What is an index?

Like the index in a recipe book, an index in the stock market is a list. But instead of recipes, it lists securities. And rather than helping you find terms in a book, it helps experts measure the market’s behavior.

What is “the market”?

The phrase “the market” gets tossed around a lot, often without much context. Let’s break down what it means. 

A stock market is a generic term for a physical location, like the New York Stock Exchange (NYSE), an electronic exchange like the Nasdaq, or any other mechanism to buy and sell securities, such as stocks, bonds, funds, and other investments.

The NYSE and the Nasdaq are the largest stock exchanges in the U.S., but there are many other stock exchanges in the country and all over the world. 

“The market” or “the stock market,” isn’t just one thing or one place. When people talk about the market, they often mean stock markets generally or a subset of stock markets, like U.S. stock markets. 

There are many stock markets, trading the stock of thousands of companies, some of which might have millions of shares. That means understanding and measuring the market can be a daunting endeavor. Stock indexes can help.

What’s an index for the stock market?

Because the market is so large and complex, it’s nearly impossible to measure the behavior of the whole thing. Indexes help solve that problem by looking at representative pieces of the market.

An index, in the stock market world, is a list of securities intended to represent the market, either as a whole or a subset of the market. Using a limited group of securities as a proxy for the market addresses the logistical challenges of measuring the entire market. And if the index is reliable, it can be used to understand the market more broadly.

Who creates indexes?

Anyone can create an index. But selecting representative securities, plus tracking, analyzing, and communicating about their behavior, is a highly specialized task. Thus, the reputation of the index provider determines how much weight the index carries with investors and experts.

These are some of the most important and referenced indexes in the financial world. If you remember any indexes, it should include these:

• S&P 500
• Dow Jones Industrial Average
• NASDAQ Composite
• Russell 3000

What kinds of indexes exist?

There are many indexes in the stock market landscape, and each has its own goal. For example, perhaps the most well-known and referenced index is the S&P 500. It’s a list of 500 large companies traded on the NYSE and Nasdaq, representing over 80% of the available market capitalization. It aims to give investors a window on the market overall.

The S&P 500 is not industry-specific. It includes companies such as 3M, Ford, and  Apple. It’s also not exchange specific; for example, Apple trades on the Nasdaq and 3M trades on the NYSE. Instead, its primary requirements for inclusion are size and trade volume.

Other indexes track sectors of the market, like technology, or industries, such as clean energy, aerospace, or fossil fuels. Some indexes may even focus on companies in the cannabis industry or companies working on artificial intelligence technologies.

Putting indexes to work with Stash

So how do you know what indexes to follow? It depends on your investment strategy. You may want to pay attention to what’s in an index. In the stock market, there are a tremendous number of companies and sectors, so consider focusing on indexes that contain securities most relevant to your portfolio. That can help you understand how your investments could behave in the future. And following big-picture indexes can be a way to grasp what’s going on with financial markets in general and give you insight to support a long-term investing strategy. 

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Here is what that term means.

IPO: When a company goes public

Going public is shorthand for something called an initial public offering, or IPO. An IPO is the first time a company sells its shares to the public through a stock exchange such as the Nasdaq or the New York Stock Exchange (NYSE).

When a company wants to open new stores, build or acquire a factory, or expand in some other way, it may need additional resources to pay for it. Company executives may use an IPO to raise additional capital to invest in and grow their business.

Often a company does not yet have enough internally generated funds to finance such projects. Going public is one way to raise a relatively large sum of money in a relatively short period of time.

Which companies have gone public?

The short answer: most large companies you’ve heard of, and any companies whose stock you can purchase as an individual investor.  If you’re investing on Stash, you’re investing in companies that have gone public.

How does a company ‘go public?’

To ‘go public,’ companies must hire an investment bank, such as Goldman Sachs, or J.P. Morgan to help conduct the process, also known as underwriting. These banks are responsible for everything from preparing the legal documents to finding investors to buy the initial shares or as so banks refer to IPO shares.

Once all parties involved in the process have coordinated their efforts, they decide on the date the company will have its IPO.

Have you ever seen people clapping and smiling in the news, after ringing the opening bell of the NYSE? Many times, that’s the celebration of an IPO.

