Successful Investor Terms – You Should Know

Mark Wendell |

By Mark Wendell
Whether you are just starting to take charge of your financial future or you are an old pro at the
task, it can be stressful approaching financial planning with confidence. Do you ever talk to your
financial manager and think that they’re speaking a foreign language? Between acronyms,
money talk, and long exotic sounding words, the experience does not have to be painful. Here
are a few financial terms you should know while consulting a financial professional. After all,
you worked hard for your money, don’t let ignorance stand in the way of financial success.

1. Diversification - When referring to financial actions, Investopedia defines diversification as,
“a risk management technique that mixes a wide variety of investments within a portfolio. The
rationale behind this technique contends that a portfolio constructed of different kinds of
investments will, on average, yield higher returns and pose a lower risk than any individual
investment found within the portfolio.”

2. Bear market and bull market – The concepts ‘bear market’ and ‘bull market’ are both terms
to describe the stock market and investing. In a bull market, everything’s moving forward:
investors are confident making a lot of buys, more companies are entering the stock market, and
more money is being invested in the stock market overall. In a bear market, investors pull back.
Prices start to hover and go down, and people wait before investing additional money into stocks
and bonds.

3. Price Earnings Ratio (P/E) – A valuation ratio of a company’s current share price compared
to its EPS (earnings per share). EPS is usually from the last four quarters (trailing P/E), but
sometimes it can be taken from the estimates of earnings expected in the next four quarters
(forward P/E). In general, a high P/E suggests that investors are expecting higher
earnings growth in the future compared to companies with a lower P/E. The P/E is
sometimes referred to as the "multiple", because it shows how much investors are willing to pay
per dollar of earnings. Observing the movement over time of an average P/E of a group of
companies may indicate the relative current or future health of an economy or of a segment of an
economy; it can also indicate the value of a market relative to historical trends.

4. Risk Adjusted Return – This is an important concept that defines an investment’s return by
measuring how much risk is involved in producing that specific return. It describes how much
return was achieved for a measured amount of risk incurred. There are five principal risk 
measures that professional investors use to ascertain the relative quality of an investment: alpha,
beta, R-squared, standard deviation and Sharpe ratio. Each risk measure is unique in how it
measures risk and when viewed together, provides a thorough opinion-analysis of an investment.

5. Inflation vs. Deflation vs. Disinflation – Inflation describes the rate at which the general
level of prices for goods and services is rising, and subsequently, purchasing power is falling.
Deflation describes a general decline in prices, often caused by a reduction in the supply of
money or credit. Deflation can be caused also by a decrease in government, personal or
investment spending. The opposite of inflation, deflation has the side effect of increased
unemployment since there is a lower level of demand in the economy, which can lead to an
economic recession or worse, a depression. Central banks attempt to stop severe inflation, along
with severe deflation, in an attempt to keep excessive movements of prices to a minimum.
Disinflation describes a slowing in the rate of price inflation. Disinflation is used to describe
instances when the inflation rate has reduced marginally over the short term. Although it is used
to describe periods of slowing inflation, disinflation should not be confused with deflation.
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