Basic Investing Terms For Kids (And Parents)

Breaking Down Fancy Investing Jargon For Kids (and their parents)

“If you can’t explain it to a six year old, you don’t understand it yourself.”

-Albert Einstein

Professional investors and people who work in the financial industry throw fancy terms around all the time. Some of them can be useful acronyms or labels and others in our opinion are just made up to try and confuse people.

One of the principles we live by here at Future Funders is we don’t believe in fancy jargon. Financial literacy is a topic we think should be available to anyone who has the desire to learn and the commitment to repeatedly put into practice skills they pick up along the way.

We also believe that learning how to use money as a tool to live your live is different for everyone and however you internalize concepts best is the way that you should seek to learn. Because of that, everything should be broken down in as simple language as possible in order to help you grow.

That’s why when it comes to money, finance and investing we thought it might be helpful to break down some key terms in a simple and easy to understand way with memes and GIFs.

The list here is by no means exhaustive and there are many more that we could include, but we wanted this list to serve as a starting point. If there are any other fancy terms you hate and want to add feel free to add them in the comments below or shoot us a note here.

Without further ado, lets get to the list.

market basics

Stock — Stock is the capital raised in a business by selling shares. Effectively this means by owning a piece of stock you own a small piece of the business. Think of it like being a part owner of a full pie because you own a small slice.

Stock Exchange — This is where people come together to buy and sell stock. There are a number of different stock exchanges worldwide (for example, the New York Stock Exchange) where people all the time are buying and sell shares of stock. While stock exchanges mostly still do have physical locations, most of the stock traded nowadays is done through computers (it used to be people just shouting at each other - we have evolved).

Bond — Unlike a stock, a bond is not a piece of ownership in a company. Instead it is a piece of debt or IOU that the company is giving you for your money. When a company needs to raise money they have several options including creating new shares of stock and selling them (giving away ownership) or selling new bonds (incurring new debt). There are different considerations around each option and why you would choose one vs. another.

Equity or Equity Market — This is used interchangeably with the words stock or stock market. Equity is stock and stock is equity. Owning both equity and stock are used to mean a piece of ownership in something (think the equity you own in your house, for example).

Bond Market — Place (physical or virtual) where people trade bonds. Same idea as the stock exchange above, just for bonds.

market trading Terms

Holding Period — Refers to the length of time you hold an investment or asset.

Buy The Dip — Term used when the price of an asset drops and people encourage you to buy more of it.

Top Ticked — Term used when you buy or sell an asset at its peak price. For example, “I top ticked that stock because after I sold it it went down 40%.”

Bottom Ticked — Term used when you buy or sell and asset at its low price. For example, “I bottom ticked that stock because after I bought it it went up 40%.”

The Tape — Tape is now used more as a slang term for wherever you are looking at the stock market data for individual companies. Before computers, there literally used to be a ticker tape that ran across recording all stock transactions throughout the trading day and typically things like trade size, price and time of trade. “Reading the tape” literally meant reading the scroll in order to get an idea of trading dynamics in the market.

Getting Flat — Term used for selling out of your investment entirely.

Paper Gains Or Losses — Used to talk about your investments when you are still holding them. When the investment goes up, you have paper gains because you have not sold and actually realized those gains yet. The same is true for losses.

Average Cost — When you buy an asset over a period of time this term is used to determine what the average price you paid over that time for it was.

market sentiment

Bear or Bearish — Fancy term for someone who is negative or pessimistic about something. It can even be used to describe someone outside of investing. For example, “my friend is bearish on her ability to cook a decent meal.”

Bear Market — Typically this term is used when stocks fall 20% or more from their highs. However, people do tend to just throw around the term sometimes when they think things are in a prolonged state of negativity.

Bull or Bullish — Fancy term for someone who is positive or optimistic about something. It can also be used outside of investing. For example, “I am bullish on my ability to get a lot done today because I am feeling energetic.”

Bull Market — Typically this term is used when stock prices are rising and people are optimistic about them continuing to rise into he future.

TakeoverS

Buyout — A transaction where an investor acquires control of a company.

Bolt-on Acquisition — Means a small acquisition that will usually not transform a company into something different. Think about McDonald’s buying one hot dog vendor (which the wouldn’t do but bear with us). Integrating this one hot dog vendor into the company is not going to change the company much.

Leveraged Buyout — A transaction where an investor acquires control of a company primarily by using debt.

Hostile Takeover — When an investor takes control of a company against management’s wishes. This can happen, for example, if an investor buys a controlling amount of the companies shares freely in the stock market.

The “Professionals”

Hedge Fund — This is broad field (like saying doctor but not knowing what kind of doctor) but the term’s meaning is generally how it sounds. Hedge Funds are investment firms that use any strategy they see fit to “hedge” or try to minimize risk of the market going up and down.

