Investing Jargon, Explained

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published 30 June 2023

Are you an “accredited investor”? Do you want to buy some “ADRs”? How do you make money on “call options”?

The investment world is rife with technical terms that can have surprisingly negative effects on your ability to build a financial nest egg, says Patrick Heck, a research psychologist for the Consumer Financial Protection Bureau. “Jargon can definitely create barriers to entry,” especially for new investors who are often discouraged by terms they don’t understand, says Heck, who notes he is speaking as a researcher and not for the agency. Jargon can cause problems for more-experienced investors as well, he said. Some investors become overconfident when they think they understand jargon, which can lead to riskier choices, one study shows.

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Some investments are so risky that they are limited to the wealthy, who can presumably withstand losses, or professionals with financial expertise. Among the qualifiers set by the Securities and Exchange Commission to become “accredited”: net worth of at least $1 million — not including your home — or annual income of at least $200,000 ($300,000 for couples) over the past two years and evidence that you’ll earn at least that much in the current year.

A call option contract gives the buyer the right — but not the requirement — to buy (or call) a stock or other financial instrument at a specific price within a specified time frame. For example, if shares of a stock are currently trading at $10, one investor might charge another a small fee for the promise to deliver those shares at, say, $15 apiece sometime in the next, say, six months. The option buyer doesn’t have to purchase the stock if the market price doesn’t top $15 but can turn a quick profit by exercising the call if it does.

Wall Street financial engineers have created financial products whose value is derived from standard investments, such as stocks and bonds. Derivatives are often used to hedge against risk or attempt to outguess the market. They range from futures contracts through which farmers lock in a price for their crops to more-exotic alternatives, such as swaps, used by professional traders to, say, bet on interest rates or currencies.

Investors who set up a margin account at their broker can borrow up to 50% of the cost of their investment. That leverage can create outsize profits, but it can also raise the odds of substantial losses. For example, a trader who bought 100 shares of a $20 stock borrowing 50% of the cost would put down $1,000. If the stock rose to $30 per share, the trader would have made $1,000 (less interest on the margin loan and any commissions). But say the stock falls to $10, leaving a value of just $1,000. You owe that much, plus interest, to the broker so you’ve lost all you put in and more.

This is some fancy terminology for the idea of throwing good money after bad. Psychologists have identified a common and self-destructive pattern in which humans continue to pursue a plan simply because we’ve already put a lot of money or energy into it, even though the prospects of any gain from the investment are poor. A better strategy is to ignore time or money that is already spent and unrecoverable (or sunk) and only move forward if there is a positive outlook for any future investment.

A graph of the interest rates of short-, intermediate- and long-term bonds plotted against their maturities depicts the yield curve. In normal economic times, the line curves up because investors typically demand higher yields for locking up their money for longer periods. When the line flattens or turns down, it means that bond buyers are willing to accept lower long-term rates — which is often an indication of worries about an impending recession.

Kim Clark is a veteran financial journalist who has worked at Fortune, U.S News & World Report and Money magazines. She was part of a team that won a Gerald Loeb award for coverage of elder finances, and she won the Education Writers Association's top magazine investigative prize for exposing insurance agents who used false claims about college financial aid to sell policies. As a Kiplinger Fellow at Ohio State University, she studied delivery of digital news and information. Most recently, she worked as a deputy director of the Education Writers Association, leading the training of higher education journalists around the country. She is also a prize-winning gardener, and in her spare time, picks up litter.