34 Investment Terms You Need To Know
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In the world of investing, knowledge is power. So, whether you are a seasoned investor or you are just starting out, understanding investment terminologies is crucial for making informed decisions and navigating financial markets effectively.
Therefore, we have gathered several investment terms to help you better understand investment and build a more comfortable life. Here are 34 essential investment terms to add to your vocabulary.
1. Asset
An asset is something you own and can be sold, which has value and potential to generate wealth. Assets come in tangible and intangible forms. Tangible assets include stocks and real estate, while intangible assets include goodwill or brands.
2. Asset Allocation
Refers to asset allocation in investment portfolios. Experts recommend a combination of various types of investment instruments to achieve long-term goals and to reduce risks. Asset allocation should take into account risk tolerance and retirement horizon to build a balanced portfolio.
3. Asset Class
A category of investments with similar characteristics and risk profiles, such as stocks, bonds, or real estate.
Investment categories with similar risk characteristics and profiles, whether it is low, moderate, or high risk.
Low risk: ASB, Fixed deposits
Moderate risk: Real estate, gold, mutual funds
High risk: Stock market, Forex
4. Bond
Bonds are a major asset class made up of fixed-income securities issued by an investor to a government or business. Bonds pay interest to the investor, but the amount of money that is invested is usually locked and inaccessible until the end of the bond period. The bond maturity period can be between one day and 100 years, while short-term bonds can mature within a few years.
5. Capital Gain
Capital gain is the return received when the price or value of the asset purchased increases compared to the purchase price.
Capital loss, on the other hand, occurs if the situation is reversed. For example, if you buy a house for RM200,000 in 2020 and today, the selling price is RM400,000, you will gain a capital profit of RM200,000 if you sell the house.
6. Compound Interest
The power of compound interest power is the concept of earning interest on interest from dividends or returns received.
For example, you invest RM1,000 in ABC stocks and receive a dividend of 10 percent. When you reinvest this dividend, it becomes part of your capital, which now amounts to RM1,100.
The following year, you once again receive a 10% dividend, increasing your capital to RM1,210 with a dividend of RM110.
By retaining dividends, the power of compound interest can double your money over time, depending on the dividends received.
Investing is the best way to make your money work for you.
7. Cryptocurrency
This refers to digital currency / virtual currency distributed in the public ledger known as blockchain. There are no specific laws regulating the exchange rate of crypto, hence its volatility is also uncertain, making it a high-risk investment. Examples of cryptocurrencies include Bitcoin, Ethereum, and Cosmos.
8. Diversification
Diversification means investing in a variety of different types of investments with different risks and return expectations in your investment portfolio. It's like the saying, 'Don't put all your eggs in one basket.'
9. EPS (Earning Per Share)
Earnings per share is the profit earned by a company divided by the total number of company shares. Companies can do two things with this profit. First, it is to retain it to grow the company, and second, it is to pay dividends.
10. Portfolio
An investment portfolio is a record of investments held by an individual or institution that shows where investments are made and the exposure to risks that investors need to bear.
Examples include investments in cash, stocks, bonds, and other assets held by individual investors or investment fund companies.
11. Equity
It is the ownership of an individual in a company based on the number of shares they hold.
12. Risk
Risk is the possibility of losing capital that you have to bear when investing. Generally, the higher the risk, the higher the potential for greater profit. Risk is usually measured based on the volatility of the value of the investment instrument, such as the price of a share unit.
13. Stock Exchange
A stock exchange is where stockbrokers and traders can buy and sell shares of stocks, bonds, and other investments. Different stock exchanges have different listing requirements and, therefore, offer different stocks. For example, in Malaysia, the stock exchange is known as Bursa Malaysia.
14. Stock
A stock represents a share of ownership in a company. Each unit of stock represents one unit of ownership in a listed company. Those who own shares in a company can attend the Annual General Meeting and vote on the proposed resolutions. There are shares traded in Bursa Malaysia that can be purchased through an IPO or at the current price when it is offered.
