Glossary of share market terms: How to speak shares

Active

An active investment strategy is when investment teams or individual experts try to beat an index using their knowledge of companies and the share markets. They combine in-depth research, market forecasting and combined years of experience to make decisions. Investors may pay additional fees for their expertise and their frequent trading. Fans of active investing believe they've picked a smart investment management company that’s capable of getting slightly higher results than an index. They also may feel that when the share markets dip, active management may limit the impacts thanks to active decision making by real people, as opposed to passive funds that simply track the market down.

Buy and hold

Buy and hold is a ‘lazy smart’ approach to investing. The definition is in the name; you buy shares and hold (own) them for the long term. A buy and hold strategy gives you the ability to get on with your life while your money works hard for you and potentially benefits from the magic of compounding growth.

Company

A company is a legal entity formed to operate a business (like Hatch). Because companies can be worth a lot of money (think billions), their ownership is broken into shares. When a company goes public, their shares become available for everyday investors to buy and sell through the share markets.

There are two ways to invest in a company through the share markets:

• Choose a company to invest in and buy shares in it. With Hatch, this will give you all the shareholder benefits of direct ownership.
• Invest in an exchange traded fund (ETF) to spread your money across multiple companies (or other investments) at once. This is called instant diversification.

Compounding growth

Often referred to in investing circles as the eighth wonder of the world. Compounding growth is where you earn returns on your returns, aka interest on your interest. This can create a snowball effect, rolling through the years, potentially picking up returns on returns. Learn about compounding growth.

With Hatch, you can become a shareholder in over 4,700 different companies and over 1,200 ETFs.

Day trading

Day trading is the act of buying and selling shares frequently. While some professionals have experience in day trading, the term day trading can also refer to retail investors who buy shares in companies to sell them quickly for what they hope is a profit. The problem is, 99% of them tend to wind up worse off than those who invest for the long term.

Diversification

Diversification means spreading your money over many baskets of investments to limit the impact of any one of them failing. In other words, potentially to lower the risks of investing. You can achieve this through the share markets by buying shares in many companies or an exchange traded fund (ETF) or two.

While the companies listed on the US share markets are usually billion-dollar behemoths, there is always a chance they may fail. But the chances of all of them failing at once may be unlikely. If you haven’t looked into them yet, ETFs can be a way investors can diversify.

Dividends

Profitable companies can decide to share their profits with shareholders and pay them out in a dividend. If you invest in companies that pay dividends, dividends will be paid into your Hatch account in USD, ready to re-invest. Learn more about dividends.

Exchange traded Fund (ETF)

An exchange traded fund (ETF) is a pre-filled basket with a variety of investments in it, such as companies, gold, bonds and property. As with KiwiSaver, your money gets spread across a bunch of investments in a single purchase. Because they deliver diversification, ETFs have been a popular method of investing.

An ETF that follows an index on Hatch is the S&P 500, which is a basket of the 500 largest companies on the US share markets. Investing in one of the S&P 500 ETFs means you spread your money across some of the world’s most recognisable brands. The S&P 500 has returned a historical average of 10% per year.

Index

An index is a categorised list of investment options, like 'the largest 500 companies on the US share markets', or 'the 10 companies with the highest dividends on the NZX'. These lists are created and managed by companies like Standard and Poor's (S&P) and are often used by investment managers as a benchmark to compare their performance.

Index Fund

These are passive funds (including ETFs) that aim to track or mimic an index. Companies like Vanguard and Blackrock have created ETFs that both track the same S&P 500 index.

Market capitalisation (market cap)

A company’s market cap is their total dollar market value or their worth as determined by the share market and investment professionals. A company’s share price and how many outstanding shares dictates their current value: Share price x number of shares = market cap (value of the company).

Nasdaq

The Nasdaq is a US share market that formed in 1971 and has been entirely electronic from day one. Most tech companies, including Apple, Facebook, Microsoft, Amazon, Google, Tesla and NVIDIA, are listed on the Nasdaq.

Like the NYSE, the Nasdaq is a public company (Nasdaq OMX Group, Inc. - NDAQ) that you can buy and sell shares in with Hatch (yep, super meta!).

Hatch gives you access to both the NYSE and Nasdaq, and there’s no difference in how you buy and sell shares in either of them.

