Decoding Investment Jargons: Your A-Z Guide
A
Asset:
An asset is anything that you own that has value and can provide future economic benefits. In simple terms, it’s something that can be used to generate income, reduce expenses, or be sold for money.
Assets come in many forms:
Physical Assets
Financial Assets
Intangible Assets
Asset Allocation:
Asset allocation refers to the strategy of dividing your investments across various asset classes, like stocks, bonds, and cash. The purpose is to optimize the balance between risk and reward according to an individual’s goals and risk tolerance.
Example: A young investor might have a higher proportion of stocks in their portfolio for long-term growth, and the proportion gets reduced as they age.
B
Bid:
The highest price someone is willing to pay for a stock or anything that can be traded.
Bonds:
A bond is a fixed-income investment where an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period at a fixed interest rate. The borrower uses the money to fund its different operations, and the investor receives interest on their investment.
Bankruptcy:
Bankruptcy is a legal proceeding involving a person or business that cannot repay their outstanding debts. In this process, the debtor’s assets are measured and used to repay some of the outstanding debt.
Beta:
Beta measures a stock’s volatility in relation to the overall market. A beta of more than 1 indicates that the stock’s price is more volatile than the market average.
Example: If an Indian stock ‘F Tech’ has a beta of 1.2, it is 20% more volatile than the overall market.
C
Compound Interest:
The magic of earning interest on your interest makes your money grow exponentially over time. It’s like a snowball rolling downhill, gathering momentum as it goes.
Capital Gains:
The profit made from selling an asset like stocks, bonds, or property for more than its purchase price.
Example: If you buy a stock for ₹100 and sell it for ₹150, your capital gain is ₹50.
Capital Gain Tax:
This is a tax on the profit earned from the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, or property.
Example: If an investor in India sells stocks at a higher price than the purchase price, the profit is subject to capital gain tax.
Credit Card:
A card issued by a financial company giving the holder an option to borrow funds from them. Credit cards charge interest and are primarily used for short-term financing.
Example: You can use a credit card to buy a smartphone and then pay back the amount over time in EMIs or lump sum.
Credit Score:
A number representing the creditworthiness of an individual based on their credit history. In India, scores range from 300 to 900, with higher scores indicating better creditworthiness.
Capital Expenditure (Capex):
Capex is the money a company spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land.
Example: If ‘Z’ company in India spends ₹20 million on new machinery and equipment upgrades, this amount is its capital expenditure.
D
Diversification:
Don’t put all your eggs in one basket! Spread your investments across different asset classes and sectors to minimize risk and maximize potential returns.
Demat Account:
An account used to hold shares and securities in electronic format in India. It’s necessary to trade stocks, bonds, etc., electronically on the stock exchanges.
Dividend:
A dividend is a portion of a company’s earnings distributed to shareholders. If you own stock in a company that pays dividends, you’ll receive a small payment, usually quarterly.
Example: If a company declares a dividend of ₹5 per share, and you own 100 shares, you’ll receive ₹500.
Dividend Yield:
It can be defined as the dividend per share divided by the stock price.
Example: If an Indian company pays an annual dividend of ₹10 per share and the stock price is ₹200, the dividend yield is 5%.
Dividend Payout Ratio:
This ratio shows the percentage of earnings a company pays out as dividends to shareholders. It’s an important measure for income-focused investors.
Example: If ‘Z’, an Indian company, earns ₹10 per share in a year and pays a dividend of ₹4 per share, its dividend payout ratio is 40% (₹4 / ₹10).
Debt:
Debt can be defined as money borrowed by one party from another. Individuals and corporations often use debt to make large purchases they could not afford under normal circumstances.
Example: You want to purchase a mobile phone worth Rs.50000 but don’t have that much money with you currently, so you take a loan from the bank or credit card and repay that amount later either in lumpsum or EMI, depending on your agreement.
Derivative:
Derivative is a financial instrument whose value is derived from the value of an underlying asset, such as stocks, bonds, commodities, currencies, interest rates, or market indexes.
Example: An Indian investor buys a futures contract on the NIFTY 50 Index, betting on the future performance of the market. The value of this futures contract is derived from the underlying NIFTY 50 Index.
E
Earnings per Share (EPS):
EPS is a measure of a company’s profitability, calculated as the net profit divided by the number of outstanding shares. It indicates how much money a company makes for each share of its stock.
Example: If an Indian company made a net profit of ₹1 billion and had 10 million shares outstanding, its EPS would be ₹100.
EBITDA:
Earnings before interest, taxes, depreciation, and amortization
Equity:
Equity refers to an ownership interest in a company. If you own equity in a company, like shares of stock, you have a claim to a part of its assets and earnings.
In simple terms, owning equity in a business is like owning a part of it.
Exchange Rate:
An exchange rate is simply the value of one country’s currency in terms of another currency.
Example: If the exchange rate is 75 Indian Rupees to 1 US Dollar($), you need ₹75 to buy 1 USD. This rate fluctuates based on economic factors and is crucial for international trade and travel.
