10 Terms to Know Before You Start Investing!

10 Terms to Know Before You Start Investing!


in today’s video I’m gonna be covering
ten terms that I think you need to know before taking the plunge into investing hey wealth builders and welcome back to
the bemused where we are making sense of all things money for the bewildered and
confused young adult this video is the second video in our making sense of
investing series so if you’re new around here and want to start from the beginning
I’ll make sure I have a card linked up here so you can watch the series all in
order I hope that by the end of the video you’ll choose to come join the
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with us in this investing series and with all of our other personal finance
content that we have for you guys so the first term that I want to talk about is
asset class asset classes are essentially investment categories so
just ways to group similar types of investments together now there are four
main asset classes out there the first one is equities and equities means that
you own a piece of a company probably the most popular type of equity
investment is a publicly traded stock like an apple or a Google or a company
like that directly investing into a private company is also a type of equity
investment now equities can have a lot of risk the stock market can be pretty
volatile and small companies private companies do have the potential to fail
however there is also the potential opportunity for tremendous upside when
investing in equities it provides great opportunity for growth the second asset
class I want to talk about is fixed income with fixed income investing
you’re essentially making a loan to an institution or the government for
example and they are paying you back with interest a very popular type of
fixed income investment is bonds fixed income in general is considered less
risky than equity investing but they also typically yield lower returns bonds
issued by the federal government for example are considered pretty safe
because it’s not very likely that the federal government is gonna go bankrupt
and not repay you your money the third asset class is cash this is just your
plain old cash money sitting in your savings account which can yield you you
know a little bit of interest here and there or just sitting in a check
as you know cash is considered to be very safe but it also doesn’t really
feel too much of a return the fourth main asset class I want to talk about
is real assets and commodities so this is when you own a physical asset like
property I know a lot of people are into real estate investing these days but
also that includes commodities like gold or oil physical products natural
resources and precious metals so those are asset classes now let’s move on to
the second term which is risk tolerance now each of the asset classes we just
named have varying degrees of risk and volatility involved the amount of risk
that you feel comfortable taking is what’s called your risk tolerance so if
the thought of putting all your money into a volatile asset like stocks for
example freaks you out then you probably have a low risk tolerance however if you
see a more volatile investment as an opportunity to experience more growth
over time then you probably have a higher risk tolerance now just because
you might feel comfortable taking on a lot of risk doesn’t necessarily mean
that you can or you should for example if you’re saving up for a down payment
on a house in the next few months to a year you definitely wouldn’t want to put
all your money in a very risky asset and have the chance of losing value right
when you need that money this concept illustrates what’s known as
your risk capacity how much risk are you literally capable of taking on the
fourth term is time horizon how much time do you have to save toward your
investment goals this one’s pretty straightforward in the home purchase
example that we just discussed the time horizon there was a few months
to a year which is pretty short on the other hand if you’re in your 20s
investing for retirement that’s a pretty long time horizon we’re talking about
the span of several decades here your risk tolerance risk capacity and your
time horizon all help shape in your asset allocation asset allocation refers
to the amount of money that you decide to invest
to each asset class so for example if you have a high risk tolerance high risk
capacity and a long time horizon you might feel very comfortable investing
most of your money into an asset class like equities where you can ride out
that volatility over a long amount of time
on the other hand if you have a low risk capacity low risk tolerance and a short
time horizon you might want to invest primarily into a less risky asset class
like fixed income or cash the next term is basis in simple terms your basis is
how much of your money you’ve contributed into an investment so for
example if I contribute a thousand dollars into my Roth IRA and invest it
and now it’s worth 1,300, 1,000 dollars is my basis because that’s how
much I put in this term will be even more important later in the series when
we get to talking about how investments are taxed the seventh term is return now
I know I’ve been using this term throughout the video so far but I think
it’s important to clarify exactly what return it means return refers to the
gain or the loss on an investment relative to the amount of money that you
contributed or your basis and it’s usually expressed in a percentage form
your return can be positive or negative so for example if I invested $100 and my
investment is now worth $90 my return is negative 10% or if I invested $100 and
now it’s worth a hundred and fifteen dollars my return would be 15% there are
actually several things that can be factored into calculating the total
return on your investment and we’ll get into that later on in this series as
well next is expense ratio if you’re putting your money into a fund that
contains several different types of investments more than likely that fund
will have what’s called an expense ratio the expense ratio measures how much of
the money that you invest into the fund is actually going to things like
administrative costs and fees this is one of the main types of fees that are
commonly found in investment products you want to make sure that any expense
ratios you’re paying are reasonably low because the more money you have going to
fees is the less money you have actually being invested and working for you but how do you know if an expense ratio is reasonable and how do
you even know if your investments are performing well how do you even measure
that a helpful way to answer those questions is to compare your investments
to their benchmarks many types of investments within each asset class have
established funds that serve as benchmarks for investments that fall
within that asset class for example the S&P 500 index represents the 500 largest
companies in the United States so if you are investing primarily in large US
companies the S&P 500 would be a good benchmark for you to determine hey how
is my portfolio performing relative to you know how it should be how most
assets in this asset class are performing the tenth and final term is
liquidity how accessible are your investments how quickly can you turn
your investments into cash things like publicly traded stocks and bonds are
considered relatively liquid because you can sell them pretty quickly on the open
market on the other end of the spectrum are investments like real estate
property you can’t just sell a property to access the cash you put into it with
the snap of a finger so real estate investing property would be considered
more illiquid so those are the 10 terms that I find really helpful to understand
before you start investing if you got value out of today’s video make sure you
comment the word value down below and if there are any other investing terms that
you guys find useful for beginners to know also leave those terms in the
comments below and let’s share the knowledge with each other also before
you go make sure you have that notification bell hit so that you know
every time you post a new video in this series and we’re also gonna be posting
other content sprinkled throughout so we’re not just talking about investing
every single week so make sure you stay tuned for those videos as well thanks so
much for watching and I’ll see you in the next video