That moment is also the first time a company’s stock trades in a major public stock exchange, which is usually a big milestone for the business.

It’s not all balloons and clapping and bells. When a company is publicly traded, there are also significant legal requirements it must follow.

The company must first register with something called the Securities and Exchange Commission (SEC). The SEC is a federal agency that regulates the company and lets them know what rules they must follow in order to get listed on a public stock exchange. One rule is quarterly filings of financial statements, so investors have a current and regularly updated picture of the company’s fiscal health.

Getting listed on an exchange

Stock exchanges such as the NASDAQ publish lists of companies that have recently issued, or soon will issue, shares for sale to the public. This IPO list can be found here.

Fun fact: Ever wonder how companies choose their ticker symbols? For more on how these letters are chosen and regulated, check out: How to Read a Stock Ticker: A Quick, Fun Guide.

The post What’s an IPO? What It Means When a Company Goes Public appeared first on Stash Learn.

One such club is for a select group called accredited investors.

What is an accredited investor?

Accredited investors meet high income and net worth requirements that allow them to make investments that are off-limits to the rest of the general public.

Typically, accredited investors can buy and sell securities, or invest in companies or private funds that are not registered with financial regulators, such as the Securities and Exchange Commission (SEC), which is tasked with protecting investors and ensuring that markets run smoothly. For example, accredited investors can buy equity or shares of private companies that are not publicly traded.

Accredited investors are given more leeway to invest than the general public because they have more money, and can afford to lose money with riskier investments. Generally speaking, federal regulators want to protect average investors from sinking all of their money into risky securities and losing it all.

From the SEC: “One principal purpose of the accredited investor concept is to identify persons who can bear the economic risk of investing in…unregistered securities.”

What can and do accredited investors invest in?

Under Regulation D of the SEC’s guidelines, accredited investors can buy or sell securities related to companies or funds that are unregistered with the SEC, or exempt from its regulations.

Generally, this includes private companies and startups. These companies don’t need to make regulatory disclosure filings, so potential investors may not be privy to all of the risks associated with a given investment. Accredited investors, on the other hand, are given the benefit of the doubt, and are allowed to take on additional investment risk.

Examples of what accredited investors may invest in:

• Hedge funds
• Venture capital firms
• Private equity firms
• Private real estate funds
• Startups and other private companies

How do you become an accredited investor?

To qualify as accredited investors, individuals must meet two primary requirements:

• Your net worth (the assets of a single individual, or a married couple) must be more than $1 million, excluding the value of your primary residence.
• You must have earned more than $200,000 ($300,000 for married couples) for the two years preceding when you seek to qualify as an accredited investor. You must also expect to earn the same amount, or more, for the current year.

Some legal entities, such as banks, trusts, and nonprofits, can also qualify as accredited investors. In some cases, an entity is in a better position to make a risky investment than an individual because they likely have more assets and resources—even more than an individual who qualifies and has a high net worth. In those cases, individuals may want to invest through a bank or trust rather than as an individual.

Keep up with the ever-evolving world of financial jargon by subscribing to the Stash newsletter.

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Or, you can think of it as a way to describe the contents of your portfolio.

What is asset allocation?

Asset allocation is the process of dividing the investments in your portfolio into different asset classes. These classes include stocks, bonds, cash, mutual funds, exchange-traded funds (ETFs), and more.

Essentially, the term refers to the particular mix of investments you own, and you can calculate the allocation out to get an idea of how diversified your portfolio is.

For example, if you have $5,000 in stocks and $5,000 in bonds, your portfolio’s asset allocation is 50/50, or 50% stock and 50% bonds.

Asset allocation vs. rebalancing

Asset allocation is closely associated and sometimes used interchangeably with the term “rebalancing”. While they are somewhat the same, rebalancing is an action typically carried out after an initial allocation mix has been enacted.

For example, say you built your portfolio to your desired specifications. But, over time, your mix becomes skewed—if you started with 50/50 stocks to bonds and it’s now 60/40 as you’ve purchased additional stocks, you can consider rebalancing.

Or, make moves (buying additional bonds, selling stocks, etc.) to return to your original allocation mix.

Start building a diversified portfolio with Stash.

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On the other hand, young people with long-term investment plans may be more willing to endure volatility with the goal of realizing major gains some time down the road.

