Financial terms
Written by R. A. Stewart
Learning some of the financial jargon and their meaning will help you better understand how the markets work and enable you to make better financial decisions before investing your savings. You should always do your own due diligence in order to reduce your chances of making a costly mistake but at the same time work out a strategy to get the best return on your savings. It is called risk-management and this takes knowledge which is acquired from experience.
Managed Funds
Managed Funds or Mutual Funds as they are also called is an excellent way for ordinary people to get involved in the sharemarket. When you invest your money into a particular fund you are combining your money with other investors who would not otherwise have been able to afford to invest directly in the sharemarket. There are fees with these funds which pay for the services of the fund manager.
Diversification
This is when you spread your money around in order to minimize risk rather than placing too many eggs in a few baskets. During the 2008 GFC there were stories of investors who lost their entire life savings when a financial company went under. These people invested all of their money in one company instead of spreading their money around different assets and types of investments which is known as diversification.
Volatility
Volatility refers to the up and down movement of the markets; it is also applicable to investing in gold and crypto currency..
Experienced investors know that the markets can be volatile during periods of uncertainty. Investors need to develop the correct mindset during these times because the markets will take even the most savvy investor on a roller coaster ride.
Risk-profile
This relates to how much risk you are willing to accept before you start to get nervous with your investments. It is easy to be an investor in growth funds when the markets are rising but as experienced investors know, the sharemarket is volatile, therefore you have to invest according to the amount of volatility you are able to tolerate.
Averaging
Averaging is that strategy where you purchase a small batch of shares regularly in stead of in one lump sum. This is possible with internet trading apps. The advantage is that with share values going up and down you at least have bought some shares at the lower price. Then find the average amount you paid for the share, add up the total amount paid for the share and divide that figure by the total number of transactions. This will give you the average amount per share. Averaging can also be used in the purchase of Bitcoin.
Dividend
A dividend is paid out by the companies to its shareholders. The dividend comes out of the profits by the company. Many investors like to reinvest any monies they receive from dividends; others prefer to receive it as income. It all depends on whether one invests for income or long-term capital gains.
Asset
An asset is something which produces an income for you. Examples of an asset are interest bearing accounts, shares, mutual/managed funds, property, etc
Liabilities
A liability is something which costs you money. If you are paying something off it is a liability. Items purchased on HP, a credit card, or finance company are all liabilities because they are costing you money. Astute money-managers have few liabilities because they know that the interest payable on borrowed money is “dead money” because they are not receiving anything tangible for their money.
Capital-Gains
Captain-gains is the increase in value of an investment whether it is shares, mutual/managed funds, property, gold, or cryptocurrency.
ABOUT THIS ARTICLE
It is important to understand the financial terms in order to become more financially sturdy and I have set out the more common ones here. My site www.robertastewart.com has lots of practical financial tips. Feel free to post this article to your blog or website.
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