Investing Terms to Know
Taking control of your financial future is a pressure-filled process. You want to have confidence in what you are doing as well as an overarching plan, yet hearing investing aficionados talk sounds like an entirely different language! Understanding financial terminology can be a dizzying process and nobody wants to be bamboozled when it comes to something as important as money. But fear not, we have comprised a short list of terminology to acquaint yourself with before you consult a financial advisor about increasing your wealth.
Compound interest is the interest that you either earn or have to pay on interest. Simply, it can be considered ‘interest on interest’. When investing, your rate of growth “is now much higher than with simple interest”1 as you are reinvesting your returns as well as the initial amount deposited. Conversely, when borrowing money it can rapidly increase your debt.
Investments that are solely put towards one vehicle carry a far greater risk. As such, asset allocation is a strategy that minimizes risk by diversifying an individual’s portfolio over a variety of asset classes. In doing this, your portfolio will not crumble if one of your investments securities struggles.
Guaranteed Investment Certificates (GICs)
GICs are an investment tool unique to Canada provided by trust companies and banks. They require an individual to invest money for a specified amount of time in order to receive a guaranteed rate of return. This is an incredibly safe investment as the principal amount invested is secure, therefore you are not exposed to market fluctuations.
Possessing a share of stocks in a company literally means that you are buying a chunk of ownership. Your shares are inextricably linked to the company’s success - when the business is strong, your investment improves. When it dips so does your stock value.
Bonds are a debt investment as you “lend money to the government or a corporation for a specific period of time at a fixed interest rate” 2. A maturity date is set in which the loanee must pay back the principal sum loaned, meanwhile they are required to pay interest regularly during the repayment process. The farther the maturity date, the greater amount of interest accrued.
A mutual fund follows the risk aversive method of asset allocation - it is a diverse portfolio of securities that is managed by a financial professional or investment company. They will then pool your funds with other investors and make investment decisions on your behalf. This is a great strategy for those unfamiliar with the market and those who do not have time to continually invest in different individual stocks.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2020 Advisor Websites.