US stock market jargon buster

We talk you through America’s own investing language and the unique events that drive Wall Street.   

It's easy to invest in US companies, and much of the language used in American finance will sound familiar to UK investors. But there are differences which will be helpful to know and understand.

In this jargon buster, we run through some of the key terminology used by American investors and the key events that can determine direction of US, and indeed global stock prices. 

• Investing in the US stock market: a beginner’s guide
• Read more about how to invest in the stock market successfully here
• Check out our award-winning stocks and shares ISA

Congress

Congress is the ‘legislative’ arm of the US government which votes to decide on important areas of policy, most notably for investors, fiscal spending and taxation. Congress is composed of two chambers: the Senate and House of Representatives. For legislation to pass, both chambers must agree to it. This means that US policy can often take a long time to pass (if at all), due to the two chambers often disagreeing. This uncertainty can often affect the stock market.

Beige Book

The Beige Book is the informal name for the Federal Reserve’s Summary of Commentary on Current Economic Conditions. This is a report published eight times a year. The book gathers ‘anecdotal’ data and information about the economic performance and outlook of different region in the US. The book is seen as a vital read for investors trying to keep a close eye on economic conditions in America.

Dow Jones Industrial Average (Dow)

The Dow Jones is the world’s oldest index of stocks, dating back to the late 19th century. Owing to its long history, the Dow Jones is often cited by non-specialist news outlets as a general gauge of the US stock market performance.

However, this index is not favoured by most investors anymore. One issue is that the Dow is composed of just 30 stocks, making it relatively small and less representative. Another problem with the index is that it is ‘price weighted’, meaning that stocks with the highest share price receive the largest percentage weightings in the index. In contrast, most major indices now use a market-capitalisation (a company’ size in dollars) weighting.

• Three reasons not to use the Dow Jones index

Driving season

Americans take to their vehicles in growing numbers as the weather improves in the spring. The period between the US holidays of Memorial Day (end of May) and Labor Day (early September) is known as summer driving season during which oil refiners increase production of transport fuels to meet demand. The strength of demand is a good indicator of the strength of the US economy. 

Earnings season

Every quarter, publicly traded companies release their most recent financial results. The period in which this happens is known as ‘earnings season’. This period can see volatility in the price of company shares depending on whether or not earnings announced are better or worse than market expectations.

• What is earnings season?

FAANG shares

FAANG is an acronym that stands for Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL) (Google). This acronym was created by financial TV show presenter Jim Cramer to collectively refer to several fast-growing US technology stocks. These stocks have all seen strong performance over the past decade. This acronym is sometimes amended to include other tech companies with similar characteristics, most notably Microsoft (NASDAQ:MSFT).

Federal Funds Rate

This is the rate charged by US banks to lend to one another overnight. It is dictated by the Federal Reserve, the US central bank, and is one of the key levers for controlling the American economy. If the economic output looks bleak, the Fed will lower the Fed Funds Rate and if the economy looks like it is heating up they will raise the rate. In response to the Covid-19 pandemic, the Federal Reserve slashed the rate down to 0.00%-0.25%, a historic low.

Federal Open Market Committee

The Federal Open Market Committee (FOMC) meet eight times a year to decide the Fed Funds Rate based on the economic conditions and the outlook. The committee is composed of 12 people, made up of the Board of Governors of the Federal Reserve System as well as presidents of regional Federal Reserve banks.

Investors closely watch the decision making of the FOMC, due to the ability of the Fed Funds Rate to move markets. However, the minutes of the FOMC’s decisions are also made public. These are often intensely studied by investors to get a sense of the thinking and economic forecast of this powerful decision-making group.

Fiscal stimulus

Fiscal stimulus refers to government spending intended to boost economic activity. In some contexts, it can also mean tax cuts designed to boost the spending potential of consumers – but usually it refers to active spending by the government.

Barack Obama was able to pass a fiscal stimulus package following the 2008 financial crisis – however, it was likely smaller than he would have liked due to scepticism of the policy alongside fears about the debt likely to accrue. According to many economists, these fears meant that the US economic recovery in the 2010s was weaker than it could have been.

Under the Joe Biden administration, there appears to have been much more enthusiastic embrace of fiscal stimulus policies, notably with the passing of his $1.9billion stimulus package. In contrast to the post-2008 crisis, politicians and economists are now much less worried about the debt implications of fiscal stimulus.

This matters to investors as greater economic growth, which fiscal stimulus is assumed to result in, means greater earnings for companies. Better earnings should mean higher share prices.

Internal Revenue Service (IRS)

The Internal Revenue Service, or IRS, is the US revenue service responsible for collecting taxes and administering the Internal Revenue Code. The government agency, established in 1862, also deals with tax issues related to mutual funds and dividends. 

Monetary stimulus

Broadly put, monetary stimulus describes policies to manage the money supply of an economy. Such policies intend to make it easier and cheaper for consumers and businesses to borrow. Quantitative easing (QE) is a form of monetary stimulus, as is a cut in the Federal Funds Rate by the Federal Reserve.

This is important for investors as monetary stimulus can help boost economic expectations and performance, which is good for markets. At the same time, lower interest rates and quantitative easing both tend to boost the value of certain stocks.

Monetary policy has been a core feature of the US economy since the 1980s. However, it became even more important following the 2008 financial crisis. Some view US economic policy as having become too reliant on monetary stimulus and urge for a greater focus on fiscal stimulus.

Mutual funds

A mutual fund is a term colloquially used to mean any actively managed, usually open-ended, fund in the US. The closest equivalent in the UK is an Open-Ended Investment Company (OEIC) or Unit Trust.

Nasdaq

The Nasdaq is a financial stock exchange known for including many technology stocks.

