Investment Terms You Need to Know

Every industry has its share of terms that for the layperson can be difficult, unknown or mean nothing at all. These sorts of words are termed jargon. While no one should be talking jargon to those who are not in the industry it is useful to understand the terms if you are looking to invest. Let us look at some of the investment terms you need to know to give you a head start.

• Asset. This is a term for any investments, money, property, shares or other items that have some monetary value. Assets are categorised as asset classes when looking at a range of similar assets for investing.

• Asset Allocation is the allocation of your funds into the different classes. It is the distribution of your money into the different asset classes such as stocks, bonds, real estate, and foreign stocks. It is represented by a percentage or number and defines where you have placed your investments and how.

• Compound Interest is interest paid on interest. You earn compound interest if you reinvest the money you earn from interest. Over the long term, compound interest makes your money grow much faster than the straight interest rate. When you earn interest on interest, even on modest sums, your investment grows at amazing rates… in fact it has been called the 8th wonder of the world!

• Money Markets involve short-term borrowing and lending with original maturities of one year or shorter. Trading in the money markets involves such things as Treasury Bills, Certificates of Deposit, and short-term asset backed securities. It provides liquidity in the markets.

• Mutual Fund. This is also known as a Managed Fund or Unit Trust depending on the part of the world you live. It is an investment made with the pooling of investor’s money and placed into a chosen fund. The idea is that you can access markets with smaller sums of money and have it professionally managed for you.

• Risk-Return Trade-Off. The principle is that the potential return rises with an increase in risk. Low risk is associated with low potential returns, whereas high risk is associated with high potential returns. You must be aware of your personal risk tolerance when choosing investments for your portfolio as taking on some risk is the price of achieving returns. The aim is to find an appropriate level of balance that generates some profit, but still allows you to sleep at night.

These are only some of the more common investment terms you need to know when contemplating investing.

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