Capital gains or losses, risk tolerance, investment portfolio, bull market. What do all these terms really mean? Learning to invest is like learning to speak a new language. Many people find investing difficult because of the confusing investment terms and jargon. No need to worry, we are here to fix that. You can learn to speak this language of investing fluently. Let us help you get started as we demystify seven essential financial terms every investor needs to know to invest wisely.

1. Investing: Firstly, this term should be understood in tandem with the word saving. The term investing is sometimes misused to describe what, in effect, is saving. However, saving accumulates money for future use, which entails no risk. On the other hand, investing involves using money for potential future gain, which will entail varying degrees of risk. Both terms intend to allow you more capital in the future, but both go about it in different ways. The most obvious difference is in the rate of return. Because investing involves a higher degree of risk than simple savings in a bank account, the rate of return or yield on an investment is typically much higher.

2. Stocks: Stocks are one the most common investments you hear about, but what exactly is a stock? A stock is a security that represents a share of ownership in a company. Stocks are one of the major classes of assets, and many people invest in stocks. They are also referred to as shares or equities and are one of the most popular investments in the market today. Whenever a business files an IPO to go public, they are selling stocks or shares, in their business. When an investor buys stocks, you are, in fact, buying shares in that company and is entitled to dividend distributions from the company’s net profit. As the company becomes increasingly more successful and other investors purchase its stocks, the value of the stocks increases and can be sold eventually for capital gains. However, there will also be dips in the value of the stocks, making the line to capital gain not smooth. Stock prices will change in response to numerous factors, including the financial performance of the company, economic developments, interest rate changes, and changes in market sentiment. Any of these factors can cause the stock price to rise or fall. The strong performance of Junior Market IPOs, especially pre-COVID, would have encouraged many Jamaicans to jump headfirst into stock market investing. However, it is usually a good idea to play the long game with stocks, as long as the company is still financially healthy and viable because stocks, like the businesses that underlie them, are long-term investments.

3. Capital Gains/Losses: Capital gains and losses refer to the money you gain or lose when the price of the asset you invested in rises or falls. Capital gains can be realised or unrealised. Any time you sell an asset for more than you paid for it, that is considered a realised capital gain. When you sell an asset for a lower amount than you initially paid, that is a realised capital loss. If the price of an asset you hold falls below what you paid for it, you have an unrealised loss. The same is true if the price of the asset you hold rises above what you purchase it for. For example, you bought shares in a company in 2000 for $200. If, in 2023, the value of a share in that same company is now $250, you would have made a capital gain of $50 on that single stock.

4. Bonds: Bonds are another asset class, like stocks, made up of fixed-income securities that a business or a government issues. They differ from stocks because they represent loans to these entities from the investor (more often a group of investors). Let us say the entity needs to borrow but at different financial terms than can be offered by a commercial bank, then the company or government usually gets the assistance of a licensed entity — in Jamaica, a securities dealer, to design the terms of the bonds and raise the funds from a group of investors. The investors buy the bond, which is equivalent to lending the entity the money upfront for a specific period. Interest is paid to the investor at specific junctures based on the terms of the bond and at the agreed maturity date, the bond investors receive the original funds they invested. Compared to stocks, bonds are a lower-risk investment and may be good for beginners or investors who want lower risk.

5. Bear/Bull Market: A bear market is a condition where overall stock prices fall for an extended period, usually marked by a drop of 20 per cent or more from the most recent peak. It is often driven by negative sentiments of the economy, such as inflation, growing unemployment, or a recession. This causes investors to sell their assets, and this fuels the fall-off in the asset price. For example, the Jamaica Stock Exchange (JSE) is currently going through a bear market due to higher interest rates and inflation. In contrast, a bull market is where prices of securities are rising for sustained periods of time. It is usually fuelled by optimism, and investors are typically eager to buy or hold onto their assets in this period.

6. Risk Tolerance: This refers to an investor’s ability and willingness to take on risk within their investment portfolio. The ability to take risks in investing refers to an investor’s capacity to withstand potential losses and financial hardship. In contrast, willingness to take risks in investing refers to an investor’s attitude or preference towards taking risks. If you are a risk-averse investor, meaning you are unwilling to take on risks or try to avoid risks as much as possible, your portfolio manager would design one that focuses more on risk mitigation. Investors should remember that investment risk and reward are correlated. That is, the higher the risk, the greater the potential for reward. The gains for a risk-averse investor won’t typically see the high yields the risk-seeking investor will see. Therefore, the investor who has a lower risk tolerance will generally see more modest returns.

7. Investment Portfolio: Your investment portfolio includes all of your investments, including retirement accounts, stocks, investment properties, bonds, private equity, etc. It is important to keep an eye on your investment portfolio to ensure you are diversifying your investments and getting the most out of your money. The blend of assets chosen for an investment portfolio is referred to as the total asset allocation of that portfolio. Asset allocation can mix cash, stocks, bonds, and other alternative assets such as real estate. A proper asset allocation will consider the financial goals of the individual investor and his or her risk tolerance. This is important as it enables investors to invest in a mix of assets that meet their specific needs and goals while minimising risks and maximising returns. Asset allocation also allows investors to adjust their investment portfolios as market conditions change or as their investment goals evolve. This allows investors to adapt to changing market conditions and ensure their portfolios align with their investment objectives.

Just like medicine or other specialised areas, there will be terms and concepts that are important for you to understand to better navigate the world of investing. Learning the definitions of some of the most important terms will assist beginning investors in becoming fluent in the language of investing and better understanding the investment recommendations that are being made by their investment advisor. Now that you have some basic investment terms down, you can continue to build your knowledge by reading investment articles, following the social media pages of your broker, and watching investor education programmes. If you have not yet started to invest, continue to educate yourself, and when you think you are ready, contact a licensed investment company to get started now on your investment journey.