Investment terms - Obviously under construction. Contact us if you have an urgent question. Otherwise, we hope what is already here is helpful!
ACH Transfer - Automatic Clearing House transfers are electronic transfers of money. Once set up, they make transfers of cash very simple. Normally, if a transfer request is submitted before noon on a business day, the money will be in the receiving account on the following business day. Remember, if you make a request for an ACH transfer on a Friday of a long weekend (when a lot of people decide to make last minute financial transactions), and you miss the noon deadline, it could be that your transfer doesn’t go through until Wednesday: you missed the noon deadline, so the transfer is implemented on the next business day, which is Tuesday; then the receiving gets the funds on the business day after that. People
Annuity - See all this text here about annuities? That's because they are confusing and complex. They might be for you, but make sure you take the time to understand. An annuity is an investment product that has a lot of bells and whistles. There are two main classes of annuity: fixed and variable. Basically, you put money into an annuity and then you can't touch it for a while (like seven years or until you reach 59 and a half). The money grows and then when you go to take the money out, several years in the future, you pay income taxes on the amount growth. The basic gist of annuities is that they are investment vehicles with an insurance wrapper. What this means is that you get the benefits of investment (such as growth or income), but the insurance features can eliminate risk (of stock market collapse). Of course, you pay for the the insurance features. Fixed annuities are safe. Variable annuities offer more growth because some of your money would be invested in the stock market. Since annuities can quickly become confusing, it can be helpful into divide your thinking about (especially variable) annuities into buckets: the death benefit (what your beneficiaries get if you die), the living benefit (what type of income stream you could turn your annuity into... there are usually several options), and the cash value (what the amount you invested is worth if you wanted to withdraw it, or take a distribution - i.e., what's left after growth, fees, penalties, etc.).
Bond - A bond issued by a corporation, government or municipality is essentially a loan you (the investor) are making. But, from your perspective as an investor, a bond is something you can put your money into in order to achieve a (hopefully) safe and predictable return (or interest rate). The interest rate you receive for holding a bond varies depending upon two factors: the length of time you have to hold the bond until it comes due (this is called maturity, common maturities are one, five, ten, or twenty years), and whether or not the bond is risky (the quality). Some bonds are very safe investments (like the Treasuries issued by the US government). And some are mostly safe (like those issued by highly rated corporations). And some are risky (like those issued by companies or countries or municipalities with low credit ratings). There are credit rating agencies (such as Moody's and Standard and Poor) that are in the business of evaluating the creditworthiness of bond issuers. Usually these rating agencies do a good job, but they are paid by the issuers whom they rate. Conflict of interest? You betcha! So be careful. Safer is better, but nothing's fool proof.
Average Maturity - Within a bond mutual fund, that is, a mutual fund comprised of bonds, average maturity is just what it sounds like: the average of all of the maturities of bonds within the fund. This measure can give you a sense of interest rate risk and potential income for the fund. A lower average maturity usually means lower interest rate risk, and lower income. But remember, quality of bonds is also a factor in determining fixed income riskiness.
Brokerage Account - This is a standard investment account. Can hold a wide range of types of investments, from conservative (like money markets) to aggressive (like small cap stocks). Can hold individual securities (like individual stocks or bonds) or mutual funds. These accounts can be taxable or tax-advantaged (as in an IRA).
Capitalization - This is a measure of the overall size of a company. Put most simply, a company’s capitalization is derived by taking all of the company’s stock and multiplying it by the stock price.
CD - Certificates of Deposit (CDs) are a lot like a super safe bond issued by a bank (see bond description above). Your investment is insured by the government (FDIC), so CDs are considered quite safe investments. And, because the quality is high, the rate of return you receive is lower than with a bond of the same maturity with a lower quality rating.
Commission - This is the fee a broker earns when he/she sells you a stock or mutual fund. These are almost always negotiable, so you should make sure to ask for the best price he/she can give you. And, ask twice, because they'll probably cave and give you a good deal. Commissions shouldn't drive your broker's decision to buy or sell. So, if you get a suggestion out of the blue from a broker to make a buy or sell decision, they should be able to convince you that it is truly an opportunity that is in your best interest. And, ask for a discount, twice, at least.
