7 Must Know Concepts to Survive a Finance Dinner Party
Invest for the long run
Everybody wants money today. But a sophisticated investor (and dinner party attendee) realizes that delayed gratification is the key to real wealth accumulation. Overall, long term investing offers access to a broader opportunity set. Long term investors can do anything that short term investors can do, plus more (compounding works to your advantage, for example).
Exchange-traded fund
An exchange-traded fund (which might be referred to at the dinner party as an ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. Owning an ETF is an affordable and practical way to invest.
Alpha
Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index used as a benchmark, since they are often considered to represent the market’s movement as a whole. The excess returns of a fund relative to the return of a benchmark index is the fund’s alpha.
The FX rate
In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, ER, or FX rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency.
Leveraged buyout
Leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
Shorting Stocks
Short selling is the selling of a stock that the seller doesn’t own. More specifically, a short sale is the sale of a security that isn’t owned by the seller, but that is promised to be delivered. When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference.
Pay Yourself First (PYF)
To pay yourself first means simply this: before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your retirement account, 401(k), Roth IRA, or your savings account. The first bill you pay each month should be to yourself.
I want to hear your stories. When’s the last time you went to a dinner party and thought, “I have no idea what these people are talking about!” What did you do?