What is Volatility?

Before attempting to understand how volatility is calculated it may be important to understand exactly what volatility is. Simply put, volatility is one tool used by investors to predict the amount of risk in a specific investment.

A high level of volatility means that there have been major swings between an investment’s high points and its low points. On the flip side of that, lower volatility suggests that an investment has been very consistent without large fluctuations in value.

Volatility is not necessarily good or bad. Specific investment plans may be more tolerant to volatility while others may avoid volatility as much as possible.

How is Volatility Calculated?

This is where the numbers get crunched.

Calculating volatility involves using historical data. Of course, no amount of historical data can provide a clear look into the future but past trends are often a good way to predict future behaviors in the investing world.

There are several ways to use the historical data available when calculating volatility. Most investment funds, advisors, and publications will provide the methods they use for calculating volatility. For example, Morningstar has a data definitions page on their website where they clearly outline the volatility calculations they implement.

One of the most common methods used for calculating volatility is standard deviation. The standard deviation can be used to calculate short-term volatility as well as long-term volatility. First, calculate the average price of a stock over the defined period. Then, use the actual price from each period to find that period’s standard deviation (actual price minus the average price).

For short-term calculations, you would look at daily closing prices. Then you will square the deviation for each period, add the results, and divide by the number of periods used for the data. The square root of the final sum is the standard deviation for that frame of time. The higher the standard deviation, the more volatility there is in an investment.

Of course, if that sounds complicated you can always use the STDEVP formula in Excel and let your computer do the work for you.

Volatility is Not Your Only Tool

Understanding volatility is important but it shouldn’t be the only tool used to determine whether an investment is right for your portfolio. Any measurement of data is only as good as the data provided.

We recommend looking at short-term and long-term volatility to get the full picture of what is going on with an investment.

With more information at your disposal, you will be able to make more informed decisions.

The post Crunching Numbers: How is Volatility Calculated? appeared first on Stash Learn.

In the business world, a monopoly is when one company, or group of companies, controls production or sales in an entire market or sector.

Why are monopolies bad for consumers?

When one company controls an entire market or sector, it gets to set prices with little or no competition from other businesses. Robust competition is a vital component of keeping prices affordable for consumers. Competition is also vital for smaller companies to develop and thrive.

Who decides when something is a monopoly?

The FTC and the Department of Justice (DOJ) are the two main agencies that weigh in about potential mergers, and whether they violate antitrust laws. The FTC is a regulatory body that can bring enforcement actions companies and individuals. The DOJ enforces those actions in the federal courts.

Penalties for violating antitrust laws can include millions of dollars in fines, as well as jail time.

Examples of monopolies

There are two primary types of monopolies. The first, called a vertical monopoly, is when companies in different industries combine to control products and services in a single supply chain. The combined companies then own the entire manufacturing and distribution process. For example, a large car company might acquire an auto parts manufacturer, to get pricing benefits. A flour company might acquire the farms producing wheat, and the stores that sell the flour. There’s nothing wrong with such an arrangement, in and of itself. But it could be problematic if the companies involved get large and start edging out competitors.

One of the most famous vertical monopolies was American Telephone & Telegraph (AT&T), also known as the Bell System. The telephone monopoly, which produced the national telephone network and all the products that could be attached to it, was broken up into eight separate companies in 1982.

The second type of monopoly is called a horizontal monopoly, which is when companies in the same industry merge. Two banks might consider combining, for example. Or two energy companies that produce petroleum.  The more roll-ups like this that happen in a single industry, the fewer choices consumers have between products.

Standard Oil, John D. Rockefeller’s oil company, was considered a horizontal monopoly. It was broken up in 1911, into 34 different companies.

Aren’t there laws against monopolies?

The U.S. created strong anti-monopoly laws, sometimes referred to as antitrust laws, starting in the 19th century. There are three primary laws.

The first law, passed in 1890, is called the Sherman Act, which essentially outlaws monopolistic and anti-competitive practices by corporations. Congress soon followed up with the Federal Trade Commission Act, which created the Federal Trade Commission (FTC), and regulates against anticompetitive, deceptive, and unfair business practices.

