fund, you probably won’t be able to do so for free. The expense ratio, expressed as a percentage of your investment, tells you how much will be taken out of the money you've put in to cover fees associated with maintaining the fund. This can be especially important when making major investments or long-term investments.