Saving money is good, but the real value comes when you start investing your hard-earned money into investment tools. It is what grows your money and secures your post-retirement life. To get started, you need not be a financial expert. However, you do need some basic understanding to familiarise yourself with the world of finance and investments.
Here is a list of a few financial terms that you will hear most often when you decide to enter into the world of finance. Of course, you will learn much more as you increase your investments and explore other options.
Asset – It is something valuable that can earn money for you. An asset has an economic value and can become your primary or secondary source of income. A few examples of assets are cash, jewelry, stocks, bonds or real estate. An asset can also be intangible like a patent that can earn you royalty.
Liabilities – Your liabilities are what you owe to others. For instance, a loan taken from a friend or a bank is considered to be a liability. Low levels of liabilities are an indication of your financial well-being.
Asset allocation – When you start investing, you will come across several investment options. Some of them like stocks are risky but give a higher rate of returns. Others, like bonds, are considered to be safer but yield lesser profits. Asset allocation is the strategy to divide your money across these asset classes. You may have to consider aspects such as your risk appetite, time horizon and expected returns to arrive at the right asset allocation for your needs.
Net worth – You must have come across this term in several celebrity magazines. A person’s net worth is the difference between assets and liabilities. To calculate your net worth, you can add the total value of all your assets. Add the current value of your home and car to this figure and deduct your total liabilities from this amount.
Cash flow – This is a term that is commonly used to describe the health of a business. Cash flow refers to the total funds that circulate in a business within a specific period. It could be the payments from the customers or the amount paid to the suppliers. Positive cash flow is considered to be a sign of a profitable business.
Credit report – Understanding what credit report means is essential if you want to avail credit from a bank. All your requests for loans or credit cards get approved after the evaluation of your credit report. It contains the complete history of your credit behavior. For instance, it contains the records of any delays in repaying your credit card dues or loan repayments. Your credit report also contains your credit score which is computed after considering a number of factors. The credit score indicates the possibility of a person’s capability to return credit advances.
Stock – A stock refers to the ownership of a company. You can buy stocks of a company if you feel it is set to perform well in the future. Buying a stock allows you to gain from the profits of a company. You can buy and sell stocks at the New York Stock Exchange.
Registered Investment Advisor – You may consider taking the services from an RIA if you are not confident about your investment choices. A financial advisor becomes an RIA after undergoing certain training and has sufficient knowledge in the field. Moreover, the RIA is reliable as she would work under certain guidelines and suggest the best options as per your interest.
Blue-chip – This is a term that you will often come across if you start investing in the stock market. A company earns the tag of a blue-chip if it has a long history of good earnings and dividends. They may be expensive to invest in but you can rest assured about your returns from them.
Bull and bear – These terms are used to indicate the perception of an investor. If the investor is positive about the market and feels it will go up, she is considered to be a bull. Similarly, an investor who feels the market is on a downward turn is considered to be a bear.