The exchange also runs several indices measuring the performance of companies listed on this index. The most known is the Nasdaq Composite, which is often cited in the news. However, the Composite consists of thousands of stocks including many small and highly illiquid ones.

As a result, index funds and exchange-traded funds (ETFs) tend to follow the smaller Nasdaq 100 index, which are the index’s largest 100 companies. The Nasdaq Composite index is very top-heavy, meaning that the largest companies account for much of the index’s performance. As a result, the performance of the 100 and Composite indices are usually not very different.

Non-farm payrolls

The measure of the number of workers in the US – excluding farm workers. It is an influential economic indicator, which tends to either positively or negatively impact investor sentiment when the data is released each month, usually on the first Friday.

Paris Climate Agreement

The Paris Climate Agreement is an international agreement between countries signed in 2016. Signatories committed themselves to substantially reduce global greenhouse gas emissions to try and limit global temperature increase in this century to 2 degrees Celsius above preindustrial levels.

In 2017, President Donald Trump announced that the US would pull of out the agreement. However, current president Joe Biden announced that America would re-join the agreement. As a result, following the victory of Biden in the November 2020 election, sustainable and environmental stocks saw a strong performance.

Quantitative easing

Quantitative easing (QE) is often referred to as printing money. In a very simple sense this is true. It involves the Federal Reserve buying bonds from banks, depositing cash into their bank’s accounts. This increase of money in the system is hoped to increase economic activity and prop up the price of bonds and then, by extension, other financial assets such as stocks.

QE was first used by the Bank of Japan in the early 2000s following a decade of stagnation. The US followed suit in the wake of the 2008 financial crisis, along with several other countries, including the UK. At the time, there was widespread fear that the policy would result in rampant inflation. This failed to happen. New rounds of QE in 2020 in the face of the Covid-19 pandemic saw these fears return.

Russell 1000

The Russell 1000 Index is a stock market index that aims to tracks the 1,000 largest stocks in the US. Like the S&P 500, it provides exposure to very large companies, so-called large caps. However, being composed of 1,000 stocks it also has some mid-cap exposure. The index is much less popular than the S&P 500 among investors and much less cited than the Dow Jones among pundits.

Russell 2000

The Russell 2000 is the 2,000 largest stocks after the Russell 1000 stocks. As a result, the index is seen as providing exposure to smaller companies, so-called small-caps.

S&P 500 

This is the major index for measuring the performance of US stocks. As the name suggests, the S&P 500 is composed of 500 stocks. This means the index is a much more representative sample than the Dow Jones. It is also market-capitalisation weighted, which is generally seen as a better way to construct an index, due to market capitalisation being a better gauge of the changing value of a listed company than price alone. As a result, most ETFs available to investors will use the S&P 500, while active fund performance is often benchmarked against this index.

The S&P 500, however, does have some quirks. In contrast to most big benchmark indices, the S&P 500 requires companies to have been profitable for four consecutive quarters to be eligible to join the index.

SEC filings

SEC filings is a collective term for several regulatory documents that all publicly traded US companies must complete. This can include regular financial accounts of the company, made public for investors to study. A notable document is the annual 10-K report, which provides a comprehensive summary of a company's financial performance over the period.

In the case of a company about to go public, its ‘SEC filling’ usually refers to its initial registration documents required to sell shares to the public. These are also made public. When a well-known company goes public, media outlets will often cover the company’s registration fillings and explain the contents.

SPAC (special purpose acquisition company)

SPACs have become an increasingly popular way for companies to go public. A company or investor will announce the formation of SPAC and sell shares in the SPAC to the public. However, the SPAC is essentially a shell company, which means it only holds cash rather than a business to run. As a result, investors in the shares are writing the owners a blank cheque. Once the money has been raised (or the blank check written, so to speak), the managers of the SPAC will look for an acquisition target – usually a mature company that has not yet listed publicly. The SPAC will then merge with the company. The hope is that the merger will see the share price of the SPAC rise above what they were originally issued at. For the company, the benefit is an easier and quicker route to going public.

Treasury bill

A treasury bill is a short-dated US government bond, meaning they have a maturity of one-year or less. T-bills are seen as providing the closest thing to a risk-free return in the market. The return on a T-bill is often used as a benchmark with which to compare other financial assets.

Treasury notes

These are medium-dated US government bonds, between one and 10 years. US government bonds with a maturity of over 10 years are simply called Treasury bonds. Technically, however, T-bills, T-notes and T-bonds are all bonds.

US dollar

The US dollar is the world’s reserve currency. When two businesses in different countries want to trade, usually they will do so in US dollars owing to trust in its value. This demand itself creates further trust in its value, in a self-reinforcing loop. In times of turbulence, investors tend to want dollars, seeing it as a safe haven – as happened in the Covid-19 sell-off. The dollar’s reserve status also means that commodities such as oil are priced in it.

Wall Street

Wall Street is a street in New York’s lower Manhattan region. Historically, this was home to some of the world’s biggest financial companies. While it is still the home of the New York Stock Exchange, many banks and brokers have moved from Wall Street to the midtown region in recent years. However, Wall Street is still used as an umbrella term to refer to activity associated with US financial markets.

West Texas Intermediate crude (WTI)

West Texas Intermediate is one of the most important global oil benchmarks. The oil it refers to is produced in Texas and is seen as being very high quality. The other major benchmark is the Brent Crude index. This measures oil produced in other parts of the world. In recent years, the WTI price of oil has fallen below Brent Crude thanks to the shale fracking revolution in the US resulting in a flood of supply.

W-8Ben

Anyone who wants to buy individual US shares must fill out a W-8Ben form. This is a form that is filed with the US tax revenue office, the IRS. The form is important as it allows foreign investors (i.e. those outside the US) to reduce the amount of tax they must pay on dividends and interest from any of the US stocks they own.