Mutual Fund — A pool of money managed by a professional manager. You can invest in mutual funds in order to meet an agreed upon investment objective (for example if you just want to pick a bunch of good industrial company stocks). They trade once a day after the market closes. Mutual funds generally adhere to strict rules vs. Hedge Funds that typically have more freedom.

Index Fund — A type of mutual fund or exchange traded fund that is set up to track an index (for example, the S&P 500 has an index fund that tracks it and aims for returns similar to the market).

Getting Fancy

Go Public — When a company decides they want to list their stock on an exchange and open their share ownership up for anyone to be able to buy.

Go Private — When a company decides they don’t want to be public anymore and seeks to not have their shares freely available. This is usually done by buying at least 51% of publicly listed shares giving the private shareholders control and allowing them to decide to not be listed on an exchange.

Initial Public Offering (IPO) — This is the process by which a company goes public. It is the first time they offer their shares to people who want to become owners in the company.

Accredited Investor — This is a legal term given to people by the government that meet a certain threshold level of income or net worth. Being an accredited investor allows someone to invest in deals that others cannot. The reasoning behind this is to prevent people from being taken advantage of and rests on the belief that once you meet these rules you are more knowledgeable or can manage your own risk better (we would argue this is not always the case).

Due Diligence — Fancy word for doing your homework on an investment or topic before committing to it.

Exchange Traded Fund (ETF) — A listed security you can buy which tracks an index or set strategy (for example, there is an ETF that tracks just consumer companies). Their prices fluctuate all day as shares get bought and sold

Private Equity — Investing in private companies not listed on an exchange. For example, if you bought or invested in the mom and pop ice cream store down the street, that would be a private equity investment.

Dividend — A sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves). Not all companies pay dividends as some companies may think they have better uses for that cash. For example, they see investments for growth (ex. building a new factory) that may help the company and you as a shareholder more down the road so instead of paying shareholders and dividend they use the cash for growth.

Futures Markets —Is basically an auction market in which participants buy and sell contracts on an underlying asset for delivery on a specified future date. Another way to think about it would be like betting with your friend that the sun will come up tomorrow and making a contract. Futures prices will change as people buy an sell contracts the closer the event happening. For example, when you hear, “the market futures are down” before the stock market is open, this is another way of saying people are betting that when the market does open it will be lower.

Getting Fancier

Pari Passu — Fancy finance word thrown around that means essentially that things are treated the same. For example, “in my family I am pari passu with my sister, even though I may argue all the time that my parents favor her.”

Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) — This number is a rough approximation of a company’s cash flow that people use to value companies. Watch out though as the number is often manipulated by management teams in order to try to make the company look better (always be careful whenever you hear the words “Adjusted EBITDA”).

Earnings Per Share (EPS) — This is the total company profit or net income (i.e. the bottom line for what a company makes after all expenses, interest payments, and taxes) divided by the total shares the company has. It is a way of looking at how much of the company’s bottom line benefit you are earning if you are an owner of an individual share of stock.

Payment-in-Kind (PIK) — A payment in kind is a fancy term for when a payment is made with stock instead of cash. An example would be if a company issues shares of stock to shareholders instead of paying a dividend in cash.

Crypto Currency — A digital currency where all transactions are verified and records maintained largely by a decentralized mathematical system (a.k.a independently), rather than by a centralized authority (a.k.a governments).

Blockchain — An underlying system in which transactions like those involving cryptocurrency are recorded and maintained across several computers linked in a peer-to-peer network.

The Fanciest

Form 13F — 13F is a quarterly report that is required to be filed by all institutional investment managers with at least $100 million in assets under management to the U.S. Securities and Exchange Commission (SEC). It discloses their equity holdings and can provide insights into what the “smart money” is doing in the market.

Form 10-K — A comprehensive report filed annually by a publicly-traded company about its financial performance and is required by the U.S. Securities and Exchange Commission. Reading a 10-K can be a great place to start learning about a company as it will describe the companies business in detail.

Form 10-Q — A report filed after each of their first three quarters by a publicly-traded company about its financial performance and is required by the U.S. Securities and Exchange Commission. Reading a 10-Q can help you keep up with a company on a more frequent basis vs. sticking just to the 10-K.

Form 8-K — A company is required to file an 8-K with the SEC if they have an unscheduled material event of corporate change that would be important for shareholders to know. For example, if the company fires their CEO suddenly, they would have to put out an 8-K to let people know about it.

Form S-1 — A Company who is looking to go public is required to file this form with the SEC. The form will be a comprehensive overview of the companies operations and financials that is worth a read for any investor looking to invest.

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