Today we’re covering 32 finance & investing terms that every investor ought to know,

Basically, this is financial jargon for beginners.

In the next few minutes you’ll get up to speed on the financial terms you need to know to have a basic understanding of the world of finance. Watch the video below to get a walkthrough of these important terms.

I’ve also provided a transcript of the video below.

Stocks

First up, stocks.

• Stocks are pretty straight forward. Each share of stock is equal to a small piece of the overall ownership of a company.
• If there are 4 shares of stock in a company and you own one share of stock. You own one-fourth or 25% of the company.
• The numbers change as the company gets larger, there are more shares and each share represents a smaller percentage ownership in the company, but the idea remains the same.
• To watch another video where I take a deeper dive into the basics of stocks, click here.

Market Cap

• Market cap is the value of the company on the open markets.
• It can be calculated by multiplying the price of one share of stock by the number of shares outstanding.
• It’s the value you would pay if you bought all of the shares a company has issued so far.

Investment Styles

Here we have two investment styles:

• Growth stocks are stocks that are expected to grow fast in the future to justify their high prices relative to their cashflows. Think Amazon or Netflix.
• Value companies are stocks that are on sale versus what their true worth should really be. The trick is that your value of the company is the right one and that the market eventually realizes the stock is mispriced and bids up the share price to what it should really be. Warren Buffett is a famous value investor.

Stock Sizes

There are three sizes of companies you’ll hear about most often.

• Small cap stocks are stocks of small companies that have a market cap of less than $2 billion.
• Mid-cap stocks are stocks of medium-sized companies that have a market cap between $2 billion and $10 billion.
• Large-cap stocks are stocks of companies that have a market cap greater than $10 billion.

Bonds

• Bonds, in their simplest form, are a loan that you make to a company or government and they pay you interest on that loan and eventually repay the original purchase price of that loan.
• Click here to watch another video on bonds.

Interest Rates

• Interest rates are simply the price a borrower pays each period, usually a year, to borrow a sum of money.
• A very basic example would be a loan of $100.
• If it has an annual payment of $5 it has an interest rate of 5%.
• You pay the $5 each year as the cost of borrowing on top of the payments you make to repay the loan.

Bond Maturity

• Bonds have a certain date at which they mature, at which point you’re repaid the original loan you made to the borrower.

Bond Default

• Default is when a borrower (for bonds, a government or corporation) doesn’t make their scheduled interest payments.

Types of Bonds

• Treasuries are government issued bonds from the US treasury.
• Corporate bonds are bonds issued by corporations.
• Agency bonds are issued by government agencies like Fannie Mae and Freddie Mac.
• Municipal bonds, or muni bonds, are issued by local governments and municipalities.
• Mortgage-backed securities are groups of home mortgages that are packaged so that they pay you like a bond.

Bond Grades

• Investment grade bonds are the least risky type of bonds. These bonds have a BBB rating or above. Investment grade bonds are issued by stable governments and established corporations.
• Junk bonds, or high yield bonds, are bonds with ratings below BBB. These carry a higher chance of default, but this higher risk causes them to pay higher interest rates.

Alternative Investments

• Alternative investments can be pretty complex, but at the heart of it, alternative investments include anything that isn’t a traditional stock or bond investment.
• Some examples would be real estate, commodities, currencies, options, derivatives, and then more esoteric strategies like Long/Short strategies.

Let’s just define some alternatives you’re likely to hear about.

• Real estate is easy to understand. You can invest in buildings and land either directly or more commonly through real estate investment trusts or REITs.
• Commodities are raw materials used in manufacturing or consumables that consumers buy and use. Some examples would be oil, natural gas, cotton, coffee, and copper.
• Derivatives are anything that does not have a value on its own but instead, derives its value from another investment. Basically, it is an agreement that pays off if certain circumstances are met.
• Options, futures and credit default swaps are all types of derivatives.

Mutual Funds

• A mutual fund is an investment structure that allows you to pool your money with other investors so that you can achieve economies of scale while investing.
• Together, you hire investment managers to manage the group’s money.
• All orders to buy and sell are processed at the end of the day, so no mater when you purchase it during trading hours, your order goes in at the end of the day.
• Typically all capital gains and dividends are passed along to the investor, making this a less tax-efficient way to invest in taxable accounts.

