Terms frequently used by financial geeks:
Asset Class– Different types of assets. Such as: Stocks, Bonds, Treasury Bills, Real Estate, Precious Metals, etc.)
Capitol Gain(or loss) – The difference between the price when you buy an investment and the price at which you sell it. The old buy low sell high.
Commission Fee– A fee charged by a broker or agent for his/her service in facilitating a transaction, such as buying or selling stock for you.
Compound Interest (or Dividends) – This is interest paid on interest. When dividends are earned on an investment and added to the original amount of the investment, future dividend payments are calculated on the new higher total
Discount Broker – There are two primary types of brokers full and discount depending on the commissions they charge. Discount brokers charge relatively low commissions, but provide little services just execute trades. Full service brokers charge higher commissions, but provide advisory services. Geeks like reputable discount brokers who charge low commission fees to execute their trade and are going to be in business for the long term. We do not need a full service broker because we place our own trades online and do not need the extra cost of their advisory services.
Diversification – Not putting all of your eggs in a single basket. The method of balancing and reducing risk by investing in a variety of stocks (from different industries) or types of assets (stock, bonds, CD’s, Real Estate, Precious Metals, etc.). Geeks use this to reduce risk and lower investor emotions, because it balances the up and down price movement of the stocks you own.
Dividends – Money paid by a company to its shareholders out of its profits (or reserves). Geeks like this form of pure passive income!
Dividend Growth Investing – A long-term investment strategy of gradually building a sustainable and growing dividend income stream by investing in stocks of companies with competitive advantages (deep economic moats) that raise their dividend every year. The strategy takes advantage of the power of compounding over time, which is driven by dividend reinvestment and dividend growth to produce a double-compounding effect.
Dividend Reinvestment Program (DRIP) – An investment plan offered by most large corporations enabling shareholders to automatically reinvest cash dividends, thereby accumulating more stock without paying brokerage commissions.
Dividend Yield – The yield a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock’s price. For example, if a stock pays out $1 in dividends over the course of a year and trades at $20, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don’t have a dividend yield at all because they don’t pay out dividends.
Dollar Cost Averaging – An investment strategy designed to reduce volatility where stock, is purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving. Thus, as stock prices rise, fewer shares are bought, and as prices fall, more shares are bought.
Financial Freedom – When your passive income exceeds your expenses so you no longer have to work to earn a living.
Margin of Safety – A principle of investing popularized by Benjamin Graham (the Father of Value Investing) in which an investor only purchases securities when the market price is significantly below its intrinsic value (generally a 20% or more discount to fair value). In other words, when the market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk.
Market Timing – Short term trading method where a speculator attempts to time the up and down movements of a stock or stock market index to produce profits from capital gains. Dividend Geek’s know that this is a futile and foolish undertaking that historically only produces a 2.8% return, which does not even beat the 30 year historical inflation rate of 3.2%.
Mutual Fund – A professionally managed (or setup to mimic an index) portfolio of stocks, bonds and other investments divided up into shares.
Passive Income – Earnings an individual derives from enterprise in which he or she is not actively involved.
Portfolio – The collection of all of your investments.
Roth IRA – An after tax (not tax deductible) Individual Retirement Account that provides tax-free retirement savings for investors 18 years of age or older. Roth IRA contributions are available for withdrawal at any time for any purpose with no taxes or penalties. Earnings, however, cannot be withdrawn tax and penalty free until age 59½ provided the Roth IRA has been open at least five years.
Sector – The high level market or industry group in which a company competes in, such as: Financial, Technology, Healthcare, etc..
Stock – A share of stock represents ownership in the company that issues it.