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WEDNESDAY WORD OF THE WEEK RECAP

Uncategorized Dec 31, 2018

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It's the end of the year and if you are subscribed to my newsletter, you know that I send a financial word of the week every Wednesday!  It is a financial term that you should know and will be helpful on your financial journey.  The whole purpose of my blog is to educate and improve financial literacy so that goal is always at the forefront.  With that said, I wanted to do a recap of all 2018 WWW terms (in case you missed it).  If you want to subscribe, just click here and type in your email at the top.  Ready?  Let's Go...

 

Federal Reserve
Definition
The Federal Reserve is the central bank of the U.S.  It conducts monetary policy (print more money, raise interest rates, etc.), regulates banks, makes sure the financial system remains stable, and provides financial services to U.S. banks, foreign governments and the public.
Why It's Important
The Federal Reserve directly affects the interest rates you pay on your debt and the interest rates you earn on your savings.  This year they have raised the Fed Funds rate 2 times from 1.5% to 2%.  You may have noticed your interest rates changing, this is why!  Keeping an eye on "The Feds" decisions can indicate what your next move should be!  I bought my house when the Fed Funds rate was 0.75% in 2017.  Now, I am locked into a low interest rate compared to what's available today! 

Diversification

Definition
A risk-reduction method by which you spread your assets among many different investments.
Why It's Important
In the event of a downturn in the market, having sufficient diversification can help you not take too much of a hit.  It is pretty much the adage, "Don't put all your eggs in one basket"!

Bull Market
Definition
A bull market or a bull run is a financial market in which prices are rising or expected to rise.  Bull markets generally take place when the economy is strengthening 
Why It's Important
We are in the 2nd longest running bull market!  It started after the dip in March 2009 and continues today.  Analyst are trying to figure out how much longer it has.  With that said, make sure you are diversified (remember?) because all good things must come to an end eventually.

Index Funds

Definition
Index funds are passively managed, meaning they track an established market index.  One example is the S&P 500 which invests in 500 of the largest companies in a range of industries.  Another example is the Dow Jones Industrial Average, "The Dow", which shows how 30 large, publicly traded companies have traded.  Usually, reporters use The Dow to exclaim how good (or bad) the market is doing.
Why It's Important
Index Funds offer broad market exposure at a low cost.  Because they are passively managed, their fees are lower than actively managed funds.  When it comes to performance, index funds generally beat actively managed funds over the long-term.  

Compound Interest
Definition
Compound interest is interest added on to the principal on a deposit or loan so that the added interest also earns interest and so on and so forth.  
Why It's Important
I think Albert Einstein said it best, "Compound interest is the eighth wonder of the world.  He who understands it, earns it... he who doesn't... pays it."  If you start with $1000 in the bank and it gains 10% a year,  the breakdown would look like this:
Year 1: $1100
Year 2: $1210
Year 3: $1331
That's compound interest!


REITs
Definition
REITs are Real Estate Investment Trusts.  They allow you to invest in different types of real estate.  REITs are available on the market for any real estate niche whether you want to invest in hotels, apartments, commercial buildings, etc.
Why It's Important
Most people think the only way to invest in real estate is to buy a house or rental property.  REITs are traded on the stock exchange (just like stocks and bonds) to take advantage of the volume of people coming together to invest in bigger projects.  They offer another form of diversification in your portfolio.

Asset Allocation

Definition
Asset Allocation is an approach to managing your investments that involves setting parameters for different asset classes (bonds, real estate, cash, stocks, etc.)  It involves setting a percentage of each kind to hold in order to reach your investment goals.
Why It's Important
Planning your asset allocations is a lot like budgeting.  There are a multitude of different resources available to see what your target asset allocations should be based on your age, income, and retirement age when planning for retirement.  Generally, the younger you are, more of your portfolio should be invested in stocks.  As you get older you would start transitioning your portfolio to more bonds as they are a less volatile investment.  This video​ may help.

Selling Short

Definition
Selling short aka short selling is when an investor thinks a stock will go down so they "short it". Essentially, the investor borrows shares of stock or another asset he or she doesn't own, sells it, pockets the money with the promise to replace the property someday, and hopes the asset declines in price so it can be repurchased at a lower cost, the differential becoming the profit.  They make money on a dip!
Why It's Important
During the financial crisis of 2008, short sellers were making money in the market while everyone else was losing.  A great movie that details what happened is "The Big Short".  Be careful when short selling because if it's not done right, it could bankrupt you!  Keep in mind that you are borrowing shares so if the stock goes up you will be in debt to the broker you borrowed from.

Averaging Down

Definition
Averaging down is when you buy more of a stock as the price goes down.  This makes your average purchase price decrease.
Why It's Important
This strategy is helpful when you purchase a stock and some big news comes out that effects the stock negatively.  If, based on the value, you feel it is under priced, you would buy more at the lower price expecting a rebound.  I recently used this strategy with Tesla.  I bought it a little higher than I wanted so when I saw the stock drop due to Elon Musk's actions, instead of selling, I bought more.  This allowed me to essentially realize more of a return once the stock recovered.