ETFs

• Exchange-traded funds have become a very popular way to invest and for good reason.. Think of these like mutual funds version 2.0.
• Just like in a mutual fund, in an ETF you pool your investment funds with other investors and you hire a manager to manage them, but they are more liquid and more tax efficient due to the way that they redeem and create shares of the ETFs.
• Instead of just being traded at the end of the day, ETFs are traded like stocks. You can buy and sell them at any time of the day.
• And because of the better redemption/creation process by which ETF sponsors bundle the underlying investments, not all dividends and capital gains need to be distributed to investors, which makes them more tax efficient.
• And to put some icing on the cake, ETFs typically have much lower fees and trading costs than their mutual fund brethren.

ETNs

• These sound a lot like ETFs but there is one crucial difference: you are buying a contract from an issuing bank that promises to pay you the returns on the asset class or strategy underlying the ETNs.
• So, instead of your money being directly invested in the investments that the ETN is tracking, you give your money to the issuing bank and they can either invest that money directly or use options and other derivatives to track the strategy of the ETN.
• There are some tax benefits to ETNs because most, if not all, of the gains you make from an ETN, are treated as capital gains rather than ordinary income. But you have to keep in mind that if the bank becomes insolvent, you may not get your money back because during a bankruptcy these act like bonds that aren’t secured by any collateral.
• Just like ETFs and stocks, these can be traded throughout the day, rather than only at the end of the day like mutual funds.
• These have a maturity date like a bond, at which point the ETN winds down and disburses all funds to investors.

Cash

• You might ask why I included this, but cash goes beyond just straight dollars sitting in your account.
• Cash includes anything that is liquid and can be converted to cold hard cash within 90 days or less.
• Cash, 90-day Treasury Bills and money market accounts all fall under this category.

Annuities

• An insurance contract between you and an insurance company that promises to pay you a certain income over a period of time.
• Annuities nowadays are a lot more complicated than they used to be, so I offer both reviews of popular annuities and an annuity myth ebook.

The Federal Reserve

• It is the Central Bank of the United States.
• It is typically called “The Fed”.
• The Fed influences interest rates through Treasury purchases, like the quantitative easing programs you’ve heard so much about over the years.
• It also sets reserve requirements & the discount rate for loans to banks.
• And finally, it determines the supply of money in the economy as well as conducting many other regulatory oversight duties for the banking industry.

Asset Allocation

• The process of diversifying your portfolio’s holdings across several types of asset classes.
• This is one of the more important steps of portfolio construction.
• Example: 60% Global Stocks and 40% Global Bonds

Inflation

• The increase in prices that typically occurs each year in a healthy economy.
• Bread was $1 last year, it increased in price to $1.02 this year, inflation was 2% over the last year.

Nominal Rate of Return

• Rates of return can be differentiated by whether they take inflation into account.
  The nominal rate of return is the return on an asset before the effects of inflation are taken into account.

Nominal Rate of Return

• The real rate of return is the rate of return of an asset after you adjust for the effects of inflation.
• To get the exact number there is a different formula, but real rates of return can be approximated by simply subtracting inflation from the nominal rate of return.
• 10% Nominal Return – 2% Inflation = 8% Real Return.

I know finance can be pretty complex at times so I’m here to help make it easier to understand for you. Hopefully, this video helped make some of the more confusing terms we financial professionals use a bit more clear.

Risk is a topic that’s on the mind of many investors today. A great place to learn how to better manage risk is my free video series How To Protect (And Even Grow) Your Portfolio In Any Market. If you’re already a subscriber to my newsletter and have yet to watch them, search your inbox for the videos.

If you haven’t yet subscribed, subscribe below to get access to those and other materials to help you become a more educated investor.

Until next time.

Yahoo Confirms Data Breach: Over 500M User Credentials Compromised In Hack

Yahoo disclosed that it had been breached in the time between 2012-2014 in one of the largest hacks ever, with 500 million user accounts breached. Basically, if you’ve ever used Yahoo, your credentials have been breached. Change your passwords for Yahoo now, as well as any other sites where you used that password.