Duration (in a mutual fund) - This is a very important measurement when considering a fixed income mutual fund (AKA a bond fund). Duration describes the fund’s potential sensitivity to fluctuations in interest rates. The fund’s duration number, expressed in years, is supposed to equate how much the fund’s price will change in response to a one percent change in interest rates. So, if a fund’s duration is 11 years, then a one percent increase in interest rates should mean the fund’s value (NAV) will drop by 11%. Interest rates and bond prices have an inverse relationship on one another. As interest rates rise, bond funds go down in value. Vice versa if interest rates fall.
Equities - In investing, the term “equities” means exactly the same thing as stocks: stocks = equities. When investing in stocks, you are investing in a part ownership share in the equity of a company.
Expense Ratio - This is the metric for measuring the internal expenses that come embedded within a mutual fund. Basically, in order for a mutual fund to do what it does (see mutual fund description below), it incurs various expenses such as management, marketing, administration, and so on. Since these can be complex and difficult to track, the expense ratio is the measure that evolved so that individual investors can have a way to make apples to apples comparisons between funds. Actively managed funds have higher expense ratios, index funds have low expense ratios. While this metric is important, it should be the only factor used in making a decision about a fund. An "expensive" fund might be in just the right sector or it might have excellent returns. Alternatively, an "inexpensive" fund might be the wrong place to put your money at this time. So you have to consider the expense ratio, along with other things (like long-term fund performance, volatility, income, etc.) in order to decide if a given fund is a good or bad investment idea.
Fixed Income Investments - This is what the investment world uses to refer to securities, or investments, that provide an income stream for investors. Fixed income can refer to corporate bonds, US Treasury bonds, municipal bonds, and CDs. There are other securities that are like bonds and are considered fixed income, but aren’t literally bonds, such as preferred stocks. Sometimes REITs are considered part of a fixed income portfolio. Interest rate fluctuations, and maturities & quality of individual securities, are the variables that determine riskiness of fixed income security.
High Grade Bonds - Rating agencies, such as Moody’s, Fitch, and Standard & Poor, evaluate bonds issued by companies and government entities. They then rate these securities according to their quality. Each agency uses a slightly different rating scale and process, but most people know what is meant by a triple A rated company (or government entity). A triple A rating is supposed to be the standard of excellence, and usually is. But, remember that in 2008 -2010, many companies and agencies with AAA ratings were discovered to have tremendous underlying financial problems. AIG, Freddie Mac, and Fannie Mae were all AAA rated at one point and now are poster children for corporate mismanagement. So, when assessing a bond, ratings are important but must be considered with some cynicism.
Illiquid - Not liquid, as in, an asset that is not easily converted to cash. Like a 10% ownership in your cousin’s pizza shop. Might have some value, but you ain’t never going to be able to sell that for cash... at least not soon.
Investment Time Horizon - The amount of time the investor can leave an investment alone, without disturbing it. It is important to consider this when choosing an investment strategy. Time horizon, plus the investor’s willingness/unwillingness to live with market volatility are key to determining the correct types of investments for an account. Don’t put short-term investments in illiquid vehicles (like annuities) or risky securities (like internet high fliers).
IRA - This stands for "Individual Retirement Account." There are many different types of IRAs: some for small businesses (SEP IRAs or SIMPLE IRAs) and some for individuals (Traditional IRAs and ROTH IRAs). What each of these have in common is that they are accounts that a person can put money from income into, and receive a tax benefit in return. For tax deferred accounts (Traditional IRAs, SEP IRAs, 401Ks, 403bs), money invested is then deducted from the contributor’s income in the current year, so the contributor pays lower taxes in that year. Then, contributions can grow and no taxes are owed on the the gains or income until distributions begin in retirement (indeed there are penalties if a person tries to take money out of a retirement account prior to age 59.5). When distributions occur in retirement, the account owner will have to add the distributions to their income, and pay income taxes on the total amount. ROTH IRAs are different in that contributions are made with after tax dollars, so there is no tax break in the year of the contribution. And, no taxes are owed when the account owner goes to take distributions in retirement. In summary, for a Traditional IRA, taxes are deferred until retirement. For a ROTH IRA, distributions in retirement are tax free.
Junk Bonds - These are low-grade fixed income investments. The rating agencies (see high grade definition above) assign a low rating to bonds from companies or agencies that are experiencing financial trouble. Since the term “junk bonds” has such a negative ring to it, Wall Street came up with the euphemism “high yield” to use instead. Junk bonds are called high yield bonds. These bonds need to offer a higher yield in order to entice investors to take on the higher level of risk. But, there can be a place for high yield/junk bonds in a fixed income portfolio. A small portion of high yield bonds provide a little extra income to an otherwise conservative portfolio. And, high yield means higher risk, but not definite risk. So adding this to a portfolio is a step that can be taken, but only with careful planning and expectations.
