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7 financial terms you need to know before you starting investing

South Africans need to know how to grow their money through investing rather than just saving it, says Hymne Landman, head of Momentum Wealth at Momentum Investments.

While people may be excited to start investing, they may be deterred due to the jargon associated with investments that can be confusing and hard to understand.

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“Everything about savings and investing looks intimidating when you don’t know what people are talking about in this space. By understanding at least, the basics of financial language, you will empower yourself to make better decisions when you are presented with options,” Landman said.

Landman shares financial terms that everyone needs to be familiar with:

Investment products

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She said, “These are products available for you to save and invest like your bank savings account, your pension fund or a flexible investments account.”

Investment products are regulated because they are taxed in different ways, and they different rules around the flexibility investors have with the investment.

According to Landman, financial advisers can help investors or potential investors identify the investment product best suited to their specific needs and investment goals.

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Assets

An asset is something that has economic value, something that can be sold or traded. Some examples of assets include houses, cars and investments.

“Just remember that some assets (like investments) are better than others (like cars) since investments gain more value over time, whereas cars depreciate (lose value) over time,” Landman said.

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Investment return

According to Landman, this refers to how much an investor will get over and above the amount you have invested. The investment return is generally expressed as a percentage of the investment amount per year.

“For example, if you invested R1 000 in an investment that gives you a 10% return per year, you will get R100 over and above the R1 000 at the end of the year,” Landman said.

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Diversification

“Imagine you had a basket of eggs and this basket falls and all the eggs fall and crack. You are now left with no eggs. If you take your eggs and put them in different baskets, it may be okay if one of the baskets fall, because you still have the others.”

Diversification is when investors invest their money in different investments. This approach that can manage the risk of a person’s investments.

“This may mean investing your money in different assets and asset classes like shares, bond investments or property… There are many others,” Landman said.

Other financial terms people need to know include:

Compound interest

John Manyike, head of Financial Education at Old Mutual said compound interest is interest earned from the original principal plus accumulated interest.

“Think about compound interest a bit like what happens when the ”snowball effect” occurs. A snowball starts small, but the more snow that’s added, the bigger it gets. As it grows, it becomes bigger at a faster rate,” Manyike said.

Risk

Risk refers to the chance that an investment’s actual gains will vary from the expected outcome or return, according to Investopedia.

Dividends

Dividends are cash payments made to investors based on the cost of investment as well as the current market or face value.

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