Investing Basics

When you dream what do you visualise for yourself?

We all aspire towards financial freedom, be it, traveling the world, purchasing the newest model of car, sending our children to the best universities or retiring early and comfortably. One of the keys to building wealth and attaining financial freedom is in investing.

Investing is not reserved only for the finance savvy or wealthy. All of us can and should invest. To help start you off in the world of investing, we have put together the following explanations for some basic investing terms.

A financial product sold by financial institutions that is designed to accept and grow funds from an individual. Upon maturity, the individual will receive a stream of payments at regular intervals in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.

A type of annuity contract that delays payments of income, instalments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase in which you invest money into the account, and the income phase in which the plan is converted into an annuity and payments are received.

Represents a loan, under which the issuer owes the holders a debt, and depending on the terms of the bond, is obliged to pay them interest and/or to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semi-annual, annual, etc.)

Budgeting is an estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money.

An interest rate that is applicable when interest in succeeding periods is earned, not only on the initial principal but also on the accumulated interest of prior periods.

Dividends represent a portion of a company's profits that is paid out to shareholders on a semi-annual or annual basis. The Board of Directors of the company declares dividends. It is not mandatory to declare dividends on common stock even though the company is making good profits.

Diversification is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio. Diversification lowers the risk of your portfolio. Many individual investors cannot tolerate the short-term fluctuations in the stock market. Diversifying your portfolio is the best way to smooth out the ride. At the same time, diversification is not an ironclad guarantee against loss. No matter how much diversification you employ, investing involves taking on some risk.

Dollar cost averaging is the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. Eventually, the average cost per share of the security will become smaller and smaller. Dollar-cost averaging lessens the risk of investing a large amount in a single investment at the wrong time.

One of the oldest and most traditional ways to invest is to buy stocks and shares in a company, which form the asset class more commonly known as equities. An equity investment generally refers to the buying and holding of shares of stock on the stock market by individuals and firms in anticipation of income from dividends and capital gains, as the value of the stock rises. Historically, equities have outperformed safer investments like bank accounts and bonds and can act as the real driver for growth in your investment portfolio.

However, investment in shares exposes you to the potential to lose some, or all, of your money. Shares are seen as the riskiest asset class, so you should take extreme care when you consider investing in equities and the different types available.

Financial planning is a tool used to achieve financial success based upon the development and implementation of financial goals. By having well-written financial goals and implementing them into a financial plan, a person will have the means to achieve the standard of living they desire. An individual's values, goals, personal choices, major life events, lifestyle conditions, and lifecycle needs work together to determine the details of an individual's financial plan.

Inflation refers to the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

A mutual fund pools together the money from many investors to purchase stocks, bonds and other securities to perform as one investment. Mutual funds can help individuals with limited amounts of money take advantage of diversification and professional management when they don't have the time or the expertise to do it themselves.

Risk refers to the degree of variability in investment returns that an individual is willing to withstand. It is the chance that an investment's actual return will be different than expected. Every investment carries some level of risk, and investors must establish their own measure of risk tolerance.

An investor with a high risk tolerance is likely to invest in securities, such as stocks in startup companies, and is willing to accept the possibility that the value of his/her portfolio will decline, at least in the short-term. An investor with a low risk tolerance, on the other hand, tends to invest predominantly in stable stocks and/or highly-graded bonds. One's risk tolerance is subjective and may vary according to age, needs, goals, and even personal dispositions.

A security is a negotiable financial instrument that represents some type of financial value. Securities are typically divided into debt securities and equities. A debt security is a type of security that represents money that is borrowed that must be repaid, with terms that define the amount borrowed, interest rate and maturity/renewal date. Debt securities include government and corporate bonds, certificates of deposit (CDs) and preferred stock. Equities typically represent stocks/shares in various companies.

The prospectus is a disclosure document that provides investors with material information about mutual funds and other investments. It usually includes a description of the company's business, financial statements, biographies of officers and directors.

Go to top