Do you ever feel like Wall Street and the financial media are speaking an alien language? They love to use technical terms to describe what are relatively straightforward investing concepts. Problem: The terminology is intimidating and confusing, and that can compromise your investment decisions and cost you money.
That’s why Bottom Line Personal asked top financial advisor Eric Amzalag, CFP, for an investment cheat sheet. Here are four common terms…what they mean in plain English…and how you can use them to be a more effective investor…
What it means: Limit orders are pre-planned instructions you provide to your brokerage firm to optimize your investment returns and ensure that your orders are carried out on favorable terms. When you buy or sell a security, your trade typically is executed right away at the best available price (known as a market order). In a volatile market, however, the last-traded price you see on your computer screen may not necessarily be the exact price you get. That may not matter if you are a long-term investor who plans to hold the stock for many years, but if you want more control of the price at which you buy or sell a security, place a limit order. A buy limit order can be executed only at your requested limit price or lower…and a sell limit order can be executed only at your limit price or higher. Example: A stock is priced at $22 per share, but you want to purchase it at no more than $20 per share. You submit a limit order for that amount and your broker fills it only if and when the price of the stock hits $20 or lower. Conversely, if a stock you own is at $15 per share and you put in a sell limit order for $20, the stock must rise to that level or higher to trigger your sale.
Why a limit order is useful: By allowing you to set a minimum sale price or maximum purchase price, you don’t have to follow a stock’s day-to-day movement to make a trade. It also allows you to wait for the markets to move in your favor before you buy or sell.
Caveats…
You don’t pay any extra fee or commission for a limit order.
You decide how long your limit order stays in effect. A “day” order is valid for only that specific trading day. A “Good-Til-Canceled” (GTC) order remains valid anywhere from 30 to 90 days depending on your broker’s policies or until you cancel it.
What it means: Unrealized gains are a vital consideration when you are deciding how long to hold an investment in your portfolio before taking profits. When you purchase a security, any appreciation in value is known as unrealized capital gains, or paper profits. Unrealized gains are calculated by subtracting the original purchase price from the current market value of the unsold investment. Example: If you bought a stock for $100 and it’s now worth $500, you have $400 in unrealized gains. The value of those gains fluctuates based on market conditions.
Why unrealized gains are useful: If you don’t sell shares of a growing security, they can compound each year, a process by which you earn returns both on your original investment and on the returns that you have received. Example: You own $100,000 worth of a stock in your portfolio. That stock price goes up by 10% in Year One. On paper, your investment has appreciated $10,000 for a total value of $110,000. But if the stock rises another 10% in Year Two, your investment grows $11,000 (10% of $110,000), boosting your total worth to $121,000. Over long periods, this compounding effect time can generate immense wealth even if the annual increase in a security is modest. That’s why legendary investor Warren Buffett described compounding as the “eighth wonder of the world” and envisioned his ideal holding time for a stock as “forever.”
Caveats…
Unrealized gains also play a significant role in your investment strategy because of tax implications. In a taxable brokerage account, you don’t have to pay taxes on your capital gains until you actually sell the security. In other words, you don’t pay taxes on unrealized gains. If you hold a security in a tax-deferred account such as a traditional 401(k) plan or IRA, you don’t pay capital gains when you sell it. Instead, you pay tax at ordinary income tax rates when you take a distribution from the account.
Unrealized capital losses also play a role in your investment decisions. If you decide to sell a security for less than your initial purchase price, you lock in your losses without giving them a chance to recover. But you can use those capital losses to help offset the taxes you owe on capital gains, as well taxes owed on your ordinary income.
What it means: Dividend yield is a quick way to gauge how much cash you can expect to earn for every dollar you have invested in a company’s stock. Conservative investors who need income love stocks that pay dividends, which are cash distributions to shareholders from a company’s profits. Many companies like Eli Lilly, Exxon Mobil and Consolidated Edison have been paying annual dividends for more than a century. Dividend yield is expressed as a simple percentage, calculated by dividing the annual dividend per share by the current share price. Example: If a stock trades at $100 per share and pays an annual cash dividend of $5 per share, its dividend yield is 5%. Unlike the yield you get from a bond, the dividend yield on a stock is not set in stone—it fluctuates either because the company increases or decreases its cash dividend or because the price of the stock shares changes
How dividend yields can be useful: They allow you to assess a company’s health. A company that raises its dividend consistently each year and maintains a stable, high dividend yield has steady growth, predictable profits and strong cash flow. You can find these types of companies in the consumer-staples sector (e.g., selling food, beverages and brand-name household goods) and the utilities sector, which provides basic services such as water, electricity and natural gas.
Caveats…
Don’t rely solely on dividend yield to pick stocks. A very high dividend yield may seem attractive, but it may also indicate that a company is struggling and may have to cut its dividend payouts in the future. Example: The drugstore chain Walgreens Boots Alliance’s recent dividend yield of 9.75%* is the highest of any stock in the S&P 500 index. That’s largely due to its stock price plunging 64% in 2024 as well as uncertain growth potential. In fact, the company’s financials have become so turbulent, that it announced in late January that it was actually suspending its quarterly dividend payments to reallocate cash. Walgreens’ profits from its pharmacy business have shrunk in recent years, and it is facing a US Justice Department lawsuit for exacerbating the opioid drug crisis.
What it means: Intrinsic value is a critical tool for uncovering hidden stock investment opportunities. It’s a measure of how much you think an asset such as a business is really worth. It’s easy to calculate what other investors in the stock market thinks a publicly traded company is worth—just look at its market capitalization. Market cap is the current share price times the total number of outstanding shares. (Outstanding shares are the number of shares owned by shareholders.) Example: Apple was recently selling at around $237 per share. With 15.1 billion outstanding shares, Apple has a market cap of $3.58 trillion. But that value may be inaccurate, especially if it is based on media hype or sentiment. Intrinsic value provides a deeper understanding of a company’s long-term worth based on objective factors such as a company’s cash flow, assets and earnings
Why intrinsic value is useful to know: Comparing intrinsic value to the stock’s current market value helps you determine whether the stock is under- or overvalued and guides your investment decisions. If you decide Apple stock actually is worth $200 per share, that suggests it is about 18% overvalued and you should wait for a pullback to consider buying shares.
Caveats…
Determining a company’s intrinsic value can be tricky and complex because there are no universal standards about how to calculate it. Analysts at investment research companies and brokerage firms often determine the intrinsic values of popular stocks and make the research available to clients. You can find a basic intrinsic-value calculator at Cheddarflow.com/calculators/intrinsic-value-calculator.
*Performance figures through March 3, 2025, and courtesy of Morningstar, Inc.
