Get to grips with some of the basic terms related to investing!
In this article, we explain some common types of investment among other terms. While explaining why something is an investment, the article may mention that there is a chance that the investment could increase in value over time and be worth more in the future.
It is important to remember that every investment carries risk. Anyone who invests is doing so because they want or expect to make money in the future, but that does not happen with every investment. There is always a chance that you may lose some or all the money you put in to an investment, so it’s important to be aware of the risks.
It’s important to do a lot of research about any investment. This will help you understand the risks involved and how to reduce them before you commit your hard-earned cash to it.
If you’d like to know more about the basics of investing and the risks involved before you read on, check out our Iona Explains… Investing video below.
Words highlighted in bold have a definition elsewhere within the glossary.
To invest in something is to put money into it with the expectation of making a profit in future.
There are lots of things that you can invest in such as property, businesses, stocks, bonds, funds, currency and cryptocurrency, non-fungible tokens (NFTs), savings accounts and lots more.
An asset is something that you own or control which has economic value, with the expectation that it will give a future benefit. For example, if you own a car or house that would be an asset as you could sell it at a later date for money.
Anything which you invest in is also an asset.
This is a type of cryptocurrency. There are many different types of cryptocurrency, Bitcoin was the first and has become the most well known.
You can use Bitcoin like traditional money to buy things in places that accept it, or you can invest in Bitcoin or other cryptocurrencies.
You may hear this term used when someone is talking about cryptocurrency.
A blockchain is a digital database that contains a record of information and is used and shared within a network available to the public.
Bitcoin, which is a popular cryptocurrency, has a blockchain that records any transactions made to buy or sell Bitcoin. Anyone can access its Blockchain to look at it.
A bond is an investment where you can lend money to a company or government for a set period of time. During this time you will receive interest payments. When the bond reaches the end of the set timeframe, also known as reaching maturity, you would have the initial sum of money which you invested returned.
These types of investments are considered to be less risky than other types such as stocks.
This is a broad term used to describe the value of your money and belongings, also known as your assets.
If you have a bank account, that is an asset. The amount of money in that account is your capital. Likewise, with an investment, the thing you are investing in is the asset, while the money it is worth is the capital.
This is a type of digital money that you can use like regular money to buy certain goods or products. It is not as accepted as traditional currencies, so there are fewer things you can buy with it.
There are many different types of cryptocurrencies out there. There are very well known ones such as Bitcoin and newer ones which get created all the time.
You can use cryptocurrency to buy things wherever accepts it or to invest in and hold on to with the hope that it will increase in value. Cryptocurrency can be a risky investment if you do not know much about it or investing in general.
This is a strategy for managing risk.
With any investment, there is at least some risk that you could lose money. The idea behind diversification is that if you have many different types of investment, you can lessen this risk.
For instance, if you put all your money into one investment and something bad happens it could have a big impact. If you spread your money across different types of investment, something bad happening with one of them won’t have as big of an impact.
This is a payment that some companies give to people who buy their stock, also known as shareholders. If you hold stock in a company on a certain date set by that company, known as the ex-dividend date, you will get a payment for an amount made known ahead of time.
A company might offer dividends paid at certain time intervals. This could be every quarter (every three months) or every year to encourage people to hold on to their stock for longer periods of time.
This is how much your investment has increased by.
You may see the term growth investing used, this is a type of strategy some people use when they invest. It involves buying stocks in younger or smaller companies with the expectation that their investment will grow more over time compared to other stocks.
This is how much the cost of things increases over time.
Many goods and services cost more now than they used to, this happens through a process called inflation. It can be a difficult concept to understand but what matters is that while inflation is happening, the same amount of money is worth less over time.
What £100 can buy you now is, for most things, a lot less than when you were born for example. In 10 years time, it will likely be worth less. This is why it can be a good option to invest some of your money because if your investment grows more than the rate of inflation then it isn’t losing value.
Putting your money in a savings account means it is much safer. The downside is it will lose value over time if the interest rate on the account is less than the rate of inflation.
The opposite of inflation can also happen when the general cost of goods and services falls, known as deflation. Inflation is much more common which is why it is a good idea to think about investing as a way to stop your money from losing value.
This is how much you have to pay for money which you have borrowed, on top of the original amount. It is given as a percentage.
The term can also describe money that you earn. Some savings accounts have an interest rate that allows you to earn a percentage of the amount you put in.
For example, a savings account that has an interest rate of 2% each year would pay you £20 if you invested £1000 over the year.
AER (Annual Equivalent Rate)
You may see this term used when talking about savings accounts.
The AER shows the total amount of interest paid in a year. It is designed to make it easier to calculate how much you’ll earn from interest when there is more than one payment during the year.
For example, say you have a savings account that has an interest rate of 2% and you put £1000 in and leave it for the year. If there is one interest payment then you will get the full 2% payment of £20 paid in one go. Your AER would still be 2%.
