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5 common investment terms you should understand
By James Yeo
For many first-time investors, it can be intimidating to plough your hard-earned money into stocks. This is especially so with all the investing jargon you might have totally no understanding of.
Understanding the diverse investing lingo is probably one of the first few things you should do to kick-start your investment journey. It is similar to when you head for an overseas vacation – you learn the language beforehand in order to know what’s going on!
So to help, here are five common investing terms you should comprehend:
1. Blue chips
Fun fact: The term “blue chips” was borrowed from the game of Poker, as blue chips are considered the most valuable chips in the game. As such, in investing, blue chips usually refer to established companies with huge market capitalisations, like Singtel or CapitaLand. Blue chips are also widely considered to be a high-quality investment option, with low risks due to their longstanding financial performance.
2. Asset allocation
By definition, asset allocation is the process of dividing your investments among the different types of “assets” such as properties, growth stocks, government bonds etc. in order to optimise your financial plan.
According to accounting professor and well-known finance blogger Kemberley Washington, there are three main categories that you’re going to split your money between:
Cash
Bonds
Stocks
By and large, cash serves as an emergency buffer and ‘ammunition’ to buy stocks during economic downturns. Bonds are usually less risky than stocks, although stocks are poised to deliver higher returns over the long term.
3. Exchange Traded Fund
As its name suggests, an exchange traded fund (ETF) is a security that aims to replicate the portfolio to track the components of a market index, albeit in smaller quantities.
Unlike mutual funds, an ETF trades like a common stock on a stock exchange such as the Singapore STI ETF (ES3). It is often said to provide broad diversification, low initial costs and ease of trading.
4. Credit rating
A company needs be assessed with a credit rating whenever they are borrowing money. The credit rating evaluates the credit risk of the debtor and checks its capacity to pay back. In other words, it helps in a way to predict whether the debtor would be a potential defaulter or not. A classic example is how Moody’s downgraded Noble Group’s ratings to Caa1 (which translates to “of poor standing and very high credit risk”) due to its weak operating cash flow and large debt maturities over the next 12 months.
5. Prospectus
A prospectus is a legal document that contains in-depth details about a financial instrument hat an investor needs to make an informed decision – be it stocks, bonds, or a mutual fund.
That said, retail investors would be most familiar with the IPO Prospectus issued by a company that is going to list on the stock exchange soon. Some of the information will include the background of the firm, their objectives of listing, policies, financial statements, risks and more.
Conclusion
The above list is by no means exhaustive – in fact, there are still plenty of investment terms that I am probably oblivious to. That said, it should not stop you from starting to invest, as you would be able to learn much more along the way.
James Yeo is a finance professional in the Asset Management industry for more than 6 years. He also founded an investment blog at www.smallcapasia.com which is dedicated to helping retail investors find winning stocks.
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