In this article, we present the 12 most important financial terms that everyone should know, from basic concepts such as interest to more complex terms such as financial leverage.
Fixed income
Fixed income is a form of investment in which an investor lends money to an entity, such as a government or company, in exchange for a regular interest payment and repayment of the borrowed principal at the maturity of the agreed-upon term. Fixed income securities include corporate bonds, government bonds, and promissory notes.
Corporate bonds are issued by companies and usually have a higher credit risk than government bonds, which means they offer a higher interest rate. Government bonds are issued by governments and are considered safer because of their financial backing.
Fixed income is a popular form of investment for those seeking regular income and stability in their portfolio. However, as with any investment, there are risks associated with fixed income investing, including default risk and interest rate risk.
Equities
Equity is a type of investment in which you purchase shares in a company or units in a mutual fund. Unlike fixed income, in which a fixed return is obtained, in variable income the return depends on the performance of the market and the company in question.
Equities are a riskier investment than fixed income, but also offer a higher potential for returns. It is important to bear in mind that investments in equities require a prior analysis of the market and the companies to be invested in, as well as a clear and well-defined strategy.
Stock market index
The stock market index is an indicator that reflects the performance of a set of shares listed on a stock exchange. It is used to measure the evolution of the market and the profitability of stock investments. Some of the best known stock market indexes are the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite in the United States, the FTSE 100 in the United Kingdom and the Nikkei 225 in Japan.
Dividends
Dividends are a portion of a company's earnings that are distributed to its shareholders. These payments can be in cash or in shares of the company and are usually made on a regular basis, such as once a year or every quarter. Dividends are a way of rewarding investors for their participation in the company and can also be an indicator of the company's financial health.
Currency exchange
Currency exchange refers to the conversion from one currency to another. This may be necessary when traveling to another country or conducting a transaction in a currency other than one's own. The exchange rate is the relative value of one currency compared to another and can fluctuate depending on various economic and political factors.
It is important to keep in mind that banks and exchange houses may charge commissions for currency exchange, so it is advisable to compare rates before making the transaction.
Inflation
Inflation is the sustained and generalized increase in the prices of goods and services in an economy over time. This means that over time, the same amount of money can buy fewer things because prices have increased.
Inflation can be caused by several factors, such as increased demand for goods and services, increased production costs, decreased supply of goods and services, or currency depreciation.
It is important to monitor inflation as it can negatively affect people's purchasing power and the value of money in savings and investments. Governments and central banks also take measures to control inflation and keep it at healthy levels for the economy.
Interest rate
The interest rate is the percentage charged for the use of borrowed money. It is a fundamental factor in finance as it affects both borrowing and saving. Interest rates can be fixed or variable, and their value can vary according to the country's economy and monetary policies.
In the case of loans, a high interest rate means that more money will be paid in interest over time. On the other hand, a low interest rate can make it easier to repay the loan.
For savings, a high interest rate means you will earn more money over time. On the other hand, a low interest rate can make it less attractive to save money.
It is important to understand how interest rates work and how they affect our personal finances in order to make informed decisions about borrowing and saving.
Par value and market value
The par value is the nominal value assigned to a share or security, which is established at the time of issuance. It is a fixed value that does not change over time, regardless of market fluctuations.
On the other hand, the market value is the price at which a share or security is quoted at a given time in the market. This value can vary constantly due to factors such as supply and demand, economic and political news, among others.
It is important to keep in mind that the market value can be higher or lower than the nominal value, which indicates the level of interest and confidence that investors have in a company.
Technical analysis and fundamental analysis
Technical analysis and fundamental analysis are two different approaches to analyzing financial markets. Technical analysis focuses on the study of price charts and other technical indicators to predict the future direction of prices. On the other hand, fundamental analysis focuses on the study of economic, financial and political factors affecting a particular company or market.
Investors can use both technical analysis and fundamental analysis to make informed investment decisions. However, it is important to remember that neither approach is foolproof and there is always risk associated with any investment.
Mutual Fund
A mutual fund is a financial tool that allows a group of people to invest their money in different financial instruments, such as stocks, bonds and real estate. The objective of the fund is to generate returns for investors through diversification and expert asset management.
Mutual funds are managed by specialized companies called fund managers. These companies charge a fee for their services and are regulated by the financial authorities.
There are different types of mutual funds, such as equity funds (which invest in stocks), bond funds (which invest in bonds) and mixed funds (which invest in a combination of assets). Investors can choose which type of fund best suits their financial needs and objectives.
Investment Strategies
Investment strategies are plans that are designed to obtain the highest possible return on available financial resources. Some of the most common strategies are:
- Long-term investment: This involves investing in assets that are expected to generate returns over an extended period of time, such as stocks or mutual funds.
- Short-term investment: This consists of buying and selling assets in a short period of time, with the objective of making quick profits.
- Diversified investment: Involves investing in different types of assets to reduce risk and maximize returns.
- Value investing: It is based on the purchase of assets that are considered undervalued by the market, with the expectation that their price will increase in the long term.
Diversification
Diversification is an investment strategy that consists of distributing resources in different types of financial assets, such as stocks, bonds, mutual funds, among others. The objective is to reduce the risk of loss by not depending on a single type of investment.
By diversifying, a balance between risk and return is sought. For example, if you invest all your money in shares of a single company and it has financial problems, you run the risk of losing all the capital invested. But if you invest in different companies and sectors, the probability of losing all your capital is reduced.
Diversification can also be done geographically, by investing in different countries and regions of the world. In this way, one avoids depending exclusively on the economic performance of a single country.
It is important to note that diversification does not guarantee profits or completely eliminate the risk of loss, but it is a strategy recommended by experts to minimize risks and maximize long-term profitability opportunities.
