To understand a thing, one always needs to get down to the basics; the same holds true about investing. First-time investors may feel intimidated by the diverse technical jargon of the world of investing. This guide helps you know the most important investment terms for beginners to make an informed choice.
The simpler terms
#1 Asset class
When an investor steps into the investment market, they are faced with choices – asset class. By definition, asset class refers to a group of financial instruments or securities that show more or less the same characteristics. Examples of asset classes include equity, debt, real estate, cash equivalents, and commodities.
#2 Investment portfolio
Also, one of the basic investment terms to know, an investment portfolio refers to an investor’s basket or collection of investments in the form of stocks, bonds, and cash, among others.
#3 Investment Strategy
Every investment requires careful planning and strategizing on the part of the investor to yield fruitful returns, which is easy if you have an investment calculator. An investment strategy means making investment decisions upon proper consideration of the following factors – risk tolerance, goals, the future need of money, etc.
#4 Dizersification
For every first-time or long-time investor, knowing investment terms such as diversification is a must to manage the overall risk involved. Diversification refers to spreading one’s investments in different asset classes so as to limit exposure to the risk of only one type of asset.
The complex terms
#1 Asset allocation
Asset allocation refers to the process of determining the right mix of investments in an attempt to overcome market volatility. On the surface level, asset allocation may seem similar to diversification, but there is a vital difference – where asset allocation means deciding which asset classes make it to your investment portfolio, diversification is all about determining how much exposure you should have to each of the chosen asset classes.
#2 Cash flow analysis
An analysis is imperative to understanding how investments are performing over time. A cash flow analysis statement displays how much money has been used in making financial investments and how much returns have been generated as a result.
#3 NAV or Net Asset Value
Also referred to as the market value of a mutual fund unit, it is on the NAV per unit that the overall cost of a mutual fund depends upon. The formula for calculating NAV is as follows –
{Total market value of all shares (this includes cash) – Outstanding liabilities}/ Total number of MF units outstanding in the market.
#4 Post-tax yield
One of the most important investment terms for beginners, the post-tax or after-tax yield, is the rate of return on investments after taxes have been subtracted. This is because tax implications may entirely alter the final result.
#5 Beta
Known as the risk associated with any investment, beta is measured as a standard deviation of the returns from the mean deviation. Beta helps in assessing the volatility of an investment.
Knowing basic investment terms is the key to successful investing. Once you are thorough with these terms and have calculated your risk profile, you can use investment apps like Moneyfy to compare between the best investment options from the comfort of your home.