When you’re researching a potential career path, you might run into some new industry terms. But what do they mean?
From technical jargon to slang phrases, the vocabulary of the Investment industry can feel like a new language. Understanding these terms will not only help you decide if this field is for you, it will also help you adapt quickly to your new profession if and when you decide to enter the field.
Luckily, this guide is the perfect place to start! Here are 9 basic terms and their definitions to help you build up your industry vocabulary.
Alpha: This measure of an investment’s performance indicates how well a fund is doing compared to a benchmark. The alpha is usually based off the growth of earnings-per-share.
Beta: This is a measure of an investment’s volatility. It provides a sense of how far the fund will fall if the market crashes or how far the fund will climb if the market rises.
Bottom-up investing: This is a business approach that is based on the belief that individual companies can still be promising investments, even if the industry as a whole isn’t performing well.
Expense ratio: This ratio represents the costs of owning a fund or, in other words, the percentage of the fund’s assets that go purely toward the expense of running the fund.
Scenario analysis: This is the process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio’s securities or key factors that would affect security values, such as changes in the interest rate. A scenario analysis commonly focuses on estimating how much a portfolio’s value would decrease if an unfavorable event, or “worst-case scenario,” occurred.
Efficient frontier: The efficient frontier is composed of optimal investments that offer either the highest return at a certain level of risk or the lowest risk at a certain level of expected return.
Laddering: This is the practice of purchasing bond investments that mature at different time intervals. Financial advisors often use this technique to avoid the risk of reinvesting a large portion of assets in an unfavorable financial environment.
Debt ratio: This financial ratio indicates the percentage of a company’s assets that are provided via debt. It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as ‘goodwill’).
Whisper numbers: If a company thinks they’re going to surpass their expected earnings, analysts develop the whisper number as an estimate of what they’ll actually make. It’s called the “whisper” number because companies try to prevent this number from being shared with others so they don’t get their hopes up.