10 Investing Terms People Search For Most

As you increase your investing knowledge, you'll notice certain terms pop up over and over again. This is a good indication that they're important—but their meanings aren't necessarily common knowledge. Below is a list of 10 of the most-searched-for and trending DIY investing terms in Canada and what they mean.

Market cap

Short for market capitalization, market cap refers to the total value of a company's shares, and it's typically calculated by multiplying the organization's outstanding shares with its current share price. Investors often balance their portfolios with a mix of small, mid and large market caps, since each has unique attributes that can contribute to long-term goals.

• Large caps tend to be older companies that pay regular dividends, are generally perceived as more conservative investments, and often form the core of an investor's portfolio. They generally have a market value of over $10 billion.
• Small caps, on the other hand, tend to be younger firms that are experiencing fast growth and might be reinvesting that cash flow to further fund their expansion. They generally have market values of $300 million to $2 billion.
• In the middle are mid-caps, which can potentially be less volatile and risky than their smaller counterparts. They typically have valuations between $2 billion and $10 billion.

Options ("puts" and "calls")

An option is a contract between two parties that gives holders the right—or the "option"—to buy or sell an underlying asset at a certain price within a specific amount of time. An option's value is tied to the underlying asset, which could be stocks, bonds, currency, interest rates, market indices, exchange-traded funds (ETFs) or futures contracts.

There are two main types of options contracts: calls and puts.

• Owning a call gives you the right, but not the obligation, to buy the underlying asset.
• Owning a put gives you the right, but not the obligation, to sell that underlying asset.

Options are appealing because they tend to cost less than the underlying asset but still offer exposure to the price movements of that asset without owning it.

(It's important to fully understand the risks associated with options before you begin trading them in your portfolio. Find out more in our Options Trading Guide.)

P/E ratio

A common concern among investors is whether a stock might be over- or undervalued. One way to figure it out is by looking at the company's price-to-earnings, or P/E, ratio, which evaluates the relationship between its stock price and its earnings.

The most common way to calculate the ratio is called trailing price-to-earnings, where you divide a company's per-share price by its "trailing" per-share earnings. (Trailing refers to the average per-share price for the previous four quarters or 12 months.) For example, a company whose shares are trading at $10 each, and whose average earnings are $2 per share, would have a P/E ratio of 5 ($10/$2=5).

Theoretically, a high P/E ratio means that investors may be anticipating higher growth in the future and are willing to pay more per share. Conversely, a low P/E could hint at a stock being undervalued, or that growth isn't expected. That said, a company's P/E ratio isn't a particularly helpful piece of data without being able to compare it to another P/E ratio; for example, that of other companies in the same industry, or the company's historical P/E ratio.

Short selling

An investment strategy that aims to profit from a falling stock price, short selling is where investors borrow shares from a brokerage and sell them immediately, in the hopes of buying them back later a lower price. If all goes well, the shares are purchased at that lower price, returned to the brokerage, and the investor keeps the difference in price (minus costs, of course).

Of course, all doesn't always go well. If the stock's price rises, an investor would be forced to buy the shares back at a higher price.

Margin calls

Want to purchase some stocks but don't have quite enough money in your account to cover the cost? You can borrow money against the existing investments in your account, using a margin account. You'll pay the interest on the broker's loan, and it holds the security as collateral. Any income or interest earned in your account may be used to help offset the cost of borrowing.

If the stock price drops, you could be faced with a margin call, where the brokerage asks you to put up more cash against the loan. You may need to place a sell order, deposit money or transfer in margin-eligible securities. On the upside, if the stock price rises, your account may have excess margin, which you can use to purchase more stock.

RRIFs

Thinking about your retirement? You'll want to brush up on Registered Retirement Income Funds, or RRIFs, which are registered accounts that provide you with income drawn from the investments and savings in your Registered Retirement Savings Plan, or RRSP. RRIFs are quite similar to RRSPs in that they offer multiple investment options, they allow for tax-deferred growth of investments, and fund withdrawals are treated as taxable income. Unlike RRSPs, however, you can't make new contributions to a RRIF—you can only transfer funds from an RRSP or another RRIF.

You can convert your RRSP (or a portion of it) into a RRIF at any age you wish, but you must transfer all your RRSP funds into a retirement income option by December 31 of the year in which you turn 71. Find out more in A Practical Guide to RRIFs.

Dollar-cost averaging

One way to invest is to take a lump sum of cash and invest it all at once. Dollar-cost averaging is the opposite: It involves investing a set dollar amount on a regular basis, regardless of current market prices. While you'll pay more for some of your shares and less for others, the overall amount you pay per share will average out, and will ideally total less than you would have paid at one set price.

Dollar-cost averaging eliminates the need to predict where the market is going, which is tough for experts, let alone everyday investors. It's also convenient, as it operates on a sort of "set it and forget it" basis. On the other hand, in an upward trending market, your average cost could climb alongside the rising market. Also, if your No. 1 goal is maximizing returns, some past studies suggest that dollar-cost average can, at times, underperform lump-sum investing.

Growth stock and value stock

As you're researching potential investments, you might notice stocks described as growth stocks or value stocks. The type you prefer comes down to personal preference.

• Growth stocks are companies that are expected to grow quickly. They're often new, or in fast-growth industries, and they usually don't pay dividends. Investors expect to profit from share price appreciation.
• In contrast to growth stocks, value stocks refer to shares of a company that appears to trade at a price lower than what its fundamentals might suggest. Not all inexpensive stocks are value stocks, of course — a company's intrinsic, or true, value may indeed be as low as its share price implies.

One quick way to differentiate growth and value stocks is to compare their price/earnings (P/E) ratios, often considered a measure of how over- or undervalued a company's stock is.

Penny stocks

You can't buy much for a penny these days. Plus, who still has pennies at all? So what's up with penny stocks?

Sometimes called sheet stocks or microcaps, penny stocks are stocks that typically trade at $5 or less—sometimes even for fractions of a cent in the case of so-called "triple-zero" stocks. They are generally not listed on traditional exchanges and are not to be confused with sub-$5 securities trading via TSX or NASDAQ, which meet certain disclosure and valuation standards that penny stocks do not.

They can be attractive to some investors because they have the potential to dramatically increase in value—say, if a company makes an exciting product announcement. Of course, the opposite can just as easily happen. Penny stocks' volatility makes them one of the riskier investments out there. They can also be very illiquid, meaning they're difficult to buy and sell when you choose to.

REIT

A REIT (pronounced "reet"), or real estate investment trust, is a type of company that owns or finances income-producing real estate assets using the pooled money of many investors. They can invest in a variety of income-producing properties — including residential and commercial properties — and can also finance properties, sell real estate or generate income from mortgages.

You can buy and sell units of publicly traded REITs in the same way you'd buy and sell stocks, and receive profits similar to dividends, only they are taxed differently. Find out more in What is a REIT?