When it comes to managing your own investment portfolio, you may have heard that doing your own research and staying informed on current events is crucial. However, financial news outlets can often use confusing jargon that can make it feel like you need a special codebook just to understand what they’re saying. Even experienced investors can find the world of investing intimidating due to the vast amount of specialized terminology used in the field. In this blog, I attempt to define/ explain some essential investment terms:
Risk is the probability of losing some or all of the money invested. All investments involve some level of risk, but different investments carry varying degrees of risk. For example, stocks are typically considered to be riskier than bonds or cash because their value can fluctuate more dramatically.
Return is the amount of money gained or lost from investing, expressed as a percentage of the original investment. Higher returns are generally associated with higher levels of risk.
Liquidity is simply how quickly or how easily an investment can be bought or sold without affecting its price. Cash is the most liquid asset, as it can be easily and quickly converted into other assets. In contrast, real estate or fine art is generally considered illiquid because it can take a long time to find a buyer and complete a sale.
When you spread your investment risk by investing in a variety of assets you are diversifying away risk. The goal is to reduce the risk of loss by not having all your investments tied up in a single asset or sector. Diversification can be achieved through investing in different asset classes, geographic regions, or industries.
Dollar cost averaging:
Dollar cost averaging is a strategy where an investor invests a fixed amount of money at regular intervals, regardless of the market conditions. This approach can help reduce the impact of market volatility on the investor’s returns and can help build a disciplined investment plan.
Principal is the original amount of money invested. It is the starting point from which any returns or losses are calculated.
A coupon is the interest rate paid on a bond. It is typically expressed as a percentage of the bond’s face value, and the interest is paid to the bondholder at regular intervals until the bond reaches maturity.
A dividend is a payment made by a company to its shareholders. It is typically a portion of the company’s profits that are distributed to shareholders as cash or additional shares of stock.
IPO stands for Initial Public Offering. It’s the first time a private company offers shares of its stock to the public for purchase. The proceeds from the sale of the stock typically go to the company to help fund its growth.
A right issue is a way for a company to raise additional capital by offering its existing shareholders the opportunity to purchase additional shares of stock at a discounted price. It’s a way for companies to raise capital without issuing new shares of stock to the public.
I hope this helped! Of course this list isn’t exhaustive, and you will from time to time come across foreign jargons and terminologies not mentioned here, but don’t lose interest- get it? “INTEREST” (Wink)… okay, corny I know. My point is, there are tons of resources available for you to decode these foreign words when you do come across them, google for example. So keep at it , and don’t be discouraged!
Until next time….