Liquidity - This refers to how easy it is to turn an investment into cash. Think spectrum. Some things that are really easy to turn into cash (like, well, cash) are highly liquid investments. Stocks and bonds and mutual funds are very liquid too, not quite as liquid as cash, but close. Just one call to your (super honest, open-minded, and attentive) broker and your holdings are turned into cash... for a small commission. Other assets are not liquid, or are less liquid. Real estate or part ownership in your brother's pizza shop are very illiquid assets. If you need cash tomorrow, try selling that 10% share of your brother's business, or that condo that's been on the market for almost a year.
Money Market Funds - These are technically mutual funds that contain highly liquid and safe investments. Money market funds comprise the cash portion of a brokerage account’s asset allocation. They are comprised of very short-term “near cash” investments, such as short-term CDs or bank notes. Typically, any cash that is uninvested in an investor’s brokerage account is automatically swept into money market funds. They provide a safe place to park cash for a time, and a low rate of return. In 2009, even money market funds showed that during a collapse, nothing is completely safe. There were some money market funds that famously had to receive contributions from their parent companies to keep from “breaking the buck” or going negative. This had been unimaginable a few months prior.
Mutual Fund - This is an investment that you can put money into if you want an easy way to diversify your investment. Basically, if you have say $1000 to invest, it might be hard for you to diversify that investment... it'd be difficult to buy shares in 100 different companies with your one grand. Mutual funds do this for you. They take your one thousand dollars and pool it with many other investors, then with that larger pool of cash, they invest into a diversified portfolio. There are many types of mutual funds, from aggressive to conservative, from cheap index funds (which are only supposed to mirror the performance of a certain index, like the S&P 500) to actively managed funds (which, for a fee, employ supposedly smart people to make active trades in the fund in an effort to provide performance that is better than an index). Which fund is for you is a matter of preference and depends upon things like your age, how much risk you want, how sensitive you are to volatility and fees, etc.
Retirement Plan - There are many different types of retirement plans, but in essence, a retirement plan is something your employer has put in place that you can use to save for retirement. Different types include the 401(k), 403(b), pension plans, and so on. They typically have a lot of rules and guidelines, laid out by the government to protect participants (you) from employers that might seek sneaky ways to stash away money without paying taxes (not that that would ever happen). For participants (employees), these plans are generally a good thing. If you sign up to participate, and you should, your contributions are normally taken about of your paycheck and sent directly to your account at the plan. Also, you are sometimes given a match, which means that your employer puts away a certain amount into your account on your behalf (it's like getting a bonus: if you put away money - they put away some too). Retirement plans are an effective way to make sure you're saving money for your future. And if you ever leave your job, your retirement plan account is still yours. You can roll it into an IRA or transfer it into the plan of your next employer. There are a few more wrinkles and bells and whistles about retirement plans, but for now, that about explains them.
Sales Load - The term used to describe an expense charged to you when you buy certain mutual funds. There are many different share classes of mutual funds, and so there are many different sales loads. The term "sales load" sounds pretty negative, right? And sometimes, you might really be better off not using a fund that charges a sales load. But, this isn't the only criterion you should use in assessing a fund. If the fund is an excellent performer, seems it will do just what you need in a fund, has a long track record, and so on, it might be worth the fee to buy into it. Or it might not. Do some homework, make a decision based on several factors. Don't just look at this one factor. Index funds do not have sales loads, so are appealing to many people because they are cheaper. Generally, for large cap equity funds, you'd be better off with an index fund because few managers in this style can beat their index over a long period of time. But, with other styles on investing (foreign, small cap, high yield, etc.), active fund managers can often beat their index. So, maybe the best thing is to use a blend of index and active funds.
Stock - A stock is a part ownership in a company. Every company has a certain monetary value (or, each company is worth a certain amount of money). Say you figured out the value of a company. Divide this value into a number of equal parts (say a thousand parts, or a million). Then these parts, called "shares," can be sold to investors. Each investor becomes part owner of the company, according to the number of shares they bought. The company can use the proceeds from selling those shares to fund their business operations. Private companies sell shares to a small circle of investors. Public companies sell shares on open markets, called exchanges (such as the New York Stock Exchange or NASDAQ, there are many exchanges in the US and abroad). Once the company has sold (or "issued") shares to the public via an exchange, the shares are then traded among people based on whether an investor wants to hold or sell their shares. After a public company originally issues its shares on an exchange and has received proceeds from that action (call an offering, like an IPO), it doesn't receive any additional money when one investor sells its shares to another.
