Financial Definitions
B
Bonds
Bonds are a type of investment that represents a loan made by an investor to the issuer (such as a company or government), and they typically pay a fixed rate of interest over a specified period of time. When you buy a bond, you're essentially lending money to the issuer in exchange for regular interest payments and the return of your principal when the bond matures. Bonds have a face value, or the amount that the issuer agrees to repay to the investor at the bond's maturity date. The interest payments, known as coupon payments, are paid to the investor periodically, typically semi-annually or annually. Bonds are considered less risky than stocks, but they also typically offer lower returns.
C
Central Bank Digital Currency (CBDC)
CBDCs are NOT cryptocurrencies. They are a digital form of a country’s fiat currency issued by its central bank. Although they are both digital currencies, cryptocurrencies are deregulated, untraceable, and outside government control, whereas, CBDCs are issued, monitored, and regulated by federal governments. CBDCs claim to help promote financial inclusion, simplify monetary and fiscal policy, and explore the potential impact on economies, financial networks, and stability, however, CBDCs are really just a more controllable dollar giving the government the ability to act as your back, and for them enact policies through your money. This means the governments will have the ability to tell you when and where you can spend your money, and they can turn it off at any time. Do you want the government to be your bank?
Cold Wallet & Hot Wallet
A cold wallet and a hot wallet are two types of storage systems used to store cryptocurrencies and other digital assets.
A cold wallet refers to a storage system that is not connected to the internet, such as a hardware wallet or a paper wallet. Cold wallets are considered to be more secure than hot wallets because they are not susceptible to hacking or other online threats. However, because they are not connected to the internet, cold wallets may be less convenient to use for day-to-day transactions.
A hot wallet, on the other hand, refers to a storage system that is connected to the internet, such as a software wallet or an exchange wallet. Hot wallets are more convenient to use for day-to-day transactions, but they are also considered to be more vulnerable to hacking and other online threats.
The choice between a cold wallet and a hot wallet depends on an individual's specific needs and priorities. For long-term storage of large amounts of cryptocurrency, a cold wallet is generally considered to be the most secure option, while for more frequent transactions, a hot wallet may be more convenient.
Cryptocurrency
Cryptocurrency is a digital or virtual currency that relies on cryptography to secure transactions and control the creation of new units. It is a decentralized form of currency, meaning it operates on a decentralized system rather than being regulated by a central authority. This decentralized system is typically based on blockchain technology, which is a distributed ledger maintained by a network of computers. This network of computers makes it nearly impossible to counterfeit. Because no one person or entity can control them, it is much harder to be regulated or manipulated. They are designed to be secure, transparent, and unchangeable, along with offering benefits such as privacy, and quick transactions.
D
Diversification
Diversification is when you spread your money out between different assets. True diversification is when you have different asset classes that are not tied to anything else.
Dollar Cost Average (DCA)
This is an investment strategy intended to minimize the impact of volatility. DCA is investing a fixed amount into a particular stock or fund (or even in the market as a whole) at regular intervals regardless of the market’s ups and downs. The goal of DCA is to reduce the risk of investing a large sum of money in a single transaction and to avoid trying to time the market, which can be difficult and often leads to poor investment decisions. This can help lower the amount paid for investments and minimize risk. DCA can take the emotion out of investing making it easier to deal with uncertain markets by making purchases automatic. This is also called unit cost averaging, incremental averaging, or cost average effect. In the UK, it is referred to as pound cost averaging.
Drip Investing
DRIP is an acronym for "dividend reinvestment plan". This means the cash dividends that an investor receives from a company are reinvested to purchase more stock, making the position in the company grow a little more with each dividend payout. Others will also use this strategy by buying more of an asset every time it falls a certain amount/percent. For example, say one of your favorite assets drops 10%, then you buy a little more of the asset, and then if it drops another 10%, then you buy a little more of it again, and so on.
