The process of paying off debts in installments of interest and principal in order to pay them off by the debt maturity date. It’s an accounting technique that lowers the book value of loans or intangible assets over a period of time.
Asset allocation describes the process of deciding where to invest your money in the market. It’s an attempt to balance the risk and reward of different asset classes in line with the investor’s goals, risk tolerance, and time horizon.
Bear markets occur when the market experiences a prolonged decline in prices of 20% or more from recent highs. It’s usually tied to the overall decline with a market or index but can also refer to individual securities. Bear markets are also often linked to prolonged investor pessimism and negative sentiment.
Bonds are essentially units of debt issued by a company and are tradeable. The owners of bonds are the debtholders, and they are used by companies and governments to raise funds. The bond contains details of the principal (the original sum of money) and when the repayment date is, as well as the interest payments to the owner. Traditionally, bonds pay out a fixed interest rate, but variable interest rates are not uncommon. The price of the bond is inverse to interest rates i.e. if interest rates increase, the price of the bonds decreases and vice-versa.
A bull market is one where prices are rising or expected to rise. It’s commonly defined as a period where stocks rise by 20% after two periods fall by 20%. Optimism and investor confidence often characterize a bull market.
When it comes to investing, risk and return are inherently linked. Generally, the higher the possible return on an investment, the riskier it is. Diversification is the process of spreading out your investments over different industries, sectors, geographic locations, or asset classes in order to mitigate your risk. If something happens to cause a company, industry, region, etc to fall in value, diversification can help ensure that your entire portfolio isn’t at risk.
A dividend is the distribution of some of a company’s profits to shareholders. The dividend amount and decision of whether to give out dividends are determined by the board of directors. They can come in the form of cash or additional stock in the company. While some companies choose to give out dividends, many do not, instead choosing to reinvest the money back into the company instead.
EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, is a method for measuring a company’s profitability. Because it shows earnings without the influence of accounting and financial deductions, it is one of the more precise ways to measure a company’s performance. It is often used as a metric to compare companies as it eliminates unrelated factors.
Environmental, social, and governance (ESG) are a set of criteria that investors may use to evaluate potential investments. It’s a value-focused form of investing that goes beyond whether an investment may be profitable and examines the environmental impact of a company, its relationship with internal and external stakeholders, and the way a company is governed. It helps investors screen out possible companies that present a financial risk due to environmental or social practices.
Like mutual funds, exchange-traded funds (ETFs) are pooled together securities (financial instruments that are fungible and tradable in public and private markets) that are traded on a stock exchange. They differ from mutual funds in that they are traded throughout the day, meaning that the price of an ETF can rise and fall with demand and you can end up paying above or below the underlying value of the assets.
Growth investing is an investing style that focuses on increasing an investor’s capital. Growth investors will generally favor smaller/newer companies that have the opportunity to grow faster than other companies in their industry. When looking at growth investments, it’s important to consider factors such as profit margins, return on equity, past and future earnings growth, and share price.
Index funds are a type of mutual fund that allows you to invest in an index such as the S&P 500. If you invest in an index fund, your returns will mirror the returns of the index. This is an example of passive investing as the fund isn’t being actively managed, which generally makes the fees associated much cheaper.
An investment portfolio is the total collection of assets you have at any given time. This can include stocks, bonds, real estate, commodities, currencies, and more.
Mutual funds are pooled portfolios that are managed by portfolio managers. An investor can buy shares in the fund and that money is used to invest in different securities, which are then owned by the fund. Mutual funds are not traded throughout the day, rather, buy and sell orders are executed when the markets are closed for the day. This is to prevent investors from taking advantage of the change in the value of the underlying net asset value of the fund.
The price to earnings ratio (P/E Ratio) measures the current share price relative to its earnings per share. It’s often used as a way to value a company. A high P/E ratio might mean that the company is overvalued or that high future growth rates have been priced in by investors.
Short selling is an investment strategy used when you think a stock (or other security) is going to decline in value. When you short sell, you borrow a security and sell it on the market, hoping that the price will fall and you can buy it back for less, leaving you with a profit. With this method, you make money if the price falls, but the amount you stand to lose is theoretically unlimited as the price of a security can continue to rise indefinitely. It’s for this reason that short selling should only be undertaken by experienced investors.
A stock (a unit of which is a share) is a security that is issued by a company which indicates proportional ownership in that company. Corporations will issue shares to raise capital for business operations. The two main types are preferred stock and common stock. Common stock lets the holder vote at shareholder meetings and receive dividends that are paid by the company. The price of common stock will rise and fall with supply and demand. Preferred stock, on the other hand, doesn’t have any voting rights but does have a greater priority on the company income, which means they get paid dividends first and are paid out first in the event of company liquidation.
A stock exchange is a market that connects buyers and sellers who want to trade equities. Examples include the New York Stock Exchange and the Nasdaq Stock Market.
Value investing involves finding companies that you think the market has undervalued and are trading lower than their intrinsic value. Value investors believe that the market can sometimes under and overreact to news and thus under or overprice a stock. Investors will often look at the business fundamentals such as revenue, earnings, cash flow, or business assets to determine whether a stock is under or overvalued. Famous proponents of this method include Warren Buffet and Benjamen Graham.
Volatility is a measure of how much the price of a security fluctuates, often measured by the standard deviation or variance between returns for that security. In the stock market, the more volatile a stock is, the riskier it is seen to be as it has large swings in each direction. One of the most obvious examples of a volatile asset is certain cryptocurrencies where rises and falls of 50% or more are not uncommon.
Learning how to start investing can be complex, and you shouldn’t go into it blind, but you don’t have to have decades’ worth of knowledge just to begin - everyone starts somewhere, and it’s actually just a process of continuous improvement. Keep in mind that getting started on your investing journey is infinitely better than not investing at all.
Anton is PocketSmith’s Marketing Intern and is currently completing his BComSci degree in Marketing and Ecology alongside working at PocketSmith. Anton started his investing journey in high school and hasn’t looked back since. He’s a strong proponent of index investing, although he still likes the thrill of individual stocks on the side.