4 Common Terms Beginner Investors Should Know AboutMarch 24, 2022 No Comments
Featured article by Alex Williams
Investments take plenty of time, money, and patience to grow into something profitable. That said, investing is no easy feat, especially if you’re still dipping your toes in the water. Before you begin to invest in something, whether it’s stocks or cryptocurrency, you need to be aware of the rules that govern the playing field.
One way to do that is to familiarize yourself with the terms investors use on the day-to-day to avoid getting lost in important conversations around investments. Involving yourself in these conversations is important so that you’re up-to-date with the latest news and trends surrounding your preferred investment. Missing out on important terms might have you feeling left out, or worse, grappling with unfamiliar territory on your own.
Here are a few of the basic terms that cut across all types of investments that you should know about:
As the saying goes, “don’t put all your eggs in one basket.” When an investor tells you to check your asset allocation, what they really mean is for you to look at your investment strategy. As the name suggests, asset allocation refers to where you put your investments. It’s recommended not to put them all in one place so that if one of your investments crashes, you’ll still have the others to fall back on.
In terms of crypto investments, asset allocation could also refer to how you diversify your investment portfolio. We’ll be explaining this in-depth later, but in terms of crypto, this basically means investing in different types of cryptocurrency to avoid parking all your assets in one place and ensuring there’s constant growth across your investments. For those trading in Monero, for example, trading your assets from your Monero wallet, alongside other cryptocurrencies, will yield a higher return on investment.
Return on Investment (ROI)
You may have already heard of this term even in circles outside finance. However, for those who haven’t yet come across the phrase “return on investment,” this pertains to the earnings you’ll get back from your investment on a particular asset. These returns often come in the form of percentages, which are then added up to your initial investment. For instance, if you get back $110 from an investment of $100, this means you’ve earned 10% of your initial investment.
The riskier the strategy, the more likely you’ll get a higher return. This is also where the concept of high risk, high reward comes from. But at the same time, the higher the risk, the more volatile an investment can be, and the higher the likelihood of crashing will be as well. This is why you need to develop a strategy that allows you to maximize your ROI both on high risk investments and more stable ones.
Another term that you need to be familiar with is “investment portfolio.” An investment portfolio refers to your collection of investments. In particular, this pertains to the types of investments you’ve made, which can include stocks, bonds, or even crypto. A diverse portfolio will show how you’ve played your hand when it comes to investments, which shows how you’ve spread out your investments across riskier industries and the like.
As an investor, it’s unwise to show a singular investment in just one industry or banking on just one type of investment. The more diverse your portfolio is, the less likely you’ll lose all your assets in high risk and volatile investments, while keeping the ROI from those ventures. A diversified portfolio can also be impressive to your fellow investors, who you can then trade your assets with.
As we mentioned earlier, risk is an inevitable part of any investment. Risk tolerance refers to your own preference when it comes to venturing into riskier investments. If you’re willing to lose some money in order to gain a potentially higher reward, then you have a high risk tolerance. On the other hand, if you prefer a more certain and steadier stream of assets into your portfolio, you may have a more conservative or low risk tolerance. Both are equally valid, and it’s ultimately what you want to achieve with your investments that will determine how your risk tolerance plays out.
Taking this into consideration, it’s important to know what you want to achieve in your investment. Is it to earn a big amount of returns over a short period of time? Is it to have a steady stream of assets over a longer duration? These factors will help you determine your risk tolerance, and ultimately, your investment strategy.
When it comes to investments, you need to be flexible yet certain in your next steps. That’s why familiarizing yourself with certain terminologies and keeping yourself updated in financial circles is important. You’ll need these to converse with your fellow investors, as well as familiarize yourself with a strategy that works best for you.
Whether you’re investing in stocks or crypto, these are some of the things that you should keep in mind when you start planning your next steps.