Understanding Investment Terms

This is the third in a series of posts from Peloton Wealth Strategists which forms Peloton’s Investment Glossary, intended to help investors understand some of the most common and confusing investment terms. We’ve shared the facts, plus our own perspective on the terms. Our goal is to help you – the investor – become a more knowledgeable consumer of financial services.

H

Hedge Fund: Historically, hedge funds were private partnerships designed to “hedge” or mitigate risk of poor stock market performance. Today, the term is applied widely but generally refers to proprietary investment or trading strategies that seek to outperform the market or another benchmark. Peloton’s take: Not all hedge funds are created equal. Like anything else in investing, appropriate due diligence is a must. See also: Carried Interest.

High Frequency Trading: A trading strategy that relies on logistical communication advantages to exploit very slight security price discrepancies, many times lasting a fraction of a second. Bottom line: High frequency trading not only won’t contribute to market efficiency, but actually tends to increase volatility.

High Yield: A classification of bonds considered riskier by the bond ratings agencies. Bonds rated below BBB- are said to be high yield or “junk” bonds because they generally yield more than safer “investment grade” bonds to compensate investors for the increased risk. Peloton’s take: We use bonds to reduce portfolio risk and to provide reliable, predictable cash flow. We buy only investment grade bonds for clients so we take appropriate risks with the equity portions of portfolios, rather than owning risky bonds. See also: Junk Bonds, Investment Grade.

Hold to Maturity: Each bond is issued with a maturity date, which is the day the issuer will return the par value to the investor. Peloton’s take: Clients that own individual bonds have the certainty of knowing precisely when they get their money back. Having the option to hold to maturity allows us to be very precise with our portfolio cash flow reports. See also: Bonds, Bond Discount, Bond Premium.   

I

Indexes: Indexes such as the Dow Jones Industrial Average and the Barclay’s Aggregate are compilations of stock, bond, and other asset prices, and are used as benchmarks for performance and diversification. Indexes are managed by the sponsoring organization (e.g., Dow Jones or Barclay’s) according to membership weighting. Peloton’s take: Indexes can be helpful for simple comparisons, but are not necessarily suitable for investment themselves (via ETFs and mutual funds).

J

Junk Bonds: Bond rating agencies use certain criteria to determine how likely an issuer is to be able to repay principal and interest. Junk bonds are rated below investment grade, and more speculative. See also: Bonds, Bond Rating, and High Yield.

L

Long vs. Short: Investors are said to “be long” a security if they own it and expect it to increase in price. When securities are sold “short,” the shares are borrowed from a third party (usually a brokerage firm) and sold in the open market. When someone shorts a security, they believe that the price will decline, and that they will be able to buy it back cheaper and return it to the original owner.