If you're just starting to invest, you've likely encountered a range of financial terms that seem complicated at first glance.
Understanding the basic vocabulary of the investment world is essential for making informed decisions and ensuring you're in control of your money.
To help, we've created this guide to basic investment terms that will clarify the most important concepts for beginners.
Shall we begin?
1. Stock
A stock represents a small fraction of a company's share capital.
By purchasing stocks, you become a shareholder of the company, gaining rights to a portion of the profits, known as dividends, as well as potential gains from stock appreciation.
Example: If you buy shares of a company that grows over time, the value of your stocks may increase, allowing you to sell them for a profit.
2. Dividends
Dividends are a portion of a company's profits distributed to its shareholders.
Not all companies pay dividends; some prefer to reinvest their profits into the business.
Established companies with stable growth often offer more consistent dividends.
Example: If you own 100 shares of a company paying $2.00 per share in dividends, you will receive $200.00 in dividends.
3. Fixed Income
Fixed income investments are those where you know or can estimate the return at the time of investment.
These include government bonds, bank certificates of deposit (CDs), and corporate bonds, which offer either fixed or variable interest rates.
Example: Investing in Treasury bonds, such as Treasury Bills, is an example of fixed income.
These investments are generally more conservative and offer greater security.
4. Variable Income
Variable income investments do not have predictable returns, as their performance depends on market fluctuations.
Stocks, real estate investment trusts (REITs), and digital assets are examples of variable income.
Example: If you buy stocks, their value may rise or fall depending on the company's performance and market conditions.
5. Liquidity
Liquidity refers to how easily an investment can be converted into cash without losing value.
High-liquidity investments, like Treasury Bills, can be quickly redeemed.
Low-liquidity investments, like real estate, may take longer to sell.
Example: A CD with daily liquidity allows you to withdraw your money when needed, while selling a house may take months.
6. Investment Portfolio
An investment portfolio is the collection of all assets (stocks, bonds, funds, etc.) you own.
Diversifying your portfolio means spreading your capital across different asset types to reduce risks.
Example: Your portfolio might include stocks of large companies, government bonds, and a real estate fund, balancing safety and potential returns.
7. Diversification
Diversification is the strategy of investing in different types of assets to minimize risks.
By diversifying, you avoid putting all your money in a single asset, helping balance potential losses with other gains.
Example: Investing in stocks, fixed income securities, and real estate funds simultaneously is a form of diversification, reducing the impact of a drop in any specific sector.
8. Investment Fund
An investment fund is a collective investment vehicle where multiple investors pool their money, and a professional manager decides where to allocate the resources.
There are fixed income funds, multi-market funds, equity funds, and real estate funds, each with its asset allocation strategy.
Example: An equity fund invests in various companies, allowing investors to participate in the stock market without individually selecting each company.
9. IPO (Initial Public Offering)
An IPO is the process through which a company goes public for the first time and offers its shares to the general public.
Participating in an IPO can be risky but may also yield significant gains depending on the company's performance.
Example: When a startup decides to go public and list its shares on the stock exchange, it conducts an IPO to raise funds.
10. Crypto Assets
Crypto assets are decentralized digital currencies that use encryption technology to ensure secure transactions.
Bitcoin is the most well-known example, but many others exist in the market.
Example: Investing in Bitcoin is considered high-risk due to its volatility, but it has attracted many investors seeking high returns.
11. Arbitrage
Arbitrage is a strategy where investors seek to profit from price differences of an asset across different markets.
A common example is currency arbitrage, where investors buy and sell currencies in different markets to earn a profit.
Example: At Lux Capital, our currency arbitrage strategy leverages variations in digital dollar (USDt) prices across markets, allowing controlled gains even in volatile times.
12. CDI (Interbank Deposit Certificate)
The CDI is an interest rate used in interbank transactions and serves as a reference for many fixed-income investments, such as CDs and fixed-income funds.
The CDI usually tracks the Selic rate, the basic interest rate of the economy.
Example: A CD may offer a return of 100% of the CDI, meaning it will follow the economy's basic interest rate.
Ready for Your Next Step?
Understanding these basic investment terms is the first step toward investing consciously and safely.
By mastering these concepts, you'll be better prepared to explore different investment options and build a diversified portfolio aligned with your goals.
If you'd like to learn more about investing and explore innovative alternatives like currency arbitrage, Lux Capital can help.
Contact us and discover how we can guide you on your investment journey.