Creating a finance portfolio may seem easy, but without knowing the standard terminology you may feel lost. Before you give up on investing, these are some terms that you can learn quickly to start working on your finance portfolio.
- Risk Tolerance: Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand. It’s important to help an investor have a realistic view of what they’re willing to lose.
- Variability: Variability is the extent to which data points in a statistical distribution or data set diverge from the average, or mean value, as well as the extent to which these data points differ from each other.
- Time Horizon: Time horizon is the length of time over which an investment is made or held before it’s liquidated. They can range from a few seconds for a day trader to several years, which can be the case for those using investing as a retirement plan.
- Asset Class: Asset class is one of the most important terms an investor can learn. It’s a group of securities that exhibits similar characteristics, behaves the same in the marketplace, and is subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed income (bonds), and cash equivalents (money market instruments).
- Diversification: Diversification is a risk management technique that mixes a wide variety of investments within a finance portfolio to decrease the amount of potential loss. For example, one stock may perform poorly, but a bond could increase, which may even out the returns and loss.
- Asset Allocation: Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to the investor’s goals, risk tolerance, and investment horizon.
- Direct Investment: Direct investment, or a foreign direct investment, refers to an investment in a business enterprise in another country other than the investor’s own. This is done to acquire a controlling interest in the foreign business enterprise.
- Expense Ratio: The expense ratio is a measure of what it costs an investment company to operate a mutual fund. It’s determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its assets under management.
- Fund: A fund is a source of money allocated to a specific purpose. A fund can be established for any purpose whatsoever, whether it’s a city government setting aside money for a new building or a college using money for a scholarship. Investors often take part in funds predicted to grow in the future and create profits for all those involved.
- Target-Date Fund: A target-date fund is a type of mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds, and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is structured to address some date in the future, such as retirement.