A further law, called the Clayton Act, deals with anti-competitive pricing and allows trade unions to organize to prevent monopolistic mergers.

The post What’s a Monopoly? It’s All About Competition appeared first on Stash Learn.

Actual liquid can be a useful metaphor for understanding what liquidity is in terms of markets and finance. You can think of an investment, or any financial asset, like it’s an ice cube. If you have an ice cube, then liquidity is the amount of time and effort it takes to melt that ice cube into water. The faster your investment ice cube can turn into cash, the more liquid that investment is. 

So, for an investment like a stock or bond, liquidity is a measurement of how long it takes you to sell it for cash, or liquidate it.

Assets can have varying levels of liquidity. The degree to which various investments, including stocks, are considered liquid assets depends on a few different factors. And markets themselves can also be described as liquid or illiquid. Read on to learn more about liquidity, liquid assets, and market liquidity.

Liquid assets

Assets that can be converted quickly and easily into cash are said to be liquid. In fact, cash itself is considered the most liquid of all assets, because you don’t need to convert it in order to spend it. The money you have sitting in a checking or savings account is very liquid, too, because the funds can be quickly and easily accessed in case of an emergency, or even if you wanted to seize a market opportunity. For example, if your car breaks down and you need money to pay for repairs, cash can be withdrawn from your savings account at a bank or, often, an ATM.

But when it comes to money you’ve invested, you may wonder what counts as a liquid asset. For example, are stocks considered liquid assets? What about bonds and funds? The answer is that they all have varying levels of liquidity. 

Publicly traded stocks are considered liquid assets in most cases, as they may be sold on exchanges nearly instantly for the current share price, and you generally receive the cash within a few days. In other words, it doesn’t take very long to melt the ice when you sell it. Many types of bonds can be relatively liquid as well because they can be sold on the secondary market before they mature. 

Other types of assets that are often considered fairly liquid include mutual funds and exchange-traded funds (ETFs), although they can be less liquid than stocks and bonds. Mutual funds, for example, can only be sold at the close of the trading day, and some of them have rules that restrict your ability to sell them immediately. And while ETFs can be easier to sell quickly, you might take a loss on the value of the investment if you sell in a hurry.

In contrast to liquid assets, some investors put money into illiquid assets, such as real estate or collectibles, which tend to take far more time and effort to convert into cash.

—

Liquid assets

Assets that can be converted quickly into cash are said to be easily liquidated. They’re also commonly called liquid assets, meaning that, again, they can quickly be converted cash.

In fact, cash itself is considered a liquid asset, as is the money you have sitting in a savings account. The idea is that the asset can rapidly be converted and accessed in case of an emergency, or even if you wanted to seize a market opportunity.

For example, if your car breaks down and you need cash to pay for repairs, cash can be withdrawn from your savings account at an ATM, making your savings account, in effect, liquid.

Market liquidity

Markets can also be described as liquid.

In a liquid market, assets are relatively easy to sell. Conversely, in an illiquid market, bid-ask spreads are larger, and selling an asset requires more work. It’s more difficult, in other words, to convert an asset into cash.

Good to know: Often you’ll hear about something called the bid-ask spread –which is the difference between the highest price a buyer is willing to pay for an asset, and the lowest price for which it will sell. The bid-ask spread is small in liquid markets, and high in illiquid markets.

That’s because, in a liquid market, it can be easier to buy and sell assets due to a higher volume of buyers and sellers. More potential buyers translate to the higher level of liquidity for your assets.

The post What Is Liquidity? appeared first on Stash Learn.

What is a tracking error?

A tracking error is a difference between a portfolio’s performance, or return, and the benchmark or index it attempts to track. In essence, it’s the deviation from a portfolio’s desired return.

Let’s say, for example, that you shot an arrow at a target. But you miss–your arrow instead hits a tree 12 feet to the right of the target. In this case, you were off by 12 feet; That would be your “tracking error”.

Continuing with our archery metaphor, if our arrow represents our portfolio or investment, then the target we’re shooting at is the benchmark or index.

Benchmarks and indexes

A benchmark is a standard or point of reference. It’s what you’re using for comparison, in other words, when judging the performance of a portfolio. An index, likewise is a tool that helps you measure or track the market.

