Financial literacy is not given importance in the school nor at college level, and this has led to confusion on how to manage money responsibly. The world of finance is full of jargons that is often difficult and confusing. It is important that we know how the world of money works. Here are some financial terms that will help you understand better.
The importance of diversification
A very important concept is to make your money work for you. It is extremely important that all your savings aren’t put in a single place, it is imperative that you pick a few options that will bring you return investments. The key here is to reduce risk so that you do not end up losing your money, so it is important to use various channels that are not only safe but also bring high returns. By diversification, you could invest your money in property or stocks, mutual funds or even bonds. Hence, choose wisely and invest in the right place for maximum growth.
What are stocks and mutual funds?
A stock can be described as an ownership certificate of any company. When you purchase a stock of a company, you are eligible for a portion of a company’s earnings. So, if the company earns profit and does well, your stock will increase in value, if not, it will decrease. A stockholder is also qualified to receive dividends. Dividends are a portion of the company’s profits which are paid to the shareholder every quarterly.
A mutual fund represents investments in many different kinds of stocks. So, your money is spread across different platforms, as with stocks the value of mutual funds is also heavily dependent on the market.
What are bonds?
In the case of bonds, you will take the role of the lender, who loans money to the entity (either government or corporations). The companies have to return the money with an interest, in the specified frame of time.
How to calculate net worth?
A net worth helps you understand the total sum of how much you own minus your liabilities. This includes your property, savings and checking accounts balances and all the various investments you own. Your liabilities include all your loans and credit card balances. This way, you will be able to understand your net worth.
The need for savings
The finance industry is constantly changing since it is affected by laws and various other factors, so it is important to stay abreast of all the transformations that take place. A long-term plan with an assurance of living comfortably days can be possible only by investing prudently and creating a varied portfolio.