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Bite sized snippets to help you feel empowered
In this episode, I’ve put together a bunch of bite-sized snippets to help you get to grips with some common bits of investing jargon that people often ask about. You’ve probably heard some of the terms before – but if you’re like most people, you’re probably not sure exactly what they mean.
The problem with uncertainty is we lose confidence – and we end up doing nothing. And when it comes to investing – that’s the last thing we should do! I’m hoping that the more comfortable you get with some of the key concepts, the more empowered you’ll feel to start.
What is the stock market?
First up I’m going to explain what the stock market, and stock market indices, are. You probably hear about stock markets in the news all the time, or you see people in suits grabbing their free FT when they get on a commuter flight and wonder what the heck they’re actually reading when they pore over the graphs and tables.
Well, the first thing to say, is there’s more than one stock market. There are different ones in different countries all over the world. In the UK, we have the London Stock Exchange, while the US has the New York Stock Exchange, and Japan has the Tokyo Stock Exchange.
The Stock Market is the business of buying and selling stocks. There are many different stock exchanges around the world which are markets where the stocks, bonds, and securities are bought and sold.
Did you know, the term ‘stock’ originated from a company named Stocks, owned by a man named P.J. Stock who started selling shares to a company that didn’t really exist.
There are other ones too, but you don’t need to know all of them – just what they are. A stock market is where companies raise money by selling slices of their business – or stocks – to investors. It’s a generic term that covers a collection of markets and exchanges.
Think of a stock market as being like a department store. Debenhams would be a great example; you can find different designers selling their stuff, in different departments across different floors. There’s John Rocha. Jasper Conran. Ben De Lisi. Betty Jackson, and loads more. These designers are like the different companies who trade on stock markets, and their products are the stocks.
Stock market index
Now, you’ve maybe also heard the term ‘stock market index’. The index is just a way of measuring or describing a particular section of a stock market.
So, going back to our department store, it would be like describing the shoe section, the evening-wear section or the jewellery and accessories section. Each section sells stock from different designers. You wouldn’t expect the shoe section to stock every single design available in the country. But, in a large store, the popularity and success of different styles and brands would be pretty indicative of the general trend.
So, if the market leading shoe brands were selling out of rainbow trainers, you can pretty much guarantee rainbow trainers will be doing well all over. This is how a stock market index works.
September is usually the poorest performing month in the stock market, often blamed on the vacations that investors take in the summer months that decreases trading.
There are lots of different ways to slice and dice a stock market. Mostly, it’s based on company size, and there are different indices in different countries.
In the UK for example, we have the FTSE 100. That’s made up of the top 100 companies in the UK stock market. The FTSE 250 is the top 250 companies. And the FTSE all-share aggregates these – and other FTSE indices. In the US, there’s the S&P 500 index. And Germany has the DAX.
You can also get indices for specific types of stock market investments. A great example would be indices for ethical investments. Basically, these meet specific environmental, social and governance criteria (or ESG criteria).
This means they’re not just about making money – although they do this too! They also aim to have a positive impact on the environment. They take a socially responsible approach to working with suppliers, employees and their community. And their corporate governance means things like executive pay and shareholder rights are properly managed.
The FTSE has a whole series of indices that measure the performance of companies with good ethical practices. It’s called the FTSE4Good Index Series. Think of these types of indices as specialist shops rather than a general department store. They’re a great way to find something specific, if you know what you’re after.
So, when you go into an independent, knit-wear shop, you know you’ll find a range of designers, but it’ll all be knit-wear.
The main thing I want you to take from this, is indices are a great way to gauge how a specific type of investment is doing.
If an index is performing well, it’s a good indication that these types of companies are generally doing well across the whole market.
When stock markets are climbing it is referred to as a ‘bull market’.
When stock prices are falling it is referred to as a ‘bear market’.
Passive and Index funds
Once you’re comfortable with stock markets and stock market indices, the next thing I want to cover is passive funds. And their opposite number – active funds.
Active funds are a nice, easy way to invest in companies. A fund manager does all the work to research the best companies to invest in, decides how much risk to take and makes sure there’s a good, diverse range. And then packages it all together in a fund. All you do, is buy a slice of the fund with your money. And when it does well, so do you. And vice versa.
Now, there are two main types of funds – passive and active. Passive funds are also called index funds. So, it’s useful to bear this in mind if you’re looking for these types of funds online.The difference pretty much comes down to what the fund aims to do. Index funds simply track an index – like the FTSE 100 that we talked about. So, the fund is made up the same way as the index.
For example, the FTSE 100 is around 24% invested in oil and gas companies, so an index fund that tracks the FTSE 100 will be the same. Now, one advantage of index funds is they’re generally a cheap option, because the fund manager doesn’t have to do too much – they just copy an index.
I think of these as being like the carbon-copies of top-end designs you find on the high street. You won’t get much change from £700 for a pair of Valentino studded shoes. But a copy-cat pair from Missguided, will only cost around £25. That’s basically because Valentino’s done all the hard design work, and Missguided can reproduce it at a fraction of the cost.
A potential downside to index funds though, is if you don’t like what’s going on with the companies in the index, then it’s tough. You’re stuck with it.
ETF’s (Eh? Read on..)
There’s another type of index-related investing called Exchange Traded Funds – or ETFs. They often track the same indices as index funds, but they’re structured differently, so the way you pay for them is slightly different.
ETFs are often cheaper to buy than an index fund. But if you’re buying and selling them regularly (for example, if you were saving a regular amount every month) they could end up costing more. That’s because they’re treated like an individual stock on the stock market. And each time you invest money, it’s like buying a new one.
With funds, once you’ve bought your slice of the fund, you can usually top it up – or sell it – at no extra cost. I think of this like buying a gym membership that gives you unlimited access, versus paying each time you go. Buying into a fund is like your membership. Once you’ve paid for it, you can use the gym anytime without having to pay anymore. That’s probably great value if you go every day or week.
Buying an ETF is like going to the gym once or twice a year. In this case, it’s probably much cheaper paying a one-off charge each time.
Now, active funds are the opposite of index funds. Instead of tracking an index, they aim to outperform it – in other words, they aim to make more money than a market index like the FTSE 100. The fund manager tries to anticipate problems with certain companies, and sell stocks before they lose value. Or they try to spot opportunities to buy stocks cheaply – perhaps in an undervalued company – hoping they’ll be able to sell them at a higher price down the line.
These active funds tend to be more expensive than index funds, because the fund manager is so hands-on – or active – hence the name!
There’s no right or wrong way to invest.
Going with active or passive funds is entirely down to your personal preference, and what’s important to you. Low cost, or the possibility of better performance. I say possibility, because the track record of active funds may surprise you!
There’s been research that shows that over half of active UK fund managers do worse than the FSTE all-share index. And that’s when markets are doing well and when they’re doing badly.
If we go back to our Valentino and Missguided shoes. Valentino is our active fund manager. And because of the high price-tag and the brand, you’d probably expect your Valentino shoes to be much better quality.
But actually, high-street brands are often just as good as designer – if not better – when it comes to cost-per-wear.
Investing jargon busted!
So, that’s the last of my jargon-busting snippets for just now.
I really hope this has helped to demystify things a little bit more for you. Keep following the series as you will continue to learn more the more you listen.
At the very least, when you come to looking at platforms, I hope you’ll recognise some of the terms.
And instead of thinking – eek, I don’t know anything about this! – you’ll know what that means and perhaps be ready to start.