Like other segments, the financial market has its language. These are terms and expressions that can be strange to those who new to this environment. Thus, below is a highlight of 10 Investment Terms for Beginners.
For each term, there is a concept behind facilitating the connection of professionals on national and even international soil. Therefore, if you are interested in the area, it is essential to understand some of them to avoid confusion.
Disagreements over the terms are typical. As a result, many beginning investors get confused and give up on making their investments due to the terminologies.
Many of these terms can be even more challenging to understand.
With that in mind, we made this guide to help everyone who’s a beginner in the financial market and investing. Check below the ten main investment terms for Beginners in the financial market.
10 Investment Terms for Beginners
In this compilation of investment Terms for Beginners, the share rental stands out. This is a resource intermediated by the Stock Exchange. This consists of the loan of shares to other investors in exchange for fees.
Investors who take the shares use these assets within the financial market in different strategies, such as selling on the spot market as collateral in future settlement market transactions. It works like this:
- The donor informs the broker of the availability of its shares for rent and its conditions. Or it can do so through the home broker.
- After giving guarantees to the broker, the borrower receives the rented shares.
Next, he sells them on the market and tries to repurchase them at a lower price. For example, if he sells a $20 and repurchases it for $15, he will have a $5 profit. After that, he returns it to the owner within the contracted period while paying the defined fee.
Hedge fund structures
There are diverse hedge fund structures in the same light, but it is common for fund managers to charge investors 20% of profits. This is in addition to 2% of assets as a management fee, for example, the ratio shows that a company growing at 15% per annum and trading at 20x earnings can be cheaper when compared with a company trading at 8x earnings and shrinking by 10% per annum. If a stock is trading at $100 per share and pays out $5 in annual dividends, the dividend yield would be 5%. The compounded average gain in the stock market over the last 120 years stands at 5%. If you buy a stock at $100 per share and the company pays out dividends, divide that dividend amount by 100 to see its percentage.
A trader wonders how much of an annual return they will get from buying stocks with different prices. They should take their answer as a fraction of 5, about 100 (as we calculated above). Then use this number when figuring future returns on investment for any given years’ worth of earnings: if your average yearly price was 10% higher than another stock’s, then congratulations! You’ve made more money because you invested sooner! In this case, the yield would be 5%.
The savings account is the most popular investment among many investors. It is a fixed-income investment that is free of any costs, both for opening and maintenance.
It has high liquidity. That is, you can make redemption at any time. The monetization, however, is credited only on the application’s anniversary date. Thus, it takes 30 days.
Banks obligatorily use 65% of the resources allocated to savings in the real estate market. So, for example, if someone wants to finance their own home, the bank will use the money you deposit in savings to make the payment. They will then charge the borrower much higher interest than pay you as the bank’s lender.
Fixed and variable income
In fixed income, the income calculation is defined in advance when you apply the resource. In practice, when you invest, you may or may not know in advance how much your investment will yield. As a result, they are not so subject to market fluctuations and therefore have low risk.
In variable income, the investor does not know how much the investment will yield. Asset price fluctuations occur all the time. Thus, they are riskier and can bring much higher returns. Among them, the stocks on the Stock Exchange and real estate funds stand out.
Learn More: 7 Must Have Streams of Income to Build Wealth
The degree of risk of investment determines the chances of a type of investment bringing positive returns or not, the more uncertain the profitability, the greater the risk.
This probability of gain or loss can broadly define the level of profitability of an asset as you get more for riskier investments. The stock market, for example, is exposed to many risks. Climate, political, compliance, and many other issues may arise that interfere with companies’ stock values.
This instability makes the gains in this type of investment reach high levels every day. But, on the other hand, the chances of losses can also be great.
The consortium is a type of investment with high security. Here, the investor invests his money to acquire a specific good or service.
Remuneration takes place through the letter of credit. The participant can be considered in a draw or through the offer of bids. If not covered in one of these situations, the investor can receive your letter after completing installments at the end of the group.
