Financial savvy starts with knowing the lingo

Part of being a good investor means knowing what you’re talking or reading about. Here’s a mini-glossary that can help you be more financially literate.

•Derivative: A financial contract whose value is “derived” from an another security, such as stocks, bonds, commodities or a market index such as the S&P 500. Common types of derivatives include options, futures and mortgage-backed securities.

•Discount broker: A brokerage that executes orders to buy and sell securities at commission rates lower than those of full-service brokerages. Discount brokers are favored by Fools. Learn more at www.broker.fool.com.

•Emerging markets fund: A mutual fund that invests in countries with developing economies, such as those in Latin America and Asia (excluding Japan). Emerging markets funds tend to be quite volatile, due to political and economic instability in their underlying companies.

•Fiscal year: An organization’s 12-month accounting period that doesn’t necessarily coincide with the standard calendar year. It is designated by the calendar year in which it ends, so “FY 2008” might refer to a year from April 1, 2007, through March 31, 2008. Retailers, for example, often sport fiscal years ending after the holiday season ends, so that those sales can be incorporated in year-end results.

•Investment grade: A classification of a bond whose credit quality is considered by independent bond-rating agencies to be among the most secure. A rating of Baa or higher by Moody’s Investors Service or a rating of BBB or higher by Standard & Poor’s is considered investment grade.

•Same-store sales: Also called comparable-store sales (or simply “comps”), same-store sales measure the percentage of change in revenues for all stores in a retail chain that have been open more than one year. This permits investors to see ongoing growth within stores instead of growth fueled partly by the existence of new stores.

•Volatility: The degree of movement in the price of a stock or other security.

•Volume: The amount (expressed in shares or dollars) of a security that is traded during a specified period.

Learn more at www.fool.com/school/Glossary/glossary.htm and www.investopedia.com/dictionary.

Ask the Fool

Q: I’ve got some stinkers in my stock portfolio, but I’m waiting for them to recover before I sell so that I can get back some of my lost money. Is this a reasonable strategy? — S.S., Vail, Colo.

A: Not really. Imagine that your shares of Alphabet Soup Co. (ticker: ABCDE) are underwater by $1,000 and that you’ve looked at a bunch of companies recently and think that five of them have good potential to appreciate. If you sell your Alphabet Soup shares for a loss and move what’s left into one of those five companies, you’re more likely to earn that $1,000 back — and more. Why try to earn a certain amount in a stock you’ve lost faith in when you can more reliably earn that same amount or more somewhere else? Keep your money invested in your best ideas.

Still, hanging on to a stinker can be smart if the company merely hit a temporary snag and your research suggests that it still has strong prospects.

My dumbest investment

About four years ago, my cousin, a financial planner, recommended a nice little stock. He said it usually goes down to about $3 per share, then goes up to $5 or so, and then back down. I bought 1,000 shares at $3.14. When it went up to $12, I looked at it again, and it started to go down, so I sold it. The little retail stock, Bon-Ton Stores, reached a 52-week high, about a month ago, of $52! The lesson: If you invest and have made quite a nice return, don’t be so quick to sell when the stock drops 10 percent. Had I held on, my $3,000 investment would have been long term, and I would have made $49,000! — A.R., Kansas City, Mo.

The Fool Responds: You’re right — it’s often smart to hang on to solid companies when they temporarily dip. But it’s hard to know what will turn out to be temporary without doing some research when it starts falling. One strategy is to sell part of your position and lock in some profit after a significant gain.