Annuity - See all this text here about annuities? That's because they are confusing and complex. They might be for you, but make sure you take the time to understand. An annuity is an investment product that has a lot of bells and whistles. There are two main classes of annuity: fixed and variable. Basically, you put money into an annuity and then you can't touch it for a while (like seven years or until you reach 59 and a half). The money grows and then when you go to take the money out, several years in the future, you pay income taxes on the amount growth. The basic gist of annuities is that they are investment vehicles with an insurance wrapper. What this means is that you get the benefits of investment (such as growth or income), but the insurance features can eliminate risk (of stock market collapse). Of course, you pay for the the insurance features. Fixed annuities are safe. Variable annuities offer more growth because some of your money would be invested in the stock market. Since annuities can quickly become confusing, it can be helpful into divide your thinking about (especially variable) annuities into buckets: the death benefit (what your beneficiaries get if you die), the living benefit (what type of income stream you could turn your annuity into... there are usually several options), and the cash value (what the amount you invested is worth if you wanted to withdraw it, or take a distribution - i.e., what's left after growth, fees, penalties, etc.).
Bond - A bond issued by a corporation, government or municipality is essentially a loan you (the investor) are making. But, from your perspective as an investor, a bond is something you can put your money into in order to achieve a (hopefully) safe and predictable return (or interest rate). The interest rate you receive for holding a bond varies depending upon two factors: the length of time you have to hold the bond until it comes due (this is called maturity, common maturities are one, five, ten, or twenty years), and whether or not the bond is risky (the quality). Some bonds are very safe investments (like the Treasuries issued by the US government). And some are mostly safe (like those issued by highly rated corporations). And some are risky (like those issued by companies or countries or municipalities with low credit ratings). There are credit rating agencies (such as Moody's and Standard and Poor) that are in the business of evaluating the creditworthiness of bond issuers. Usually these rating agencies do a good job, but they are paid by the issuers whom they rate. Conflict of interest? You betcha! So be careful. Safer is better, but nothing's fool proof.
Average Maturity - Within a bond mutual fund, that is, a mutual fund comprised of bonds, average maturity is just what it sounds like: the average of all of the maturities of bonds within the fund. This measure can give you a sense of interest rate risk and potential income for the fund. A lower average maturity usually means lower interest rate risk, and lower income. But remember, quality of bonds is also a factor in determining fixed income riskiness.
Brokerage Account - This is a standard investment account. Can hold a wide range of types of investments, from conservative (like money markets) to aggressive (like small cap stocks). Can hold individual securities (like individual stocks or bonds) or mutual funds. These accounts can be taxable or tax-advantaged (as in an IRA).
Capitalization - This is a measure of the overall size of a company. Put most simply, a company’s capitalization is derived by taking all of the company’s stock and multiplying it by the stock price.
CD - Certificates of Deposit (CDs) are a lot like a super safe bond issued by a bank (see bond description above). Your investment is insured by the government (FDIC), so CDs are considered quite safe investments. And, because the quality is high, the rate of return you receive is lower than with a bond of the same maturity with a lower quality rating.
Commission - This is the fee a broker earns when he/she sells you a stock or mutual fund. These are almost always negotiable, so you should make sure to ask for the best price he/she can give you. And, ask twice, because they'll probably cave and give you a good deal. Commissions shouldn't drive your broker's decision to buy or sell. So, if you get a suggestion out of the blue from a broker to make a buy or sell decision, they should be able to convince you that it is truly an opportunity that is in your best interest. And, ask for a discount, twice, at least.
Duration (in a mutual fund) - This is a very important measurement when considering a fixed income mutual fund (AKA a bond fund). Duration describes the fund’s potential sensitivity to fluctuations in interest rates. The fund’s duration number, expressed in years, is supposed to equate how much the fund’s price will change in response to a one percent change in interest rates. So, if a fund’s duration is 11 years, then a one percent increase in interest rates should mean the fund’s value (NAV) will drop by 11%. Interest rates and bond prices have an inverse relationship on one another. As interest rates rise, bond funds go down in value. Vice versa if interest rates fall.
