Top Financial Terms Every Investor Should Know
For a newbie, it can be very intimidating to invest money. There will always be the anxiety that comes with taking risks and knowing you might not get all your money back. What is more intimidating are the investment jargon. There are a lot of complicated words financial advisors and financial experts use that are essential for average investors to understand. This list will help you understand these terms will make you feel more confident about investing.
Asset allocation. This is just an intricate term for your investment strategy. There are 3 common categories where you can put your money. These are cash, bonds and stocks.
Cash. Cash is just plain money. But if a financial expert suggests you move some of your portfolio to cash, the expert must probably refers to certificates of deposit, treasury bills and money market accounts.
Bonds. When you are investing in a bond, you are loaning money to an organization or government. Provided that nothing negative happens, you can cash in the bond on the maturity date and collect some interest.
Stocks. When you are buying a stock in a company, you are buying a little bit of ownership in the company itself. The better the company performs, the more worth your stock will be and vice versa.
Mutual fund. This is a stack of money that comes from a few investors and then invested into stocks or bonds. A mutual fund can be hundreds of stocks with the purpose of spreading the risks. Usually, money managers make buy and sell decisions for mutual funds.
Expense ratio. It will cost money in able to run mutual funds, this is so investors can expect to pay an annual fee which is expressed as the expense ratio. Expense ratio is the percentage of your funds that goes to the managers of the mutual fund that you have invested in. The bigger the expense ratio, the less money you will be going to make.
Index funds. This is a famous type of mutual fund due to its costs are generally low. If you want to understand index funds, you must first need to know about indexes. Indexes are collections of stocks that represent a piece of the economy.
Prospectus. If you are looking for a go-to source that contains every bit of information about investments, you can ask your financial advisor for a prospectus. A prospectus is a legal document that contains details about stocks, bonds and whatever you have invested in. If you are thinking about what the expense ratio is on your mutual funds or would want a list of all your fund’s holdings, you will be ble to find it in the prospectus.