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Ever felt like the stock market is one big brain teaser?
In Episode 5 of the Zurich Money Mindset Podcast, Ross Hutchison, Head of Eurozone Market Strategy & Economics, breaks down financial jargon. No more scratching your head over dividends or indices as he puts all the pieces together for you.
If you find financial jargon puzzling, you are not alone. In this episode of the Zurich Money Mindset Podcast, we're going to be talking about stock market jargon, dividends, preference shares, exchanges, indexes, individual securities, Dax. What are all these things? We're going to provide some clarity to help you with your investing journey. Please find it on the Zurich Money Mindset Hub. Good job! Welcome to episode number five of the Zurich Money Mindset Podcast. In today's episode, we are going to be doing a deep dive into the terminology or the jargon that has to do with the stock market. There are lots of terms that are floating around there... Dividends, buybacks, exchanges, indexes, individual securities, common shares, preference shares, sectors, all sorts of words. What on earth do they all mean? It's actually not as complicated as you might think. And we'll be discussing that and more. I tell you what else is not complicated. That is, subscribing, liking, commenting, etc. anything to do with this channel and video. Please do all three of those things below. Thank you very much.
Part one:
Individual stocks. Individual stocks are the securities, the shares of single companies that you can buy, sell, own, invest in. They are either a common form like common stock or preference shares, and that refers to the type of voting rights that you as an owner have. The most common, unsurprisingly, that you will find in the market is common or ordinary shares that most active companies that you will be able to buy or sell in the market, will give you access to. Now, how do you make returns on individual shares for companies? Generally, there are two ways to go about this: One is capital appreciation. The price of that share goes up as investors or other people in the market are willing to pay a higher price for that. They value the business more, they value the cash generation and the profitability of the business more. Of course, the opposite can happen as well. If things are deteriorating and you get capital loss there.
Another way is really two things:
Dividends or buybacks. And that is, the company is using money it generates, to pay you directly as a shareholder. That's a dividend. Or to buy back some of its stock from the market in order to return cash to the shareholders. Different investors have different preferences to what they like, the taxation that you pay as well, also might mean you might favor one over the other, but that's how you should really be thinking about the two avenues of returns from equities. Generally, you should find it’s the case that you can invest in buy or sell securities in most exchanges around the world, but that might depend on where your residency is and taxation and other considerations around those specific exchanges. Lastly, I want to talk about stock indices or a stock index on a singular basis. No doubt you will have seen as you walk down the street, you pass a bank, you turn your head, you see a TV, and there's numbers flashing up and down on the screen in green or red if they are down. The S&P 500, the German Dax, the Spanish Ibex, all of these are a collection of stock indices. Now, they are not individual securities, they are not an exchange. They are a collection of individual securities that sometimes might share an exchange. But they are a separate concept, but a very important one. They tend to be the common reference point for most global investors when they talk about equity markets. For example, the US’s S&P 500 is a list of 500 individual securities that are based on US exchanges, and it tracks the performance of those 500 stocks. Some of them may be going up, some of them may be going down. It's weighted by how large each company is. The larger the company, the higher a portion of the index that it is. And if a big company is going up a lot, that will put a lot of pressure on the overall calculation of the index to make it go higher. And generally for companies going down, but it's a small company that might have less impact on the overall index. People use these when they're thinking about benchmarking their investment return or deciding where to invest in particular.
There are lots of different versions of these:
I mentioned the S&P 500, that's a classic; in the UK, we have the Footsie 100, that is really the 100 largest publicly listed companies in the UK market. We have the German Dax, that's 40 companies based in Germany, the largest 40 publicly traded companies there. Again, a very commonly held or referred to measure. Now there are lots of differences with these as well. For example, the German one, as I said, only has 40 companies. The sectoral split will look very different to that of the S&P 500, given the makeup of the German economy in the listings compared to those. That's the last concept I want to talk about here, which is sectors. Those are characteristics that individual stocks would have. For example, if a bank is listed, its sector would be in financials, but it will be a bank specific sector. You will find that markets, for example, like the Italian market or the Spanish market, are quite heavy in terms of banks, whereas other markets have less exposure there. It's really important to understand and learn about this when you're thinking about what of specific exposures you would like. There are indexes that are made up of basically all the large stocks around the world. For example, one is the MSCI World, you might hear that a lot. So to wrap it up here, first, the bad news: A lot of this is simple memorization. There are not necessarily tricks or techniques in order to help you memorize every single exchange in the world or every index. But there are some big, obvious names that be important to you, specifically with an index based, as I mentioned the S&P 500 and MSCI world. It's also good to understand the difference between individual securities, exchanges, where they're listed on, an indexes, which we often refer to when we talk about investing. That is all we have time for today. Please, as I said the beginning, do not forget. Like, comment and subscribe. You can find us on the Zurich Money Mindset Hub. And you've been listening to the Zurich Money Mindset Podcast.