If there is more than one payment, the 2% interest will get split between these payments. If you got 2 interest payments 6 months apart, you would get paid 1% on the first, which is £10. On the second payment, the next 1% includes the £10 in interest which you have already been paid. This means the AER is 2.01%.
In the example above the difference isn’t much, you’d get an extra 10p over the year. Depending on the sum of money involved and the difference between the interest rate and the AER, it can be significant so it is an important figure to pay attention to.
This is someone who owns a property, usually in the form of buildings. A landlord rents out the use of that property to an individual or organisation for money.
Becoming a landlord is a way to invest because by renting out you receive regular cash payments. You also still own something which you will be able to sell later for further profit. This type of investment requires a lot of money to start out with due to the costs involved with buying and maintaining the property.
There are many responsibilities that come with being a landlord. You need to follow strict legal regulations, so as well as having startup cash you need to do your research and be aware of what these are if you are thinking of investing in property.
Loss is money that you lost as a result of an investment. It is the opposite of profit.
Investing always comes with at least some risk that you will lose money. For example, if you put £100 into an investment and you end up with £50 you will have made a loss of £50.
NFT stands for Non-Fungible Token.
These are a type of digital assets which have unique properties that identify them. They convey ownership of an item. The item which they are a token for could be anything from a video or a meme that exists online to real-world items such as property or artwork.
You cannot exchange NFTs like-for-like. You could swap one Bitcoin for another because each one is identical, but you cannot do this with NFTs because of their unique identities.
NFTs get stored on a blockchain, an online database that keeps a record of ownership and transactions that anyone can see. This makes it easier to buy, sell and trade them while also reducing the probability of fraud.
A pension is money that you get paid or have access to when you retire from work.
There are different types of pensions including state, workplace and private or personal.
The term portfolio, when talking about investments, describes a collection of financial investments. Everything that you have invested money in would be your investment portfolio.
If you have a diverse portfolio, that means you have invested in many different things which could include stocks, bonds, savings accounts, property and more. See the definition of diversification for why this can be a good idea.
Profit is any money you make above what you put in in the first place.
An investment which you put £100 into and get £150 out of in the end will have made you a profit of £50.
Return on Investment (ROI)
This term describes how well an investment is doing, or how much money you have got in return from what you invested.
To work out the ROI, you would take the current value of an investment minus what you invested at the start. You then divide that number by what you put in. Finally, multiply the answer by 100 to get a percentage.
For example, if you invested £200 into a stock and it is now worth £250, you would do 250 – 200 = 50, 50 ÷ 200 = 0.25, multiplying this by 100 gives you an ROI of 25%.
This is an account that you can open through a bank or building society and deposit money into.
Savings accounts come with an interest rate, meaning whatever you put in will earn a little bit more money on top over time. These are generally safe ways to invest.
A share is part-ownership of a company. People who have ownership in a company are shareholders.
Having shares in a company can be an investment as that company could grow in value over time. If this happens, your share will become worth more than what it cost when you bought it. Some companies also pay dividends to their shareholders.
You can become a shareholder in different ways. You could start a company in which case you would be the only shareholder unless you decided to sell or give away some of the ownership. Businesses often give employees shares in their company. You can also buy shares in some companies which have listed themselves on the stock market.
This is a type of cryptocurrency where the value is linked in some way to another asset. This could be another currency such as the Great British Pound or the US Dollar, or an asset such as gold.
They aim to offer some of the benefits of cryptocurrencies such as privacy and instant processing while having a more stable value than other types of cryptocurrency.
The stock market is a general term referring to different places where you can buy shares in companies that are publicly listed.
The London Stock Exchange, the New York Stock Exchange (NYSE) and the Nasdaq are all well-known marketplaces. They list their own selection of companies you can invest in by buying stocks. Each of these is what’s known as a stock exchange. Together, along with many more stock exchanges, they make up the more general term stock market.
Stock Market Crash
A stock market crash is a quick, often unexpected, drop in the price of stocks.
These can happen for a variety of complex reasons but recent examples include the 2020 COVID-19 pandemic and the 2008 financial crisis.
It is important to be aware of these if you invest in stocks because they can cause shareholders to lose a lot of money in a very short space of time.
A stock is an ownership interest in a company.
Companies listed on the stock market issue stock which you can buy. Like other investments, you would buy a stock with the hope that the company will do well in future and the value of that stock will go up in price, allowing you to sell it for a profit later.
The term is often confused with shares, but they mean different things.
While the stock is what you are buying from the company, the share is the number of units you buy. For instance, if you bought five shares in one company you would own one stock. If you bought shares in five different companies you would own five different stocks.
This is a term used to describe how much an asset’s value moves up and down. You may hear it used to describe a particular type of investment, an individual stock or the stock market in general which can go through periods of volatility.
An investment that often goes up or drops in value very quickly is volatile. There is a greater risk involved when there is volatility in investment.
This is an actual street in New York City in the United States. It is often used as a general term for the stock market or other financial institutions. This is because of its historical links to big companies and banks and also being the home of the New York Stock Exchange (NYSE).