10 Important Financial Terms You Should Know As A New Investor
Updated: Jan 4
Learning about investing is very much similar to learning a new language. A lot of people struggle to learn about investing and finance due to the confusing investment-related terms.
If you are someone who is new to the world of investment there is no need to worry, you will be able to understand these terms and start speaking the language of investing fluently in quite a small amount of time. In this post, we are going to break down some of the important financial terms you should know as an investor. So are you ready to learn and be a person who understands the language of investment?.
Here are 10 important financial terms you should know as a new investor.
1# Mutual Funds
In simple terms, a mutual fund is the amount of money that comes from various investors and is then invested in assets like stocks and bonds. A mutual fund usually holds multiple stocks across different domains with the purpose of spreading the risk. Usually, money managers are the ones who make buying and selling decisions for mutual funds.
As an investor, when you are investing money in a bond, you are simply loaning money to a company or government and cash in the bond on the maturity date and earn some interest if everything goes fine and nothing bad happens with the company.
When as an investor buy stocks of a company, you are buying a certain amount of ownership in the company. If the company performs better, the value of your share will increase, and if the company does not perform well, the value of your share will decrease or may even be worthless.
Assets are items that have a certain value in the market. In terms of business, an asset is something a business owns that has a certain commercial value in terms of currency. An intangible asset is an asset that has some currency value but may not be worth anything unless the business is successful. Usually, this is an asset that was acquired by buying another business.
5# Index Funds
The index funds are a very popular type of mutual fund because it's usually cheaper. If you really want to understand index funds, you need to understand indexes, which are simply a collection of stocks that represents a portion of the economy. The performance of indexes gives an investor idea of how the bond market or stock market is doing.
By investing in an index fund, you are essentially betting on the success of the collection of companies it contains.
6# 401(k) Plans
The 401(k) is a retirement account created by collecting a portion of your salary pre-tax month. The 401(k) is also known as a defined contribution plan. There is a certain defined amount of money that you can put in your account each month. Once you retire, you pay taxes to the federal government. But nowadays, if the stock market dips, your retirement fund decreases with it.
7# Return On Invested Capital
Return on invested capital is the percentage return you get back from the cash you have invested. The simple way to calculate it is to subtract dividends from net income and divide that number by total capital. Return on invested capital is a good measure of how effectively a company uses the money invested in it. As an investing rule, you usually target at least a 10% return on invested capital per year.
A dividend is the distribution of a portion of a company's earnings to a section of its shareholders, as determined by the company's board of directors. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date. Dividends may be paid out in the form of cash or additional stocks.
9# Price To Earnings Ratio
The price to earnings ratio is the price of a company's stock in relation to its earnings. The price to earnings ratio gives you a general measure of whether your investments are overvalued or not. As a general rule, a low price to earnings ratio (0-10) means that the company is not doing well or doing just ok but is undervalued. If the ratio is high i.e greater than 25, it may be an indication that the company has a lot of growth potential in the future, but might also be a sign that the industry is at the top of a bubble that's about to burst.
10# Expense Ratio
The expense ratio is the percentage of your money that goes to the manager of the mutual funds you are investing in. In short the bigger the expense ratio, the less money you are going to make. The expense ratio also covers other fund expenses such as administrative fees, record-keeping fees, etc. In 2013, the average stock mutual fund has an expense ratio of 1.25%.
We hope that this post provided some interesting and useful information that will help you in investing and learning more about it. If you are someone who is very new and don't know anything about investing, you can start here.
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