Equities - In investing, the term “equities” means exactly the same thing as stocks: stocks = equities. When investing in stocks, you are investing in a part ownership share in the equity of a company.
Expense Ratio - This is the metric for measuring the internal expenses that come embedded within a mutual fund. Basically, in order for a mutual fund to do what it does (see mutual fund description below), it incurs various expenses such as management, marketing, administration, and so on. Since these can be complex and difficult to track, the expense ratio is the measure that evolved so that individual investors can have a way to make apples to apples comparisons between funds. Actively managed funds have higher expense ratios, index funds have low expense ratios. While this metric is important, it should be the only factor used in making a decision about a fund. An "expensive" fund might be in just the right sector or it might have excellent returns. Alternatively, an "inexpensive" fund might be the wrong place to put your money at this time. So you have to consider the expense ratio, along with other things (like long-term fund performance, volatility, income, etc.) in order to decide if a given fund is a good or bad investment idea.
Fixed Income Investments - This is what the investment world uses to refer to securities, or investments, that provide an income stream for investors. Fixed income can refer to corporate bonds, US Treasury bonds, municipal bonds, and CDs. There are other securities that are like bonds and are considered fixed income, but aren’t literally bonds, such as preferred stocks. Sometimes REITs are considered part of a fixed income portfolio. Interest rate fluctuations, and maturities & quality of individual securities, are the variables that determine riskiness of fixed income security.
High Grade Bonds - Rating agencies, such as Moody’s, Fitch, and Standard & Poor, evaluate bonds issued by companies and government entities. They then rate these securities according to their quality. Each agency uses a slightly different rating scale and process, but most people know what is meant by a triple A rated company (or government entity). A triple A rating is supposed to be the standard of excellence, and usually is. But, remember that in 2008 -2010, many companies and agencies with AAA ratings were discovered to have tremendous underlying financial problems. AIG, Freddie Mac, and Fannie Mae were all AAA rated at one point and now are poster children for corporate mismanagement. So, when assessing a bond, ratings are important but must be considered with some cynicism.
Illiquid - Not liquid, as in, an asset that is not easily converted to cash. Like a 10% ownership in your cousin’s pizza shop. Might have some value, but you ain’t never going to be able to sell that for cash... at least not soon.
Investment Time Horizon - The amount of time the investor can leave an investment alone, without disturbing it. It is important to consider this when choosing an investment strategy. Time horizon, plus the investor’s willingness/unwillingness to live with market volatility are key to determining the correct types of investments for an account. Don’t put short-term investments in illiquid vehicles (like annuities) or risky securities (like internet high fliers).
IRA - This stands for "Individual Retirement Account." There are many different types of IRAs: some for small businesses (SEP IRAs or SIMPLE IRAs) and some for individuals (Traditional IRAs and ROTH IRAs). What each of these have in common is that they are accounts that a person can put money from income into, and receive a tax benefit in return. For tax deferred accounts (Traditional IRAs, SEP IRAs, 401Ks, 403bs), money invested is then deducted from the contributor’s income in the current year, so the contributor pays lower taxes in that year. Then, contributions can grow and no taxes are owed on the the gains or income until distributions begin in retirement (indeed there are penalties if a person tries to take money out of a retirement account prior to age 59.5). When distributions occur in retirement, the account owner will have to add the distributions to their income, and pay income taxes on the total amount. ROTH IRAs are different in that contributions are made with after tax dollars, so there is no tax break in the year of the contribution. And, no taxes are owed when the account owner goes to take distributions in retirement. In summary, for a Traditional IRA, taxes are deferred until retirement. For a ROTH IRA, distributions in retirement are tax free.
Junk Bonds - These are low-grade fixed income investments. The rating agencies (see high grade definition above) assign a low rating to bonds from companies or agencies that are experiencing financial trouble. Since the term “junk bonds” has such a negative ring to it, Wall Street came up with the euphemism “high yield” to use instead. Junk bonds are called high yield bonds. These bonds need to offer a higher yield in order to entice investors to take on the higher level of risk. But, there can be a place for high yield/junk bonds in a fixed income portfolio. A small portion of high yield bonds provide a little extra income to an otherwise conservative portfolio. And, high yield means higher risk, but not definite risk. So adding this to a portfolio is a step that can be taken, but only with careful planning and expectations.
