Irrespective of who you are and what you do, you must have knowledge about the basic investment terms. As the world of investing is growing, you never know when you have to make your own investment decisions.
Becoming clearer about these 10 basic investment terms will help you grasp the concept of investing better.
Sub-topics we’ll be discussing:
Basic terms used for companies
1. Assets and liabilities
Assets: They are the things that the company owns. Assets provide a future economic value for the company.
Example: Land and property owned for the company’s operations. Talking about a personal example, it could be your home. If you have given a part of your home on rent, then you would be receiving a return from it, which makes it an asset.
Liabilities: Contrary to the assets, liabilities are the obligations that the company needs to pay in the future. The company will have to make a payment to fulfill these liabilities.
Example: Loans – the company might have taken loans to finance its recent projects. It needs to pay interest from time to time. Also in your personal case, if you have taken any kind of loans such as education, home, etc, then it becomes your liability.
2. Income vs profit
At first sight, income and profit sounds the same, doesn’t it? That’s what I used to think as well. After all, both these bring in money for the company. However, you will be able to find a clear difference.
Income: Income means all the ways through which a company brings in money. For Apple, it is by selling iPhones, Mac, iPod, and so on. Your personal income would be the salary you get from your job, the rent you receive from your home, etc.
Profit: Profit is the leftover after reducing income from expenses. For Apple, it would be the manufacturing cost for its devices, employee expenses. For you, it would be your living expenses related to food, health, electricity, and so on.
Profit = Income – Expense
3. Net worth
Net worth = Assets – Liabilities
In other words, it’s what the company is worth. Increasing net worth is a positive sign as it indicates the company should be able to make more money than it would spend.
4. Income statement
The income statement shows all the incomes and expenses made by the company throughout a particular time period (usually a year). Its main purpose is to find out whether the company made a profit or loss. A lot of investors make their investment decisions based on the data of the company’s income statement.
5. Balance Sheet
The balance sheet shows the assets and liabilities held by the company. After deducting liabilities from assets, we get net worth. The purpose of a balance sheet is to reveal the financial position of the company at a given time.
Managing your investments
Diversification is the action of dividing your portfolio into different types of investments. It will help you to minimize the risk of your investment loss. For example, you might think it would be very risky to have only the stock of Amazon. So you buy a few shares of Apple, Microsoft, and Samsung to diversify your portfolio.
I have had a tough time dealing with diversification. If you like to know about my personal experience with it, then check this out – The Art of Diversification
7. Mutual fund
A mutual fund is the collection of funds that are managed by a professional investment manager. The fund manager compiles funds from all the people, which he then uses to invest in the stock market. This is particularly useful for investors who don’t have much time for investments. Apart from that, there are many other benefits of mutual funds.
8. Portfolio Management
Portfolio management is the process of properly managing your investments. You would plan how long you want to invest, which stocks to buy, how many stocks to buy, and so on. The most successful investors are the ones that are able to manage their portfolio effectively. One of the common mistakes new investors make is that they are unable to maximize their portfolio returns.
Stock market basics
9. Trading vs investing
|Time horizon||Short term||Long term|
|Focus on||Stock price||Company fundamentals|
|Transaction frequency||Quite a lot||Only a few|
|Purpose||Quick profit||Get return in the long term|
10. Bull vs bear market
|Particulars||Bull market||Bear market|
|Meaning||A continuous increase in prices||A continuous decrease in prices|
|Supply and demand for stocks||Strong demand and weak supply for stocks||Weak demand and strong supply for stocks|
|Psychology||Positive; Optimism throughout the market||Negative; Pessimism throughout the market|
|Investor participation||Most investors try to participate to earn profits||Most investors avoid from participating to limit losses|
The Bottom Line
By this time, we hope that you have learned the 10 basic investment terms. Now, if you ever come across a situation where you have to make an investment decision, these basic terms should help you out.
If you are only starting out, then follow these precise techniques to begin your investment journey with a bang – How To Start Your Investment Journey With A Bang?
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