Beginners who are considering investing for the first time may become overwhelmed and indecisive. It’s easy to feel intimidated about taking your first steps because so many terminology are carelessly flung around by investing professionals and the financial media.
But the truth is that investing is a straightforward process. You’re likely to do well if you continuously donate to assets with a solid long-term track record.
However, mastering the jargon of the investment world might give you the confidence you need to get started. With that in mind, here are 18 investing phrases you should be familiar with before diving in head first.
Asset Allocation: The numerous sorts of investments you acquire with your money are referred to as asset allocation. If you just buy 100 shares of Microsoft, for example, your asset allocation is 100 percent stocks. Your asset allocation is more diverse if you mix in some bonds, foreign currencies, Treasury bills, and so on.
Diversification: It refers to distributing your asset allocation among several types and styles of investments in order to lower your total risk. Diversification, in other words, is the polar opposite of “placing all your eggs in one basket.”
Bull Market: A bull market is defined as a market that continues to trade higher over a long period of time.
Bear Market: The polar opposite of a bull market, characterised by a drop in market values of at least 20%.
Capital Gain/Loss: When you sell an investment for a higher or lower price than when you bought it, you have a capital gain or loss. Long-term capital gains, defined as those held for more than a year, are taxed more favourably.
Momentum investing: It is the practise of purchasing stocks or other assets that are rapidly increasing in value, regardless of valuation or other fundamental factors. Momentum investors believe that an asset in motion will tend to continue in motion.
The bid/ask spread: It is the difference between the highest price a buyer is willing to pay for an asset and the lowest price at which another investor is willing to sell that asset. A transaction is made when the two prices match.
Bond: A bond is a type of loan. Bond issuers accept money from investors in exchange for the promise of regular interest payments and the repayment of principal at a future period called the maturity date.
Stock: A stock is a fractional share of a company’s ownership. On worldwide stock exchanges, the value of this ownership stake fluctuates minute by minute, and sometimes second by second.
ETF (Exchange-Traded Fund): An ETF, or exchange-traded fund, is a mutual fund that may be purchased and sold on a stock exchange like a stock. ETFs often track key indices like the S&P 500.
Margin: Although not suggested for novice investors, margin allows you to increase your returns by borrowing against your holdings. You can, for example, utilise margin to buy $1,000 worth of shares with only $500 in your account. Your profits — or loses — are multiplied by 50 percent at this level of 50 percent margin.
If your equities increase in value from $1,000 to $2,000, your net profit is $1,500 rather than $1,000 ($2,000 sale price minus $500 invested equals $1,500 profit).
Short selling: It is when you borrow stock and then sell it with the intention of buying it back at a cheaper price and returning it to the lender. A short sale is essentially a gamble that a stock will lose value. Short selling necessitates a margin account and may force you to put up additional funds if the stock rises in value rather than falls in value.
Real Return: The actual market return of an investment, also known as the nominal return, minus the rate of inflation, is referred to as the real return. Other expenditures, such as taxes, are also subtracted by some calculators. The real return is intended to provide investors with a more accurate view of how much extra purchasing power their investments provide.
Investment Objectives: Your investment objectives define what you want to accomplish with our money. Growth, income, and capital preservation are all common investment goals. Your asset allocation is guided by your investing objectives.
Risk Tolerance: On a scale from conservative to speculative, risk tolerance relates to the level of volatility you are willing to endure in your investments. Another crucial aspect in determining your asset allocation is your risk tolerance, which determines which types of investments you are comfortable holding.
The rule of 72:It is a simple mathematical formula that can be used to estimate how long it will take to double your money with an investment. For instance, if you expect an annual return of 8%, your money will double in around 9 years. You may also use the method in reverse to calculate the rate of return required to double your money in a certain time period.
Dollar Cost Averaging: Dollar cost averaging is the practise of investing the same amount of money on a regular basis. If you have $12,000 to invest, for example, you can add $1,000 to your portfolio each month. This allows you to buy more of an investment when it is cheap and less when it is expensive, resulting in a smoother long-term average cost.
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Yield: The interest rate that a bond, stock, or other investment pays as a percentage of its principal value is known as yield. A common stock, for example, might pay a 2% dividend, whereas a bond would pay a 5% interest rate. This only applies to the income portion of your return.