NYSE

The New York Stock Exchange (NYSE) dates back to 1792. A common nickname for the NYSE is the Big Board, and ‘big’ may be an understatement. The NYSE is the world’s largest share market, and the total value of the companies listed on it is higher than the Nasdaq, Tokyo and London share markets combined. The story of the NYSE is almost the Westernised story of America, which may make for a lively nighttime read!

It may surprise you to learn that, like the Nasdaq, the NYSE is owned by a public company (Intercontinental Exchange Inc - ICE) that you can buy and sell shares in with Hatch. Yes, you can buy shares in an entire share market through that share market #Meta.

Hatch gives you access to companies listed on the NYSE and Nasdaq, and there’s no difference in how you buy and sell shares in either of them.

Passive

A passive investment strategy means the investment team isn't making active investment decisions to try to beat an index; instead they spend their time replicating an index. Because there's no human expertise involved, passive ETFs usually have lower fees. Fans of passive investing point to evidence that in the long run, it's unusual for an actively managed fund to beat the index, and they prefer the low fees.

Primary market

When a company goes public, they list their shares on the primary market where institutional investors (big dogs like hedge funds, major banks, the mega-wealthy, and since 2021, Hatch) investors can buy them during an IPO period.

After a company goes public, anyone can buy and sell shares through the secondary market, also known as a share market or stock exchange, like the Nasdaq and the NYSE.

Portfolio

A portfolio is a fancy name for all the investments (holdings) you own. Your share portfolio includes all the companies and exchange traded funds (ETFs) that you have money invested in.

Retail investor, or everyday investor

Retail investors are people just like you who are putting their money to work in the share markets.

Up until the invention of the internet, the share markets were the exclusive domain of the financial elite. Advances in technology over the last decade - and really only the past five years - have enabled investing platforms like Hatch to make investing in shares straightforward, accessible and affordable for anyone with internet access.

Between 2019 and 2021, more than 10% of Kiwis started investing shares for the first time. This rise of the retail investor revolution that democratises investing access, gained a fair bit of media interest. Here’s a sample:

• Stuff: What kind of sharemarket investor are you?
• Stuff: What's next for retail investors?
• The Spinoff: Understanding investing series

Returns

A return is the money made on your investments over time. With shares, you can make returns in two ways:

• Selling your shares for a higher share price than you bought them for
• Through dividends.

Through the potential of compounding growth - which works over time - investors who own shares in companies and exchange traded funds (ETFs) for many years or decades may expect to see the amount their investments grow in value over time.

Risk

The word ‘risk’ typically has negative connotations with investing. Risk refers to the chance your investments might fluctuate, that is go up and down in value. Also known as share price volatility, which is the short-term up and down movement based on statistics of prices in the share market. Volatility in the share markets is considered ‘normal’ and is something investors need to manage by understanding their feelings and emotions around risk and volatility. High market volatility may seem scary for investors, but is something to be aware of rather than afraid of.

Savings

Savings are typically money set aside after bills and spending needs are met, which is typically stored in a bank account, ideally to earn interest but with ‘minimal returns’. Savings are considered one of the lowest risk places to store your money. But the low risk may also mean low reward.

Share

A share usually refers to a single unit of ownership in a company or exchange-traded fund (ETF). Think of the total value of a company as a pie, and each share is a slice of that pie.

Because companies often have high price tags (many on the US share markets are valued at over $1 billion), one person rarely owns the whole thing. So they are broken up into shares allowing thousands of investors to have a slice each: Share price x number of shares = value of the company

While some companies are privately held, owned by founders, financial backers and employees, once a company goes public, anyone can buy and sell their shares in the company through the share markets.

Shares are not the same as stocks, even though many people use these terms interchangeably. It doesn’t matter if you confuse the two; the difference is small and has no impact on your ability to invest.

Shareholder

Shareholders are people like you (and some organisations) who own shares in a company or exchange traded fund (ETF). When you’re a shareholder, you’re a part-owner of a company or ETF, meaning you have a shareholding. You can become a shareholder with Hatch, and learn how to grow your investing confidence.

