There are many things an investor needs to know. You need to know your specialist area inside and out if you’re going to make a killing. For the majority of people, they start by learning some of the general terms of investment. This guide is going to introduce you to some of the terms you may have never heard of before.
Term #1 – Annuity
An annuity is a financial mechanism that pays out a guaranteed amount of money every year. Most people purchase annuities for retirement. They can also be a great investment tool. For example, you can cash in a structured settlement annuity for a lump sum.
Annuities can come in a number of forms, and it’s possible to make more money if you tie them to the market.
Term #2 – The Fed
The Fed is important for everyone because they set interest rates. Known formally as the Federal Reserve, they impact all investors. Consider the fact that 35% of Americans have less than $ 1,000 saved for retirement and you can see why interest rates are making people nervous. Right now they’re at record lows, so these people have no way out.
Any smart investor will know the current short-term interest rates set by the Fed.
Term #3 – Spinoff
A spinoff is when a company splits some of its operations to create completely separate entities. This often happens when one entity becomes so successful that it can warrant its own company. One example of this is when eBay released PayPal.
The spinoff will have a certain degree of autonomy about it, but it’s far from a totally separate company in practice. Both companies will continue to work towards the same goals. This is important for investors because a spinoff can increase the value of both companies.
Term #4 – Market Timing
Market timing is a term to define what every single day trader does on a daily basis. It’s the act of trying to buy low and sell high in real-time. This is a difficult skill to get right because the market will often make unpredictable changes without any real warning.
Great market timing is ultimately about being able to use both technical and contextual analyses. Together they can give you an edge over other traders.
Term #5 – Price-to-Earnings Ratio
A company’s price-to-earnings ratio, known as the P/E ratio, is a big part of analyzing a company’s financial position. This is essentially what someone would be willing to pay for $ 1 of a company’s overall earnings. You can get this ratio by taking the company’s share price and dividing it by the earnings per share.
A higher P/E ratio is best. If someone pays $ 20 for $ 1 of a company’s overall earnings, this makes the company far more valuable than a company where investors are only going to pay $ 2 for $ 1.
Term #6 – Beat the Street
Wall Street is the heart of the financial system in the US. Every company on the stock market will have predictions regarding its performance during the next financial quarter. If the company performs better than people expected this is considered to be beating the street.
This is when investors get interested because it either means it’s time to sell or to double up and buy even more shares. Smart investors will always look for a history of a company outperforming Wall Street’s expectations.
Term #7 – Buy and Hold
Buy and hold is a strategy that has been popularized by investors like Warren Buffet. The idea behind it is to buy a stock and hold it for an extended period of time. You take a stock and you may hold it for ten years going forward. This allows you to ride out any market fluctuations and get a truer value of a company.
This can also work the opposite way, though. For example, the company could go into terminal decline and never recover. It’s far from a guaranteed win.
Term #8 – Inflation
Inflation is what makes every investor scream for mercy. Every year the Federal Reserve prints more bank notes and sends them into general circulation. This naturally devalues the currency in general ever so slightly. It’s what causes prices to rise every year.
An investor should always look to beat the current rate of inflation otherwise your net worth is actually dropping in real terms every year.
Last Word – Terms to Know
These are the basics every investor should know. Continue to advance your education and you’ll become more adept at investing over time. What do you think is the most important term on this list?
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