Basic Investing Terms
Assets
An asset is something that provides a current, future, or potential economic benefit for an individual or other entity.
Bonds
A bond is essentially a contractual debt obligation by a government or corporate body. The borrower issues a bond in exchange for the money borrowed. Depending on the terms of the bond, the issuer (borrower) will pay the bond holder (lender) interest and/or repay the principal at intervals or all in one at the end of the contract (maturity). Interest is usually payable at fixed intervals (semi-annual, annual, etc.).
Collective Investment Scheme (CIS)
A collective investment scheme pools together money from many investors to perform as one investment. Collective investment schemes may help individual investors with limited amounts of money to access diversification and professional management services, especially if they do not have the time nor expertise to do it themselves.
Compound Interest
Dividends
Diversification
Equities
Equity, typically referred to as shareholders’ equity (or owners’ equity for privately held companies), represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off in the case of liquidation. In the case of acquisition, it is the value of company sales minus any liabilities owed by the company not transferred with the sale.
In addition, shareholder equity can represent the book value of a company. Equity can sometimes be offered as payment-in-kind. It also represents the pro-rata ownership of a company’s shares.
Equity can be found on a company’s balance sheet and is one of the most common pieces of data employed by analysts to assess a company’s financial health.
Historically, equities have out-performed safer vehicles like bank accounts and bonds and can act as the real driver for growth in your investment portfolio.
However, investment in shares exposes you to the potential to lose some or all of your money. Shares are considered a risky asset class so an individual should give careful consideration and conduct proper research when contemplating investing in equities.
Financial Planning
A financial plan is a comprehensive picture of your current finances, your financial goals and any strategies you’ve set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. Financial planning is used to attempt to achieve financial success.
Risk Appetite
Risk refers to the willingness of investors to bear financial risk. It is the knowledge that an investment’s actual return may be different than expected and the willingness to accept this possibility. Every investment carries some level of risk and you must determine your risk appetite and establish your own level of risk tolerance.
Risk Tolerance
An investor with a high risk tolerance is likely to invest in securities such as stocks in startup companies and is willing to accept the possibility that the value of his/her portfolio will decline, at least in the short-term.
An investor with a low risk tolerance, on the other hand, tends to invest predominantly in stable stocks and/or highly-graded bonds. Your risk tolerance is subjective and may vary according to your age, needs, goals, even your personal disposition.
A security is a negotiable financial instrument that represents some type of financial value. Securities are typically divided into debt securities and equities.
A debt security is a type of security that represents money that is borrowed and must be repaid with terms that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs) and preferred stock.
Prospectus
The prospectus is a disclosure document that provides investors with material information about mutual funds and other investments. It usually includes a description of the company’s business, financial statements, biographies of officers and directors