2019 is here and we know it’s going to be an exciting year ahead for you. You may be at the stage of your life where you realise the importance of growing your personal wealth especially since you’ve begun to accumulate some capital. You decide to go online and do some research on investing and growing your money. Desktop research alone is already surfacing big finance words that make investing seem exclusive to a select few. Fret not! We’re here to break down some of the jargon!
So where do you start? Before you decide to put your money into any investment vehicle, understanding the common investing jargon is important to help you decide on the best option. Here is a list of terms you should know and why they are important:
Where do you put your money?
When you decide to invest, you need to learn which asset class to put your money into. Asset allocation simply refers to the proportion of different asset classes within your investment portfolio. The different asset classes include equities, bonds, currencies, real estate or other alternative investments. In order to decide how much money to put in each asset class, you need to ask yourself how much risk you are willing to stomach. A rule of thumb is that high-risk instruments tend to generate high-returns and vice versa. A simple example would be to compare investing in equities versus bonds. Equities are generally riskier than bonds, which also mean that they tend towards providing greater returns compared to bonds. This means, if you have a bigger risk appetite, making equities a larger percentage of your investment portfolio might make more sense for you. The asset allocation strategy depends on your risk tolerance, goals and investment time frame so it’s important to think about these things before putting your money in different financial products.
How do you measure the current value of your investments?
Profit & Loss (P&L)
When you are managing your own investments or trading, the term P&L is usually shown on your account. The thing to note about this is “realised P&L” versus “unrealised P&L”. realised P&L simply refers to the actual amount of profits or losses you have made at that current point of time. This means that the value reflects the actual value you have left after executing your decisions. Unrealised P&L refers to the current value of your open positions, which means that it has not been reflected in the current balance of the capital in your account. This is important to know in order to implement the proper risk management strategies that ensure your hard-earned money doesn’t go to waste! Of course, more on those strategies next time.
Should you invest in big or small companies? Which is better for you?
When deciding between investing in big or small companies, you need to look at the company’s market capitalisation. Market capitalisation (market cap) refers to how much the market values the company. It is calculated by multiplying the current share price with the number of shares outstanding. Market capitalisation values can be one of the factors that help investors decide the combination of stocks in their investment portfolio. Generally, smaller market cap companies tend to grow faster which results in huge potential of high returns on investment. On the other hand, companies with larger market cap tend to be more stable and provide higher dividends. Having a well-diversified investment portfolio is always the way to go, which makes market capitalisation an important concept to understand.
What are the fees you are paying for your investment decisions?
For new investors, investing in mutual funds or ETFs is very common. When making this decision, understanding the expense ratio is very important. In layman terms, expense ratio refers to the percentage of the value of the fund that is used to cover the expenses for managing the fund on an annual basis. This includes administrative costs, marketing costs, and many others. It should always be included in investor calculations because it directly affects the profits shared with investors.
We hope that understanding these 4 terms will help you in your investment journey. Most of the time, investment jargon may start out sounding pretty intimidating but in actual fact, most of them have simple meanings. You’ll realise this as you go along. Keep learning and exploring – until next time!