Investment is such a loaded word. It covers a wide area, I guess similar to the word ‘science’. If you’re not from that world, reading content about it is likely to make you confused at some point or another. You need A to understand B to understand C to understand D. This is why beginners find investing intimidating in the beginning.
What I’m going to attempt in this article is to kind of explain those investment terms using analogies, examples, and memes. I’m covering: Technical analysis, fundamental analysis, hedge, arbitrage, ROI, equity, options, futures, IPO, ICO, 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 doing FA subconsciously.
Technical analysis is better 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.
TA is maths and patterns. To a certain degree, what is being traded doesn’t matter, the profit potential does. 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. Say I have $100, and the platform allows 1:10 leveraging, this means I can make a $1000 trade.
TA is very popular among forex (foreign currency) traders. See: Should You Try Them Forex? No-Bullshit Guide for Gen Y
Image credit: Scoopnest
Fundamental analysis on the other hand is for people who keep up with current events, news and updates. A bit of applied macroeconomics, FA is when you take into account the bigger picture. Personally, I use FA more than TA, because research is more up my alley. 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 5 Things I Learned About REITs in Malaysia (From a Bursa Malaysia-Sponsored Workshop) article for a bit more context on how FA is used.
#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)
This investment term 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.
I love investments with compound interest, like mutual funds as my passive income. Low-risk investments + time = decent ROI. You can read my passive income guide here.
#5 – Equity
Equity means different things in different contexts. But as an investing term, you can think of it as something like, ‘ownership’.
For example, Malaysia now have equity crowdfunding (ECF) right? The govt regulated this to help Malaysian businesses get more sources of funding, aside from the traditional route of using own money or taking out bank loans. When you invest in this, you are essentially picking which companies you believe will do well in the future, in return for a stake in the company.
For more context, see this Investopedia article on equity.
#6 – Options and Futures
So trading is, in simple terms, buying and selling. 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.
I don’t have too much to expand on this, but if you have anything to add, please add in comments!
#7 – IPO / ICO
Stands for Initial Public Offering and Initial Coin Offering respectively. The latter is relatively new, so far only exist in blockchain-related tech companies and institutions. Funds are (by right) raised to expand and scale the company. People are excited about new IPOs and ICOs because in many cases, if they’re popular/solid company, the ROI can be quite good after the end of the sale. You might have seen IPOs in the news, going like, ‘Shares in Company A was oversubscribed by x” – that means there were more shares than available for sale; a bragging point for Company A.
- IPO – the first time a private company offers its shares to the public. Regulated.
- ICO – the first time a tech company offers their own in-platform cryptocurrency to the public. Unregulated and risky.
I don’t suggest people without familiarity and expertise in the industry to buy into IPOs and especially ICOs.
#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.
Image credit: memegenerator.com
#9 – Pump-and-dump
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 stocks off while the ones who were caught unaware will be left with worthless stocks. There are regulations in place to stop this from happening, but in unregulated markets like cryptocurrencies, a lot of people have lost money.
Unethical people do this by releasing and promoting false positive statements. This is why you have to research the company you want to buy into and make sure none of the people affiliated have history in pumping and dumping.
Image credit: MicroCapClub
What other investment terms did I miss? Did I make sense?
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. Ask me anything; even if I can’t answer maybe other people can.