E
Exchange-Traded Funds (ETF) & Mutual Funds
An exchange-traded fund (ETF) is a type of investment vehicle that trades on a stock exchange like a stock but represents a diversified portfolio of underlying assets such as stocks, bonds, or commodities. ETFs are designed to track a particular index or benchmark, and their share price fluctuates based on the value of the underlying assets. ETFs can be bought and sold throughout the trading day like stocks, and investors can use them to gain exposure to a particular sector, asset class, or investment strategy.
Mutual Funds are a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are managed by professional investment managers who use the pooled money to buy and sell securities on behalf of the fund's investors. Each mutual fund issues shares, and investors buy and sell these shares based on the fund's net asset value (NAV), which is calculated by dividing the total value of the fund's assets by the number of outstanding shares.
Differences between Mutual Funds and ETFs:
Trading: Mutual funds are traded at the end of the trading day based on the NAV, while ETFs can be traded throughout the trading day like stocks.
Fees: Mutual funds may have higher expense ratios than ETFs, but ETFs may have trading commissions associated with buying and selling shares.
Minimum Investment: Mutual funds may have minimum investment requirements, while ETFs can be purchased with no minimum investment.
Diversification: Both mutual funds and ETFs offer diversification by investing in a portfolio of underlying securities, but ETFs may offer more targeted exposure to specific sectors or investment strategies.
F
Financial Mutant
The Money Guy Show is a popular personal finance podcast and YouTube channel, and they have used the term "financial mutant" to describe individuals who think about money differently than the average population. These are individuals who have achieved exceptional financial success through a combination of smart financial decisions, hard work, and creativity. According to the Money Guy Show, financial mutants are people who have been able to achieve financial independence by building significant wealth through entrepreneurship or investing, or finding innovative ways to earn and save money. The term "financial mutant" is meant to highlight the fact that these individuals are rare and exceptional in their financial abilities and mindset.
Fractional Reserve Banking
This is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending. Today, most economies' financial systems use fractional reserve banking. (2022 Investopedia)
https://www.investopedia.com/terms/f/fractionalreservebanking.asp
H
HODL
This is a slang term used in the cryptocurrency community that is said to have become popular after a post on the BitcoinTalk forum in 2013 in which the poster misspelled "hold" as "hodl" when they wrote, "I AM HODLING." The post gained traction and became a meme, with the term "hodl" being used as a rallying cry for cryptocurrency investors to hold onto their investments through market ups and downs. It is also sometimes referred to as meaning “hold on for dear life” as a strategy of holding onto a particular asset, regardless of short-term market fluctuations or price declines, with the expectation that the value will increase over the long term. Individuals that HODL are also known as Hodler.
Hot Wallet & Cold Wallet
A cold wallet and a hot wallet are two types of storage systems used to store cryptocurrencies and other digital assets.
A hot wallet, on the other hand, refers to a storage system that is connected to the internet, such as a software wallet or an exchange wallet. Hot wallets are more convenient to use for day-to-day transactions, but they are also considered to be more vulnerable to hacking and other online threats.
A cold wallet refers to a storage system that is not connected to the internet, such as a hardware wallet or a paper wallet. Cold wallets are considered to be more secure than hot wallets because they are not susceptible to hacking or other online threats. However, because they are not connected to the internet, cold wallets may be less convenient to use for day-to-day transactions.
The choice between a cold wallet and a hot wallet depends on an individual's specific needs and priorities. For long-term storage of large amounts of cryptocurrency, a cold wallet is generally considered to be the most secure option, while for more frequent transactions, a hot wallet may be more convenient.
I
Investor Sentiment
Investor sentiment refers to the overall attitude or feeling of investors towards a particular market, asset class, or individual security. It is a measure of how optimistic or pessimistic investors are about the prospects of an investment and can be influenced by various factors, such as economic indicators, company performance, news events, and geopolitical risks. Investor sentiment can have a significant impact on market prices and returns, and many investors use sentiment indicators to help inform their investment decisions.
