So you’ve decided you want to invest in the stock market. The only problem is you haven’t got a clue where to start. The language of investments can seem incredibly confusing and even intimidating and you may feel like there’s just too much to get your head around. But never fear, here’s comes help! We’ve put together a list of ten of the most commonly used terms in the investment industry, all explained in simple, jargon-free English.
When you buy shares in a company, they become your equity in that company – the portion of the business which is owned by you. This is true however large or small your financial interest. An equity portfolio is when you have a number of shares in different companies.
A bond is an investment in which you lend money to an organization such as a business or a government body. This loan is made for a fixed period of time, ranging as widely as 90 days or 30 years, though the average is between three and ten years. The money is lent at an agreed level of interest, giving you security that you will receive a definite return on your investment.
Also known as unit trusts, mutual funds are investments which are divided into units. These units, which are equivalent to shares, can be bought from and sold back to the manager of the fund. The fund’s value per unit is calculated frequently to monitor its progress. Many countries have favorable tax regimes for mutual funds, as they encourage saving.
Options and futures
An option is a contract which entitles you to buy or sell a predetermined stock or bond during a specific period of time. The price is established before the contract is made. A future is a contract which obligates you to do the same.
A hedge fund uses futures to offset the risk of investments falling short of expectations. For example, a fund manager concerned about declining stock prices might hedge his or her accounts by committing to sell some separate stocks at a later date. Hedging is used extensively in international funds to minimize the impact of currency fluctuations.
Exchange Traded Fund
An exchange-traded fund (ETF) is similar to a stock on an exchange, with its value fluctuating depending on the market. An ETF might include assets like bonds, commodities and stocks. Indeed, this is one of the main benefits of this type of fund, in that you get a diverse portfolio under a single umbrella.
Bid offer spread
The spread is the difference between the selling price of an investment and its purchase price. For example, if the selling price is USD100 and the purchase price is USD110, the bid offer spread is USD10. The selling price is always less than the purchase price, with brokers keeping the spread as their profit.
Many people wrongly believe that quantitative easing (QE) involves the printing of banknotes to try and boost the economy. However, it actually involves central banks buying assets like government bonds with funds created for the purpose. QE is aimed at promoting higher levels of lending and boosting the money supply when interest rates cannot be made lower.
A benchmark index (BI) is a series of indicators used to evaluate the performance of a fund or investment manager. The most common BI for equity-orientated funds is the S&P 500 or the FTSE-250. Others are the Dow Jones Industrial Average and the Russell 2000.
Inflation is an increase in the prices of products and services over time, reflecting the subsequent decrease in the purchasing power of money over the same period. It affects many areas of our lives, including our savings, our pensions and day-to-day costs like food and gasoline.
We hope our plain English guide to these investment terms has been useful. Remember, if you’d like more information about ways to invest your money, don’t hesitate to get in touch with our friendly teams across Asia. For your nearest office, visit www.bluestar-amg.com/contact-us and follow us on Twitter for updates about the world of investments and savings: https://twitter.com/bluestaramg.
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Mark Matlaszek has lived in China for over ten years and is the director of BlueStar AMG in Beijing. He has been helping expat families plan for their children’s future education costs for the last decade, as well helping parents plan for their retirement. If you would like a free consultation, contact him directly at firstname.lastname@example.org.