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12 financial terms you need to know

Legal Disclosure: Tony Robbins is the Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity based on increased business derived by Creative Planning from his services. Accordingly, Mr. Robbins has a financial incentive to refer investors to Creative Planning.

By now you’ve learned some basic terms to start you on the path to investing, and you’ve learned a few more to boost your economic IQ.

Now you’re ready to learn some of the fancy (or frightening!) words and phrases that financial news pundits and financial planners throw around. After all, what you don’t know can hurt you. These twelve phrases are specifically focused on some of the strategies and fees associated with investing. Although this is the last article of this series, we at Team Tony encourage you to continue growing your financial sophistication and get in the game because waiting on the sidelines will cost you dearly in the long run!

Or, an exchange-traded fund. The most popular exchange-traded product on the market, the ETF is an investment fund in which an investor can buy and sell shares, much like a stock. The ETF fund itself holds assets (stocks, commodities or bonds) and its value is subject to change through the course of a day. They have high liquidity, lower fees (but not always!) and usually track an index, such as a stock or bond index.

 

The expense ratio of a stock or mutual fund is the total percentage of the fund’s operating expenses divided by the average dollar value of its assets under management – essentially, what does it cost the investment firm to operate the fund? For example, a 1% expense ratio (considered a typical annual ratio for a domestic stock fund stateside, although index funds are considerably lower) means that 1% of the fund’s total assets will be used to cover the fund’s expenses. Keep in mind that the expense ratio is not the only fee being charged.

 

The commission paid to a broker (financial advisor, etc.) by the investor for purchasing mutual funds on the investor’s behalf. These can vary greatly and often sway a broker’s decision to sell the fund.

 

Opposite a load fund, a no-load mutual fund is sold without a commission or sales charge to the investor. This means 100% of the investor’s money is working for the investor, rather than a percentage being taken off the top (front-end load) or upon payout (back-end load) to pay commissions. A no-load fund still charges a management fee (aka expense ratio) and other fees, so by no means is it free.

 

One of those ‘other fees’ mentioned earlier that some mutual funds charge investors when they transfer from one fund to another within the same “family” of funds.

 

Cash is usually a good thing and makes you feel safe, but in this case, it really may be hurting you. Cash drag is the uninvested cash that a fund manager sets aside, usually to handle withdrawals from the fund. However, this portion of the fund is failing to participate in the market and therefore has no upside or downside potential. To add insult to injury, you are paying fees on this portion of the fund.

 

A structured note is a loan to a bank in which the bank knows it will retain your money for a specific period of time (say, three years). The bank issues you a note and at the end of the period, they usually provide 100% of your money back AND a percentage of the upside of the market (or a particular index). It’s a way to have a relatively safe investment with some upside participation. Beware of very high and hidden fees. It’s best to access through a fee-based fiduciary advisor who legally can’t charge commissions and can strip out the unnecessary fees.

 

A rule of thumb that conservatively suggests that retirees withdraw just four percent from their retirement account annually in order to maintain adequate funds to sustain the investor through their later years.

 

Just as its name implies, high-frequency trading consists of firms using powerful computers with complex algorithms to transact an incredibly large number of orders at very fast speeds. These traders can move in and out of positions within fractions of a second, often with the goal of capturing a fraction of a cent in profit on every trade.

 

In this niche, traders focus on stocks that are moving significantly in one direction on high volume, and much like surfers, try to ride the wave of momentum in order to pull in a profit. Typically they hold their positions for a short period of time – from minutes to a day.

 

Otherwise known as a “constant dollar plan” or the “cost average effect.” This strategy consists of buying a fixed dollar amount of a particular investment on a set schedule, whatever the share price may be. When the share price is high, the investor receives less shares for the dollar amount (or whatever currency used), and when the price of shares is low, the investor gains more shares. This strategy reduces the risk of volatility on large purchases and is particularly effective in markets undergoing temporary declines.

 

Also known as a “shareholder rights plan.” This is a defense tactic used by corporations to discourage a hostile takeover by making its stock less attractive to the would-be buyer. This is done by essentially giving the shareholders a discount on the stock, thus diluting the buyer’s interest.

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Team Tony

Team Tony cultivates, curates and shares Tony Robbins’ stories and core principles, to help others achieve an extraordinary life.

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