Top 5 Mis-Understood Finance Words
People often hear words in the finance world and because they hear them so frequently, they don’t truly understand their meaning. Below are the five most common misunderstood and misused words in finance world.
1. “Hedge”
You hear it most often when talking about hedge funds in the news. Hedging is a fancy way to say insurance. If you hedge a bet, you make sure something is there to back it up if it fails. If you are a hedge fund, you do the same thing but buying in bigger quantities at higher risk (and reward).
2. “Short”
You hear it when talking about the market, in the popular book “The Big Short.” It just means that you think something is going to fail or go down. So if you “short” a stock you think it’s going in the crapper. If you “short” America, you think it’s going to fail.
3. “Equity”
A stock is an equity. Period. It’s a fancy word to talk about stock or portion of a company you own. You are hearing it a lot in the media lately with regards to “private equity” — that’s just a way to own parts of company that isn’t available in public stock or equity exchanges.
4. “Bond”
You also hear it as “fixed income” or “paper.” It’s buying a portion of debt in turn for a percentage of profit. You can buy “paper” from the government, known as Treasury bonds, or “paper” from companies known as corporate bonds. The riskier the company or country you are buying from, the more income you will get in return. It’s fixed, unlike the profits in the stock market because you know what you are getting and it’s typically less risky that investing in public companies.
5. “AAA”
You get a credit score, so does a country. We are hearing a lot about countries losing the AAA rating. That’s a way to tell the risk of that particular country. So when you buy a “bond” that’s not AAA, which is the highest, it has more likelihood of failing. So AA+ is below AAA and then AA, AA-, A+, A, A-, then down to BBB…Greece, for example, which is bankrupt has CC. It’s a grade for anything we can invest in, just like the cleanliness grades at restaurants.
Written by, Nicole Lapin whose everyday financial insight is followed by millions through appearances on CNN, Morning Joe, NPR and more. Nicole is also the owner of website Recessionista.com which has lots of great female-friendly content. Nicole’s message is to “Remind women — rich or poor — that you don’t need to break the bank to be fabulous.”