All the options and the financial jargon relating to investments can make the process of decision-making quite overwhelming, says Hymne Landman, head of Momentum Wealth at Momentum Investments.
Landman said its therefore important that the first thing to do when you start saving is to get to know the terminology and jargon.
“By understanding at least, the basics of financial language, you will empower yourself to make better decisions when you are presented with options,” Landman said.
Landman shares the 5 most important financial terms that everyone should know:
Investment return is the amount of money you will receive over and above the amount you have invested. The investment return is shown as a percentage of the investment amount per year.
Landman said, “For example, if you invested R1000 in an investment that gives you a 10% return per year, you will get R100 over and above the R1000 at the end of the year.”
Investment risk refers to the uncertainty linked to your investment, according to Landman.
Some investment risks are bigger and more uncertain than others, so you need to make sure that you know the odds before you invest your money. Investors need to keep in mind that an investment is a long-term commitment and that your money should work for you over a long-term.
An asset is something that has economic value, something that can be sold or traded such as houses, cars and investments. Assets like investments are better than assets such as cars because investments gain more value over time, while cars lose value over time.
Investment products allow you the investor to save and invest. Examples of investments products include bank savings accounts, pension funds and flexible investments accounts.
Investment products are usually regulated because they are taxed differently, and have different rules around the flexibility you have with the investment.
With the help of a financial adviser you can identify the investment product that suits your needs and your investment goals.
Diversification allows investors to put money into different investments and manage the risk of their investments.
This may mean investing your money in different assets and asset classes such as shares, bond investments or property.
Here are three other financial terms that investors need to know:
Stocks are shares in a company. Also known as equities or shares, stocks are risky because if the company fails then equity investors will be the last to receive payments.
The value of your stocks is also affected by the performance of the company that you bought stocks in. This is influenced by a number of factors including the profits of the company as well as how the company is perceived to be performing.
Dividends are cash payments made to investors based on the cost of investment as well as the current market or face value.
Bonds are debt instruments issued by a government or a company. With bonds, there is not any equity involved. Investors receive interest on the bonds they have bought. Bonds are also bought and sold on a secondary market, like stocks.