Investing lingo can be intimidating when you hear something referenced but aren’t fully familiar with what it means. We’ve taken some of the most common investing acronyms and broken them down. Here are eight investing terms to know.
1. S&P (or S&P 500)
This is likely the most common but arguably one of the least understood. We will dive in to what this means. S&P 500 is an index, which is simply a list, or pool, of companies that are tracked together as one overall unit. The S&P 500, staying true to the name, includes 500 companies.
The S&P 500 is known as the best broad measurement of large-cap American companies because it is comprised only of American, large-cap, publicly traded companies. What this means is that you can hypothetically look at the S&P 500 index as a singular unit and take an inference from that as to how all of the large-cap American companies are performing in the stock market.
The S&P 500 is “capitalization weighted”, meaning that the proportion of company percentages in the overall index are based on their respective market caps. For example, if a cap weighted index contained two companies, ticker ABC with $100 billion market cap and ticker DEF with $300 billion market cap, the index would be weighted 25% of ABC and 75% of DEF. Market cap is a snapshot of a company’s overall value at any given time, a function of price per share by number of shares outstanding.
The S&P 500, while being capitalization weighted, does not contain the 500 largest market caps in American companies. There is actually a selection process, defined and managed by a committee, that determines which companies are added and removed from the S&P 500. The selection is based off of eight criteria and includes thresholds for market cap and trading volume to even be considered for inclusion.
IPO stands for Initial Public Offering. This marks when a company is first traded to retail and institutional investors on a public stock exchange, like NYSE or NASDAQ. Prior to an IPO, a company is privately owned, and its shares are not traded on an open market, so most of the world can’t invest and buy shares. You will typically hear the acronym “IPO” in accordance with “going public”. For example, “Apple went public on December 12, 1980 at $22.00 per share.”
3. NASDAQ and NYSE
When company shares are traded, there must be a buyer and seller for the transaction to take place. One additional piece? An exchange for the transaction to take place over. NASDAQ stands for National Association of Securities Dealers Automated Quotations, and NYSE stands for New York Stock Exchange. Both of these are exchanges where shares of public companies are traded.
While both of these do have physical locations in New York that house exchange workers, equipment, traders, etc, the real magic is happening online, and the exchanges simply provide the infrastructure for this to happen. Companies typically will list the exchange they are traded on, but they can list on multiple exchanges.
You may hear the saying “the NASDAQ is up” from time to time. This is simply referring to the overall performance of the pool of companies that make up the NASDAQ exchange. Fun fact: the NYSE is actually owned by Intercontinental Exchange, which is headquartered in Atlanta, GA.
One of the more common acronyms in investing is the Individual Retirement Account. The IRA is a tax-advantaged investing account that was first introduced in 1974. You can set up an IRA like you would a bank account or brokerage account, through any financial institution that offers it.
Within most IRAs, you can buy and sell stocks, derivatives, mutual funds, bonds, CDs and more. The options are relatively wide open, especially compared to some 401k options that only allow specific funds. IRAs and 401k accounts are not the same, although sometimes they are paired together. The primary difference is that IRA is an individually hosted account while a 401k account requires sponsorship from an employer.
There are two primary types of IRAs, Traditional and Roth. This is based on the tax advantage setup. Both accounts offer the opportunity for pre-tax contributions, and the difference is that Traditional IRAs defer taxation until you withdraw the funds, while Roth IRA contributions are made with after-tax dollars but are able to grow with no capital gains taxation.
This is a very high level overview of an IRA. In reality, there are other variations such as SIMPLE IRAs, SEP IRAs, and deductible vs non-deductible IRAs, as well as contribution limits, early withdrawal penalties, estate planning considerations, and more. Make sure you do your research and work with a trusted financial professional before investing with an IRA.
Okay, so this one is technically not an acronym, but it’s one of the most common you hear. A 401k is a tax-advantaged investment account. This is similar to the IRA in the sense that you can have Traditional, pre-tax contributions, or Roth, taxed contributions. The difference? 401ks are offered by your employer and typically managed within the same financial institution for all employees of an employer.
401k is what has ultimately replaced the widely known Pension plans. It shifts control of the investments more to you, the individual. Employers generally will have a matching contribution to what you contribute of your salary to the 401k. For example, 100% match for up to 3% of your paycheck.
While you may not have full control over what investments are offered in a 401k, you do have control of your contributions in the sense of where your money goes if you leave your employer. 401k investments can be transferred, or more commonly “rolled” into a rollover IRA when you leave a company. There are small but meaningful differences in the rules for what you can do with your money in a 401k compared to an IRA.
ETF stands for Exchange-Traded Fund, and it is simply a pool of stocks that are grouped together under one package. This package is then traded on a stock exchange, like a stock, with its own ticker symbol.
For example, you can invest in the S&P 500 index by one of the ETFs that track the index, such as an ETF with ticker: SPY. By purchasing shares of the SPY ETF, you are diversifying your investment across multiple companies but under one single ticker. We cover more on ETFs in this article, but make sure you do your research and work with an investment professional.
HSA stands for Health Savings Account, and this is a widely under-utilized tool for protecting yourself in emergencies and building wealth along the way. An HSA works in a similar fashion to an IRA in that you can make tax-advantaged contributions to a savings account. The funds are then used to pay for qualified medical expenses that may arise.
HSAs are offered by many High-Deductible Health Plans (HDHP) and will be found in your benefits package with your employer. This is also available for self-employed individuals, so long as you are enrolled in a HDHP.
HSA accounts are generally fairly flexible in what you can do with the funds, meaning you can invest the funds in CDs, stocks, bonds, and more. Some employers will even offer matches or a yearly deposit. The funds in an HSA are always yours to keep if you leave your job. There are rollover plans to new employers, or you can keep it in the current account and use it as needed for qualified medical expenses.
Last but not least are REITs, usually pronounced as “Reet”. Real Estate Investment Trusts are business entities that are formed to invest in incoming-producing real estate assets. Some of these entities are publicly traded companies, meaning you can trade the company like a stock. This allows investors to gain exposure to real estate markets without having to actually buy commercial real estate.
REITs generally pay out their income to shareholders, which will look like a dividend to an investor. Because of this, the tax considerations for a REIT are a bit different than your typical equity investments.
Investing in a REIT is a great way to diversify your holdings into income-producing real estate, but it comes with its fair share of risks. One of these is investing in a highly leveraged REIT that has the allure of higher dividend payouts. Do your due diligence on a REIT before you invest.