Jumping into the sea of investment can seem intimidating at first, but you don’t really have to be an expert to take the first leap (grow your wealth). However, you can become more confident and aware of where and how your money is being invested, just by gaining knowledge about certain investment terminologies.
Learning about these terms will help you stay ahead in the race of investments and be more confident in the financial arena. Below mentioned are the top investment terms and expressions.
It is the strategy of actively buying and selling securities with the intent of outperforming the market. Active investors keep an eye for any sort of profit and sell the securities at the very hint of it.
A market cycle in which stocks keep falling for a prolonged period, motivating the investors to sell. Bear markets usually last for a few months to one year and are then succeeded by Bull Market.
A bond refers to a fixed-income financial asset. The creditors lend money to a company or government for a fixed term. In return, the company or the government provides them with interest(money) on monthly or quarterly basis. The full repayment of the initial investment amount is paid to the creditor at the bond maturity date.
It is the value of an asset as documented in balance sheets or financial statements. For investors, this is the value of a security at the time of purchase and may be different from the present market value.
A brokerage account is an account that is owned by the investor but maintained by a broker or a firm. That is, the broker has the power to make any trades using the funds in the account on behalf of the investor. You will require a brokerage account in order to buy and sell financial securities like stocks, bonds, and ETFs.
A market cycle in which the stocks keep rising for a prolonged period, motivating the investors to buy them. Bull markets usually last for 5-6 years and are then succeeded by Bear Market.
The increase in the value of an investment as compared to the price for which it was purchased is known as capital gain. It can also be referred to as the positive difference between the market value and the book value of a stock. If the investment is not conducted under a registered account, then the capital gains are subject to income taxes.
A discount broker is a broker who conducts buy-and-sell operations at low or no commission rates. However, a discount broker does not provide any financial advices or analysis to the investor.
Dividend is the payment that is made to the shareholders of the company or enterprise. This is a form of profit sharing among the shareholders. Dividends can be handed over on a monthly, quarterly, bi-annually, or on annual basis. Remember, not all stocks pay dividends.
Dollar-Cost Averaging (DCA)
Dollar-cost averaging is an investment strategy that comprises of purchasing a fixed amount of financial securities at regular intervals/schedules. This helps in reducing the impact of market volatility on large purchases of large financial assets.
ETF (Exchange Traded Funds) is a collection of related financial assets that can be traded like a single stock on the stock market exchange. Investing in ETFs is a simple and low-cost way to widen your investment portfolio.
Equity refers to the stock or shares of a company that may have debts or other liabilities attached to them. It is basically a financial investment in an asset that may also include liabilities.
Index Fund is a collection of financial assets that represent an industry, geographic location, or type of investment. Index funds are also an easy way to diversify your investment portfolio. Some examples of index funds are ETFs and index mutual funds.
Inflation refers to the timely increase in the prices. It is very important to keep in check the rate of inflation in order to protect the value of your financial assets in future.
Initial Public Offering (IPO)
Initial public offering refers to the process of offering shares to the investors in the public market for the first time. It is a great way for the companies to make money by selling their stocks.
Investment portfolio is the investment in form of stock, bond, or other financial assets with the expectations of getting high returns. These investments are made in hopes of growing them in value over time.
Management Expense Ratio (MER)
It is the ratio between the total cost of any management fees, taxes, and operating expenses for an index fund, to the fund’s average value for that year. The typical range of MERs charged by Index mutual funds and ETFs is from 0.05% to 1%.
The fee that you pay to a manager of a fund, for the services he’s offered in managing the investment portfolio is called Management Fee. It can be a fixed amount or a percentage of the total portfolio value.
Margin account is an account that permits an investor to borrow money directly from the broker, to purchase any financial assets. This allows investors to take advantage of the debt in order to earn greater returns. Margin accounts will allow you to borrow up to 50% of the cost of the securities you intend to buy.
Market value is the value of an asset or security on the market exchange. This is the value of a security on the stock market, for the investors. It may be different from the book value or cost for which the security was originally purchased.
An investment account that is not registered to anyone. It provides no tax-sheltering or tax-deferral status. With a Non- Registered account all your investment income is taxed but there is no such taxation on the withdrawals.
Options are a class of financial derivatives that provide an investor with the liberty to buy or sell a stock at a certain price. In an options contract, Call options allows the holder to buy a stock at a set price even if the market value of the stock is higher. Put options allow the holder to sell stock at a set price, even if the market value is lower.
Passive investing is just the reverse of active investing. Instead of going for active trading, this one relies on automated tools such as robot-advisors or index funds. Passive investing strategy tends to outperform active investing.
A Registered account is one that is registered to an individual. It is a tax-optimized investment account. All investment income earned under a registered account is either tax-deferred or tax-sheltered. The contribution and withdrawal rules for Registered accounts are usually strict.
A stock, also known as a share, is a financial security that is the representative of the partial ownership of a corporation. Owning stocks in a company entitles the shareholders to profit-sharing with that company. Along with this the shareholders acquire the voting rights as well.