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Foundations

Glossary of Investing terms, Part 1

Everyone who’s new to investing finds the terminology intimidating. Most investment articles, including mine, use terms like NAV, P/E, ratios, corpus, return etc. which a novice investor tends to get all confused about. Most people give up thinking, “I’ll come back later when I have time to understand these terms”.

I’m going to try to explain some of these terms in as much detail as possible. As always, tell me what confounds you and I will add those terms in with my explanation. Note that the below is a logically ordered sequence, not alphabetic.

Investor: You. This means the person who is investing. It’s not any third party person who you need to give your money. This is you.

Investing, Saving: There’s a difference. Essentially, investing is the art of growing your money, after you have paid tax and accounted for inflation. Saving is just about having more money than you spend.

Return: The rate at which your money grows when you invest. Sometimes return is used to depict how much you get back when you put in some money. Mostly measured in percentages.

Risk: When you invest, you have a possibility of losing some or all of the money you invested. This may be a small probability (low risk) or a large one (high risk). For instance, if you put some money to buy oranges, hoping you can sell them for a higher price, no one may buy any of your oranges and you have lost all your initial investment. This is a high risk investment. On the other hand, putting your money in a fixed deposit in a bank is quite safe – low risk, but not zero risk; after all the bank may go bust. Note usually that risk is directly proportional to potential for return; higher the risk, higher is the potential for return.

Equity, stocks, shares: Terms for units of companies. Every company is divided into units called shares, and you can buy these units (of public companies) on stock exchanges. Since some companies do very well in their fields compared to their counterparts, they tend to be in demand and therefore their price increases.

Funds: A term for Mutual Funds.

Portfolio: An enumeration of your investments. These can be some stocks, some mutual funds, a few fixed deposits etc.

Net Worth, Corpus: What your portfolio is worth, if you take the current market value for each investment you hold. Corpus is usually used when you can get income using that money.

Cash flow: A complex word for a simple concept – Cash flow is a list of what you earn (income) minus what you spend (expenditure). The list can be monthly – which gives your monthly cash flow – or yearly.

Assets: What you own. See this article for more.

Liabilities: What you have to give back to others. See this article for more.

Capital, Principal: This is the money you have invested. If you buy something for Rs. 100, then your capital was Rs. 100. If you manage to sell it for Rs. 110, you have a positive return of Rs. 10, because your initial Rs. 100 is returned to you and you have Rs. 10 left after taking out the capital. But if you sell for Rs. 90, you have lost Rs. 10 of your capital.

Interest: Usually depicts a percentage rate of the capital that you receive (or pay) for an investment (or a loan).

Diversification: Investing in different areas, low risk and high risk, or in different sectors of industry, or different methods of investment etc. The idea is to reduce the risk of one area going down and pulling you with it.

Part 2 : Stock Market Concepts (Coming soon)