On your journey to financial freedom, you’ll encounter unfamiliar financial jargon. While a quick dictionary search might help, it often lacks the depth needed to truly understand these concepts. Once you grasp these terms, investing becomes less intimidating and more empowering. Here’s a breakdown of essential investment terms to strengthen your financial literacy:
1. Interest Rate
The interest rate is either the cost of borrowing money or the reward for depositing it.
- For Borrowers: The interest rate is what you pay to your lender, determined by the loan amount, loan term, and compounding frequency.
- For Savers: It’s the return your bank or institution pays you for holding your money.
2. Credit Rating
Your credit rating reflects your financial reliability as a borrower. It tells lenders whether you’re likely to repay debts on time. A good credit rating increases your chances of securing favorable loan terms.
3. Overdraft
An overdraft allows you to spend beyond your account balance, essentially borrowing money from the bank. While convenient, overdrafts can be costly due to high fees, especially if you go over the free limit.
4. Bear Market
A bear market occurs when investment values drop by 20% or more, often driven by economic downturns or investor pessimism. This can be an opportunity to “buy the dip” and invest at lower prices.
5. Bull Market
In contrast, a bull market represents a strong economy, with investment values rising by 20% or more. It’s a time of investor confidence and a great opportunity to hold or sell investments.
6. Compound Interest
Compound interest allows your investment to grow exponentially as you earn interest on both the principal and previous interest. This can work against you in debt, where unpaid balances accumulate additional charges.
7. Opportunity Cost
Opportunity cost refers to what you give up when choosing one option over another. For example, spending money on luxury items instead of investing represents the potential gains you’ve sacrificed.
8. Mortgage
A mortgage is a long-term loan for purchasing property. You’ll repay it in monthly installments over 10–30 years. The property itself serves as collateral.
9. Collateral
Collateral is an asset pledged as security for a loan. For example, in a mortgage, the property you purchase acts as collateral. If you default, the lender can seize it.
10. Investment Portfolio
An investment portfolio is the collection of all your investments, akin to a basket of diverse assets such as stocks, bonds, and real estate.
11. Loan-to-Value (LTV)
LTV is the ratio of a loan to the value of the asset being purchased. For example, if you borrow 90% of a property’s price, your LTV is 90%.
12. Capital Gains
Capital gains are the profits earned from selling an asset like property or stocks at a higher price than you paid. These profits may be subject to taxes, with allowances to reduce your taxable gains.
