Investment is such a loaded word. I guess you can say it’s similar to the word ‘science’. If you’re not from that world, it will probably confuse you in the beginning. It’s like, you need A to understand B to understand C to understand D.
This is one of the reasons why beginners find investing intimidating, at first. So this is my attempt to explain them. I’ll be covering: Technical analysis, fundamental analysis, hedge, arbitrage, ROI, equity, options, futures, IPO, bull and bear market, and pump-and-dump.
Disclaimer: not a financial expert. If any of my personal understanding below is wrong, please comment and I’ll edit.
#1 – Technical Analysis (TA) / Fundamental Analysis (FA)
The analysis people use in making an investing decision. An investor usually favours one over the other. By default, most of us probably start out with Fundamental Analysis, and later on, may dabble with Technical Analysis.
Fundamental analysis is for people who make investment decisions based on what they learn from current events, news and updates. A bit of applied macroeconomics, FA is when you take into account the bigger picture. Usually for long-term investing decisions, you consider the who what why when and how.
FA can be used for all, if not most types of investments. For example, stocks. A good investor doesn’t just blindly buy, they’d consider:
- Is the company sound? Do they have good management? Do they have a large amount of debt?
- Will the current economic climate support their growth? Any world events that might form a threat to its growth? If yes, how likely is that to happen?
- What is the market demand, and will it grow? How?
- And more.
You can read my DividendMagic Taught Me How to Read Financial Statements and Buy Stocks article for more info 🙂
Technical analysis, on the other hand, is for (1) people who is not intimidated by numbers, graphs and charts and (2) people who prefer short-term trading (hours and days as opposed to months or years).
There are equations that they can use to calculate and predict whether the stock/commodity/currency/similar will go up or down in value, and by how much. None of them are conclusive, just an indication.
TA is an easy skill to learn, but difficult to master. Mistakes can be very costly, because leveraging is common. Leveraging is when the platform allows you to make bigger trades than what you actually have in your account.
How leveraging works: Say I have $100, and the platform allows 1:10 leveraging, this means I can make a $1000 trade. If my ‘prediction’ is accurate, I’ll get a huge reward for my risk. But if I’m wrong, likewise.
Important: NO TRADER WORTH THEIR SALT WILL SAY THEY ARE RIGHT IN 100% OF THEIR TRADES. Learn more about how ACTUAL traders trade in: I Interviewed A Professional Trader from a Malaysian Investment Bank article.
#2 – Hedge / Hedging
“How do I protect the value of my wealth in case my country’s currency drops?” <— how people usually start thinking about hedging.
Everyone lives somewhere and need fiat (government-issued money) to buy stuff and live. Hedging is when you convert a part of that money in another store of value – another currency is common – to protect or increase the value of the money.
People usually factor in liquidity – how easily they can be converted back to their own money. Therefore, gold (and silver) and currencies (USD, GBP, EUR, crypto), among others are popular options.
#3 – Arbitrage
Buy low, sell high at its finest. This is when a trader takes advantage of different prices in different markets, so they buy low in X and sell high in Y. It’s used when trading commodities, securities and currencies.
- Commodities: raw material or agricultural product. Examples are palm oil and copper.
- Securities: Things that mean you ‘own’ a part of a company or institution. Examples are stocks and bonds.
- Currencies: Examples are fiat currencies (MYR, USD, GBP) and cryptocurrencies
As an analogy, think of it like this – I buy 1000 TVs in Malaysia at RM1000 each. I know that I can sell it for RM1300 each in Russia or whatever. I sell it and make RM300k on the difference in price.
People are usually secretive about arbitrage opportunities as they want to keep the advantage to themselves. If other people find out, they’d do the same and the extra supply will push down the price, lowering the profit potential.
#4 – ROI (Return on investment) and Compounding
The investment term ROI or return on investment simply means – how much you get back on the money you put in. It’s calculated in percentage.
For example, you purchased RM1000 worth of stocks in Company X. It performed well and a year later, the value of your stocks is now RM1100. Your ROI for this investment is therefore 10%. ROI is a very common term and can be used for all types of investments.
