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27 Jul 2021 • 4 min read
If you’re put off from learning about investing because of, what seems like, its endless jargon, you’ve come to the right place. Today, we’re busting the investment terms you may inevitably come across as you delve into investing but making it simple. It’s kinda what we do best.
Asset: An asset is something that holds value or has the potential to make you money such as cash, stocks, and real estate.
Appreciation: To put it simply, appreciation is when the value of an asset increases over time. For example, if you bought a stock for £100 and sold it for £200, your asset has increased in value.
Depreciation: Contrary to appreciation, depreciation is when the value of an asset decreases over time. Take a brand new car for example, from the moment you drive it off the forecourt, it loses its value. When you go to sell your car in a few years, you’ll most likely sell it at a much lower price than you had bought it.
Diversification: Diversification is when you spread your money across a variety of assets to reduce the risk of just having to rely on one particular asset. A.K.A putting your eggs in different baskets.
Investment portfolio: An investment portfolio is a collection of assets that an investor has bought with the expectation to earn a return from, I mean, it’s the whole point of investing right?
Recession: A term you’ve probably heard perhaps on the news or in a history lesson; a recession refers to a significant decline in economic activity such as buying and selling e.g. the population stops buying as much as they did previously, often as a result of their ability to spend having been reduced in some way.
Risk tolerance: Your risk tolerance is simply your attitude towards risk. Is risk appealing to you or would you rather steer clear from as much risk as possible? Knowing this helps you to determine your investment strategy.
Asset Class: An asset class is a category that your asset falls into, such as stocks and real estate, and is grouped based on their similar characteristics. We’ve broken these down on our blog here.
Commodities: Commodities are raw materials or agriculture that is traded such as gold, oil, or Beef. Commodities are one example of an asset class. Learn more about commodities on our blog here.
Brokerage account: If you want to start investing, you’ll need one of these. It’s an account that allows you to deposit your money to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETF. You can transfer money into and out of a brokerage account much like a bank account, but unlike banks, brokerage accounts give you access to the stock market and other investments.
Balance sheet: A.K.A the paperwork stuff - a balance sheet is a document that shows you what a company owes (liabilities), owns (assets) and the amount invested by shareholders. It paints a picture of how a company is doing financially.
Net worth: A company’s net worth is made up of its financial assets minus its liabilities. They provide an indication of a company’s financial position. This is also applicable to net worths for individuals, sectors, and even countries.
ROI: This stands for Return on Investment which measures the return on an investment to see whether it was a loss or a profit from the amount that the asset was bought for. Only profits around here, please!
Inflation: Inflation is the general increase in prices of goods and services over time, as the purchasing power decreases. For example, if you were to buy a loaf of bread in 1950, that would set you back no more than 5p, whereas now the prices have increased to £1 or more.
Investing in equities i.e. stocks & shares
Equity: Equity refers to the total ownership stake in a company. When you purchase shares in a company, you're purchasing part ownership in that company. Equity is often also referred to as a stock or share.
Shareholder: You become a shareholder when you buy shares in a company - you own a part of the company.
Bonds: A bond is essentially an agreement of a lender (the investor) loaning to a bond issuer, which can be the government or corporate firms.
Bid Price, Ask Price, Spread: Think of these terms as if you were at an auction. The bid price simply means the highest price an investor is willing to pay for an asset, whereas the asking price is the lowest amount that a seller is willing to accept to secure the trade. The difference between the bid price and the ask price is known as the spread.
Dividend: Some companies offer dividends, which are regular payments made to shareholders from the company’s profits. It’s kind of a “thank you” from the company for investing in them and encourages other investors to also invest in the company. However, not all companies offer dividends as some would rather reinvest profits into the business for growth.
Capital gain: Capital gain is the profit you make from selling an asset at an increased value.
Earnings per share: Earnings per share, or EPS, is a financial measure that determines how much profit a company makes per common share. The higher the EPS indicates higher profitability.
IPO: IPO, or Initial Public Offering, is the first time a private company offers its shares to the general public to raise capital. A recent example of this is one you might have seen with Bumble.
Blue Chip: a.k.a your safe bets. Blue-chip companies are well-established, profitable, and reliable, so they’re typically seen as safer investment options compared to others for beginners starting out. Even during times of financial crisis such as recessions, these companies are usually the last guys standing.
Volatility: Volatility is essentially the up and down fluctuation of prices in individual stocks or the market as a whole. This is why there are risks with investing as there can often be great swings in the market that are unpredictable and can change very quickly.
Bull Market vs Bear Market: A bull market is a market condition where prices are expected to rise, whereas a Bear Market is when the market is expected to fall.
S&P 500 and FTSE 100: These are examples of market indexes. The S&P 500, or the Standard & Poor’s 500, is an index of the 500 publicly traded companies in the U.S, many of which are technology firms or financial businesses. The FTSE 100 is the Financial Times Stock Exchange 100 Index, which consists of the top 100 listed companies in the UK based on market capitalization (how much they are worth).
Index: Indexes essentially track the price performance of a collection of assets. These could be a broad collection that captures an entire market, or a more specific collection of assets, for example, the technology sector.
Index funds: An index fund is a selection of companies or securities which are grouped together based on things like sector or by size, so for example, a group of tech companies. The index fund is set up to match the investment returns of a benchmark stock market index (e.g. the S&P 500). An index fund allows you to invest in a group of companies or securities, instead of only investing in one company. So you’re not putting all your eggs in one basket!
Mutual funds: A mutual fund is similar to an index fund, however instead of investing in a set group of securities, a mutual fund invests in a changing list of securities. A mutual fund also requires active management, as the fund must shop around for the best investment opportunities to beat the investment return benchmark (whereas index funds are set up to track against market benchmarks).
ETFs: ETF stands for exchange-traded funds. They’re similar to mutual funds, except that they can be traded like stocks throughout the day whereas mutual funds are bought and sold based on their price at the day's end.
So, now that some of those terms have been debunked, the next time you see one of these words, don’t let it intimidate you. When learning all about investing and amidst all the jargon, it can be tempting to let it deter you, but, with a little bit of decoding, investing can be for anyone to grasp.
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