Liquidity - This refers to how easy it is to turn an investment into cash. Think spectrum. Some things that are really easy to turn into cash (like, well, cash) are highly liquid investments. Stocks and bonds and mutual funds are very liquid too, not quite as liquid as cash, but close. Just one call to your (super honest, open-minded, and attentive) broker and your holdings are turned into cash... for a small commission. Other assets are not liquid, or are less liquid. Real estate or part ownership in your brother's pizza shop are very illiquid assets. If you need cash tomorrow, try selling that 10% share of your brother's business, or that condo that's been on the market for almost a year.
Money Market Funds - These are technically mutual funds that contain highly liquid and safe investments. Money market funds comprise the cash portion of a brokerage account’s asset allocation. They are comprised of very short-term “near cash” investments, such as short-term CDs or bank notes. Typically, any cash that is uninvested in an investor’s brokerage account is automatically swept into money market funds. They provide a safe place to park cash for a time, and a low rate of return. In 2009, even money market funds showed that during a collapse, nothing is completely safe. There were some money market funds that famously had to receive contributions from their parent companies to keep from “breaking the buck” or going negative. This had been unimaginable a few months prior.
Mutual Fund - This is an investment that you can put money into if you want an easy way to diversify your investment. Basically, if you have say $1000 to invest, it might be hard for you to diversify that investment... it'd be difficult to buy shares in 100 different companies with your one grand. Mutual funds do this for you. They take your one thousand dollars and pool it with many other investors, then with that larger pool of cash, they invest into a diversified portfolio. There are many types of mutual funds, from aggressive to conservative, from cheap index funds (which are only supposed to mirror the performance of a certain index, like the S&P 500) to actively managed funds (which, for a fee, employ supposedly smart people to make active trades in the fund in an effort to provide performance that is better than an index). Which fund is for you is a matter of preference and depends upon things like your age, how much risk you want, how sensitive you are to volatility and fees, etc.
Retirement Plan - There are many different types of retirement plans, but in essence, a retirement plan is something your employer has put in place that you can use to save for retirement. Different types include the 401(k), 403(b), pension plans, and so on. They typically have a lot of rules and guidelines, laid out by the government to protect participants (you) from employers that might seek sneaky ways to stash away money without paying taxes (not that that would ever happen). For participants (employees), these plans are generally a good thing. If you sign up to participate, and you should, your contributions are normally taken about of your paycheck and sent directly to your account at the plan. Also, you are sometimes given a match, which means that your employer puts away a certain amount into your account on your behalf (it's like getting a bonus: if you put away money - they put away some too). Retirement plans are an effective way to make sure you're saving money for your future. And if you ever leave your job, your retirement plan account is still yours. You can roll it into an IRA or transfer it into the plan of your next employer. There are a few more wrinkles and bells and whistles about retirement plans, but for now, that about explains them.
Sales Load - The term used to describe an expense charged to you when you buy certain mutual funds. There are many different share classes of mutual funds, and so there are many different sales loads. The term "sales load" sounds pretty negative, right? And sometimes, you might really be better off not using a fund that charges a sales load. But, this isn't the only criterion you should use in assessing a fund. If the fund is an excellent performer, seems it will do just what you need in a fund, has a long track record, and so on, it might be worth the fee to buy into it. Or it might not. Do some homework, make a decision based on several factors. Don't just look at this one factor. Index funds do not have sales loads, so are appealing to many people because they are cheaper. Generally, for large cap equity funds, you'd be better off with an index fund because few managers in this style can beat their index over a long period of time. But, with other styles on investing (foreign, small cap, high yield, etc.), active fund managers can often beat their index. So, maybe the best thing is to use a blend of index and active funds.
Stock - A stock is a part ownership in a company. Every company has a certain monetary value (or, each company is worth a certain amount of money). Say you figured out the value of a company. Divide this value into a number of equal parts (say a thousand parts, or a million). Then these parts, called "shares," can be sold to investors. Each investor becomes part owner of the company, according to the number of shares they bought. The company can use the proceeds from selling those shares to fund their business operations. Private companies sell shares to a small circle of investors. Public companies sell shares on open markets, called exchanges (such as the New York Stock Exchange or NASDAQ, there are many exchanges in the US and abroad). Once the company has sold (or "issued") shares to the public via an exchange, the shares are then traded among people based on whether an investor wants to hold or sell their shares. After a public company originally issues its shares on an exchange and has received proceeds from that action (call an offering, like an IPO), it doesn't receive any additional money when one investor sells its shares to another.
