Tycoon Talk: 10 Terms Every Investor Needs to Know

Put your money where your mouth is by speaking the language of Wall Street

To mangle Cyndi Lauper’s 1980s hit, investors just want to have fund. But there are so many of them: How to choose? Or for that matter, how do you choose one when you don’t know how any of them work, exactly?

That's the conundrum with Wall Street. On the one hand, no one's trying on purpose to tie your head in a financial knot. But if no one's ever explained an "index fund" to you, for example, then how are you supposed to figure out what it is?

And what kind of index, exactly? And if there's more than one kind, shouldn't it be called "indexes funds"? 

That's where we come in: Allow us to take the jargon out with the junk (or junk bonds, if you prefer), and provide some badly needed clarity. With these ten terms for beginning investors, more than half concentrate on the world of funds. So here’s to taking the mystery meat out of those turns of phrase the money moguls like to toss off like they’re waving a wad of Benjamins above their heads.

Exchange-traded funds: Also known by their acronym, ETFs are securities that track a commodity, asset group (such as an index fund) or a given index of stocks (such as the Standard & Poor’s 500). It trades like a stock on an exchange and goes through price changes daily as ETFs get bought and sold. To learn what an index fund is, keep reading…

Index fund: As the name implies, this fund contains key stocks from a certain index, such as the S&P 500.

The goal of an index fund is to follow the movement of the index as a whole—so if the S&P 500 goes up, the index fund should go up as well. 

Mutual fund: With this fund, you’re grouped with “mutual” investors in owning a collection of stocks, bonds, real estate or other securities. Mutual funds are professionally run and investors can liquidate their holdings at any time.

Fund manager: A money manager who directs the investment strategy and trading activity of a fund along a spectrum that ranges from aggressive to conservative. These managers are paid a percentage of the total amount of assets in the fund.

Hedge fund: Hedge funds are reserved for experienced investors such as institutions or wealthy individuals who have a net worth of more than $1 million (also known as accredited investors). Money invested in a hedge fund must remain there for at least a year or more, and the funds themselves often employ risky strategies such as using borrowed money to invest. 

Target-date funds: These funds are tied to a future “target date” when the investor cashes in their investment, often determined by retirement or a child’s entrance into college. Commonly, the investment strategies of these funds get more conservative as the target approaches.

Prospectus: This is the document that the issuer of a stock or bond files with the Securities and Exchange Commission. It contains legal information about how the security in question is set up, from details on the business to how much stock has been issued. With mutual funds, the prospectus describes investment strategy, risk level and goals.

 

Bull market: A period of time when stocks continuously rise in value. Dating to the 1930s, bull markets last an average of 8 years and can see stocks rise by as much as 10 times over the “bull run,” as they did in the period World War II. 

Bear market:  A period of time when stocks continuously fall in value. Bear markets are much sorter in duration—usually about 18 months. The last bear market came with the Great Recession, from December 2007 to June 2009, and saw the Dow Jones Industrial Average shed more than 50 percent of its value.

Commodities: As opposed to stock, which grants an ownership stake in a company, commodities are raw materials (such as gold and copper) and agricultural products (such as wheat and pork). They are traded on “futures exchanges,” so named because the commodities are bought or sold for a pre-set price at a future date.