Compounding, on the other hand, is when the RM100 profit from the example above generates more profit the following year. It’s kinda like,
In numbers, assuming the investment generates 10% every single year (impossible scenario lol, but let’s use it as an example anyway), it’ll look like this:
|Year||Amount, compounded||Amount, if NOT compounded|
Do you see why compounding is the bombz!
The good thing is, if you’re invested in EPF, PRS, SSPN, robo advisors, mutual funds like ASB and putting in money every month and never (as much as possible) take out the money, you’re already doing ‘compounding’ 🙂
#5 – Equity
Equity means different things in different contexts. But as an investing term, you can think of it as something like, ‘ownership’.
The ‘equity market’ is somewhat synonymous with company shares in the stocks market, but there are other types of equities too. For more examples, see this Investopedia article on equity.
#6 – Options and Futures
So trading is, in simple terms, buying and selling. By default, the buying and selling is assumed to happen in real time but what if the trade happens upon meeting conditions, or in the future? That’s where Options and Futures comes in.
Options is when the buyer gives the seller the opportunity to make the purchase at X price for a specific time frame. Futures is similar, but for X price at a later date.
To learn Options and Futures in more detail, you usually have to have an intermediate or expert grasp in the stock market, it’s quite advanced stuff and carries more risk.
But honestly? You don’t need to know in depth about Options and Futures, it doesn’t make you a better investor or anything. The compounding strategy in #4 is good enough (and recommended for most people tbh).
#7 – IPO
IPO stands for Initial Public Offering. It is the first time a private company offers its shares to the public, and it is a regulated process. The funds raised is meant to expand and scale the company (or pay debt, or… read the documents, they will list it out).
People are excited about new IPOs because in many cases (but not always!), if they’re popular/solid company, the ROI can be quite good when they launch. For this reason, IPO launches attract a lot of attention and is considered newsworthy.
IPO strategy is an investment strategy that is medium risk. It does need a fair amount of capital but basically how it works is (1) apply to buy IPO before listing (success rate very low; Bumi folks get 2 chances to apply) and (2) sell the minute market opens (profit is NOT guaranteed but historically in your favour)
You also need luck. Depending on the company, the success rate of getting IPOs before launch is under 10% for us regular folks (retails investors).
Of course, there are a lot of nuances and in-depth info and tips. Do you want a separate post on IPO strategy? Let me know, no point write if no demand 🙂
#8 – Bull and Bear Market
A way to describe if the market (stocks, usually) is unusually good or unusually bad.
Bull market is when the overall stock prices go up in value (how to remember – bulls use horns to lift up their opponents) while bear market is when the overall stock prices go down in value (how to remember – bears take down their opponents).
Bull statues are common in financial districts. The Wall Street in New York have a famous one, and closer to home you can find one at Bursa Malaysia.
Bear markets are not necessarily bad. Some people wait for bear markets to buy stocks in good companies at a cheaper price, in preparation for the next bull run. No one is really sure which point they are in during bull or bear markets; analysts might make predictions, and often experts will contradict each other.
#9 – Pump-and-dump
Pump-and-dump describes a situation where the value of a financial instrument (stocks, etc) is artificially inflated, then nosedives, fast. The people who do it or can identity it will sell off their shares/ownership while the ones who were caught unaware will be left with worthless stocks.
Pump-and-dump are really dangerous, which is why there are regulations in place to stop this from happening. Howevr, in unregulated spaces like DeFi, a lot of people have lost money.
How does it work?
- Unethical people hype up and promote the ‘investment’, with false positive statements.
- A lot of people buy in, hoping to make 1000% ROI or whatever
- At its peak price, the same unethical people will cash out and deplete all the value, thus making the remaining shares worthless.
This is why you have to be very careful with anything hyped up in the investment world. Research the company you want to buy into and make sure none of the people affiliated have history in pumping and dumping.
EVEN IF you want to join, NEVER go all-in, never use 100% of your money. If you want, maybe 1%, max. That way you get to scratch your gambling itch (let’s call it what it is) and even if you lose it all, you still have 99% of your money.
What other investment terms do you want to know?
What other investment terms do you want to know, aside from the above? Put in the comments section, I’ll add on to and improve this list 🙂
I also want to say here that there are no stupid questions – all beginners have to start somewhere. Ask me anything; even if I can’t answer maybe other people can.