Back to the archery range–if the target is our benchmark, then an index would be a tool that helps us aim. Ultimately, we would judge our arrow’s performance based on how far off from the target it landed. The goal, of course, is to get as close as possible. And the closer we are, the better our performance.

The same logic applies to your investment portfolio. The closer you are to your target, or benchmark, the lower your tracking error.

Calculating tracking errors

How do you calculate a tracking error? There are a couple of calculations–with varying degrees of complexity–that you can use.

The simple formula only requires you to take the performance of your portfolio or security and subtract it from the benchmark to find the difference:

T E = Portfolio performance – Benchmark performance

The second, more accurate but vastly more complicated way to calculate the tracking error requires you to find the standard deviation, or, how to spread out points of data are across different periods of time.

To calculate a tracking error using this formula, you’ll need to know the fund’s return (F), the index’s return (I), and the number of time periods, likely quarters, you’re including (N). From there, it’s a matter of plugging in the variables and cranking out the calculation to land at a percentage, the tracking error.

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Buying on the dip essentially means making a purchase of a stock, fund, or some other security after the share price has dropped in value. The drop in price can be caused by some event that affected the company or fund directly, or it can be the result of a drop in the broader stock market.

Numerous stocks and funds lost value in February, for example, when key indexes experienced something called a correction, which happened after they dropped about 10%. Markets soon recovered.

And if you had bought a stock that fell during the winter correction, it’s likely you could have benefitted from rising stock prices in the immediate aftermath.

While buy the dip may seem like a good time to invest, it’s perhaps not as smart a strategy as buying and holding.

Buying the dip vs dollar-cost averaging

Whether it’s ETFs, mutual funds or stocks, buying and holding means you purchase a stock or fund you believe in, and hold on to it for a period of years.

Think of it this way: It’s rarely a good idea to try to time the markets. On average, stocks have returned about 9% over the last 80 years. Going forward, that return is likely to be closer to 5.9%, according to research. By buying and holding, you’re more likely to experience consistent gains over time.

In fact, it could be that you’ll earn just one third as much on your investment by buying on the dips than buying and holding, according to some research. Why? Because you’ll be keeping your investment money in cash for longer periods of time than you might otherwise, waiting for that event when a stock or fund declines in value. During that time, your cash will sit on the sidelines, potentially earning only a small amount of interest in a savings account.

Buying the dips has some other possible problems. It’s hard to know when a stock or the market has reached a bottom, according to some experts, or you might wait too long and buy after a stock has recovered most of its value.

Similarly, you could also be waiting for an extreme event, such as a bear market–when stocks lose 20% of their value or more– for a long time, as they are relatively rare occurrences.

Capitalizing on market drops

That’s not to say buying the dips is always the wrong idea, either.

It might make sense for investors who want to add more stocks to their portfolios, or who think there’s a long way to go with the current bull market, according to some experts.

One strategy to consider is called dollar-cost averaging. That simply means you take a small amount of cash and regularly put it into stocks, bonds or funds on a regular schedule–for example, either bi-weekly or once a month.

By doing that, you not only take the emotion out of investing, but you will sometimes buy on the dips, as well as the market highs. Over time, the highs and the lows should balance each other out.

The post What Does It Mean to “Buy the Dip?” appeared first on Stash Learn.

Commodities are the stuff of life. They’re also one of the building blocks of the economy, and they’re as old as time. They’re things like gold, steel, aluminum, oil and even food. Pork bellies and cattle, live and turned into beef. They’re also the unleaded gas in your car. The corn and sugar in your pantry.

All of these things are commodities. They’re all valuable, and that’s why people invest in them.

What are commodities?

Unlike some of the more esoteric elements of the economy, commodities are rooted in reality. They’re heavy, they fill up pallets, and sometimes they even smell and make noise. They’re more tangible than currency, and they’re certainly more earthy than that flashy new stuff called cryptocurrency. And they’re easier to understand.

Commodities are useful. People were trading in gold and wheat thousands of years ago. Why? Their value is undeniable. Gold is generally considered the safe haven for investment, because everyone has always recognized its value.

How are commodities traded?

