Getting into investing is a little like getting into baseball: the deeper you research, the more you are you’re hit with new and obscure stats and terminology. Unlike baseball, however, many people rely on investing for their financial future. The financial industry, and investing in specific, comes with its fair share of jargon, and not everyone has the time, means or inclination to learn every single term.
To that end, in order to empower investors who are either just starting out, or for whom many of the key tenets of investment still remain a mystery, this article will spotlight four terms you should know. Knowing these terms can help you form a baseline of knowledge about investing, upon which you can build and learn. Let’s take a look:
Perhaps it is actually best to start by defining an asset. An asset is any resource of economic value – that might be stocks, bonds, real estate, inventory, cash, vehicles, patents… the list goes on. Asset allocation is concerned with how an individual or company combines a mix of assets, in particular, their investments.
Establishing the right mix of bonds and equities (two terms this article will touch on below) is fundamental to managing risk and return, and achieving your financial goals. Striking the right balance in asset allocation is a skill, which is why many people turn to investment managers, or wealth managers, for help – you can click here to learn more about finding the right wealth management company.
Equities often referred to as “stocks”, are a type of security that represents ownership of a share in a company. The “shareholder” has a claim to a fractional portion of the company they invest in and are entitled to a portion of profits that are paid out, called dividends, as well as potential capital gains. Equities typically produce higher returns than bonds, but they are also seen as risker since they are tied to the volatility of the market.
In order to raise capital and finance certain projects government agencies and corporations will issue debt securities. They can be thought of as IOUs, where the issuer promises to pay the principal along with interest by an agreed upon date. These IOUs are commonly known as bonds and are an important fixed income investment in a portfolio. While they generally offer more modest returns than equities, they are seen as safer.
Diversification is a process in investing that seeks to combine different types of investments in a portfolio in order to mitigate risk. When looking to diversify a portfolio, an investor or wealth manager will not only look at the right mix of bonds and equities but will look at different market caps (in the case of equities) and different types of bonds. They also look at spreading investments across geographies, sectors, and industries in the market.
When investing, knowledge is power. There is a great deal to learn about investing, but hopefully, these four fundamental terms can help you get started. To learn more and to take proactive steps toward achieving your financial goals, contact a wealth management company today.