Blue Chip Stocks
Definition
These are stocks behind large, industry-leading companies.  Typically, they offer stable dividend payments and have a reputation of managing their financial affairs efficiently.  
Why It's Important
Companies such as AT&T (T), Tanger Factory Outlet Centers (SKT), and Walmart (WMT) are considered blue chip stocks.  They have a long track record of consistent growth and high dividend payments compared to the rest of the market.  These stocks are generally great to have in your portfolio for the long term.

Stop Loss Order

Definition
A Stop Loss order is a trading order you can put in after buying a security (stock, bond, ETF, mutual fund) in the market to hedge against losing too much money.  You may also see it listed as a Sell Stop order.
Why It's Important
It is always important to have a stop loss order in place if you are unable to keep an active eye on your investments.  This is especially useful when trading in individual stocks that are risky.  For instance, I recently opened an account on Robinhood​.  I bought a few shares of GE at $14.46.  Immediately after I put in the buy order, I put in a stop loss order for $12.  This means if the price goes anywhere below $12, the system will automatically sell my stock.  This order triggered yesterday and I was able to get out before my losses increased!
Interested in trying Robinhood? Click here and get a free stock once you sign up.  I love this platform because all trades are free!  Other brokers charge between $1.99 - $4.99 per trade.  Those costs add up quickly!

Day Trading

Definition
Day Trading is the practice of buying and selling shares within the same trading day.  Investors that use this strategy are called "day traders" or "active traders".
Why It's Important
Day Trading is popular among a subset of investors that use algorithms or have time to keep an eye on the stock market.  Most day traders use platforms that execute buy and sell orders based on conditions that they have pre-determined.  Day trading can be very lucrative if it is done right.  Much like having a long-term portfolio, it is important to have a strategy and stick to it!

Moving Average

Definition
A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices.
Why It's Important
Let's look at the figure below.  The blue line indicates the moving average of Amazon.  In general, when a stock is trading below the line, you should buy because it is below its moving average price.  When a stock is trading above the line, it is likely that the stock will drop.  Of course, there are other indicators you should look at when making investing decisions but this is one of them.

Arbitrage
Definition
Arbitrage is the simultaneous purchase and sell of an asset to profit from the imbalance in price.  Using this strategy, takes advantage of price inefficiencies in the market.
Why it's Important
Arbitrage opportunities provide a way to collect high returns with little to no cost to you.  This is how it works:
Let's say a stock is trading on the NYSE (New York Stock Exchange) for $50 a share.  Simultaneously, the same exact stock is trading on the SSE (Shanghai Stock Exchange) at $50.30 per share.  An arbitrage opportunity exists because you can buy on NYSE and turn around and sell on SSE making a profit of $0.30 a share.   
or
You buy a big name stock (like Apple, Alphabet, or Amazon).  In order to create an arbitrage opportunity, you short the S&P 500 Index (SPY).  This way if the stock gains, you win but also if the stock goes down you win.  Big name stocks weigh very heavily on the market and if the stock goes down the index would probably follow suit.
Shoot me an email if you have any questions!

Dividend Yield

Definition
The dividend yield represents the ratio between the stock price paid and the dividend paid. A stock trading at $100 per share, with a dividend that amounts to $5 per year, you would divide the $5 by $100 and turn it into a percentage. In this case, the yield would be 5%.
Why It's Important
You will typically find the dividend yield for a stock when trying to research whether it is a good investment.  Remember, not all stocks pay dividends!  The example below is from Yahoo Finance.  The current dividend yield for GE is 0.50%.  This is extremely low as GE has been having a tough year.  In order for companies to pay dividends, they have to be doing well enough to distribute extra funds.  Always look at the financial statements before you dive into an investment. 

Margin

Definition
Margin is when brokers (Charles Schwab, TD Ameritrade, etc.) lend money to investors to make trades (think of credit) so they can leverage their assets to make more money.
Why It's Important
Investor beware!  Although using a margin account has the ability to make you more money, it is very risky.  If you are trading on margin and the investments drop, you still owe that money to the brokerage.  In addition, brokers can initiate a "margin call" where they demand some, if not all, of the money they lent to you right then and there.  They can immediately sell your assets for the debt.  It is best to just use a cash account especially if you are a new investor. 

Penny Stocks

Definition
Penny stocks are stocks that are trading below $1.00 a share. They are highly volatile. 
Why It's Important
Investor beware!  Penny stocks have the potential to make investors a lot of money they also expose investors to a lot of risk.  They key to penny stocks is volume.  Making $0.10 on a single stock does not seem like a lot but when you multiply it by hundreds or even thousands, it adds up!  On the other side, losing $0.10 on a single stock does not seem like much until you multiply by hundreds or thousands.  With that said, be aware of what you are getting into when dabbling in these types of companies and trades.  Happy trading!

Bear Market
Definition
A bear market is when stocks see a 20 percent decline or more from a recent high.   

Why It's Important
The S&P 500 officially hit bear market status on Monday, dropping 20 percent from its 52-week high. Historically, these periods last about 13 months on average.  So, with that being said, brace yourself for more blood shed in the markets.  The good news is if you have been eyeing a stock for a while, this period may be the perfect time to buy, buy, buy!  If you are worried about losing money in your retirement and you have decades left before it's time to retire, you will be fine!  Usually, the market bounces back and when it does, it typically goes higher than it previously did.  Sit back and enjoy the ride!

Please Note:  This is a recap and any images referenced are only available to subscribers.  

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