Do you know the most important definitions related to investing?
If your answer is “somewhat,” or “No”, then you’ve come to the right place.
To understand the world of investing, you need to have a glossary of key investment terms. It might seem a little intimidating at first, but once you get these definitions in your head, you’re halfway to becoming an investment pro.
Not only will you find it easier to critically assess the risks and opportunities of investment opportunities, but you will also be able to make financially sound decisions for the future.
In this article, I have sorted and explained popular and important investment terms for you. The best thing to do is to add this page to your web browser bookmark list so that you can always easily access the definitions even when you’re offline. Here we go…
Common investment terms you should know
1. Long-term investment
An investment you want to hold for more than a year.
2. Short-Term Investment
An investment you’ll want to hold for less than a year. Stocks are often short-term investments that are bought and sold monthly, weekly, daily, or even hourly.
3. Portfolio
The name for all your investments or assets combined. Whether it’s stocks, gold, cash, or something else such as real estate. You can treat it like your financial wallet.
4. Yield
The profit or loss you make as a result of your investments.
5. Compound Interest
The interest you earn by immediately reinvesting interest you’ve already earned. For example, if you earn a 20% return on your investment of 100,000 Naira annually, you will earn 20% on 120,000 the following year and 20% on 144,000 Naira the following year. Compound interest rewards those who invest early and for the long term.
6. Risk Tolerance
Your risk tolerance refers to how much risk you are willing to take in pursuit of your financial goals. Generally speaking, the higher the risk, the higher the reward (the flip side: the higher the risk, the higher the chance that you’ll lose everything if the investment doesn’t work out in your favor).
7. Diversification
Owning a range of different types of investments to reduce risk and prevent losing all your money if an investment goes in the wrong direction. This is advisable because it means that if one type of investment takes a financial hit, your entire portfolio won’t be destroyed.
8. Divestment
Divestment means selling your assets, which is the opposite of investment. These days one often hears of individuals and organizations divesting themselves of fossil fuels and selling their stakes in this industry.
9. Liquidity
This refers to how quickly an investment can be sold and turned into cash without suffering a significant loss in value.
For example, cash in your savings account has high liquidity compared to real estate. Real estate isn’t as easy to sell and can go down in value if you do.
10. Volatility
This is the amount your investment goes up and down. If the price rises and falls sharply in a relatively short period, this is a sign of high volatility. Low volatility means that the price remains relatively stable. High volatility tends to result in higher returns (or higher losses) because the risk is higher.
11. Bear Market
This definition describes a stock market that has experienced a significant drop in value (generally 20% or more) over an extended period (typically 2 months or more).
During a bear market, investors generally have low confidence in their investments, and there are more people selling than buying.
12. Bull Market
The bull market is the opposite of a bear market and refers to a period of prosperity for stock markets. This applies if the values increase by more than 20% for at least 2 months. During a bull market, investors are bullish and prices rise as demand for stocks is high.
13. Asset class
There are many different types of investments – stocks, bonds, funds, ETFs, cash, and more – each of which can be primarily categorized into one of three asset classes: equity (e.g. stocks), interest-bearing securities (e.g. bonds), and cash equivalents (e.g. paper money). Other asset classes can include real estate or commodities, for example.
Investments are classified into one of these asset classes because they share similar financial characteristics and structure, meaning they can be traded in the same markets and are subject to the same rules and regulations.
When a company “goes public,” it is divided up like bread so the public can buy slices of that bread. The slices are therefore called Shares or Stocks. The stock price is based on supply and demand, meaning the more people want to buy a stock, the higher the price will be.
The terms shares and stocks can be used interchangeably as they have the same meaning.
It’s already said that “shares” is the size of your “bread slice,” which is the percentage of a company that belongs to you. Equity is therefore the amount of money you would receive if
- you sold (or “liquidated”) your shares, or similarly
- a company was liquidated and all shareholders were paid out for their shares.
16. Dividend
A periodic payment made by a company to shareholders based on the company’s profits. These vary from company to company but are always proportional to the number of shares you own. They provide an incentive to buy shares in a company as they provide regular income for shareholders.
17. Blue chip company
While there is no official list of blue chip companies, the term refers to any company that has a good history of earnings, profits, and dividend payments.
In general, these companies find it easier to weather global financial downturns. Typically, these are well-known names such as Microsoft, Amazon, Johnson & Johnson, and Mastercard.
18. Exchange
This refers to the infrastructure where stockbrokers and traders buy and sell financial assets such as stocks, bonds, and ETFs. Some of the largest stock exchanges are the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), and Euronext.
19. Bonds
This is a type of fixed income investment, in the form of a loan from one organization or person to another, on specified terms, and for a specific project or investment. When an institution needs money, it issues bonds that investors can buy. These bonds pay an agreed rate of interest, also known as the coupon rate. The date when the money must be returned is also set and is called the due date.
Bonds can be bought, sold, and traded between investors just like stocks and are considered to be a lower risk with lower returns.
20. Mutual Funds
A mutual fund (often just called a fund) is a pool of investor money that is then used by the investment company to buy a variety of assets, such as stocks, bonds, gold, and sometimes cash.
Conclusion
I hope this list of investment glossaries has been helpful! As I have said earlier, it is best to anchor the list in your bookmarks so that you always have the terms ready when you need them. If you have any questions, ask in the comment section.
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