Investing may seem frightening and pretty daunting. But if you want to become successful, you need to understand the main rules and principles of the financial world. There are certain investment terms that men, especially young guys, should know to stay aware of their financial health. You won’t turn into a millionaire overnight with these terms, but they will help you in achieving financial freedom.
1. Net worth
Net worth helps you better understand your financial situation and how the things are going on. This is the difference between your assets and liabilities. You can figure out your net worth by calculating all of the money you have and subtracting all of your debt. The money you have includes your savings, investments, the current market value of your houses and cars. The debt includes credit card balances, loans, mortgage balance, etc. Always take the pulse of your net worth.
2. Compound interest
Compound interest may become one of your best sources of income. This is the interest that you get when you’re investing or saving. This is an accrual of both the amount of your original deposit and the interest that has grown. It is a very powerful tool that you should know about. Compound interest will make your savings and investments grow much faster than simple interest.
For example, you have a $100 deposit or investment. In a while, the sum will be increased by 10% to $110. In the future, the compound interest allows your deposit to grow off not only of $100, but of $110 you’ve already accumulated.
3. Exchange Traded Fund (ETF)
Exchange Traded Fund is an investment fund that collectively owns certain assets such as stocks, commodities, or bonds. An ETF makes it possible for investors to divide ownership of the fund’s shares. ETFs are similar to mutual funds, but they are cheaper and more tax efficient. Another benefit of EFTs, they can also be more passively managed.
Diversification is simple. It means spreading your money out among various investments. It allows you to be less vulnerable to the ups and downs of the market. You will never lose all of your money at once. You should always keep in mind that putting all of your financial eggs in one basket may lead to an irreparable disaster.
Stocks, also called shares and equities, let you get ownership in a company. When you buy a stock, you buy a little piece of a company and become a shareholder. There are two main types of stocks, common and preferred. Common stocks give you the right to vote at meetings and receive dividends. Preferred stocks give their owners a higher claim on earnings and assets, but shareholders don’t have the right to vote.
Bonds are debt investments. When you buy a bond, you essentially loan money to an entity, like the government or a corporation, for a fixed period. That entity has to pay you back, of course, with interest.
Rebalancing is crucial in order to stay diversified. This is the process of buying and selling securities to maintain the target asset allocation. For example, you set up a 70% stocks, 20% bonds, and 10% cash portfolio allocation. Over the year the stock market worked the best for you and your allocation changed to 80% stocks, 10% bonds, and 10% cash. In this case, you need to rebalance your portfolio to what it originally intended to be. You could sell your stock assets and invest in bonds. Always take the pulse of your portfolio allocation to make it more profitable and rebalanced if needed.
8. Expense ratio
Expense ratio is crucial for your investment portfolio. This is the total percentage of your investment paid for administration, management, advertising, and all other expenses used for running the company. It does not include sales loads or brokerage commissions. Every investor should be aware of the fees and expenditures he is paying.
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