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7 Basic Investment Terms One Should Know:

Hi, I am here again to make your learning journey simple and fun. Before getting deep into investments it’s important to understand basic terminology. Here I have listed a few basic investment terms that one should know, along with their definition.

Asset:

The asset is a resource that an individual, business or country owns in the expectation of added benefits in future.

There are two types of assets-

Tangible: Assets that have a physical existence.

E.g: Land, Building, Stock, Marketable Security, Machinery, Equipment etc.

Intangible : Assets that do not have physical existence.

E.g: Goodwill, Brand , Patents , Copyrights, Permits , Trademarks etc.

Liability:

In general, a liability is a legal obligation or debt that an individual or a company owe. They are settled over a particular time period.

E.g: Bills payable, loans, taxes payable, Accounts payable, debt, mortgages etc.

Net worth:

An individual’s or a company’s net worth is simply the value left after subtracting all the liabilities from assets(current market value). In other words, a snapshot of an entity’s current financial position is net worth.

Formula:

Net worth= Total Assets – Total Liabilities

Capital:

In simple terms capital is money. Every business needs money in order to maintain the operations and to buy more assets.

business capital comes in two forms debt and equity

Debt: It includes the loan and other types of credit that has to be repaid in future usually with interest.

Equity: it doesn’t involve direct obligation to repay the funds. Instead, the investors buy shares and receives a partial ownership by the company usually named as stocks.

Return On Investment:

The gain or loss generated on an investment relative to the amount of money invested.

it measures the ratio ratio between net profit and cost of investment, which is generally used to compare the profitability or the efficiency of different investments.

Compoud Interest :

The interest earned on the previously earned interest along with the principal amount.

Compounding allows you to earn interest on your principal and also on the interest that you reinvest. It might sound simple but the power of compounding is such huge that Albert Einstein Once said it is the eighth wonder of the world.

Formula:

A=P(1+r/n)nt

where,

  • A= Final Amount(principal + interest ),
  • P= Principal Amount,
  • r= Interest Rate,
  • n= Number of times interest is compounded per year,
  • t= Time(years)

Share:

In order to raise capital, companies divide capital into a number of equal units and that smallest unit is called ‘share’. People who buy or own shares called shareholders.

A Shareholder is essentially a part-owner in the company. When the company performs well and gets profit it is shared with the shareholder in the form of increased stock value or in the form of dividends.

I hope the article helped you to understand a few basic terms. Though, the investing terminology list is large, I have shared here only a few which are relevant for this basic investing series.

I’ll be back with another interesting article.

So, stay tuned, keep learning!

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