Fed Leaves Interest Rates Alone; Dials Down 2016 Forecast

All eyes were on the Fed this week as they met to decide whether to raise interest rate targets this month, ultimately deciding the keep interest rates at the current targets. The results were unsurprising to many investors, but the markets still enjoyed a Fed-fueled rally after the announcement. The Fed will next meet to decide interest rate policy in December.

BOJ Shifts Policy Framework to Targeting Japan’s Yield Curve

The Bank of Japan has said it would fine-tune its asset purchase program in the short-term to better manage short-term interest rates while maintaining the $780 billion in asset purchases per year over the longer term. This move signals it is now looking at how it can move to a more sustainable framework for monetary policy.

The Feds Just Got Real About Self-Driving Cars (It’s About Time)

Regulators have issued new guidelines for self-driving cars, significantly clearing up the rules manufacturers should follow when developing their self-driving technologies. This will help expedite the delays associated with regulatory oversight essentially figuring out rules on-the-fly and help prevent costly litigation later in the product cycle.

The Real Story of How Amazon Built the Echo

A look at the project that launched the Amazon’s speaker Echo and the AI assistant built into it, Alexa. It’s a great read on some of the internal dynamics of Amazon’s secretive tech lab, Lab126 and how those brought about this smash hit of a device, despite setbacks (or maybe because of setbacks) like the Fire Phone.

State Farm, Citing DOL Fiduciary Rule, Cuts Agents From Mutual Fund and Variable Annuity Sales

State Farm, in a move to preempt the Department of Labor’s fiduciary rule, has removed the ability of agents to sell variable annuity and mutual fund products due to the inherent conflicts of interest those agents have when selling them for a commission. Basically, as you’ll find with most insurance companies, it’s an admission that their agents are not actual advisors representing their clients’ best interests, they are sales agents for the firm, representing the firm’s best interests.

Making The Case for a Startup Visa

America is a country of immigrants and many of our most storied companies have been founded by first generation immigrants. In today’s immigration environment entrepreneurs looking to move to America to start a company need to first work somewhere else or have to have a significant equity investment already lined up. That needs to change, we need a visa that makes America better accessible to the smart, industrious entrepreneurs the world over.

Bitcoin is Money, US Judge Says in Case Tied to JPMorgan Hack

Bitcoin has been ruled, to indeed, be currency when determining whether a business is engaging in the exchange of the digital currency. This should make digital currency exchanges safer and (I’m speculating here) may set the stage for other challenges as to how cryptocurrency is treated when taxed.

Greenspan Says He Would Like to See Dodd-Frank Bank Law Repealed

Greenspan thinks that Dodd-Frank went too far in its prescriptions for how banks should reform and believes a much simpler bill that increased the reserve requirements for banks would have been sufficient. He would have liked to see the banking system shift to more equity-to-assets, namely around 20% to 30% of assets must be accounted for by equity. While this would shrink the banking system, he posits it would create a much more stable environment.

Twitter Stock Skyrockets on Report that Google and Salesforce are Interested in Buying the Company

We may see a sale of Twitter in the near(ish)-future. Goldman Sachs is reportedly helping Twitter find buyers. Among those it is courting include Google, Salesforce and possibly even Verizon. From the outside, it’s easiest to see the synergies between a Google and Twitter than other companies. It also has the deep pockets required to make the $15B+ purchase.

Other News:

The FTC is Cracking Down on Predatory Science Journals

Many young researchers have been scammed by high fees and false claims that their research paper will be peer-reviewed in these predatory science journals. Getting published in a peer-reviewed journal would normally be a big break at the start of an academic career. However, once the research paper gets entered into these predatory journals they hold it hostage in exchange for a fee and simply being in the journal can be bad for a career. Can’t wait to see these gutted.

Facebook and Intel Reign Supreme in ‘Doom’ AI Deathmatch

AIs are getting better and better at image recognition and developers are taking on more unique challenges to test the mettle of their AI creations. Tech giants and students alike entered their AIs into a competition involving the classic video game ‘Doom’ and duked it out over multiple rounds in a tournament. The computer vision and navigation systems employed in this competition are the same types of algorithms that are used in self-driving cars and autonomous robots.