The investor profile is a set of a user’s characteristics that determine their degree of risk tolerance. This profile can be conservative, moderate, or aggressive. To find out which group you fit into, it is necessary to assess the following aspects:
- objectives with the application;
- financial status (volume of income and equity, for example);
- risk tolerance;
- Knowledge and experience with the financial market.
Assets and liabilities
An asset refers to any tangible property that an organization or person has. So anything that can have any value attached to it is an asset.
- You can classify this term used in the financial market as:
- Permanent assets: bonuses and shares
- Fixed assets: buildings, land, and copyrights, among others
- Deferred assets: applications in research and projects, for example
- A liability, on the other hand, is everything that represents an expense for you, such as:
- Current liabilities: accounts and taxes payable
- Long-term liabilities: mortgages and bills of exchange
- Results of Future Years: cash that you can receive in advance
Liquidity is the facility that an investment has to be converted into cash for you without losing value.
The faster this process is, the more high is the liquidity of that asset. An example of a highly liquid bond allows you to redeem the amount invested in one business day without negative returns.
Types of Liquidity:
There are two types of liquidity: daily and due. Check out their differences below:
Daily liquidity: you can redeem an asset that has daily liquidity at any time.
Liquidity at maturity: In this case, you cannot withdraw your capital before the investment deadline.
Interest can be remuneration for renting a sum. Whoever holds the money makes a loan. You can then take the interest as the price of the money.
The percentage practiced is also based on the principle of supply and demand, like any other good traded. There are two major types of interest:
- simple interest: Interest is the amount you calculate on top of the principal amount of the application or loan;
- Compound interest: in this case, the interest calculated in a period is put together. And this amount will be used as the basis for the following interest calculation, boosting the results.
Investment Funds (IF)
An investment fund gathers financial resources applied by different participants. The fund is managed by an economic entity, which can be a bank or a fund manager, for example. A common analogy is that of the condominium. Here, there are several members, and each one receives a piece of income depending on their portion size.
Learn More: Money Management Habits for Beginners
The fund’s resources are applied in different types of investments according to the investment policy to yield. Thus, the composition of the investment portfolio varies according to the nature of the fund. The main ones are:
- fixed-income funds;
- equity funds;
- real estate funds;
- multimarket funds;
- Referenced funds.
Furthermore, for Rule #1 investing, you must use a minimum of fifty percent margin. As Rule #1 investors, we desire to see at least ten percent ROIC yearly. Also, we don’t want to see it on a downward trend. Rule #1 investors seek to purchase businesses at 50 percent of their Sticker Price. This is when they are undervalued, though.
Investment Terms for Beginners: FAQs
What are some investment terms?
Some investment terms include:
- Share rental
- Fixed and variable income
- Investor profile
- Assets and liabilities
- Investment Funds (IF)
What are good investments for beginners?
Some good investments for beginners include:
- Target-date mutual fund
- Exchange-traded funds (ETFs)
- Index funds
What are the basics of investments?
The basics of investments include profits, losses, and investment funds.
What is the best ten-year investment?
The best ten-year investment includes:
- Bond funds
- Dividend stocks
- Stock funds
- Target-date funds
- Small-cap stocks
- Real estate
How can I get rich in 5 years?
You can get rich in 5 years by:
- Controlling your finances adequately.
- Seek for a wealthy mentor.
- Getting adequate financial education
- Taking good care of your health
- Saving with the mindset of investment. Imagine that you’re just 25 years old and have been investing $5,000 a year for ten consecutive years. If your investments earn 8% annually (which is more than the average rate of return), then by age 65, you’ll end up with over half a million dollars!
- Getting multiple income sources
In conclusion, there are many terms used in the financial market that may end up confusing some investors, especially beginners. So, you must get to know them to get the best possible results from your investments. In addition, these Investment Terms for Beginners will become natural as you begin to invest and use them.
I am Lavinia by name and a financial expert with having a degree in finance from the University of Chicago. In my blog, I help people to educate by making wise choices regarding personal investment, basic banking, credit and debit card, business education, real estate, insurance, expenditures, etc.