Think Of It Like This: Investing Concepts Simplified

If knowledge is power, investors stand to gain a lot from a clear understanding of complex investing concepts – but some are easier to wrap our minds around than others. Take, for example, shorting. Maybe you grasp what a short is, but what happens when it's “squeezed"? Perhaps you know what SPAC stands for, but how does a SPAC operate, exactly, and how does it impact an investor? Plus, knowing your order types is key to executing your investing decisions without a hitch.

Whether you're a bit hazy or a total loss about these investing concepts, our analogies are here to help deepen your understanding.

THINK OF A SHORT SQUEEZE LIKE THIS…

Every summer, you run a lemonade stand on the boardwalk. Last summer everyone was thirsty for pink lemonade. But fads fade and you expect pink lemonade to soon become passé. Still, to take advantage of today's higher price for pink lemonade (compared to the classic kind), you borrow a few bottles of pink lemonade from your neighbour. You're pretty well stocked, so you decide to sell the borrowed pink lemonade to an owner of a nearby stand who's willing to pay good money to keep up with current demand. You figure you can sell the pink lemonade to that stand owner at a higher price today and just buy it back later at a lower price to return to your neighbour. If all goes as you expect, you get to keep the difference as a tasty profit.

Your plans take an unexpected turn when a lifestyle influencer posts a rave review of pink lemonade on social media. Demand for the pink drink skyrockets along with the price. At a rapidly escalating price, you struggle to buy back the lemonade cheaper than what you sold it for to return it to your neighbor and make a profit. It's not just the lemons feeling the squeeze—it's you!

Learn more in What Is a Short Squeeze?

THINK OF A SPAC LIKE THIS…

The farmer down the road is well-connected and informed. She has a track record of finding ways to increase her yield. She's confident she's going to augment her operation to boost the bottom line within the next two years. How? Will it be new machinery? Or maybe a new breed of livestock? That part is unknown. First thing first: she needs some cash to make it happen. That's where you come in, if you choose to. To make her vision a reality, she's collecting money, but she's not greedy – everyone who buys in gets a piece of any potential gains. With the buying power of many, she plans to acquire the means to, she believes, earn everyone who participates a pretty penny. Should she fail to acquire what she needs within a two-year time frame, everyone gets part or all of their money back. This is a risky proposition as there are many unknowns, including what it is that may ultimately be purchased with your cash (and whether you'll get a fair price for it or not). With all of this in mind, one question remains: Are you in or are you out?

Learn more in What Is a SPAC?

THINK OF MARKET AND LIMIT ORDERS LIKE THIS…

When Selling:

You're a vintage car collector and you've had your eye on a canary yellow Ferrari that is up for auction. You have two choices: You could buy it at the current live auction price, or you could set a maximum amount you are willing to pay for it. If you choose the former, you know the car is yours, and the transaction will likely go through right away — though you may end up paying more than you would have liked. If you choose the latter, it could take some time, or never, before a seller shows up who is willing to part with the car at your set price (or lower).

When Buying:

Selling works much the same way as buying. Let's go back to the canary yellow Ferrari example above. You decide it's time to sell the car from your collection. You have to decide whether to accept the market price, which could be lower than your ideal sale price (but you'd likely sell it right away), or you can hold out and set a minimum amount you're willing to accept for it. A buyer could take it off your hands at your set price (or higher).

Learn more in Market or Limit Order: Which One Should I Choose?