An Introduction to the Basic Terms in Investment
There is always a kind of craving to join the bandwagon in life, even more in business and investments. Due to the several testimonies abounding on investment platforms generating massive returns, people long to start an investment, but with little or no knowledge on how the financial market runs.
While great investors always assert and are outspoken about the risk factor involved in all kinds of investment, it is not just expedient to know the basic terms of the market but also have more than primary knowledge on how the market works and how best to generate the desired return on investment.
A quick read through this simple guide may be all you need to avoid that colossal mistake that may push you into regrets and loss, so walk with me on this necessary journey.
What is an Investment?
According to Investopedia, an investment is an asset or item acquired to generate income or profit. Appreciation refers to an increase in the value of an asset over time while profit refers to a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing.
The investor purchases assets and items but for the ultimate reason is for generating profit and income, not for immediate consumption. For instance, if Mr. Leary should purchase a fleet of cars to brand them into cars for public transport, these cars are going to be bringing in returns in the form of profit. Another man, say Mr. Edwards spends an exact or equivalent amount in purchasing a fleet of cars for the sole purpose of luxury. Mr. Leary and Mr. Edwards have both done the same thing but with two very different motivations and intent, what defines whether or not a given item is an investment is what it would be used for if it is to generate income or not. So it is very possible that what is an investment to Mr. A is a mere luxury to Mr. B.
A definition of Asset allocation by Investopedia holds that
“Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.”
There are three main asset classes which include equities, fixed-income, and cash and equivalents, these three classes possess different levels of risk and return, which means that each one will behave differently over time.
In investment, cash is more than currency notes. Not only is it legal tender-currency or coin that can be used to exchange goods, debt, or services, it also includes the value of assets that can be easily converted into cash immediately, as reported by a company.
A company with just a million-dollar currency note and assets valued at $50 million possess have more purchasing power than a company with just a $10 million currency note.
A bond simply means a fixed income instrument representing a loan made by an investor to a borrower, a bond is often used within corporate or governmental corridors.
A bond could also be thought of as a document between the lender and borrower that explains in detail the facts and agreed-terms of the loan. These terms include the date when the principal of the loan is to be paid to the bond owner and also may include terms for variable or fixed interest payments made by the borrower.
Stock is a term that describes the ownership certificates of any company. There are two basic types of stocks which are common and the preferred, while the holder of a common stock possesses voting rights exercisable in corporate decisions, the preferred doesn’t. the Holders of Preferred stock however are legally entitled to receive a level of dividend payments before any dividends can be issued to other shareholders. A share on the other hand refers to the stock certificate of a particular company. Simply holding a company’s share makes one a shareholder.
This refers to the interest on a loan or deposit calculated based on both the initial interest and accumulated interests from that interest. Often referred to as ‘Interest of interest’, it makes a sum grow at a faster rate than simple interest, which is gotten only on the principal investment.
With these terms, you can rest assured that you won’t be lost in the next conversation on investment. In subsequent articles, we will consider more important aspects of the subject.