Do you feel overwhelmed knowing the vocabulary of investing? Moreover, the jargon and terminology may seem like a foreign language at times. However, if you aim to make well-informed decisions, it is critical to understand the vocabulary of investing.
Below are some of the words you should be familiar with when it comes in investing.
Basic Investment Terms
- Stock: It means that you are part of owning a company through some fractional shares. Additionally, buying stock in a particular company means that you become a shareholder and a part owner of that company. When the company makes a profit, you are entitled to a portion of the company’s profit.
- Bond: This is an investment instrument that you as an investor loan to a borrower. In most cases, these borrowers are corporations and government entities. These loans are used to finance the projects and operations of the borrowers. Bonds are paid on an agreed period and either through a variable or fixed interest payments.
- Exchange-Traded Fund (ETF): An ETF is similar to a mutual fund, but it’s traded on stock exchanges just like individual stocks. ETFs monitor indexes like S&P 500, the Dow Jones, and Nasdaq. This is also an investing medium that offers investors a convenient and cost-effective way to grow their money in a portfolio of diversified assets.
- Mutual Fund: A mutual fund is a type of investment that pools money from many investors to purchase a diversified portfolio of stocks, bonds, short-term debts, and other securities. For some, this is considered a safer investment risk as compared to purchasing bonds. There are several types of mutual funds:
- Money market funds
- Fixed Income funds
- Equity funds
- Balanced funds
- Index funds
- Specialty funds
Advanced Investment Terms
- Diversification: Diversification is a type of investment strategy where investors put their money into different forms of investment mediums. Investments involve risks. Moreover, some investments have higher risks as compared to others. The purpose of diversification is to minimise your overall risk and increase your potential for returns.
- Risk: Risk is the potential for loss in an investment. As an investor, it is important to assess the level of risk that you can manage or the amount of money that you can tolerate losing.
- Return: Return is the profit or loss that you make on an investment. It’s expressed as a percentage of the amount you invested.
- Asset Allocation: Asset allocation is the process of dividing your investment dollars among different types of investments, such as stocks, bonds, and cash. Additionaly, set your investment goals and risk tolerance before starting to invest.
Key Investment Vocabulary
- Bull Market: A bull market is characterised by rising prices and optimism. You can consider this a good time to invest in stocks.
- Bear Market: A bear market is the opposite of a bull market. It is characterised by prices going down and a negative outlook. It’s considered a challenging time to invest in stocks.
- Portfolio: A portfolio is a collection of investments that you own. It’s important to regularly review your portfolio. Ensure that it’s aligned with your investment goals. Diversify your investments.
- Capital Gain: A capital gain is also a profit that you make from the sale of a capital asset, such as a stock or bond.
- Capital Loss: A capital loss is a loss that you incur from the sale of a capital asset.
Take time to educate yourself with financial jargon and terminologies to improve your financial literacy. You will gain a better understanding of your financial situation and the financial industry as a whole. At first, learning about the vocabulary of investing can seem intimidating.
But, once you understand the key terms, it becomes much more manageable. If you are just a beginner, make sure to do research and read. Set your financial goals and determine your risk tolerance.