Deutsche Bank Says 35-Year Party is Over for Bond Bulls

Deutsche Bank analysts stated in a recent report that they believe the global economy is at an “inflection point” that heralds the end of a 35-year bull market in bonds.

“Put bluntly the best realistic scenario for financial stability in the new era is that bond holders around the world see a slow real adjusted haircut over several years, probably over at least a couple of decades. The best example of this through history was the post-WWII period where government debt was at similar levels to that currently seen. Over the next 35 years, this debt was successfully eroded by a long period where nominal GDP was notably above bond yields. So bond holders took a large real haircut…”

The World’s Safest Investment Just Got More Dangerous

Bonds are anything but primed for growth. In this current environment, there just isn’t a whole lot of room for bonds to run. We’re currently in a world of historically low-interest rates, with the first negative interest rates in history occurring in other developed nations. Bonds may experience another period like the 50’s to the 70’s, where bonds struggled to return even the rate of inflation.

“A good asset becomes a bad investment if you pay too much for it.”

Apple Is Said to Be Rethinking Strategy on Self-Driving Cars

Project Titan has long been rumored to be Apple’s top-secret autonomous car initiative. Many expect Apple to eventually release its own car that it either manufactures itself or partners with an automotive manufacturer to build. However, Apple has recently laid off employees who were tasked on the project. It seems that there’s been a lot of internal struggles with the project (with Apple taking a hard look as to whether it should even try to build a car) and Apple may have decided to pivot toward building just software for such cars rather than hardware and software.

The Last Word on a Federal Reserve Rate Hike May Mean Standing Pat

There has been a lot of market turmoil over the last week about what the policymakers at the Federal Reserve will decide to do with interest rates during the September 20-21 meeting. Many expect them to maintain interest rates at their current level, with only 15% of traders expecting interest rates to rise. However, the continued indecision of the Fed has led to increased volatility in the markets.

Central Banks Should Learn to Live With Low Inflation: BIS

”Despite printing over a trillion euros ($1.12 trillion) and adopting a range of measures to stimulate lending, the European Central Bank has missed its target of almost 2 percent inflation for over three years.

“Borio argued that, at a time when inflation is kept low by globalization and technological advances, continued stimulus risks creating a situation in which debt is difficult or impossible to repay, or “debt trap”.

“A debt trap would threaten and make it hard to raise interest rates without causing damage to the economy,” he said. “The mix of balance sheet recessions and a stubborn disinflation process can be toxic.”

Deutsche Bank to fight $14 Billion Demand from U.S. Authorities

The US Department of Justice is pursuing $14 billion in fines against Deutsche Bank for its part in the financial crisis and mispresenting the mortgage-backed securities it was selling. However, it’s unlikely that the bank will pay that high of a fine. The DoJ demanded Citigroup pay $12 billion and it eventually paid $7 billion, and Goldman Sachs paid $5 billion on similar claims.

Other News Worth Consideration:

WaveNet: A Generative Model for Raw Audio

Deepmind, Google’s star artificial intelligence subsidiary, has been making a lot of news this year. Earlier this year it beat the world champions of Go, a game infinitely more complex than chess, with its AlphaGo program, now it’s making near-lifelike voice simulations with a better version of voice software. Siri, Cortana, and Google Now all sound loads better than robotic voices in the past, but they still sound robotic. Well, WaveNet, Deepmind’s new initiative has created a voice that is near-lifelike and pushing the uncanny valley between robotic voice and human voice. Give it a listen on their blog, in a few years we’ll be using this type of technology to read us books and listen to anything else we want our personal AI overlords assistants to read to us.

Why Bezos’ rocket is unprecedented—and worth taking seriously

Amazon’s Jeff Bezos is building rockets at Blue Origin to take on the likes of Elon Musk’s SpaceX and the growing number of commercial space companies. After having successfully launched a small rocket to sub-orbital altitudes and landed its booster back several times thus far, he’s going big on his next venture. His new design, a heavy-launch vehicle named New Glenn, will be almost as tall as the Saturn V rocket that launched astronauts to the Moon, and about half as powerful. The nice thing about the plans of the 4^th richest man is that he’s entirely self-funded the company. So there’s no deadlines and has the drive (not to mention the resources) to see it through to completion.

