Investing is one of the best things anyone can do with their money. If you learn to invest properly, you can turn a small pot of cash into a fortune. People have been doing this for decades, and most of the wealthiest people alive earn their money from investment assets.
As a complete beginner to the world of investing, you don’t really know where to begin. You understand that investing is the process of buying something in the hope of it growing in value. However, there are all sorts of terms you’ll come across that probably mean nothing to you. Get to grips with these terms, and investing suddenly becomes a whole lot easier!
Below, you’ll find some of the most commonly used terms that beginner investors should learn:
An asset is a resource with monetary value that you will own. It refers to the things that you invest in. Let’s say you invest in the stock market, you will have different shares of companies – these are your assets. Likewise, a house is an asset, and so on.
You’ll hear this a lot when making investments, and it refers to the value of your assets. In essence, appreciation is where an asset goes up in value. So, it was bought for £100 but is now worth £200. Conversely, depreciation is when an asset decreases in value. Naturally, you want to invest in things that will appreciate!
Again, this is something you hear a lot as it is the most common thing people talk about when speaking about investments. Stocks are basically tiny shares in a company. When you buy a stock, you’re buying a share of ownership in that business. As the business grows and gets better, your share of the stock will increase. Let’s say you buy 10 shares in a local business, which amounts to £1000 at the time of investment. In 5 years time, the company has grown and is now one of the best in the land. Your 10 shares are now worth £500,000! These are random figures, but you get the point; stocks are shares in companies, the better a company does, the more a share is worth.
Some people will suggest you invest in bonds, but what does this mean? Essentially, a bond is a loan. When you purchase a bond, you are agreeing to lend money to someone – usually the government or a company. Whoever gets your money will agree to pay it back on a future day, while paying interest until that point. Provided everything does according to plan, you get the money back from your bond on the agreed-upon date, plus the interest they paid over time.
Contrary to popular belief, real estate doesn’t just refer to houses. Instead, it includes all types of property, as well as land. This means office buildings, shops, fields, static caravans, and houses are all considered real estate. In fact, you can break real estate down into four different types:
- Residential – properties people live in
- Commercial – properties businesses use
- Industrial – manufacturing buildings, warehouses, etc.
You may encounter people or articles that tell you to work with a broker when making investments. Typically, you think of stockbrokers when this term is used, but there are others around as well. Effectively, you can find a broker for any type of investment you’re interested in – but what are they?
Simply put, a broker is someone who deals with financial transactions for you. You pay them a fee, and they will buy or sell assets depending on your needs and instructions. It can be beneficial to work with a broker as they can use specialist knowledge to help you find the best assets to buy.
This term comes after broker as the two regularly get mixed up. To reiterate, a broker will only deal with buying or selling assets. On the other hand, investment managers are tasked with giving you financial advice. They look at your money and come up with advice on how you can invest it to get the biggest return. As such, they don’t deal with things like buying or selling your assets – they could help you get things set up, but they will never make transactions unless they also offer brokerage services.
A mutual fund is something you’re likely to hear about if you’re a beginner. They are a good way for people to get started on the investment ladder, consisting of money from various investors all into the same investment fund. All of this money gets pooled together and invested in various things that you don’t have any control over. Hundreds of stocks could be invested in, but you don’t have to worry about selling or buying anything. You can watch the fund grow in value and request to sell your portion whenever you want out of it.
People often use this word when talking about how risky an investment is. If something has high volatility, it will go up and down in value very quickly. This makes it a risky investment that could make you a lot of money but could also lose you loads. Investments that aren’t volatile are considered the safest.
Stocks and Shares ISA
Finally, beginner investors will definitely need to know about Stocks and Shares ISAs. An ISA is an Individual Savings Account, which is basically a savings account on steroids. With this particular ISA, you can invest your money in the stock market. However, it’s almost like a mutual fund in that you aren’t in control of what’s invested in. You will be asked what you’d prefer to invest in, but the individual investments are not your choice. It’s managed for you, but the returns can be so much higher than a standard savings account.
Get to know these terms if you want to start learning about investing in more detail. As you make your way through the world of investments, you slowly start to learn new things and understand how everything works.