Common finance words
“Sooo, when will you start investing?” It’s one of those typical #adulting questions that people tend to start asking upon graduation. And when this question balloons into a full-blown investment talk, you’ll spot an awkward smile plastered on my face.
You see, no matter how often I hear these jargon, I just don’t get it. When it comes to this foreign financial world, I’m just like Jon Snow – I know nothing.
If you’re like me, you’d know the feeling of cheem-sounding financial terms going way over your heads. But asking around and searching up tutorial videos has eased my journey into this realm of adulthood. To help out some equally-lost souls, here are some of the more commonly-used finance words broken down.
Sit down with any financial advisor, and you’ll definitely catch the word “portfolio” being thrown around every so often. Newbies might initially think it’s a reference to our résumé, but in the financial world, it’s a grouping of your financial assets – which includes your stocks, bonds, cash, currencies and the like.
Just like how the cliche “don’t put all your eggs in one basket” goes, a portfolio is the same way. Different assets have different risks, and you won’t want to just bank on just one type. Anything from new tech to a terrorist attack can wipe out your assets, and by having a diversified portfolio on hand, you’ll be making sure that you have varied assets to keep you afloat long-term.
2. Risk Profile
Portfolios have various risk levels that range from conservative to aggressive. This is determined through a questionnaire that investors fill up, before they build their portfolio.
The questionnaire measures 3 main things:
1) how tolerant they are to risks
2) their needs that they’re investing for
3) their investment horizon (i.e. how long they are investing for before selling their investments)
For an investor, understanding your risk profile is important as it can help to prevent severe loss of investments. You should choose suitable products or product types (also known as asset classes) to match your risk profile. For example, if your risk profile is considered conservative, it is advisable to invest a higher percentage of your portfolio in bonds or fixed income which are less risky than equities.
Let’s think about our parents for a second. We’re grateful for all the things they’ve invested in our lives as we were growing up. Eventually it comes to a point where we’re capable of thanking them financially for their support.
That’s sort of what a dividend is. It’s a monetary sum a company gives its shareholders from their profits as a reward for their investments, and it usually comes in the form of cash or stocks.
4. Active/Passive Investing
The investment game can be played in mainly 2 different ways. You might have heard about active investing, which is a hands-on approach that has you monitoring your investments regularly to try making the most of the stock market.
Those who do this have to carry out decisions based on market conditions – which means that they’ll need next-level confidence to know when’s the right time to buy or sell. One form of doing this is through Unit Trusts, whereby a group of investors contribute money for a professional to invest in various avenues for potentially higher returns.
On the other hand, passive investing goes a longer route. Instead of checking up on the stock market’s every move, you’d instead be adopting a “buy-and-hold” mentality. That means you’d first research and invest in a company’s long-term potential, and reaping your returns as its profits grow over time.
Of course, each method has its pros and cons, which you can decide according to your own preference. But the next time your finance-savvy friends go into heated debates about this, at least you’ll now be able to vibe along.
5. Bullish/Bearish market
Finance newbie or not, we’ve seen those spiky-looking graphs that show trends in financial markets. And we know that these trends are crazy volatile. All it takes is just one major change like a recession, and bam – these lines go haywire.
And if you’ll be talking about these trends, here are some terms you need to know. When investors feel that prices are going up, they’re feeling bullish. This usually happens in good economic times, where there are low unemployment rates, people are financially more confident and are willing to invest more.
Conversely, in poorer economic conditions, investors would start feeling bearish instead. That’s when stock prices are falling, and that usually happens in times of crises such as The Great Depression or recessions, when people aren’t as confident to spend as freely.
If you have trouble remembering which is which, just remember: a bull attacks by thrusting its horns up, but a bear will swipe its claws down.
6. Exchange-Traded Funds (ETFs)
There are different ways to start off your journey into the investment world, and one of the most popular baby steps is Exchange-Traded Funds – or ETFs for short. Essentially, it’s like a basket of investments containing a variety of securities and assets, which performs like an index that you can trade on the stock market.
It’s similar to a portfolio, but remember that your portfolio is your personal group of investments. If you choose to adopt the passive investment strategy of ETFs, that means you’ll be adding a bunch of different assets to your portfolio, which will instantly diversify it at low prices and attempt to duplicate the index’s performance.
You might hear people debating over choosing ETFs or stocks. While we’ve established that ETFs boasts diversity, stocks are simply an investment into a sole company. Therefore, your success of your investment in this stock is directly dependent on the company’s performance.
7. Blue-chip stocks
Owning stocks would mean having partial ownership of a company. But finding a good company to purchase stocks from can take a while, which is why most people instantly turn towards blue-chip stocks instead.
Simply put, the blue-chip stocks are the stocks of A-list companies. They’re financially stable, reputable, and of high quality, which puts them straight at the top. They’re great for low-risk investors, since they tend to have a positive record of churning out a steady amount of profits and earnings growth.
Local companies in this elite group include OCBC Bank, Singapore Press Holdings, and CapitaLand.
8. Dollar-Cost Averaging (DCA)
Investing involves loads of strategies, and one of the more common ones you’d hear about is Dollar-Cost Averaging (DCA).
Picture yourself earning a lump sum of money – say about $1,200. You’re thinking about investing this entire sum of money, but the thing is, you don’t know if the company you want to invest in will have a good year ahead. Because if it doesn’t, well – you’ll be slammed by a loss, and your investment goes to waste.
That’s where DCA comes in. Instead of putting in a lump sum at the start, you’ll instead invest via a smaller, fixed amount at periodic intervals (usually monthly). By doing so, you’ll minimise your risks by preventing a buy-in at the highest price level, and you won’t have to guess the best time to buy or sell your asset.
9. Shorting/Beating the market
Movie buffs might be familiar with the Oscar-winning movie The Big Short. And if you paid attention during the scene of Margot Robbie in a bubble bath, you’d realise that she was talking about a guy who’s about to short the market.
Beginners typically live by the old “buy low, sell high” mentality to make money, but in reality, there are other ways to do so. More experienced investors would try short selling. In times when prices are falling, they’ll borrow a stock from another investor, sell it, and buy it back when prices fall. Tadah: the investor makes a profit, and the lender gets their stock back.
Another similar-sounding term you might hear about is beating the market. It’s not the opposite of shorting – but instead, requires active investing on a regular basis. You don’t have to feel alone in it however – professional fund managers such as Franklin Templeton and Nikko AM can help you manage your investments.
Common finance terms
Investing is just like a football game – to score, you’ll need to play well. And with loads of head-spinning terms floating around, it’s easy to get confused by all the investment-related talks you’re bound to stumble into.
But by clearing up the meaning of some common words, your journey into this finance world is now a little easier to navigate. And if you’re more eager to try it out yourself, you can head over to FSMOne.com to give it a shot. Between things like ETFs, managed portfolios, and even insurance, it’s a one-stop investment platform that will handle all your investing needs and queries.
If you want to learn more about this, FSMOne.com will be holding their annual FSM INVEST Expo 2020 on 18th January 2020. Located at Suntec Convention Centre Hall 403, there will be industry experts sharing about the basics of investing so that anyone from newbies to seasoned investors can benefit.
This post was brought to you by FSMOne.com.
Photography by Pepita Wauran.