Welcome to the Get Rich Brothers Financial Freedom Dictionary!
One of the great things about language is that it allows us to communicate complex information to one another effectively. One of the downsides is that this can often lead to confusion if both parties understand a term in different ways.
This Financial Freedom Dictionary should, we hope, help alleviate any misperceptions that may exist out there about personal finance from a dividend growth investor’s point of view.
Beware: The definitions here are largely made up by us. This is what we mean when we use these terms. Also, this is a work in progress, so expect updates and such. Dictionaries are never complete.
We hope you enjoy!
A
Asset: Anything that makes you money.
For instance, a dividend paying stock would qualify as an asset because it returns cash flow to the investor.
B
Buyback: Companies are able to buy back their own shares to reduce the outstanding number of shares available. This has the effect of increasing the Earnings Per Share (EPS) of the company and also helps offset dilution caused by issuing stock options (typically to company executives).
Buybacks are one method of returning value to shareholders as they ultimately make each remaining share worth more on a per-share basis. This is a less direct method of rewarding shareholders than, say, paying a dividend.
C
D
Dividend: A portion of the earnings of a company which is sent to shareholders. A dividend is the shareholder’s reward for investing in a given company. Not all companies pay dividends, though those of the highest quality typically do.
A rising stream of dividends over the years is one indication of strong financial strength for a company.
E
Early Retirement: The state achieved by terminating regular employment prior to the typical retirement age. In Canada and the United States, retirement typically takes place in the early-to-mid 60s. Anything earlier than 55 can reasonably be deemed early retirement.
Exchange:
Extreme Early Retirement: The state achieved by terminating regular employment much earlier than the typical retirement age. Any age earlier than 40 can reasonably be deemed extreme early retirement.
F
Financial Freedom/Independence: The state achieved once passive income exceeds expenses.
For instance, someone who earns $35,000 annually from dividends and has $32,500 in annual expenses would be considered financially free/independent. Conversely, an individual earning $100,000 from their day job with very little passive income and $101,000 in annual expenses is a modern day slave.
FIRE: Financial Independence, Retire Early – This is a lifestyle/movement characterized by frugality and a desire to escape the rat race as quickly as possible. Many adherents follow extreme strategies to minimize their expenses so they can leave the workforce as soon as possible and live life entirely on their own terms.
G
H
I
Investor: An optimistic individual who believes the future will be better than the present. An investor takes risks with the understanding that if they get it right, they can unlock value for their future selves to benefit from.
J
K
L
Liability: Anything that costs you money.
For instance, a home is typically a liability because it costs money each month to maintain it; mortgage payments, taxes, heating, etc., all take money out of the homeowner’s pocket.
Lifestyle Inflation: When someone begins receiving a higher amount of income and then suddenly begins spending more rather than investing the proceeds. The most common example is when someone gets a pay raise/promotion at work and begins receiving, say, an extra $100 bi-weekly. Rather than putting that increase into their investment account, they begin buying more expensive clothes, eating out more often, or financing a more expensive vehicle.
M
Market Capitalization or Market Cap: The total market value of a publicly traded company. Market Cap = Share Price x Outstanding Shares.
N
O
Opportunity Cost: Every choice we make in life comes at the cost of another choice we could otherwise have made. Choosing to see a movie on a given time on a particular night precludes the opportunity to have seen a different movie. Likewise with investing, each investment decision we make regarding which stock to buy inherently comes with the consequence, the opportunity cost, of not being able to spend the investment capital/dollars on a different investment.
Option:
Outstanding Shares: This represents the amount of shares of a company which are available on the open market.
P
Private Company: A company which is not traded on stock exchanges for sale (it is “unlisted”). As a result of being Private, a company is not required to publicly disclose its earnings or business plans.
Public Company: A company whose shares are traded on a stock exchange/market such as the Toronto Stock Exchange or New York Stock Exchange.
The companies discussed on this site tend to be public companies because these are easily traded and have rules governing them in terms of transparency for investors.
Q
R
S
Share Buyback: See Buyback.
Share Price: The cost of a single share of a given stock/company. The share price indicates how much an investor will need to pay for one full share of the investment. Share price does not on its own, however, indicate how much a company is worth relative to other companies. See Market Capitalization.
Stock Exchange: See Exchange.
Stock Market: A marketplace which allows for the buying and selling of stocks (also called equities). While many refer to the stock market in general terms, stocks are actually held on individual exchanges and moderated accordingly.
Also known as an “equity market”.
T
Treasury Shares: Shares which are held by the issuing company such as those which have been bought back from the open market.
U
V
W
X
Y
Yield-on-Cost (YOC): Current Annual Dividend/Distribution divided by Original Cost Per Share/Cost Basis.
For example: Consider a company that costs $50 per share and pays an annual dividend of $2.00. The company currently yields 4% at this point when Investor A buys his stock. The stock subsequently rises to $100 per share and pays the same annual dividend of $2.00. Investor B buys stock at $100 per share and only receives a dividend yield of 2% on her money since she paid a higher price for the same annual dividend of $2.00. So, Investor A is earning a YOC of 4% while Investor B is earning a YOC of 2% in this scenario.
The YOC concept has been covered specifically in relation to TD in this article and with regard to my full portfolio in this article.