We Rode in Uber’s Self-Driving Car — Here’s What It was Like

Business Insider has a cool recap of riding in an Uber autonomous vehicle through Pittsburgh. It’s mostly photos so it’s a quick read.

Wells Fargo Fined $185 Million After Employees Opened 2 Million Unauthorized Accounts

5,300 Wells Fargo employees have recently been fired after having opened millions of accounts so the employees could “earn” extra compensation for opening accounts. Fees on these accounts ranged from a more standard $8-$10/month on business accounts to $40 a month to money market accounts. Many of these abuses were committed by having customers sign many, many, pages of documents, which they thought were just bureaucratic necessities to open a single account.

“Wells Fargo built an incentive-compensation program that made it possible for its employees to pursue underhanded sales practices, and it appears that the bank did not monitor the program carefully,” said CFPB Director Richard Cordray.

Unfortunately, this type of headline can feel a bit routine…”Oh look, another abuse of consumers by a Wall Street megabank….”

How Elizabeth Holmes’s House of Cards Came Tumbling Down

Vanity Fair has a great exposé about the Theranos blood-testing start-up scandal. How Elizabeth Holmes, CEO and founder of Theranos, had deceived the public and investors about the accuracy and efficacy of the technology they were building. Her company was shrouded in secrecy, with Holmes one of the only members of the company who knew what was really going on. To the public, she claimed that their microfluidic testing could test for thousands of diseases in blood, with just a drop of blood. But the reality was that Theranos continually struggled with developing an accurate technology. The article is worth a read to delve into how the story of the company outshone the reality of its successes and failures.

The Three Most Important Words? ‘I Don’t Know’

Barry Ritholtz makes some great points about the ridiculousness that surrounds the Theranos scandal. Basically, it was built on zero fact-checking and hope. Many investors and pundits did not admit they didn’t know how the company did what it was claiming to do with the blood test technology it offered. I’d like to add that knowing your circle of competence, which Buffett and Munger expound upon at length, (and not straying beyond it) is of utmost importance in investing.

G-20 Leaders Pledge to Fight Slow Growth

“The statement called for G-20 members to use “all policy tools” including monetary, fiscal and structural policies either individually or collectively depending on situations in the respective countries.”

Although I’m not sure what the governments will feasibly do to bolster economies in the near future. The US needs a huge infrastructure overhaul, so unless we’re talking about useful infrastructure projects in the trillions of dollars for things we need (not just to create jobs) I don’t think the government can do much to help the slowing economy.

The John Bogle Stock Valuation Model – Bogle Predicts 2% Stock Returns For The Next Decade

By any valuation measure the United States markets are expensive. This leads to lackluster performance in the longer term because markets are cyclical and mean-reverting. What goes up more than average tends to have lower returns in the future. Sometimes it takes a while, but the mean reverting nature of markets always comes roaring back.

Now You Can Finally Use Your Drone to Make Money

“The U.S. Federal Aviation Administration’s new drone regulations limit commercial operations to relatively low-risk scenarios. The aircraft must weigh less than 55 pounds, remain below 400 feet, and cannot fly beyond the operator’s visual line of sight, at night, or directly over crowds of people.”

Underperformance: Not a Bug, a Feature

It takes guts to be a contrarian investor and do something different from what everyone else is doing. And doing something different is the only way to become a stellar investor. This article takes a look at the long periods of underperformance of the better investors out there.

“When I looked at some of the best track records out there, they underperformed the S&P 500 or 60/40 portfolio most of the time.”…” Buffett’s Berkshire Hathaway has underperformed the market a little more than half the time.”

Apple iPhone 7 Plus’s new dual camera: Computational imaging finally goes mainstream

Apple has quite the buzz going for it, both for and against, having stripped the iPhone 7 of its headphone jack, but the camera tech its adding is a real step forward. iPhone 7 Plus’s new dual camera system allows analog zooming by changing lenses and utilizing two cameras for instant post processing. By having two cameras at different angles you can do things like refocus an image after the fact or have a better chance of your pictures being in focus.

