Before you start investing, it’s crucial to understand a few basic financial terms. Every investment comes with its own set of investment jargon that could sound highly intricate and intimidating. Not knowing basic investment terms may push you off investing. In fact, understanding key terminologies helps you make an informed decision.
Knowing about some basic financial terms and definitions can be helpful before you take the plunge in stocks, bonds and mutual funds. This is why it is crucial to know how available investments can help you make smart decisions for your investment portfolio. Here we look at decoding the financial jargon that would be useful to you.
✓ Market capitalization
✓ Price earnings ratio
✓ Systematic investment plan
✓ Capital gains
The simpler terms
✓ Asset class
Asset class refers to group of securities or financial instruments that show similar characteristics and behaviour. Asset classes are classified as equity, debt, cash equivalents, real estate and commodities.
✓ Risk profile
Risk profile indicates your risk appetite. In other words, it suggests how much risk you can take when it comes to investing.
✓ Investment portfolio
Investment portfolio refers to your collection of investments.
✓ Investment strategy
Investment strategy refers to planning an investment and taking investment decisions based on goals, risk level and future need of money.
Diversification refers to investing in wide variety of asset classes in order to management the overall risk.
The complex terms
✓ Asset allocation
Asset allocation is a process of spreading your money across different asset classes. The entire objective is to reduce the overall risk of the portfolio while maximising returns. There is no guarantee but asset allocation can help you absorb market volatility because your investments are diversified across various sectors of the economy. For instance, if your gold investment doesn’t fare particularly well, you can rely on your equity investment to protect you.
✓ Cash flow analysis
Once the cash flow is determined, it becomes easier for you to plan your investments accordingly.
Net Asset Value (NAV) is the market value of each mutual fund unit. The NAV also determines the total fund value.
NAV = (Sum of Market Value of all shares (Including Cash) – Outstanding Liabilities)/ Total number of units outstanding in the market.
✓ Post-tax yield
The actual return of any investment needs to be weighed on a post-tax basis and not in isolation. This is because the tax implications of any investment might show a completely different result than otherwise. Hence, the post-tax yield is what matters the most as that is what affects the customers directly.
Beta is the risk associated with any investment. It is measured as the standard deviation of the return from the mean return, i.e. the volatility of the investment can be ascertained through the beta of the fund. So, while opting for investments, the beta needs to be kept in mind along with post-tax yield so that the overall risk of the portfolio doesn’t rise too much.
Understanding the fundamentals of basic investment terms definitions and getting it are the key to successful investing. It’s important to be well aware of products and market where your hard earned money is getting invested. Knowing the basic investment jargons can help you make prudent choices.