16 Investing Terms You Need to Know

The world of investing can be a daunting place for beginners.

• Financial risks

• Scams on every corner

• New & confusing terminology

I’ve been there, and it’s that bottom point that I want to address today.

To help you avoid the possibility of losing money thanks to a lack of understanding certain words or phrases, here are 16 investing terms you should familiarise yourself with…

1. Assets

An asset is something you own that increases your net worth over time.

Robert Kiyosaki famously described assets as things that “put money into your pocket.”

Examples of assets include:

• Real estate

• Stocks (ownership of a company)

• ETFs

• Commodities (Gold, oil etc.)

• Cryptocurrency

The rich make buying these a priority every time they earn money.

2. Liabilities

A liability is the opposite of an asset, and is something that decreases your net worth over time.

The poorer in society tend to prioritise these over assets, often in an attempt to look wealthier than what they are.

Some examples of liabilities include:

• Brand new cars (some cars can depreciate by 50% in the first few years)

• Designer clothes

• High interest debt

3. Dividends

A dividend is a regular payment issued to shareholders of a company, as a reward for investing.

Dividends aren’t issued by every company, as some companies prefer to reinvest their profits back into the business for growth.

Dividends are paid monthly or quarterly, and are represented by a percentage which equals the amount you’ll be paid per share, per year.

4. Shares

Every company, public or private, is made up of shares.

When you buy shares of a publicly traded company, you become part owner of the company, and receive shares in exchange for capital.

This is called becoming a shareholder, and anyone can become a legitimate shareholder of companies like…

• Apple

• Google

• Tesla

…by buying a share on the stock market.

5. Appreciation

Appreciation is the term used when something goes up in price, or value.

This is commonly used when describing assets.

If a house appreciates, this means it’s becoming more valuable.

6. Depreciation

Depreciation is the opposite of appreciation, and is used to describe something that loses value.

This is commonly used when describing liabilities, like a brand new car.

If your car loses 10% of its value in the first year, you could say that it has depreciated 10%.

7. Exchange Traded Fund

An exchange traded fund, or ETF, is a fund that you can buy which tracks a specific index, like the S&P 500, or a commodity like Gold.

It helps investors gain exposure to markets they wouldn’t normally be able to because buying the actual thing would be quite hard.

Instead, you can buy an ETF which simply tracks the price.

Popular ETFs include:

• Total Stock Market ETF

• S&P 500 ETF

• Gold ETF

• Nasdaq 100

Check out my 7 favourite ETFs here…

8. Diversification

Diversification is a term used for having exposure to a wide range of industries and asset classes in your investment portfolio.

It’s important to ensure that you don’t have all your eggs in one, or a few baskets in investing, so you don’t lose out too much if an investment fails.

So, by diversifying, you can offset any losses with the gains of other investments.

You can diversify by:

• Sector — finance, manufacturing, healthcare etc.

• Asset class — stocks, commodities, real estate etc.

• Location — global, US, international, EU etc.

And more.

9. Compound Interest

Compound interest is the term used for earning interest on top of your initial interest, plus interest you’ve already earned.

Say you invest $1,000 in year 1 and earn 10%. Now you have $1,100.

Say in year 2 you make another 10%, but now, instead of earning an extra $100, you earn $110, because of the additional first year returns.

Compound interest is a phenomenon that can boost your earnings over time, and was called “the eighth wonder of the world” by Albert Einstein.

Compound interest emphasises the importance of investing for the long term.

10. Dollar Cost Averaging

Dollar cost averaging is an investment strategy which involves investing over a long period of time at regular intervals, rather than all at once.

By investing at regular intervals, say weekly or monthly, you can minimise risk by investing regardless of whether the market is going up or going down.

If you invest all at once, you take on a huge amount of risk because you don’t know where the market is headed for the short term.

Instead, a smarter approach would be dollar cost averaging, and slowly increasing your exposure as time goes on.

11. EPS

EPS, or Earnings Per Share is a figure to determine the strength and performance of a company by showing the revenue in relation to the number of shares.

It’s commonly used as an indication of the value and trajectory of a company.

12. Capital Gains

Capital gains is the term used for earning a profit on investments.

This could be from:

• Real estate

• Stocks

• Commodities

• Cryptocurrency

When you realise profits, you are liable to pay a capital gains tax, and the rate of this varies depending on your country of residence.

13. Bull Market

A bull market is the term used to describe a period of time where the prices of assets are generally moving in an upwards direction.

Bull markets are where assets become more expensive, because of several reasons:

• Economic outlook is good.

• Growth is strong.

• The geopolitical condition is favourable.

• Unemployment is low.

And so on.

14. Bear Market

A bear market, in contrast to a bull market, is where the prices of assets generally follow a downwards trend.

It could be because of:

• Geopolitical conditions

• Poor economic growth

• High inflation

• High unemployment

And so on.

As a result, investors lack confidence and begin to sell their investments.

This, despite being a harsh time for investors, tends to be the best time to buy investments, as prices are low.

15. Volatility

Volatility is the term used to describe how much the price of an asset fluctuates over a certain period of time.

The greater the price fluctuations, the more volatile the asset is.

Typically the most volatile asset class is cryptocurrency, with seasoned investors regularly used to seeing double digit prices rises or drops, which is unheard of in other asset classes like commodities or ETFs.

Volatility can work in your favour, but as a new investor, it’s best to avoid highly volatile assets to help you learn and develop as an investor.

16. Market Capitalisation

Market capitalisation (or market cap for short) means the overall value of a business.

It’s determined by multiplying the number of shares, with the current share price.

So, if a company is made up of 1,000,000 shares, and they’re worth $100, the company is worth $100,000,000.

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