Five Useful Investment Terms You Should Know

Written by Bloom Investment Counsel, Inc. on August 28, 2023. Posted in Financial Literacy.

financial literacy written in red on a dark yellow sticky note

Investing is putting your money to work in assets other than a savings account that have the potential to provide you with a greater rate of return than you would receive from holding your money as cash.

Most people have a general knowledge of basic investment terms including types of investments (stocks, bonds, GICs, etc.,) and common media topics such as inflation, interest rates, recession, and mortgage rates. However, when you are about to commit your assets to an investment portfolio, it’s useful to expand your investment knowledge beyond the basics. In this article, we examine five terms that you should understand when investing.

Investment Risk

Investment risk refers to the chance that an investment may decrease in value. All investments come with a certain degree of risk. When there is a greater potential return, there is usually a greater risk. The amount of investment risk you are willing to take on for a greater potential return is your risk tolerance. You can minimize your investment risk through diversification.

Diversification

Diversification is the investment equivalent of not putting all your investments in one basket and is a core principle of portfolio management. Diversification is an investment strategy that is used to lower the overall risk exposure of an investment portfolio.

Diversification can be achieved by investing in several asset classes (asset allocation) whereby the losses of one asset class may be offset by the gains of the other asset classes. Diversification may also be achieved within an equity portfolio by holding stocks from a number of different industries, countries, and risk profiles.

Asset Allocation

Asset allocation involves dividing investments amongst different asset categories, to minimize overall risk and potentially increase returns.

The process of deciding which mix of assets to hold is a very personal one. The asset allocation that works best for you at a particular point in your life will largely depend on your risk tolerance and time horizon.

Time Horizon

The length of time over which you plan to invest is your time horizon. Generally, the longer your time horizon, the more investment risk you can afford to take as you have more time to recover from any short-term losses.

A long-term investment horizon is usually best. It enables you to avoid the day-to-day noise of investment markets and media. Long-term investment disciplines become regular investment habits. Employing a long-term investment horizon will also provide you with the benefits of compounding.

Compounding

An advantage of investing long-term is that you can benefit from the power of compounding. This is where you get returns on your returns as well as on your initial investment. The sooner you start investing, the greater the benefits of compounding that will accrue to you.

Next Steps

Investing is the act of using your assets to generate returns in the form of income and capital gains. By familiarizing yourself with these essential investment terms, you will be better equipped to make informed decisions about where to invest your hard-earned money and maximize its potential for growth. However, the input of a qualified investment professional is always beneficial.

For over 38 years, Bloom Investment Counsel has specialized in one thing: investing in income-generating investments, specifically dividend-paying stocks. Dividend-paying stocks can help you generate income, if needed, and growth from investing in the stock market. We would be pleased to work with you and/or your other financial partners to share our expertise and help you make informed investment decisions. Call us at 416-861-9941 or email us at info@bloominvestmentcounsel.com

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.