Becoming a shareholder through share ownership may give you the potential to earn money from your investments over a long period of time. But before you decide whether you want to invest your hard-earned money in shares, doing your research and taking our free Getting Started Course may help you understand what it all means

Shareholding, or holding

The total number of shares you own in one company or ETF is referred to as a shareholding or holding. It’s also sometimes referred to as ‘owning stock in a company’. An easy way to remember this word is that when you own shares, you hold onto them, aka shareholding. And someone with a shareholding is known as a shareholder. Your combined shareholdings, which is all the shares you own, is your portfolio.

Shareholder benefits

The main reason people own shares is the potential that as the company grows their share values grow alongside them. If you own shares in a company or ETF that pays their shareholders dividends, you may also receive regular cash payments into your Hatch account as the company shares their profits with their owners.

On top of the bragging rights that come with being a shareholder, you can also hold power. With Hatch, you own your shares directly, which may be important to you. Being a direct owner means you get invited to attend annual shareholder meetings, vote on their future decisions and leadership, and potentially influence how a company you own shares in is run.

Some companies have additional benefits for shareholders - the perks of being an owner.

Share market, or Stock exchange

After a company has gone public through a primary market, their shares are listed on a secondary market, commonly referred to as a share market or stock exchange.

A share market is simply a place where shares in companies and ETFs are bought and sold. While ‘share market’ and ‘stock exchange’ may seem very different terms for the same thing:

1. Share market: A market to buy and sell shares
2. Stock exchange: A place to exchange (buy and sell) shares in stocks

Similar to Trade Me, they are just marketplaces. But instead of buying and selling products and services, everyday investors buy and sell shares in the companies that create them. Since their inception in the early ‘90s exchange traded funds (ETFs) have made it possible for investors to buy a basket of investments in one purchase, providing an alternative to choosing individual stocks for your portfolio.

There are 60 share markets across the world, including the NZX here in New Zealand. The world’s largest and most popular share markets are located in the USA, called the NYSE and the Nasdaq. Many of the brands you see everyday with are likely listed on these US share markets.

Share price

The share price is the price you pay for one share (aka one unit of a company’s stock or ETF). A company’s share price can go up and down depending on many things, from the death of a CEO to a company being the first to fly to space.

To calculate the market cap (or total value) of a company, use this equation:

Share price x number of shares = value of the company

It’s important to note that it’s almost impossible to decide which company is a ‘better’ investment by comparing two companies’ share prices. While it may intuitively feel like the right thing to do, it’s worth learning more about how share prices are calculated.

Stock

Despite how they are used in everyday conversation, a stock is not the same as a share. A stock represents ownership in a company as a whole (‘I own a company’s stock’), whereas a share is a unit of a stock (‘I own five shares in a company’s stock’). Does the difference matter? We don’t think so.

Trade, or order

When you trade shares, it’s a similar process to trading goods and services through sites like Trade Me. A trade is when an investor sells shares to another investor through a share market. The term ‘trading’ has become loaded over the years and can be associated with buying and selling shares at speed (known as day trading). Because Hatch’s aim is to help Kiwi people work towards understanding share markets, you’ll hear us use the word ‘order’ rather than ‘trade’.

With Hatch, you can place four types of orders. Many investors simply stick with market orders, and depending on your own financial goals you may or may not not choose to use all types of orders.

• Market order This is the most straightforward way to buy and sell shares. Market orders are named because just like in a market, you're buying and selling shares in real-time (or when the markets next open).
• Auto-invest Auto-investing can take some of the admin out of building your portfolio. With Hatch, you can auto-invest into as many companies and exchange traded funds (ETFs) as you like. For example, if you want to invest $300 a month every month into the same company or ETFs you can set up an auto-investment. A market order will be placed on your behalf at the frequency you choose, such as ‘the 21st of every month’ or every fortnight, month, quarter, etc.
• Limit order Limit orders can give investors more control over the price shares are bought and sold for, and are primarily used to attempt to buy or sell shares at a better price. You enter the exact number of shares you want and the price you want to buy or sell them for. If the share price doesn’t reach your target price, your order will not be completed and you won’t buy or sell the shares.
• Stop-loss orders and stop-buy orders. Investors use stop-loss orders similarly as they would an insurance policy aiming to try and stop or reduce losses, and to control risk. Stop-loss orders give instructions to sell shares if they drop in value to a certain price, known as the stop price.