Finance and investment are diverse areas that will have something confusing caught in them. Knowing these basic terms will simplify your navigation of the financial world. It’s time to take a look at some of these important concepts one by one.
1. Asset
What you own is an asset. It can be cash, property, stocks, bonds. Things that can generate an income or can be sold for cash are important assets. The wealthier you are, the better your finances.
2. Liability
An asset is the opposite of a liability. A debt or the obligation that you must pay someone else. That can include loans, mortgages or credit card debt. You have to manage your liabilities. If your liabilities grow too high, you’ll be in a bad position.
3. Equity
Ownership value in an asset is called equity. As an example, if your home is valued at a $300,000 and you still owe $200,000, your equity in home is $100,000. This term is also used in stocks. If you own stock that means you have some equity in that company.
4. Diversification
The risk of diversification is a strategy. If you spread your investments across different asset classes meanwhile, you guard yourself against losing all your money if one investment falters. It is like not putting all your eggs in one basket.
5. Return on Investment (ROI)
ROI is a measure of the profitability of investment. It tells you how much you made in return for your investment. The better the investment, the higher ROI. This is a key term for any body that wants to grow their money.
6. Market Capitalization
Market cap, or the market cap, is the total value of a company’s outstanding shares of stock. The total number of shares are multiplied by the share price to figure out it. Market cap is an indicator of company size to investors.
7. Bull Market and Bear Market
They refer to market trends. Stock market is up, therefore a Bull market, stock market is down is therefore a Bear market. By knowing these terms, you can see when to buy or sell investments.
A portfolio is a gathering of investments in a single asset by an entity. Therefore, this can encompass such things as stocks, bonds, real estate and more. Risk is best managed and financial goals are best reached as a result of a well balanced portfolio.
9. Dividend
A dividend is a fraction of company earnings paid to shareholders. As a rule, companies are obliged to pay dividends to their investors. Even if the stock isn’t going up, if you own stocks that pay dividends, you can make money.
10. Inflation
General price level increase is called as inflation and is the amount of price increase of goods and services. It reduces purchasing power. Without prudent savings, inflation will consume away at your savings. In any case it is important to keep an eye on inflation.
11. Compound Interest
Interest on a loan or deposit paid according to a series of percentages, each calculated on the previous principal and interest, as opposed to interest added each year at a single final amount. That means your money can grow faster. It’s like getting paid for paying you back.
12. Index Fund
By investing in an index fund you are basically betting on an index, such as the S&P 500, to perform well. You like these funds because they usually have lower fees and give you more of what you want: the market.
As you learn more about finance, keep exploring. There are always new concepts and strategies to discover. Remember, the world of money can be overwhelming, but breaking it down into simple terms makes it more manageable. So, keep these basic terms in mind as you navigate your financial future. For more tips and insights, visit Moneyphobia.
I a finance writer with 2+Year of Exp in financial topics. With BBA in Finance degree, content writer, SEBI-certified investor, and stock market enthusiast.