L
Lifestyle Creep
Lifestyle creep, also known as "lifestyle inflation," refers to the gradual increase in a person's standard of living as their discretionary income rises. It occurs when people increase their spending as their income increases, without necessarily saving or investing more money.
M
Money Market
A money market is a segment of the financial market where short-term, low-risk debt securities are bought and sold. These securities typically have a maturity of one year or less and can include things such as treasury bills, certificates of deposit (CDs), commercial paper, and municipal notes. Money market investments are often considered a safe haven for cash reserves because they are backed by the creditworthiness of the issuing entity and have short maturities, reducing the risk of default. Money markets provide an important source of liquidity to the financial system, allowing financial institutions and governments to manage their short-term cash needs while also providing a low-risk investment option for investors.
Money Market Account
Money market accounts are a type of savings account offered by banks and credit unions that typically offer higher interest rates than traditional savings accounts. Like savings accounts, money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), which protects depositors against loss if the bank or credit union fails. They may offer check-writing privileges and ATM access, however, there may be some restrictions with these accounts. Money market accounts are subject to Federal Reserve Regulation D which means they often require a higher minimum balance than traditional savings accounts, and there may be limits on certain types of withdrawals and transfers and/or on the number of withdrawals and transfers that may take place in a given month.
Overall, money market accounts are a popular option for individuals who want to earn a higher interest rate on their savings while maintaining easy access to their funds.
Moon Bags
This is a slang term often used in the cryptocurrency community, but it can be used for other asset categories as well. For this strategy, when an asset you invest in goes up a certain amount, you will then pull out your initial investment and maybe even some of your profits, while still holding some money in the investment. This gives you a “bag” of investments that you own free and clear, like house money. You can then HODL without the risk of losing your initial investment. This strategy can be used to help investors manage their risk by ensuring that they have recouped their initial investment and they can still potentially benefit from further gains.
Mutual Funds & Exchange-Traded Funds (ETF)
Mutual Funds are a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are managed by professional investment managers who use the pooled money to buy and sell securities on behalf of the fund's investors. Each mutual fund issues shares, and investors buy and sell these shares based on the fund's net asset value (NAV), which is calculated by dividing the total value of the fund's assets by the number of outstanding shares.
An exchange-traded fund (ETF) is a type of investment vehicle that trades on a stock exchange like a stock but represents a diversified portfolio of underlying assets such as stocks, bonds, or commodities. ETFs are designed to track a particular index or benchmark, and their share price fluctuates based on the value of the underlying assets. ETFs can be bought and sold throughout the trading day like stocks, and investors can use them to gain exposure to a particular sector, asset class, or investment strategy.
Differences between Mutual Funds and ETFs:
Trading: Mutual funds are traded at the end of the trading day based on the NAV, while ETFs can be traded throughout the trading day like stocks.
Fees: Mutual funds may have higher expense ratios than ETFs, but ETFs may have trading commissions associated with buying and selling shares.
Minimum Investment: Mutual funds may have minimum investment requirements, while ETFs can be purchased with no minimum investment.
Diversification: Both mutual funds and ETFs offer diversification by investing in a portfolio of underlying securities, but ETFs may offer more targeted exposure to specific sectors or investment strategies.
S
Stocks
Stocks are a type of investment that represents units of ownership in a company. When a company goes public, it issues shares of stock, which can be bought and sold on a stock exchange. When you buy a share of a company's stock, you become a part owner of that company. Investors who own stock in a company are referred to as shareholders, and they can potentially profit from the company's growth and success through increases in the stock's price or through dividend payments. However, stock ownership also comes with risks, as stock prices can fluctuate due to a variety of factors, including company performance and/or financial health, industry trends, and economic conditions. This can all cause stock prices to rise and fall rapidly. Stocks are just one type of investment, but they can offer significant returns if chosen wisely. The key advice? By low, and sell high.