Trying to decode the vocabulary associated with the investment world can often seem like trying to understand another language. The modern finance market, however, is all about transparency and information; the internet has now given more people access to the investment market, and at the same time given those people more information about the market as a whole and how it operates.
But complex investment terminology remains and it’s important to get to grips with what it all means in order to ensure you make the right decisions when it comes to investing. Below we’ve listed a few of the most common investment terms, terms that many use but not as many know the full meaning of:
Bonds are essentially a way for entities such as companies or governments to raise funds by borrowing money and repaying it with interest. Buying bonds means you are basically lending that entity money with a view to collecting the money back on the maturity date with the interest added.
Where bonds are a way to lend money to companies, stocks are a way to buy a proportional share of the ownership of that company. If the company performs well the value of your stocks will go up; however, if it does not perform well the value of the stocks will decrease. (N.B. The term “shares” is what’s used when referring to the share of ownership you have in a specific company; stocks is a more general word used to describe having shares in more than one company.)
This is the finance industry’s way of talking about what investment strategy you’re using. If “asset” refers to where you’re going to put your money (for example stocks, bonds or real estate), then “asset allocation” simply refers to the way you’re going to invest in these assets – what combination, how much you’re going to spend, when you’re going to invest, and how long the investment horizon will be.
Diversification is an investment strategy that involves putting money into multiple different asset types in multiple different industries – it is one of the most profitable, secure and well-regarded strategies in the financial sector. A fully diversified investment portfolio (i.e. collection of investments) should include investments in everything from stocks to alternative investments like real estate; the idea here is that the money is spread so that failures in one area of the portfolio are balanced out by successes in another.
When investing in things like stocks, bonds or real estate, the yield is the amount of money gained on top of the initial investment, usually expressed as an annual percentage. Yield is either known or prospective, i.e. a projection of the anticipated percentage increase for that year – this is usually referred to as “yield potential”. Yield should not be seen as the same as profit – profit is the money gained after all other costs (taxes, overheads etc.) are accounted for.
A tangible asset refers to assets that physically exist – real estate, land, currencies, machinery etc. Intangible assets are those that do not have a physical form but still retain some value, for example intellectual property or copyrights and patents.
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