Overview – Investment Jargon Is Unavoidable
Imagine you’re someone who’s interested in investing, but haven’t committed any serious time to perform any study or training yet. In your quest of familiarizing yourself with how investing works, you come across the following discussions:
- “This stock’s P/E ratio is way too high and its free cash flow is inconsistent, but the payout ratio is alright and the P/B ratio and ROE isn’t too bad. Maybe it’s just a diamond in the rough?”
- “I’m planning to start looking at REITs, but my experience with securities other than equities, bonds, ETFs is limited, plus the balance sheet, income statement, and cash flow statement of a REIT are a bit tricky to understand.”
- “I’m planning to short this stock because of all the volatility that’s going on, but I’m told that may not be the best idea and to go long instead.”
It doesn’t take long to run into these seemingly alien terms, whether it’s in a book, article, or video.
Just like any other specialized field, there’s no shortage of investment jargon that’s used on a regular basis to convey certain bits of information. Given how quickly the investing world changes, it seems like new terms are being created almost every day.
If there are so many specialized investment terms in existence, then how many of them should investors be aware of, and how can investors possibly hope to learn them all?
What’s the Point Behind Using Investment Jargon, Anyways?
Before we start our discussion of how much investment jargon an investor will need to know, let’s first take a step back and answer an even more fundamental question: what’s the point of using jargon in the first place?
Investing, just like any other field, is filled with theories, best practices, established norms, and other intellectual nuances. Some of these nuances are relatively simple to explain, while others are quite complicated.
So, instead of taking the long-winded route of explaining these things in everyday terms, specialized terms are created to get the point across faster.
In the overview, the first hypothetical discussion mentioned the P/E ratio, P/B ratio, and ROE. All these specialized terms exist to talk about very specific things, and as a result, help get the point across as quickly and succinctly as possible. As long as everyone involved in the conversation understands what these terms mean, then the discussion can go a lot smoother and faster.
Without investment jargon, every time a concept is brought up it would have to be explained in layman’s terms. Instead of a discussion that lasts only a few sentences, investors would need to come up with entire speeches just to get their point across.
Imagine how inefficient and tiring it would be to give a full explanation of what the P/E ratio, P/B ratio, and ROE were every time you wanted to talk about them. It’s safe to say that most investors would probably want to rip their hair off after doing this several times.
Thankfully, instead of doing that, we can use certain, specialized terms to talk about major ideas without having to run out of breath every time we do so, all while saving everyone’s time in the process.
Your Investment Jargon Vocabulary Will Naturally Increase Over Time
If investment jargon is important in order to get certain points across in a succinct manner, then how can an investor hope to learn all the terms they’ll one day need to use, let alone keep up with all the new terms being created almost every day?
Assuming an investor takes the time to continuously improve themselves through constant study and training, then they’ll naturally learn more terms as they go along.
So, if you’re just starting your investing journey and you come across jargon you don’t yet understand, don’t lose heart – in time you’ll understand what these terms mean and you will soon use them as naturally as you breathe.
Although an investor can learn a lot by taking the time to expand their theoretical knowledge, it’s important to remember that theoretical knowledge represents just half of the equation – a wealth of knowledge can also be gained through hands-on investment experience.
It’s possible to learn all the investment jargon you need through study, but this is typically a long and arduous process. A faster (and, for some people, more enjoyable) route to learning more terms is to accumulate more experience as an investor.
You’d be surprised how much you’ll learn when you first start out as an active investor and start to gain some real-world investing experience, no matter how much prerequisite study and training you did before making the jump.
This is also a good time to remind investors that their education is a continuous process, and isn’t something that stops after reaching a certain point or milestone. As was mentioned earlier, the investing world changes every day, so in order to stay abreast with all the jargon they may one day use and/or come across, investors are responsible for always improving themselves and expanding their knowledge.
Slack off for too long and an investor may find themselves constantly scratching their heads when they encounter more jargon they’ve never seen before.
Accelerating Your Investment Jargon Education
Although you’ll naturally come across more investment jargon as you go along, there may be situations where you will need to pick up the pace and familiarize yourself with a variety of new terms in a relatively short amount of time.
One such scenario is if you decide to branch out to other forms of investing in the near future.
Say you’ve worked solely with stocks, bonds, and ETFs ever since you started investing. However, over the past few months, you’ve steadily been gaining interest in real estate investing, and have finally decided to start making some real estate investments within the next couple of years, primarily through REITs.
However, because of your prior investment experience, it’s safe to say that your knowledge of real estate investing is quite limited, let alone the jargon you may run into. So, if you want a strong start to your real estate investing, then one of the steps you’ll need to take is to familiarize yourself with the necessary jargon you may encounter.
MLS, FFO, AFFO, Mortage/Lease Financing, Wholesaling: depending on the type of real estate investing you want to do, whether it’s simply buying REITs or buying entire properties, there’s a lot of catching up you’ll need to do in order to be ready on time.
Some investors may want to expand their investment jargon vocabulary simply because they want to. After all, when it comes to investing knowledge is power, and a difference in knowledge between investors may sometimes make all the difference. One of the worst things that can happen is for a major miscommunication to occur between investors because one of them didn’t know the meaning behind certain jargon that was used.
While it certainly doesn’t hurt to go the extra mile, it’s important to remember that you don’t need to know every bit of jargon out there to be an effective investor. At the end of the day, jargon exists to facilitate easier communication between people with similar levels of knowledge.
Learning more investment jargon without taking the time to improve your underlying knowledge base will amount to nothing more than a waste of time.
Jargon Is Useless Without Adequate Knowledge
In any sort of specialized field, jargon helps facilitate more effective and efficient communication between people and parties by distilling large, complex ideas down to just a few words.
Whenever jargon is used, the implicit assumption being made is that everyone involved in the discussion has the knowledge needed to understand what the terms being used mean and how exactly they fit in the context of what’s being discussed.
If two investors are talking about the P/E and P/B ratios, then the assumption being made by both of them is that the other understands that they’re talking about stock price, earnings per share, and book value per share, and how these metrics are connected to one another.
Investors can learn as much investment jargon as they want, but none of that will matter if they lack the knowledge needed to understand the words they are speaking.
The use of jargon is only as effective as the user’s underlying level of knowledge – using terms that you don’t understand the meaning of will only make you look like a buffoon in front of people who actually understand what you’re trying to talk about.
Familiarizing yourself with investment jargon is important, yes, but the first step is developing a strong knowledge base. This is why, as an investor, you first build your investment knowledge, then you learn how to communicate those ideas to other investors.
Remember, the whole point behind using jargon in the first place is to convey certain ideas in a concise manner. There’s no point in learning a bunch of fancy terms if you don’t know what sort of knowledge or insights you want to convey in the first place.
Wrapping Up
Investing, just like any other technical field, comes with its fair share of jargon to help its practitioners convey big ideas with the least words possible. With so many terms in existence, and with many more being coined seemingly every day, how can investors possibly hope to keep up with all this investment jargon?
Assuming they continue to work on themselves and constantly expand their knowledge, then the jargon that investors are aware of will naturally increase. If an investor wants to branch out into different sub-fields of investing, then they’ll need to put in additional work needed to familiarize themselves with the necessary jargon they’ll encounter.
Although familiarizing yourself with more investment jargon is generally beneficial, the implicit expectation is that your level of investment knowledge increases at a commensurate rate as well. You could know all the investment jargon in existence, but that won’t matter if you don’t lack the knowledge needed to understand what they mean, let alone use them in a discussion.