Now I’m off to watch the Battle at Bristol…Go Hokies!

The Disastrous $45 Million Fall of a High-End Wine Scammer

Premier Cru offered premium collector wines at rock bottom prices that were too good to be true….and they turned out too good to be true. John Fox, the owner of the company, started Premier Cru in 1980 and has since offered deep discounts on wines if you prepaid for them with an extended waiting period (waiting periods are typical of many stores in the wine market, but his were even longer waits). This extended waiting period allowed him to create a Ponzi scheme over the years that eventually imploded and ended up bilking customers for $45 million in undelivered wine.

68 Million Dropbox Accounts Hacked And That’s Why You Need To Change Your Password Now

Back in 2012, Dropbox was hacked and user passwords were compromised. That list has now been leaked to the broader internet. At the time, Dropbox required you to change your password, but if you used Dropbox in 2012 and the password you used was also used on any other services, change those passwords now.

Google Is About to Take On Uber in a Big Way

It’s been a foregone conclusion that Google would eventually get into the ridesharing game once their autonomous cars hit the road, but it looks like they’re getting a head start on getting their ridesharing programs out to the public. Google has launched a prototype ride-sharing program in San Francisco and has plans to expand the service throughout the city.

EU orders Apple to Pay €13B In Tax Plus Interest

The EU recently ordered Apple to pay 13 billion Euros ($14.5B) after Ireland reduced Apple’s taxes from 1% in 2003 to 0.005% in 2014. The EU alleges that this treatment gave it an unfair advantage over competitors.

In a letter on Apple’s website, CEO Tim Cook stated: “Every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.”

Bank of Japan Won’t Hesitate To Boost Stimulus

The Bank of Japan has already conducted some of the world’s most extreme cases of monetary policy with its asset-buying programs. It maintains that it will continue the large amounts of stimulus and even boost their asset-buying programs in an effort to achieve 2% inflation.

Fed has options for dealing with recession, Yellen says

Janet Yellen doesn’t rule out the Fed getting into the asset-buying extravaganza in the future should we be faced with a prolonged recession. In the event of a recession, she notes Chair Janet Yellen said. “Future policymakers might choose to consider some … tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation,” she said.

EU-U.S. Trade Deal In Doubt As France Urges End To Talks

The free trade deal between the EU and the US has received pushback from France, adding their voice to others such as Austria and Germany. This may end the talks for the trade agreement.

Explosion At SpaceX Launch Pad Destroys Rocket, Satellite

Like to sensationalize this, but rocket explosions are unfortunately par for the course. A rocket is essentially a controlled explosion, which is why rockets tend to blow up when the smallest of things go wrong.

Perks Vanish as Funding Recedes for Startups

Startups capital is being a bit more careful these days. When startups perks and the tech job market stabilizes to a more “normal” regime some tech employees will have to come to terms with how a more normal job market works.

Wall Street’s Next Frontier Is Hacking Into Emotions of Traders

Emotional surveillance is a new buzzword on Wall Street. Traders at Wall Street banks may soon have sensors in their badges and AI monitoring their voice levels on phone calls.  The aim is to avoid the bad trading activities that can occur when traders get in a hole from a trade and try to get back to even, piling on risk until they get even or, more likely, lose big. When a trader can lose $100 million on a single bad trade, I can see why the banks would want to monitor their emotional states

Market shrinkage: Fewest US Stocks Since 1984

There are the fewest stock shares outstanding since 1984. This may be due to more companies staying private for longer thanks to more robust private equity markets.

Anyone Can Invest Like a VC Now—So Why Aren’t They?

Equity crowdfunding has been available to companies for the last few years, but it really hasn’t taken off, with only 16 companies actually raising capital in this manner. This may be due to the complexity of the process and the limit to the capital raises possible ($1M cap). A new bill coming down the pipeline may simplify the process.

Why I Invest in Stocks….Why Do You?

Big returns in stocks can mean huge drawdowns on the way there. Many people can pick good stocks, few can soldier through a position having a 90% drawdown (e.g. Amazon).­

A Hidden Habit of Successful People

Doing less busywork and extraneous activities and spending more time thinking.