15. Stock Market
The stock market is a market where a company's stocks are traded as issues at a set price. It is regulated by a specific authority, allowing investors to buy and sell as long as they do not violate the established laws.
16. Bull Market
The market refers to the trend when there is an overall increase in stock prices and gives positive confidence to investors
17. Bear Market
Referring to the market where there is an overall decrease in prices, creating negative investor sentiment.
18. Sales Charge
A sales charge is imposed when you want to invest in investment instruments such as mutual funds. Typically, the amount charged is around 5% of the investment amount made.
19. Mutual Fund
Unit trust is a pool created from funds collected from investors, which is then managed by professional fund managers to generate income.
Typically, the funds in this pool are invested based on a predetermined portfolio depending on the fund category and profit expectations. The income distributed by this fund is known as income distribution.
20. Interest
Interest rate refers to the charge from lenders such as banks on borrowers. For example, if you borrow RM50,000 to buy a car, the bank typically imposes an interest rate of between 2-3 percent per annum on the loan.
Interest rate also refers to the profit earned if you deposit money in savings accounts and fixed deposits.
21. Dividend
The distribution of profits of a company approved by the board of directors is to be given to its shareholders.
22. Investment Capital
Investment capital is the money you invest in any investment instrument with the hope of getting returns/profits.
23. Risk Tolerance
The level of risk someone is willing to bear when they want to invest. Each individual has a different risk tolerance level depending on their own profile. Those who enjoy adventurous activities are usually considered to have a high-risk tolerance because they are willing to take risks.
24. Volatility
Changes or fluctuations in prices are usually used as a measure of risk for a particular type of investment. For example, the stock market has high volatility because the price of a share can change at any time, while mutual funds have moderate volatility because the price per unit only changes once per day.
25. Liquidity
Liquidity refers to how easily an asset can be redeemed for investors to recover their capital. The easier it is for an investment to be redeemed, the higher its liquidity rate. Liquidity also refers to how easily a particular type of investment can be bought or sold without significantly affecting the price.
26. Fund Manager
A fund manager is a company responsible for managing funds collected from investments to generate profits. For example, the manager of the ASB fund is Permodalan Nasional Berhad (PNB).
27. Hedge Fund
A hedge fund is a limited partnership between private investors whose funds are managed by professional fund managers who employ a wide range of strategies, including leverage or trading non-traditional assets, with the aim of achieving higher returns compared to other investment instruments.
28. Options
A contract that gives a buyer the right to buy or sell a specific asset at a certain price before or on a certain date.
29. Futures
Financial contracts obligate the buyer to purchase or the seller to sell an asset at a predetermined price on a specified future date.
30. P/E Ratio
Price-to-Earnings ratio is a measure of a company's valuation calculated by dividing its stock price by its earnings per share.
31. IPO (Initial Public Offering)
The first sale of stock by a private company to the public is often used to raise capital for the growth or expansion of the company.
32. ROE (Return on Equity)
Return on Equity is a measure of a company's profitability calculated by dividing its net income by shareholders' equity.
33. Dollar-Cost Averaging
An investment strategy is one in which an investor regularly purchases a fixed amount of a specific investment, regardless of its price, over time. You can read more here to better understand dollar-cost-averaging (DCA).
34. Amanah Saham Bumiputera (ASB)
ASB is a fixed-price unit trust offered by ASNB at a price of RM1 per unit. The initial investment is RM10, while the maximum investment is RM300,000. Because it is a low-risk investment, you don't need to worry about losing your capital; instead, you have the opportunity to build savings through the chance to receive consistent dividends every year.
Are you ready to start investing?
Understanding investment terms can help you start investing and managing your money more effectively. Don't worry about the terms used; they may seem unfamiliar when you're just starting out, but as you become more familiar, they will become easier to understand.
As the saying goes, 'practice makes perfect'. So, don't postpone your desire to start investing if you haven't already. While full of risks, investing can help you build wealth and peace of mind if managed well.
