You remember dropping a coin in your piggy bank to save money as a kid? Imagine getting returns on that money you set aside; that’s an investment for you. Have you been thinking about investing but don’t know where to start? Well, you have headed in the right direction. Investing some of your earnings can lead to getting better returns, something that will give you an edge over the meager return that you get from your bank account. But then, no matter how tempting, you realize investing is like a rabbit hole, of which you literally know nothing about.
So here we are, with a list of Investment terms that one SHOULD know before they venture into the world of investment.
Common Stock: A share of common stock is a type of security that is owned in a legally formed corporation. Many companies have a single class of stock that represents the entire company, while some have multiple. Various kinds of Common stock come with different levels of voting rights in a corporation.
Preferred Stock: This is a class of stock that allows stakeholders of a company to have ownership over a larger dividend, and that dividend is often guaranteed. Even though holders of preferred stocks do not have voting rights, they can receive a special status if the company heads into financial distress. Interestingly, if a company is being liquidated, preferred stock shareholders must be paid before common stock shareholders.
Bonds: Simply put, a bond is just like a loan. So, when you buy a bond, it is usually that you are agreeing to lend money to a government or a company. And then, the bond issuer usually promises to repay the entire principal loan amount on the maturity date. The bond issuer also pays interest income in the meantime based upon a coupon rate. There are a plethora of bonds available, but we’ll talk about them in detail at a later date.
Real estate: Real estate, as the name suggests, is property or land that is present in real-time. Often real estate owners allow others to use his/her estate in exchange for payment. So, simply put, if you own a house, you own real estate. If you own a plot of land, you own real estate. If you are renting an apartment, you are paying your landlord in exchange for his real estate.
Mutual Funds: A mutual fund is a systematically managed investment fund that pools in all its money from its investors who purchase securities. Investors who buy shares or units in a fund invest their money through a professional portfolio manager. In case of equity, the fund itself holds individual stocks and bonds when dealings happen in bond funds.
Exchange-Traded Funds: These funds are a lot like mutual funds, except that they are investment funds that are bought and sold throughout the day on stock exchanges as if they were stocks. This is a reason why ETF share prices fluctuate constantly.
Index Funds: There various stock market indices gauge a particular stock market or category’s performance. Now, Index funds sometimes work like mutual funds and even ETF and allow its investors to “invest” in a particular index. The most pop example of such an index is the S&P 500.
Hedge Funds: A hedge fund is also a type of fund that functions similar to the mutual fund — by pooling in money, but then they trade in relatively liquid assets. This is what allows them to make extensive use of more complex trading, portfolio construction, and risk management techniques, which is again instrumental in improving its performance. Commonly, hedge funds engage in investment activity that is riskier than typical investments.
S&P500: Looks pretty fancy and complicated, no? Well, it really is just a stock market index that is used to gauge the stock performance of the top 500 large companies that are listed on the stock exchanges in the United States of America. It measures the performance of the big guns, basically. Yes, kind of fancy and complicated.
This can be overwhelming, but having the right knowledge and medium can help you build a fortune by investing. More investment lingo’s coming your way, till then, keep an eye on this space to know more about money matters.