Learning is an evergreen process and as they say, there is no age or time for learning new things! The new year has started and we thought it as an opportunity to introduce you to the world of finance. Consider it as a late Santa gift for Finance Terms you need to know to simplify your investing journey.

Do-It-Yourself (DIY) Investor has been the talk of the town, and everyone wants to board that train. Rest assured; I will help you on this journey. First things first, let’s try to comprehend interest terms, which will form the base.

Read: A Simplified Guide On How To Buy A Home In Canada

1. Simple Interest

This must remind you of the good old school days, where we started to learn this. As the name implies ‘Simple’, is the interest calculated on the principal amount and remains fixed throughout the tenure. Let me illustrate this with an example: 10% annual simple interest on $2000 would be $200 (10% of 2000) for 2 years. This is the basic finance term you should know.

2. Compound Interest

It is most widely used and termed as 8th Wonder of the world. This interest compounds your amount at a particular rate and is sometimes also referred to as interest on interest paid.

Let’s take our previous example: $2000 invested that earns 10% per year will yield you $200 (10% × $2000) for 1st year and for 2nd year it will earn me $220 (10% × $2200). So previous year’s interest is also added to the principal and the return is computed. Legendary investors like Warren Buffet patiently compounded their investments and became what they are today.

3. Time Value of Money (TVM)

As we already learned about Interest methods, TMV cannot go out of sight. It is a must finance term to know. It states how much money is worth at present compared to its future rate. For example, in the above example, $2000 is the value of money currently, while $2,200 is the future value. This is true because the money you have right now can be invested at some rate to increase its value in the future. The time value of money is also referred to as Net Present Value.

4. Stocks

Stocks are capital raised by the company through the issue of shares. This represents ownership in a company. Even if you own one share of a company, you have fractional ownership and you can enjoy various rights given to shareholders. This is a great investment tool as you can profit by selling your stocks at a price higher than your cost price.

Read: How to Buy Stocks in Canada: The Ultimate Beginner’s Guide

5. Bonds

This is one of the two most popular Asset classes. This is one of the crucial finance terms you should know to diversify your investments. Bonds are debt vehicles where the investor lends money to the issuer (borrower) and in return expects interest payments (termed as coupons) during the tenure of the bond and receives the principal back at maturity. 

Read: Amazing Investment Options in Canada to Grow Your Money

6. Mutual Fund

Scott D. Cooks rightly alludes: ‘Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.’

Mutual funds give you exposure to various asset classes, giving diversification benefits and managed by a fund manager with his experienced team. Mutual funds collect money from a large group of investors and try to generate above-market returns. As an investor, you need to be aware of the fees and other charges known as the expense ratio which we will discuss later.

Read: Guide to Investing in Mutual Funds in Canada

7. Index Fund

In simple words, it’s a type of Mutual Fund that tracks an index like Standard and Poor’s 500 Index (S&P 500) or Nasdaq.

The fund manager tries to replicate the index instead of beating the market. Investors get the exposure of a pool of well-known companies constituted in the index. This type of investing is also known as passive investing. There are various advantages to investing in an Index fund such as lower fees. Lower expenses magnify your returns in short term.

8. Exchange-Traded Funds (ETFs)

Exchange-Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. This essentially means that they can be bought and sold on the exchange and exhibits price changes just like stocks. Again, the advantage of investing in ETFs is you get exposure to top companies around the world and lower management fees. But it also brings volatility with it as it trades like a stock.

9. Diversification

It is a risk management technique that mitigates risk by allocating investments across different financial instruments, industries, and several other categories. It works like a beacon of hope during market turmoil.

10. Asset Allocation

Synonymous to diversification, where an investor allocates their funds in different asset classes. The objective is clear, to generate good returns and take advantage of asset classes available.

11. Financial Risk

This is one of the important finance terms you should know before investing in any asset class. It is the uncertainty of returns and the likelihood of some loss. Every asset class has a different level of financial risk.

12. Risk Tolerance

Attributable to an investor, measure how much risk an investor is willing to take. Risks differ from age, return expectations, investing knowledge, etc. Money managers use this tool to recommend investments to investors and classify them mainly into risk-averse and risk-taker.

13. Risk-Return Trade-off

Higher risk is associated with higher return/losses and lower risk with lower return/losses. This trade-off which an investor faces while making investment decisions is knowns as Risk-Return Trade-off.

Read: Avoid These Biases for Making Investment Decisions in Canada!

14. Expense Ratios

The expenses that are incurred while investing in mutual funds / ETFs are known as the Expense ratio. It is annual fees paid by investors in the form of Management fees, administrative fees, etc. The lower the ratio, the better it is. 

15. Liquidity

It means how quickly you can get your hands on your cash. Investments in highly liquid assets bode well for investors in terms of entering/exiting the investment, costs, etc. Market participants define this term as liquidity.

16. Market Volatility

Volatility is often measured as Standard deviation or variance between returns or prices from the same security or market index. If Volatility is high, the price or return of the security fluctuates more. In simple words, it’s the fluctuations of rates. 

17. Dollar-Cost Averaging

A must-know finance term for an investor where an investor divides up the total amount to be invested across the time period in an effort to reduce volatility. purchases are made regardless of the asset’s price but at regular intervals.

18. Dividends

The pay-off a shareholder receives out of the company’s profit for holding the shares.

19. Bull Market

A market where the prices for a security, commodity, currency or anything is increasing consistently. The recent bull market is the classic example where investors received good returns.

20. Bear Market

A market where prices of any asset class are falling consistently. Generally, a drop of  20%+ in prices is considered the bear market. The classic example is the March 2020 sell-off.

21. Long Position

An investor purchasing any asset is said to have a long position. The intention is to hold and sell it when the price rises.

22. Short Selling

This is one of the last finance terms you should know. It is exactly the opposite of the long position discussed above. An investor sells an asset first with an intention to profit by purchasing that asset at a lower price later. It has unlimited risks, investors should exercise caution.

Read: Creative Side Hustles in Canada to Increase Your Earnings in 2022

The post 22 Finance Terms You Should Know in 2022! appeared first on YourFirst.ca.