Most likely, you have come across dozens of investment terms in business conversations and media news. You have probably heard about asset diversification, an expense ratio, and a stock investment fund. Although most words sound familiar, there may not be a clear understanding of their meanings..
Understanding monetary terminology is very useful if you want to correctly manage your funds. Therefore, we will talk about the main issues on the investment topic. Do not be afraid to learn and understand even complex mechanisms, and then you will only make smart decisions.
What is the difference between stocks and bonds?
Stocks allow you to own a share of the organization’s assets and income. The value of your shares rises or falls in accordance with the financial well-being of the company and the assessment of its well-being by other shareholders. Stocks are risky but potentially more profitable.
Bonds are similar to loans granted. When you buy bonds from a corporation, government or other person, you give money with the expectation of their return at a specified time with a certain percentage. In other words, you lend your money.
Bonds are safer than stocks. You can look at how a particular bond is valued before you buy it, to understand how risky it is (“AAA” and “AA” indicators indicate a high level of reliability and investment rating).
Read also: Best Promotions for New Investors in 2018
What are dividends??
Dividends are periodic payments of part of the income that companies can distribute among shareholders. Or simply put, dividends are a kind of cash bonus for owning the shares of a project. As a rule, they are paid in cash or additional shares. For investors, dividends are a good way to earn extra income by investing in fixed assets to make a profit in the company’s shares. Please note that dividends may be taxed..
What is the difference between passive and active funds?
The name of the investment fund determines the type of its management. Passive funds adhere to a policy of non-intervention. For example, an index fund tracks popular stocks on the stock exchange and reflects their returns. Actively managed funds are trying to influence this indicator by expanding the range of investments. An investment fund itself is a group of individuals who pool their funds for investing in securities (collective investment) and trust management professionals. Thus, they minimize the risks of losing money..
What is the difference between mutual funds and exchange-traded funds?
A mutual fund is a company that manages the fund’s capital, which consists of investor money. The goal is to increase this capital and distribute its profits among the participants in the fund. Exchange-traded funds (ETFs) are actually a new type of securities, like the price of ordinary shares, they change and are traded during the day, unlike mutual funds, which are calculated only at the end of the day. This is the main difference.
What is a cost ratio and what is important in it??
The expense ratio shows how much the fund is worth, including management expenses, taxes, and so on. It is calculated annually by dividing operating expenses by the average dollar value of the fund’s assets, which reduce the return on investors.
Specialists recommend working with funds with an expense ratio below 1-0.5%. High commissions affect the investment portfolio in a negative sense and reduce profits. We are also talking about the loss of potential income..
What is diversification??
Diversification means investing money in various assets (for example, bonds and stocks) to reduce your own risks. For example, for the optimal distribution of finances, you want to invest in companies of various sizes from different countries, both in well-known companies and in fast-growing start-ups. Ideally, a diversified portfolio includes stable assets in reserve (bonds), which will always grow if other, more risky (stocks) go down.
Read also: Investment rule that really works
How compounding works?
Compounding is the increase in the initial investment amount as a result of interest accrual. Compound interest – this is when your profit percentage earn additional interest, i.e. accelerate the increase in cash. Everything you invest in the stock market benefits from compounding, so start investing as early as possible.
We hope our text about the basic concepts in investment will help you.
Similar articles
- Mutual Fund Strategies to Know About Before Investing
The criteria used by mutual fund managers when choosing their assets vary greatly depending on the experience and preferences of specialists….
- Redistribution of investments – an important rule that works
Looking at how stock indices grew throughout 2017 (Dow Jones Industrial Average, rose to 23,000 points by mid-October and then…
- What is an alternative investment? – 9 real life examples.
Alternative investments are non-traditional capital investments that extend beyond traditional stocks, bonds and unit shares…
What are the key investment concepts that every investor should be aware of?