A Beginner Guide To Investment: Understanding Basic Concepts

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Discussed very briefly in our list of basic finance concepts, Investment might come off as intimidating, particularly to those who are new to the world of finance. Murky terms, potential risks and seemingly complex strategies can all feel overwhelming.

However, you’ll soon find out that financial growth and stability is the fundamental aim of investing. That seemingly complex process becomes an effective way to make your money work for you.

Growing wealth is a necessity in these times, and a good investment will not only get you started, but can keep you going for a long long time. If you already have some experience investing, you can stick around to refresh your memory, but remember to stay tuned for our future articles. We’ll be covering the basics of investments as it pertains to an everyday individual — that is, you and me.

What is Investing?

Investing is an act with a clear goal: receiving returns. In contemporary financial systems, the act of investing typically involves strategic buying and selling.

Assets like stocks, bonds, even real estate or a car – if you consider the accounting perspective – are the usual commodities in the general investment market. Sometimes, people can trade creative ideas, technological advancements and such as investment commodities.

Investing differs from trading in that investing is for the long-term, usually years or decades. Investing is one of the key strategies to building long-term wealth and financial security. — Investopedia

Basic terms and concepts

While investing is a good approach to wealth management and growth, many are deterred by the overwhelming amount of special terms exist in the space. Whether you aim to be an expert or not, there are certain jargon that are must-know for anyone who needs or wants to participate in investment activities and conversations.

Penny’s gathered a few of the most common investment terms and what they mean. Here’s what we found:

Annual Return: Usually expressed as a percentage, this is the gain or loss from a year-long investment.

Assets Allocation: This refers to the strategy of dividing your investment portfolio among different asset categories, such as stocks, bonds, and cash.

Bear vs Bull: These terms describe stock market trends. A 'bull market' indicates that prices are rising and the economy is growing, while a 'bear market' means falling prices and economic reduction. Investors are interested in the state of the stock market in these terms because it can be used to determine strategy.

Bid Price: The highest price that a buyer is willing to pay for an asset.

Brokerage: A firm that acts as an intermediary between buyers and sellers in investment transactions.

Capital Gain: Profit earned from the sale of an investment or property.

Compound Interest: This is a financial process of calculating interest. The principal (ie the amount originally invested) grows every year by the value of the accumulated interest (ie interest from all the previous accounting periods.

Depreciation: This refers to the decrease in the value of an asset over time.

Diversification: With the aim of reducing risk, this investment strategy spreads the total investments or investor’s portfolio across various financial instruments or other categories.

Dividend: This is a portion of a company's earnings distributed to its shareholders.

Equity: This refers to ownership interest in a company, typically in the form of stocks.

ETF (Exchange Traded Fund): These are funds that track indexes like the NASDAQ-100 Index, S&P 500, etc. ETFs trade like common stock on a stock exchange.

Liquidity: This refers to how quickly an investment can be sold without significantly altering its price.

Margin Account: This is a type of brokerage account that allows you to buy securities by borrowing money from a broker.

Portfolio: This is the distribution of investments in a portfolio among various sectors or industries.

Risk Ladder: A representation of investment options ranked by their relative risk levels.

Stock Market: A place where buyers and sellers trade shares of public companies.

Technical Analysis: This is a method of predicting the future direction of a security's price based on its historical price data and volume.

Wall Street: This term refers to the financial district of New York City, which is synonymous with the U.S. financial markets.

Image via Stockcake.

Yield: This is the income return on an investment, such as the interest or dividends received.

Conclusion

You might still be hesitant about jumping right in after learning about the above concepts, but the next time we send Penny out for investment nuggets, we’ll focus on understanding investment commodities and strategies.

Investing is one of the most important practices for achieving long-term financial security and even success. This means that you should probably check out another one of our posts if you're looking to make quick profit. Nonetheless, when you start thinking about sustaining and increasing wealth Plently will always be here with the financial help you need!