Why finance keeps confusing investors: The everyday words that mislead us

Subscribe to enjoy similar stories. A few days ago, I spoke with someone who had read that markets are expensive right now. Sensibly enough, they assumed this meant stock prices were high.

In their mind, a share trading at ₹100 was obviously more expensive than one at ₹20. It took some effort to clarify that when market commentators call stocks expensive, they're referring to valuation metrics like price-to-earnings ratios, not the actual rupee price. A ₹20 stock can be far more expensive than a ₹100 one if the fundamentals don’t justify the price.

The equivalent confusion is even worse in mutual funds, something I’ve written about earlier. People often assume that a fund with a net asset value (NAV) of ₹15 is cheaper and therefore a better deal than one at ₹150. The reality is that NAV is just the per-unit price and tells you nothing whatsoever about whether the fund is a good investment or likely to grow.

Yet this misunderstanding leads investors to make completely illogical choices, hunting for low-NAV funds as if they were bargains at a sale. Should we blame these people for the confusion? Absolutely not. The fault lies squarely with those of us who work in finance.

We’ve taken ordinary words that people use every day and given them a completely different technical meaning—and then we act surprised when ordinary investors misunderstand us. This isn't an isolated problem. The world of finance is littered with words hijacked.

Take the word “dividend" in mutual funds. For years, I wrote column after column explaining that the funds calling themselves dividends were not, in fact, dividends. They were simply a return of your own money, a partial redemption dressed up to look like income.