F
Fixed Deposit (FD):
An FD is a financial instrument where you deposit a lump sum amount of money for a fixed period, typically at a higher interest rate than savings accounts. FD holders can choose to receive the interest earned monthly, quarterly, half-yearly, or annually as preferred.
Example: If you deposit ₹50,000 in an FD for 1 year at a 6% interest rate, you’ll get ₹53,000 after a year, a profit of Rs.3000.
Fiscal Policy:
It is a government policy that attempts to influence the direction of the economy through changes in government spending or taxes.
Example: The government reducing taxes to stimulate economic growth.
Free Cash Flow (FCF):
FCF represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It’s an important indicator of a company’s financial health and ability to pursue opportunities.
Example: ‘D Industries’, an Indian company, generates ₹40 million in cash from operations and spends ₹10 million on capital expenditures, resulting in an FCF of ₹30 million (₹40 million – ₹10 million).
G
Gross Domestic Product (GDP):
The total value of all goods and services produced within a country’s borders over a specific period. The GDP growth rate is an important indicator of the economic performance of any country.
H
Hedge (Hedging):
A hedge is a strategy used to reduce the risk of losing money due to changes in market conditions.
I
Initial Public Offering (IPO):
A company’s first sale of its stock to the public, marking its grand entrance into the stock market. Think of it as a company’s debutante ball on the Stock Market.
Inflation:
Inflation, in easy terms, is the increase in the prices of goods and services in an economy over time, and subsequently, purchasing power falls.
Example, if inflation is 6%, then a ₹100 item will cost ₹106 next year.
Interest Rate:
The amount charged by a lender( the person who gives the money) to a borrower (the person who needs the money) for using assets is usually expressed as a percentage of the principal. This is commonly seen in loans and savings accounts.
Example: If you take a loan of ₹1,00,000 at an interest rate of 10% per year, you’ll have to pay ₹10,000 as interest annually.
Insurance:
A policy in which an individual receives financial protection or reimbursement against losses from an insurance company.
Example: Health insurance helps cover medical expenses, and car insurance helps cover costs in case of a car accident.
J
Junk Bond:
A junk bond is a high-yield but high-risk security. It’s rated below investment grade due to the issuing company’s shaky financial standing.
Example: An Indian startup with a high debt-to-equity ratio and uncertain profit streams may issue junk bonds to raise capital, offering high interest rates to compensate for the risk.
K
Key Rate:
A key rate is an important interest rate that influences the entire economy, typically set by a nation’s central bank.
Example: The Reserve Bank of India (RBI) might change the repo rate (a key rate) to control inflation or stimulate economic growth.
L
Liquidity:
The ease with which an asset can be converted into cash without affecting its market price. In India, savings accounts are highly liquid, whereas real estate is less liquid.
Leverage:
The use of borrowed money to increase the potential return of an investment.
Example: Suppose you want to buy a property worth ₹100,000. Instead of using only your own money, you use ₹20,000 of your own funds and borrow ₹80,000 from a bank to complete the purchase. This is a form of leverage because you are using a small amount of your own money (₹20,000) to control a much larger asset (₹100,000 property). If you use a small amount of your own money and borrow the rest to invest in a property, you are using leverage.
M
Mutual Fund:
An MF is an investment fund that pools money from many investors to purchase securities like stocks, bonds, etc. Professional Fund Manager manages the fund.
Investors earn returns on their investments minus any fees or expenses charged.
Example: You can invest ₹500 in a mutual fund, which will be combined with other’s money and invested in the stock market and other assets.
N
Net Worth:
The total value of an individual’s assets minus liabilities. In simple terms, it’s what you own minus what you owe.
Example: If you own a house worth ₹50 lakhs and have debts of ₹20 lakhs, your net worth is ₹30 lakhs.
Net Asset Value (NAV):
In the context of mutual funds, NAV represents the per-share/unit price of the fund on a specific date or time. It’s the price at which investors buy shares from a fund company and sell them (redemption price).
Example: If ‘Axis Mutual Fund’ in India has assets totalling ₹500 million and liabilities of ₹50 million, and 10 million shares outstanding then its NAV per share is ₹45 (₹500 million – ₹50 million) / 10 million.
Non-Performing Asset (NPA):
An NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
Example: An Indian bank has a loan given to a business, but if the business hasn’t made any payments for over 90 days, the loan is classified as an NPA.
O
Operating Margin:
This profitability ratio indicates what percentage of revenue is left over after paying for variable production costs. It measures how much profit a company makes on each rupee of sales.
Example: If ‘B Corp’, an Indian company, has an operating income of ₹10 million on net sales of ₹50 million, its operating margin is 20% (₹10 million / ₹50 million).
P
P
Q
Q
R
R
S
S
T
T
U
U
V
Volatility:
The degree to which the price of a security, market, or index goes up or down. High volatility means prices can change dramatically in a short period.
W
W
X
X
Y
Y