Happy #FinanceFriday ! (I know it’s Saturday, but its the thought that counts, right?) I’m a day late, but not a dollar short.
This week is a continuation of last week’s #FinanceFriday, which defined several basic investment terms every investor should know. First, lets talk about how you can define the value of your investments.
When you invest, the goal should be to earn money from your investment over time; this is known as future cash flows. There are two types of cash flows when referencing your return on an investment:
- Cash flow while holding an investment: This includes interest and dividends (more on dividends and their relevancy in coming articles).
- Cash flow when you sell an investment: This is known as your capital gain or capital loss.
There are also two types of investment valuations: market value and intrinsic value. Market value is the current price of the investment according to what the market thinks the investment is worth. This value changes constantly throughout the day and is what Day Traders try to speculate. Intrinsic value is known as the true value of the investment based on the value of the business and it’s cash flows. This value does not change as often as the market value. Efficient markets imply that the market value and the intrinsic value are the same and that the investor should not expect to consistently outperform the market.
We all know that with investing there are risks. There are different types of risks that we will cover in future #FinanceFriday articles, but for now we will define risk as the possibly of loss (from an investor’s perspective) or anything that was not expected (from a finance professional’s perspective).
When you feel comfortable with your investment knowledge (hopefully, by reading these articles) and you decide to seek an investment broker for help, you should know there are several types of approaches brokers can take. Your broker can be a technical analyst, someone who studies price and volume charts to decide when they should buy or sell an investment, or a fundamental analyst, someone who studies the fundamentals of the business and it’s financial statements. I’m partial to the fundamental approach.
There are also two approaches to investing, active and passive. An active investor actively picks investments using valuation methods to find investments with a greater intrinsic value than market value. A passive investor thinks the market is efficient (the market and intrinsic values are the same) and normally invests in index funds or mutual funds (more on those funds later).
Lastly, lets cover reliable investor resources (other than http://www.NsideMyBox.com or course!). Bloomberg, the Wall Street Journal, Yahoo! Finance, CNN Money, and CNBC are a few top resources. All of these can be found on social media and some even have podcasts so keeping up with the latest investment news is convenient and easily accessible. However, you may see or hear terminology that may be unfamiliar to you, but don’t fret…that’s what NsideMyBox is for ;-).
Comment below and let me know any questions you may have. You can also hit me up on Twitter or email me at NsideMyBox@gmail.com.
See you next week!