12 Financial Terms Every Investor Needs To Know
Picture this: You made the decision to take control of your finances and making steps to start investing. You opened a trading account, added in some funds, and getting ready to buy some stocks. As you start researching you realize that the world of investing is laden with jargon that can make it sound like a foreign language.
To help you become fluent in the language of investing, here are the 12 most used terms and definitions. From here you can start to master this jargon and gain financial confidence to invest and manage your money.
THE 12 FINANCIAL TERMS EVERY INVESTOR SHOULD KNOW.
Balance Sheet: this is a snapshot of the financial health of a company. The document reports on a company’s assets, liabilities, and shareholder equity at a specific point in time.
Capital: Capital includes cash and other financial assets owned by a person or a company that has value. Examples of capital include cash, stocks, or equipment.
Commodity: This refers to a raw material that can be bought and sold. There are many examples of commodities but the most popular include agricultural (wheat, soy beans), metals (gold, silver), and energy (oil).
Diversification: Have you heard the saying, don’t put all your eggs in one basket? This holds true for your money and investments. Rather than investing all your money in one stock or one company, diversification is the action of spreading out your money in different investments, such as cash, bonds, stocks, real estate, etc. Diversification is a way to manage risk.
Dividend: This is when company’s share the wealth. When a company makes a profit they can share a portion of it with its shareholders in the form of a dividend. Dividends can be paid out in the form of additional stocks, or in cash and dividends are usually paid out quarterly.
Dollar-cost averaging: This is a strategy where you invest the same amount of money at regular intervals. Because nobody can time the market, by investing regularly (in both up and down markets), investors are able to buy more shares at lower prices and fewer shares at higher prices.
Earning per share (EPS): This is a financial calculation which is calculated by dividing a company’s Net Income by the number of Outstanding Shares. This is a test to assess a company’s performance and profitability. The higher the EPS, the more profitable the company usually is.
Lump-sum investing: The opposite of Dollar Cost Averaging, lump-sum investing is where you take a sum of money and invest it all at once.
Outstanding Shares: All publicly traded companies have shares. Outstanding share refers to the number of a company’s stock that this currently held by all of its shareholders.
P/E ratio: Price to Earnings (P/E) is a ratio that measures the value of a company by comparing the price of its stock to how much money the company has earned. Typically, the P/E ratio is used by investors to see if a company’s stock is overvalued or undervalued.
Robo-Advisor: First things first, a robo-advisor is not a robot. With a robo-advisor, you don’t need to speak with a broker (although you can speak with person is you have questions), it is a digital platform that provides automated, algorithm-driven financial planning services based on your answers via an online survey.
Security: A security is a financial asset such as a stock, bond, or option, that can be traded on the stock market.
SUMMARY
So there you have it, the 12 terms that people who are beginning to in. There are many more teams to learn, but with this, you are off to a great start.
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