Investment terminology can be confusing, but perhaps this index of “differences” can help you sort through the opportunities….
Sometimes, in considering an investment, we ask “How much does it pay?” without realizing there are different ways of answering that question. Nominal yield refers to the interest rate actually printed on a bond certificate, stated as a percentage of the face value of that bond. That nominal yield doesn’t change. However, since the price of the bond fluctuates throughout its life, at any one point you would use the current yield to measure the interest payment against the then-current value of the bond. The equivalent on stocks is dividend yield, which is measured in terms of the current price of the stock.
The par value of an investment (also known as face value)refers to the dollar value of a bond or CD on two dates: the day the security is issued and the day it reaches full maturity. The market value, by contrast, fluctuates constantly, affected by interest rate movements and by supply-and-demand factors. An investor who is purchasing a security at any point between issue and maturity might be paying a premium over par value or perhaps buying at a discount from the face value.
The coupon refers to the stated interest rate on a bond or CD, and interest-bearing securities usually pay out that interest semi-annually. The one exception is zero-coupon bonds, which are issued at a discount to their maturity value. No interest is paid out until maturity, at which time the bond reaches its par or face value.
Professional analysts, in judging the future prospects of any stock, use one of two systems: Fundamental analysis looks at specific factors with a company, including the experience of the management team, the debt structure, the company’s products and services compared to those of its competitors, and potential legal liabilities specific to that business. Technical analysis, on the other hand, employs charts to track the price trends for that stock, within both its own industry and in the economy as a whole, in order to make judgments about the prospects for that company.
Investments can be better understood by categorizing them as either debt or equity. Debt securities are “loaner” investments, where the investor is essentially lending capital to some entity (a government or governmental agency or a corporation), in exchange for interest payments. Equity securities consist of ownership, and investors are hoping for growth in the value of their ownership share. Hybrid securities
have some of the characteristics of both debt and equity.
MONEY MANAGEMENT APPROACHES
Money managers tend to make portfolio selections based on either a growth or a value approach.
Growth managers have their eye firmly on the future. They are interested in a company’s new products, new markets, recent or anticipated acquisitions of other companies—any factors that would appear to lead to higher earnings in the future. Value managers study the past, looking for stocks whose prices are now below their historical highs, but whose real value has yet to be recognized by investors today. Price is an important consideration to value managers, who are looking to add stocks that are “on sale.”
The money management approach at Sheaff Brock is value-oriented while attempting to avoid undue risk. Yet the company isn’t afraid of volatility as an approach to get returns, which can be a different concept than what is offered by most traditional money managers.
You might say that investment terminology is all about telling the difference.