Guide to Investment: Principles, Drivers & Terminology
This article provides a simplified and practical summary of investment concepts based on our full investor education guide. It’s designed to help clients build financial confidence by understanding how investments work, what drives performance, and the terminology used by professionals.
Key Investment Terminology
Understanding basic terms is the first step toward informed investing:
Asset: Something you own that has value (e.g., stocks, bonds, real estate).
Equity: Ownership in a company, often in the form of shares.
Bond: A loan made to a company or government, with fixed returns.
Diversification: Spreading investments to reduce risk.
Risk Profile: Your personal comfort with investment risk.
Yield: Income return on an investment (e.g., dividends or interest).
Company Valuation Basics
Investors often use different metrics to value companies:
Market Capitalization: Total value of a company’s shares.
Cash Flow: Cash generated by a company.
Enterprise Value (EV): A more complete measure that includes debt.
Price-to-Earnings (P/E) Ratio: How much investors are paying for $1 of a company's earnings.
Understanding Economics in Investing
Economic indicators shape markets:
GDP: Measures a country’s economic output.
Inflation: The rate at which prices rise.
Interest Rates: Affects borrowing, spending, and investment returns.
Government Policy: Fiscal and monetary policies can drive markets up or down.
Investment Types and Strategies
Equities (Stocks): Higher potential returns, higher risk.
Fixed Income (Bonds): Lower risk, lower returns.
Alternative Assets: Real estate, commodities, art, etc.
Mutual Funds & ETFs: Pooled investments with professional management.
Investment Approaches
Active Management: Professionals select assets to try to beat the market.
Passive Management: Tracks a market index at lower cost.
Factor Investing: Uses rules-based strategies to target performance factors like momentum or value.
Dollar Cost Averaging: Investing regularly to reduce the impact of market volatility.
Performance Metrics
Alpha: Measures performance above a benchmark.
Beta: Sensitivity to market movements.
Sharpe Ratio: Return per unit of risk.
Standard Deviation: Volatility of investment returns.
Staying Informed
Investing is a long-term journey. Knowing the basics helps you make smarter choices, ask the right questions, and work more effectively with your financial adviser.
For a deeper dive into any of these concepts, please refer to your full investment guide or speak with your adviser.