Know your financial terms to invest better

If the current economic client has taught South Africans anything, it’s the importance of investments and saving money.

But, South Africans need to do more than simply save their money, they need to know how to make it grow through investing.

Interestingly, recent research conducted by Momentum Corporate has found that younger individuals have less exposure to financial terms, which leads to difficulty in understanding financial concepts later on. On average, the research found a 19% decrease in financial term familiarity between 2018 and 2021.

Head of Momentum Wealth at Momentum Investments, Hymne Landman explained that when it comes to investments, all the options available together with all the financial jargon can make decision-making quite overwhelming.

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Landman strongly believes that knowing just the fundamentals can take a person a long way. This, she says, is the first steppingstone to financial freedom.

“The first thing you should do when you start saving, is to get to know the terminology and jargon that commonly gets used in this space, just like how you would understand the jargon in any expertise when you enter into that space.

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

She adds that getting to grips with the basics of savings and investments is surprisingly easy.

“Basically, as soon as you know the most important terms and know what they mean for your hard-earned finances, you will start to know what questions you should be asking your financial adviser and which opportunities to look for.

“You’ll know which investment vehicles may be the best fit for you, and get a better idea of what you can do with your savings,” she said.

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With this in mind, Landman shares a list of the top 5 most important and basic financial terms that everyone should familiarise themselves with:

Investment return: This is how much you will get over and above the amount you have invested. It is usually 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.

Investment risk: Now that 10% return, does not necessarily come without taking a risk of some sort. Investment risk refers to the uncertainty linked to your investment – Will your investment grow at all? At what return will your investment grow and what is the likelihood of achieving that return? Some risks are bigger and more uncertain than others, so make sure you know the odds before you invest.

And always keep in mind that investment is a long-term commitment and that your money should work for you over a long-term time horizon.

Assets: An asset is something that has economic value, i.e., it can be sold or traded. Assets are things like houses, cars and investments. Just remember that some assets (like investments) are better than others (like cars) since investment gain more value over time, whereas cars depreciate (lose value) over time.

Investment products: These are products that are available for you to save and invest like your bank savings account, your pension fund or a flexible investments account (there are many out there).

Investment products are usually defined by regulation, as they are taxed in different ways and have different rules around the flexibility you have with the investment. A financial adviser can help you identify the investment product that would best suit your specific needs and investment goals.

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 baskets fall, because you still have the others.

Diversification is putting your eggs (money) in different baskets (investments). It is an approach to manage the risk of your investments. This may mean investing your money in different assets (and asset classes like shares, bond investments or property, there are many others).