When I was younger, I stayed away from things that I didn’t know too much about because I was afraid someone might think I was dumb. I had to learn that this was not the best strategy and could actually cause problems – particularly when it comes to personal and business finances. Here is a short list of some financial terms that are important for you to know and understand.
Compound Interest – is an amount or interest that is added to the original amount or principal of an investment (or loan) so that the additional amount now earns interest, too. This addition of interest to the principal is called compounding.
Inflation – This is the rate at which the cost of living increases. This is important because if your money is not growing over time, then you may lose money each year due to inflation as your purchasing power is reduced.
Risk – Investing involves the risk of losing money. Investments are classified by risks ranging from wanting to minimize risk (Conservative) to willing to accept a lot of risk (Aggressive).
Return – Investments may earn a return that could be zero, positive (an addition to the principal) or negative (a loss of principal). Higher returns are typically associated with higher risks and lower returns are typically associated with lower risks.
Diversification- spreading out your risk or not investing all your money in one area. These areas are called allocations and examples are cash, equities and bonds.Diversification does not guarantee profit or protect against loss in declining markets.
Stock – A type of investment that gives you partial ownership of a publicly traded company, the owner is called a shareholder. Investing involves risk, including the possible loss of principal. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with stocks, including market fluctuations.
Bond – A debt instrument, a bond is essentially a loan that you are giving to the government or an institution in exchange for a pre-set interest rate paid regularly for a specified term. The bond pays interest (a coupon payment) while it’s active and expires on a specific date, at which point the total face value of the bond is paid to the investor. Investing in bonds involves certain risks such as market risk if sold prior to maturity and credit risk especially of investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original costs upon redemption or maturity.
This information is provided for educational and illustrative purposes only.This article is meant to be general in nature and should not be construed as financial advice related to your personal situation.
Kim Fernández is a Financial Advisor with Waddell & Reed and can be reached at 520.745.3090 x116 or by email at email@example.com for assistance. Waddell & Reed, Inc. Member SIPC