With the glut of biz mags, investment Web sites and financial news channels, it stands to reason that the general public should be investment literate. A 2003 NASD Investor Literacy Survey found that was only partially true. For example, 79 percent of respondents understood the concept of an equity security, but only 40 percent could predict a “reasonable” rate of return for a diversified stock mutual fund.
We decided to extend this research with a less scientific, though more humorous, poll of our own. We spoke to a group of diverse professionals (an architect from New Hampshire, a political reporter from Boston, an office manager from Maine, a public relations exec from San Francisco and an ad sales manager from New York), all of whom invest, and asked them to define the following 10 terms. Here's a sampling of what they came up with.
Mutual Fund:
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“A collection of stocks managed by someone else. You can buy shares of the funds as opposed to the individual stocks.”
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“A fund in which…I don't know exactly…I just know I have some.”
IPO:
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“An initial public offering. That is when a company goes public and now they are on the stock exchange.”
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“It's an initial public offering. That's when a company wants to go public and they offer their shares and some middle manager firm makes a killing off of it.”
401(k):
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“The retirement program in which the employee makes pretax contributions that are matched (hopefully) by the employer, and you take the money out when you retire.”
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“I know it's a type of retirement fund. At our office we have an IRA, but I'm not sure how to define IRA as different from 401(k).”
Dow Jones Industrial Average:
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“It's made up of the companies that have been determined to be the bedrocks of the American economy, and the number represents the price of their shares.”
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“I don't know what the actual numbers stand for, but it's a number that tells you how the market is doing in general.”
Bond:
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“It's a long-term investment whereby you loan money to the government or another organization and receive interest on it after a certain number of years. I dated a bond salesman.”
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“Yeah, I don't really know how to define bond.”
Stock Split:
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“That's when the share splits, so if you had one share, suddenly you have two shares.”
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“This is when a company decides to split the number of shares outstanding and, therefore, dilute the price of the stock but give shareholders more quantity. Companies usually do this when trying to raise cash.”
Money Market:
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“A type of savings vehicle that is cash-oriented but yields more than a savings account. It's liquid as opposed to having cash tied up in a stock or mutual fund.”
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“I'm not sure exactly what it is exactly, but it pays a higher interest rate than a savings or checking account.”
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“A glorified savings account.”
Basis Point:
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“A hundredth of a percentage point on a loan or mortgage.”
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“The price point at which you purchase a particular stock.”
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“ Sh-t, I knew this one. It has something to do with the stock valuation.”
Hedge Fund:
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“I sort of know what it is on a really nebulous level. My friend's husband used to work for one. I think it's kind of like a fund of funds, meant to be fairly aggressive in its growth.”
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“A type of investment vehicle where there is very high risk. They invest in either futures of companies or companies not publicly traded yet.”
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“I've heard of hedge funds, but I can't remember what they do.”
Internal Rate of Return:
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“I'm guessing this has to do with your personal portfolio and how well your portfolio is doing.”
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“The amount of money that an investment delivers.”
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“I have no idea.”
The take-away? The investing public may know more than they did a decade or two ago, but that might mean they know just enough to be dangerous. They aren't clueless, but advisors shouldn't take their understanding for granted, because even if they think they know what something means, they might be off by a bit — or quite a bit more. Hey, how would you have done on this little quiz?
Writer's BIO: Christie Matheson, a former investment banker, is an editor at Boston magazine.