Commodities are divided into several categories, including energy, metals, agriculture, meat and consumer goods. Energy includes oil and gasoline, both natural and unleaded. Metals include gold, silver, platinum and copper. Agriculture includes corn, soybeans and wheat. Meat includes hogs and live cattle. Consumer goods include cocoa, coffee, cotton and sugar.

Commodities are divided into several categories, including energy, metals, agriculture, meat and consumer goods.

In the U.S. the two largest commodity exchanges are in New York (of course, think Wall Street) and Chicago (which makes sense, considering the stockyards of “The Jungle,” by Upton Sinclair.) They are called the New York Mercantile Exchange, the NYMEX and the Chicago Mercantile Exchange, CME.

Why do people invest in commodities?

Here’s something else, to keep in mind: Commodities can act as hedge against inflation, according to some experts, since they tend to increase in value as inflation rises.

Inflation can have a negative impact on  other stocks. And as we wrote recently, fears about inflation have sparked some of the current market turmoil. So commodities can potentially work as a stabilizing position in a portfolio when other equities are particularly volatile.

How do people invest in commodities?

There are three primary ways to invest in commodities

You can buy the actual raw product. Cowboys still run cattle drives into Fort Worth, Texas and miners still extract gold from the depths of South Africa. But if you don’t feel like buying a ton of zinc on a pallet and trying to figure out how to unload it, there are other ways.

Some investors put their money in commodity futures. They may try to predict what will happen to the price of bacon a month or two down the road.

Others might invest in exchange-traded funds, also known as ETFs. They’re perhaps the most user-friendly tools for investors, since they act as baskets of commodities (such as pork bellies) which are traded as units on the market.

What are the risks?

Commodities can still be subject to volatility, caused by natural shortages, or even political uncertainty. President Trump and the U.S. Department of Commerce unveiled a blueprint recently that would impose a 24% tariff on all steel imports, and even steeper tariffs of 53% on steel imports from a dozen countries. This could spark fresh price swings in commodities markets.

Explain it to me: What’s a tariff?

Oil is also notoriously volatile, experiencing the worst spikes during its long history in 1979, when the unstable political situation in Iran disrupted the flow of petroleum, followed by an even worse spike in 1980 with the Iran-Iraq war. Oil prices spiked once again to their biggest peak ever in 2008, when hit $100 a barrel for the first time, due to a regional crisis.

Even something as simple as corn can be the plaything of the environment and politics. Remember when biofuels like ethanol were going to change the world? That was also in 2008, when corn prices spiked so dramatically from the ethanol boom that was blamed for driving up food prices in general.

Back in October, the CME Group in October started including the trading of bitcoin futures in its exchange. Is cryptocurrency the new commodity?

Not yet. The thing about commodities is that they’re rooted in the real world. And for investors looking to diversify, they can potentially have a place in your portfolio that can hedge against inflation and rising interest rates.

The post Jargon Hack: What are Commodities? appeared first on Stash Learn.

Economy, Sector, and Industry are sort of like that. These terms are ways to break down the economy into pieces that investors can then analyze and understand.

When it comes to investing and the stock market, a sector refers to a large segment of the economy. Companies within a single sector have a common product or service.

There are 11 different sectors reflected in the U.S. Stock Market:

• Communications services
• Consumer Discretionary
• Consumer Staples
• Energy
• Financials
• Health Care
• Industrials
• Materials
• Technology
• Real Estate
• Utilities

Each sector then contains several industries. An industry is a narrower distinction that represents a specific group of companies. For instance, the materials sector can contain the chemicals and construction materials industries.

By way of example, Johnson & Johnson is part of the health care sector and the pharmaceutical industry, and Chevron is part of the energy sector and the oil & gas industry. One company can also have its feet in multiple sectors and industries.

General Electric, for example, is one company, but it’s in both the energy and industrials sectors.

An entire economy can be broken down into sectors, which, when combined, account for pretty much all the activity of the economy. Certain economies are even known for particularly successful sectors; think Saudi Arabia and energy, China and industrials, and the United States and technology—Apple, Microsoft, and Google ring any bells?

Often people choose to invest in particular sectors and industries in order to diversify their portfolios.

Often people choose to invest in particular sectors and industries in order to diversify their portfolios. Diversification is an investing technique that involves investing across varying sectors, geographies, and asset classes in order to weather the ups and downs of particular investments. Different sectors potentially behave differently in different economic environments.

