#FinanceFriday is back and here to stay this time! If you missed the first #FinanceFriday entitled 3 Steps to Become Financially Healthy, you should check it out. This series of articles will be sequential, so it is in your best interest to go back and read what you’ve missed.
The goal of #FinanceFriday is to give you a starter kit for investing (knowing the terminology, what to look for when investing, etc.) so you can start investing for the future. This week will cover investment terminology.
A market is a metaphoric place where supply meets demand, or in other words where a seller sells to a buyer and an exchange (usually money) occurs.
In a financial market, money is sold…yes, you sell or buy money in a financial market. Think of it this way, when you take out a loan for a house, you are buying money and the bank who gave you the loan is selling money. How so? Interest! Financing a purchase means you will pay more money than the price of the item you are buying due to interest that is charged. A more technical term for interest is Return on Investment (ROI), which is the interest you gain from an investment you’ve made.
When you make an investment (stock, bond, mutual fund, ETF, option, artwork, real estate, etc.), you are not buying that investment. These things aren’t tangible. You are actually selling your money to the person or firm who is buying your money and giving you interest in return (ROI). However, there is a difference between an investment and a security. Investments can be anything you gain a return from, but securities are specifically formal investments that trade on an organized exchange like the stock market. Therefore, all securities are type of investments, but all investments are not considered securities. That might be a little too advanced, but just note there is a difference in these terms. Once you’ve made several investments, you now have a portfolio, or a collection of investments.
Lastly (for this week), there are two types of markets. The primary market offers Initial Public Offerings (IPOs), which is the first time a firm offers investments in the financial market (when a company “goes public”). This is not to be confused with a venture capitalist investing money in a start-up company BEFORE the company has gone public. A company goes public and offers investments in the primary market to raise capital (funds) to grow the company. The secondary market is what we think of most of the time when we talk about investing (especially investing in stocks). The secondary market hosts buy/sell exchanges between existing investors. The company that holds the contract for the investment you either bought or sold does NOT receive funds from the secondary market. An investor who sells their investment for a higher price than what they bought it for (the investment is valued higher than the day it was purchased) receives profit from that sale. The secondary market offers investors liquidity, the ease at which investors can sell their investments for liquid cash.
Pretty lengthy article with lots of terms, but you made it! Lol. Come back for part two of this introduction to investments next Friday. The deeper I get into investing, the more technical it will get, but I promise I will “break it down so it can forever and consistently be broke” (Love Jones quote). PLEASE do not hesitate to ask me any questions you my have in the comment section below or hit me up on Twitter (Nside_My_Box).