A big part of investing is knowing the different investment concepts. Do you know what diversification is and why it is important in investing? And do you know terms like bear and bull markets, volatility, blue chips and hedging?
Shares - represents a security that evidences ownership of a share in a given joint stock company. Investing in shares provides individuals with the opportunity to participate in the ownership and profits of a company. As the value of a company increases, so does the value of its shares, allowing investors to sell their shares at a higher price than they bought them for and make a profit. Shareholders have the right to participate in profits (paying dividends) and to vote at general meetings.
Rating - expresses credibility and stability, denoted by letters from AAA to D. The most well-known rating agencies are Standard & Poor's (S&P), Moody's and Fitch. With the AAA rating level posing almost no risk and D being high risk. Riskier investments have better appreciation, but they are also much more likely to be lost.
Profitability - expresses the ratio of profit to capital employed, calculated as profit/equity × 100 (%). There are several types of profitability, namely profitability of assets, equity, costs, sales and long-term capital.
Solvency - expresses the ability to meet its obligations, it is the ability to pay.
Liquidity - informs how quickly assets can be converted into cash. A low liquidity ratio indicates that the enterprise is unable to pay its liabilities on time. Conversely, a high liquidity ratio means that the enterprise is able to pay its liabilities on time, but on the other hand, this reduces its profitability.
Volatility - indicates the degree of fluctuation in the value of a given financial instrument. High volatility indicates that the value of an asset can change rapidly and significantly over a short period of time, indicating a higher level of risk and can yield higher profits. On the other hand, low volatility indicates greater stability and less risk, but usually less profit.
Security - can be a stock, bond, bill of exchange, share certificate, treasury bills, cheques, and other financial instruments. The issuer of the security, or issuer, obtains the necessary capital in this form and the investor thus appreciates his money.
Hedging - is a hedge against risk, it is an investment technique whereby opposite trades are entered into or opposite positions are held to offset the risk of the original investment asset. The most common instruments used for hedging include futures contracts, options, swap contracts, and forward contracts. These financial derivatives allow investors to control and reduce the risk in their portfolios.
Blue chips - these are stocks of large companies that are known to be stable and highly liquid. The term "blue chip" was coined in the early 20th century to refer to the dark blue high-value poker chips that marked the highest value and could be used to place the most significant bets.
Beta - is a measure of a stock's volatility in relation to movements in the overall market. A beta greater than 1 indicates a stock is more volatile and a beta less than 1 indicates a stock with lower volatility.
Diversification - used to minimize investment risk. The key is not to invest in just one financial instrument, but to spread your investments across multiple types, thus eliminating the risk of loss.
Broker - a so-called intermediary who arranges the buying and selling of shares. He acts as an intermediary between the investor and the stock exchange.
Bear market
A bear market is defined by a long-term decline in investment prices - generally, a bear market occurs when there is a decline of 20% or more from its recent high. A bear market is thus an ideal opportunity for investors to buy stocks.
Bull market
A bull market is defined by an uptrend in the market over a period of time - generally, a bull market occurs when there is an increase of 20% or more from the previous low or when the price has hit an all-time high. In this case, investors either continue to hold the stock with the prospect of even higher profits or sell.