Investing your money to acquire assets is important in ensuring a secure financial future. Before venturing into an investment, it is important to understand some investment terms. Knowledge in investment terms will help you gain confidence and make firm decisions while investing. The following are basic investment terms that every new investor should know.
When investing in stocks, you may find terminologies and definitions that you don’t know. For instance, you may be wondering, “What is margin trading?” Margin trading is a situation that happens when an individual investor buys more stocks than they can afford. A broker initiates the opening of a margin account for the investor and funds the investor with money. As an investor with little cash, you have the capabilities to trade in a wider market.
As an investor with little cash, after you get funded by a broker, you have the capabilities to trade in a wider market. When you know about margin trading, an investor will know how to increase returns by diversifying investment vehicles. When margin trading, a new investor can make lots of profit or make huge losses. When margin trading, an investor can gain access to credit easily and quickly.
Stocks are securities that make a new investor get shares in assets and capital of a company. When a new investor has stocks in a company, they have ownership shares in its capital. Stocks allow investors to earn money when their prices rise and sell their stocks for profit. The prices of the stocks fluctuate according to factors like inflation, and losses can happen when the prices of the stocks are lower.
Before a new investor chooses to buy stocks from a specific company, it would be best to research the company. The research will help you know about the financial status of the company. There are two main types of stocks: common stocks and preferred stocks.
When investors purchase common stocks, they will be paid their dividends, but dividends are not guaranteed. Purchasing preferred stocks is better because an investor is guaranteed to be paid their dividends in full. Moreover, if the company has excess profits, they are equally shared among the preferred investors.
A loan is simply a loan made from an investor to either a corporate company or a government institution. A bond consists of when the loan will be given to the borrower, when the payment should be made, the parties involved in the bond, the lender, and the borrower. In the bond details, the terms also govern the payment, that is, the loan’s interest rates.
The bond prices are inversely related to interest rates. When the interest rates rise, the bond prices fall, and the bond prices increase when the interest rates fall. Corporate companies are issued bonds to help them grow, while the government institution is issued with bonds to facilitate infrastructure development.
Asset allocation involves the process of managing your investment vehicles to limit the risk of getting losses. Asset allocation involves the diversification of your investment vehicles. This process involves dividing your assets into equities, fixed-income, cash, and equivalents. As an investor, you allocate your assets according to your personal financial goals.
When asset allocating, some factors need considerations. As a new investor, you must be risk-tolerant; this means your willingness to lose a certain amount of money when pursuing a high rate of returns on your investment. Another factor to consider is time. For instance, a long-term investment strategy requires an investor to be ready because situations may arise before completing the investment period.
Bear and Bull Market
A bear market is a market situation mostly feared by investors because the prices fall below the normal. Bear markets make most investors lose money because they sell their assets or stocks below the normal price. In a bear market, the performance of the economy tends to be slow, causing a recession. The bear market causes unemployment and a poor economy.
The bull market is a market situation where the value of the prices rises above the normal. A bull market situation occurs when the economy is doing well, and the economy is growing rapidly. Most investors’ confidence is always high because the companies make profits and the dividends are higher.
Knowing the above investment terminologies is beneficial because you will know what stocks to invest in, the right time to trade, and where to allocate your assets.