This can be well illustrated by two sectors that sound similar, but are often behave individually: consumer staples and consumer discretionary. Consumer staples are the things you really need to survive, think food and beverages, household goods, and personal products. The consumer discretionary sector includes industries like retail, hotels and leisure, and clothing and apparel. During hard economic times, the consumer staples sector tends to thrive, as people continue to buy the things they need while cutting back on more discretionary purchases. During economic boom times, the consumer discretionary sector tends to benefit as people spend their extra income on travel, restaurants, and more leisure-oriented purchases.

Mutual funds and exchange-traded funds, or ETFs, often attempt to track indexes, which are groups of companies with something in common.  While some indexes, such as the Dow Jones Industrial Average are broad, others track entire sectors.

With that in mind, well-known exchanges like Nasdaq and the New York Stock Exchange (NYSE) have sector-specific indexes, such as the NASDAQ Telecommunications Index and the NYSE Health Care Index.

Fun Fact: the Dow Jones Industrials Average doesn’t only track industrials, though it used to! It was first calculated in the 1800s and made to represent the industrial sector. Now it tracks some of the largest companies in the United States like 3M, ExxonMobil, and Verizon.

As an investor, it can be important to be broadly diversified across sectors and industries. Putting all your money into one sector means that you will benefit when it is doing well, but you will feel the pangs of loss when that sector has a setback. Though even the most diversified portfolio can suffer losses as all investing involve risk, broad diversification across sectors and geographies can help to guard against loss when a particular sector suffers.

The post What’s a Sector? What’s an Industry? What’s the Difference? appeared first on Stash Learn.

An emerging market refers to a country with a developing economy and growing business infrastructure.

The term is used primarily to describe nations with free markets and expanding global trade, but which may still have some governmental and institutional instability, and areas that are still primarily rural or underdeveloped.

Mexico, India and China are three countries widely referred to as emerging markets, but there are dozens of other examples throughout the world.

What classifies a country’s market?

The answer isn’t exactly concrete. The countries that are considered emerging markets will vary slightly between different analysts or investment firms, and they change over time.

Global stocks on domestic markets

When you invest in an emerging market, you’re purchasing the stocks of businesses located in those countries.

While these stocks are generally traded on local exchanges, investors in the U.S. can often buy them on our own exchanges, through something called an American Depository Receipt, or ADR. It’s traded on a U.S. exchange, but it is essentially a certificate issued by a bank that represents shares of a foreign stock.

Another way to buy them is through an ETF.

Why own emerging market stocks?

The globalized economy has opened many avenues of growth for both businesses and investors. These opportunities are increasingly appearing outside U.S. stock exchanges in emerging markets.

The post Jargon Hack: Emerging Markets appeared first on Stash Learn.

If you’re willing to take the risk of asking for a higher salary, you’re probably weighing the risk of your request with the potential reward. (That’s called risk management.) You might be familiar with risk in your personal or professional life – but what does risk mean for your investments?  

What is investment risk?

Investment risk is the uncertainty of your investment’s future returns. This includes the possibility that your future return may not match the expected return. And this mis-matching of expectation and reality could negatively affect your financial welfare.

In other words, the performance of your investment may not be as successful as you hope. If you invest $100 every month, with the goal of a $7 (7%) return, you run the risk that the return on investment may be lower (or even a negative). But remember! A low expected return in the short term shouldn’t stop you from thinking long term.

Risk and investing in ETFs

Stash investments are categorized by risk level. And when it comes to foundational investments, Stash offers diversified mixes.

Each mix has a certain ratio of stocks to bonds. A greater allocation to stocks generally makes an investment more aggressive, just as a greater allocation to bonds generally makes an investment more conservative. What’s your mix? It’s all about figuring out your own taste for risk.

Risk management: How does it relate to your Stash?

Remember those personal questions we ask you in sign-up about your age and income? We’re not just asking you because we are curious. All of this information helps us diagnose your risk profile. This is based on your financial situation and investing goals.

A risk profile combines the amount of risk you are willing to take and the amount of risk you are able to take, based on those inquisitive sign-up questions. We place investors into a conservative, moderate, or aggressive risk level, and we make available suitable investments to match. 

