Learn Financial Lingo – Start Anywhere, Just Start!
I really struggled with where to start this Learn the Lingo article and I struggled with it for a long time. I couldn’t decide what concept to start with, what piece of financial lingo was the building block on which to build gradually and it held me back. I wanted to make sure you learned the lingo in the perfect order such that you could progressively learn and build on the fundamentals with confidence.
Then I realized that my struggle is comparable to the struggle many of you are going through in that you don't know where to start your learning. And it was at that point that I realized it really doesn’t matter what word we start with; we just have to start.
I saw a 'You are Here' symbol on a map and it occurred to me that together we need to just start from where we are (‘Here’) and build. Hence, without any further procrastination: We are Here. And from here you will begin to learn the lingo.
Bull vs Bear Market
A Bull market is one in which there is more buying than selling, comparable to a seller's market in real estate: prices are going up. A bull stands with its head high and upward sloping, just like the upward sloping stock market chart of a bull market – that visual is how you'll remember that a bull market means share prices are going up.
A Bear market is one which there is more selling than buying, like a buyer's market in real estate: prices are going down. A bear lumbers around with its head bowed and sloping downward, just like the downward sloping stock market chart of a bear market. That visual is how you'll remember that a bear market means share prices are going down.
You may have memorized what bull and bear markets are just from hearing them often, but now you have a mnemonic to solidify that memory: a bull's head slope up and a bear's head slope down.
One reason it's important for you to understand the meaning of these two terms is so you don't find your eyes glazing over when investment professionals throw around lingo like this – instead, you'll know how to respond.
Knowing the definition of terms like bull vs bear is good and is the first step.
Understanding the significance and relevance to you of terms like this is where the magic starts happening. OK, maybe I'm overstating this – it might not be magical, but at least you'll be able to think critically about what a bull vs bear market means for you and your investments.
Your homework is to use Bull Market once in conversation and Bear Market once in conversation today. The conversation doesn't have to be about stocks and bonds – actually, it'd be better if you notice things in the normal course of your life where prices seem to be going down due to lower demand or up due to higher demand and I want you to consciously call it either a Bull Market or Bear Market.
Annuity
An annuity is an insurance product. It is sold by insurance companies. You fork over a lump sum of money and in exchange you get a guaranteed income for a guaranteed amount of time.
(There are other versions of annuities, like paying into it over time, but we're starting with a basic kind of annuity here)
An annuity is how you create your own guaranteed pension.
I can confidently keep using the word guarantee because it's not an investment, it's an insurance product. You sign a contract with the insurance company. The insurance company takes your lump sum of money and invests it for a pre-known amount of interest (for example, let's say they know they can get 6% interest for investing your money) and then they turn around and pay you a little less interest (for example, maybe they pay you 4% and keep 2% for their troubles).
The awesome part is that you don't have to worry about whether that payment is going to come in because it is guaranteed. You don't have to take any time over the years to keep an eye on an annuity because there's nothing to keep an eye on – it doesn't change.
You do have to worry about your expenses going up though because you've agreed to a set payment for the whole time and you don't have flexibility to withdrawal more money than you agreed to originally. You could pay extra for an annuity that has payments that keep up with inflation, which is worth asking about (you'd have to fork over a larger amount of money for this privilege).
Here's your homework on this one: do an online search for 'what are annuities paying' in your country. You'll get a sense of how much monthly income you could expect as a result of buying an annuity for a certain amount of money. How does that amount compare to what you’d call your essential, non-negotiable monthly expenses like utilities and food? By doing this practical research, you’ll be storing the concept of annuity in your long term memory and you’ll truly have learned the lingo!
Yield
Yield is an important piece of lingo to understand because you could easily be misled if you don’t ask the right questions.
Yield is a specific kind of investment return. Yield only refers to the income an investment gives you.
I’ll give you an example of yield that isn’t about the stock market. Think about a situation where you were considering buying a condo as a rental property. Forgetting all the other details of mortgages and management expenses for now, you are going to buy the condo with the hope that you sell for a profit later, which you’ll call your investment return.
But this isn’t the only way you hope to profit off this condo investment. You also hope to rent the condo out and earn income and it is this part of the investment profit that is called yield. Yield is the rent you earn.
Specifically, yield is annual rent divided by market value of the condo and is expressed as a percentage.
When you buy a stock, it’s the same thing: you hope to sell it later for a profit and you also may hope to earn dividend yield. Same with bonds: if you happen to sell before the bond matures and earn a profit, great, but the main way you profit from bonds is from the interest income a bond yields.
Yield is a useful way to compare two different investments apples-to-apples. I’ll go back to the condo example to explain what I mean.
Let’s say you are deciding between two condos to buy as a rental investment. The first condo costs $800,000 and the second condo costs $600,000. The going rent in each neighbourhood, however, is the same: $24,000 per year.
If you divide $24,000 by the cost of the first condo, you get a yield of 0.03 or 3%. When you do the same calculation for the second condo, you get a yield of 0.04 or 4%. If you are only evaluating this investment based on the income yield, then the second condo is a better deal for you.
Hence, yield is a measure that allows you to compare the income earned off different investments.
Similarly, if one stock costs $25 per share and another stock costs $40 per share yet they both pay a dividend of $1 per share per year then the first stock has a 4% yield (dividend divided by share price) and the second stock has a 2.5% yield.
Your homework: find your calculator, any old calculator, on your phone or the one you used in high school that’s still in your junk drawer.
You have a rough sense, probably, of the cost of a condo and the going monthly rent in your neighbourhood (it doesn’t really matter if you’re right or wrong, this is just hypothetical), so multiply the rent by 12 to get the annual rental income and divide that smaller number by the larger full market cost of the condo. Then multiply by 100 to get percentage and that’s the yield on a rental property investment.
Now, open a web browser and do a search for the following: What is the dividend yield on the S&P500 index? Compare that % yield to the % yield you calculated above – what can you conclude?
OK. That’s all for now. You have learned about Bull vs. Bear markets, Annuities and Yield. Excellent start on your Learn the Lingo journey!
