EAGER TO PLAY IN THE MONEY MARKET BUT STILL LOST IN THE MISHMASH OF FINANCIAL JARGONS? BELOW ARE SOME INVESTMENT CONCEPTS SIMPLIFIED:
Appreciation vs. Depreciation
Appreciation is the increase in value of assets over time while depreciation refers to its decline. Buildings and equipment normally depreciate due to wear and tear while real estate and other assets may increase their value depending on their location, condition, or economic situation.
Asset Allocation
This refers to the method of deciding how much money to invest in which investment vehicle (e.g. stocks, bonds, mutual funds, etc.) to maximize earning.
Diversification
It's strategy where an investor puts money in several kinds of businesses or securities to protect his investment in case the market suffers a downturn. This could be a mix of shares in the stock market, mutual fund and government securities like bonds and treasury bills.
Dividends
Dividends are earnings distributed by publicly listed companies among its stockholders. The amount is in proportion to the number of shares held by the stockbroker, paid either annually, semi-annually, or quarterly. Dividends may take the form of cash, stocks, or property.
Fund Manager
Refers to a person who advises or helps manage an investor's portfolio. Some financial institutions provide professional fund managers to clients as part of their investment package.
Inflation
Refers to the increase in the prices of commodities in relation to the capacity of people to purchase such goods - it is said that money may no longer be able to buy in the future what it can afford today. Higher inflation rate diminishes the ability of the investment to yield higher returns. If the inflation rate is a 3.5% and your investment is earning you less than that, you're basically losing money.
Interest
There are basically two types: the simple interest, where the base for computing interest is the original amount he invested or borrowed; and the compound interest, where the base to compute interest accumulation changes as the investment grows. Compound interest works better for investments as it makes money grow more quickly, while it does the opposite for loans and debts.
Liquidity
Liquidity refers to how fast investments or other assets can be converted to cash. Investments in the stock market and mutual funds are normally considered liquid because they can easily be sold to the stockbroker or issuer, while real estate investments take a while to dispose of.
Mutual Fund
A type of investments where money of several investors are pooled together by a mutual fund company that buys and manages shares of stocks or securities on their behalf. This is ideal for investors who have little money, time, or expertise to monitor the performance of the investment.
Portfolio
A persons investment in stocks, securities, bonds, and treasury notes consists his portfolio-a term which refers to the investment collectively.
Principal
It is the amount an investor originally uses to buy securities or stock shares. It also refers to the value where simple interest rates are computed, and so is the amount paid for by the issuer of treasury notes and bills (usually the government) upon maturity.
Return on Investment
The return on investment is how long it takes to recover the amount of money an investor has put into a business or other money-vehicles-higher returns at lesser time is ideal.
Saving vs. Investing
Money allocated for savings and deposit accounts are normally set aside for future expenses or emergencies, while cash invested in stocks, securities, or bonds provides opportunities for money to grow over time. The major difference here is that investments usually require higher risk-you either lose money or make tons of it through higher interest rate and changing economy.
Stock Investing
Refers to buying shares of ownership in a publicly listed company, normally through a stockbroker or on-line trading through the internet. Investing money in a corporation can be riskier, but it can also be more profitable, as your returns can be anywhere from 20 to 30 percent.
Taxes
Earnings from investments are subject to taxes, but there are some (like mutual funds) that are exempted from it.
Term
It refers to the length of time your money has to be tied up to a deposit account or investment vehicle, which could either be for short, medium or long-term. Terms could indicate the investment's yield (e.g., for bonds, long terms may offer higher interest rates) while pre-termination (in time deposits, for example) may require you to pay a certain amount as penalty.
Time Deposits
This is where a bank depositor maintains an account with the minimum amount earning a fixed interest rate for a specific time. It is ideal for those who don't need their money immediately - money is tied up for at least 30 days (longer for some banks) but offer a higher interest rate of about five to six percent per annum. There is also the option of "rolling over" the amount, which means you just keep renewing the time deposit at the end of every period.
Treasury Bills
Treasury bills are similar to treasury notes, except that they require shorter term of 30 days to a year - and are risk-free since they carry the government's full and unconditional guarantee. Interest rates can go as high as four percent per annum.
Treasury Notes
Here, you loan your money to the Philippine government to finance public expenses. They require a longer investment - from two to 25 years - but you can enjoy coupon interest payments, usually handed out semi-annually, in arrears. Longer term equals a higher interest rate.
Trust Funds
When you enter into s trust fund, you are allowing your bank's investment managers to place your money in various securities (i.e. commercial papers, government loans) along with other investors. All gains are split among the individual investors. - Researched by Millet M. Enriquez and Katrina Tan
Source: Entrepreneur Philippines, June 2006 Issue