If you’re risk averse (aka you’re not down for that risky investing business), you may be sorted into a conservative or moderate risk level. It’s also important to note that Stash won’t show you investments that don’t match your risk level.

We take our fiduciary responsibility seriously and want you to invest according to not only your beliefs and goals, but also in a responsible way that keeps the long term in mind.

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Let’s break it down.

Equity is ownership. Debt is a loan. 

Let’s start with equity.

We know equity is ownership. But ownership of what?

In the wonderful world of investing, ownership is most often called stocks or shares. The terms stocks and shares are often used interchangeably. If you own shares, you’re a shareholder (Go you!). And this means that you have ownership interest* in a particular company or industry.

*If “ownership interest” sounds a bit jargon-y, think of it this way: you own a portion of a company, so you’re interested in the growth and prosperity of that company.

If you’re a shareholder, you are investing in the future of a company. As stock values and share prices rise and fall, so do the value of your investments.

Another benefit of stocks is that some equity investments also pay dividends. Dividends are handy payments a company can issue when they generate profit and distribute a bit of that money to each shareholder in proportion to how much they have invested.

Now on to Debt

Debt is a loan. And it is a loan you are giving to a company. As an investor, this happens when you buy ‘debt instruments’ called bonds.

Here’s the Tl;dr, to get us on to the good stuff (aka, what this all means for you as an investor):

Sometimes a company, municipality, or government needs to raise funds, and they ask real people like you and me for money, in the form of issuing bonds. This means that you loan them a set amount of dough, and they agree to pay you back, plus interest, over a set period of time.

For most bonds, payments of interest happen at a predetermined rate and schedule, which is why they are also called fixed income securities. You know how much you’re going to get, and when. And when your bond matures*, you get back your original investment.

*Maturity of a bond does not guarantee any increased maturity of its owner.

Debt and Equity: Compare & Contrast

You now have the basics of debt and equity, know the difference between a stock and a bond, and can hold your own the next time you’re at that family reunion and your annoying hedge-fund-manager-cousin tries to impress the family with all their investing jargon.

But what does all of this mean for your investing future?

Exciting Equity

Equity has built in risk, but also has the potential for growth. In this case, the old adage is often true: The higher the risk, the higher the (potential) reward.

Some Stash investments with higher equity exposure include:

Delicious Dividends: As the name suggest, the companies represented in this fund have a history of showing investors the dividend dollars.

Roll With Buffett: This is the only fund on Stash that is not an ETF. When you Roll with Buffett, you’re investing in Berkshire Hathaway, Warren Buffett’s famously successful holding company.

Global Citizen: If you’d like to diversify your equity portfolio and invest in some companies not based in the United States, this fund represents companies that are almost equally split between the U.S. and beyond.

Dependable (Investment Grade) Debt

Investment grade debt can be pretty darn dependable. This is because when you invest in bonds issued by highly rated corporations and governments, they are keen on servicing their debt, which means making their payments on time.

There are a couple Stash investments with plenty of bond action:

Public Works: Those municipal bonds we mentioned earlier? Here’s where you can find them on Stash! Bonus: muni interest income is exempt from federal taxes.  

Uncle Sam: Here’s the Stash way to invest in treasury debt, which is considered pretty much risk-free.

What’s Your Equity Exposure?

Finally, we here at Stash think you should diversify that portfolio! And this means having some equity and some debt.

When investing, you want to have some exposure to a variety of investments. This can help to minimize your risk, while encouraging potential for growth. Only investing in (investment grade) debt: pretty darn conservative. Entire portfolio of equity: pretty dang risky. So instead, we suggest you find the balance that is right for you.

Another way to think about this is asset allocation. How are your assets invested?

Are you ready for some risk and want to invest more aggressively? Then go for the equity and consider grabbing some Aggressive Mix. Want something dependable with plenty of bonds? Conservative Mix might be your ideal investing cocktail.

Still not sure what you should be investing in? Well, a common adage is that your equity exposure (aka the amount of risk you are taking by investing in equity), should be higher when you’re young, and get lower as you get older and might want to move on to a more conservative investing approach.

When you’re young, and employed, and have decades of time to let that investment sit, you might take a bit more risk, and err more on side of more equity.

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