Investment Principles

Time Value of Money

The principle that money available now is worth more than the same amount in the future due to its potential earning capacity.

Inflation

The general rise in prices from one year to the next; it causes money to lose value over time.

Liquidity

The ease with which an asset or security can be converted into ready cash without affecting its market price.

Saving

A short-term tool that helps build emergency funds or personal financial goals while keeping funds secure.

Investing

A long-term commitment aimed at building wealth.

Rule of 72

A formula used to estimate the number of years required to double the invested money at a given annual rate of return.

Rate of Return

The gain or loss on an investment over a specific period of time.

Simple Interest

Interest earned only on the principal amount.

Compound Interest

Interest earned on the principal amount plus the interest that accrues.

Diversification

An investment strategy where a mix of different investments is employed to reduce risk.

Asset Allocation

The process of dividing an investment portfolio among different asset categories to balance risk and reward.

Growth Investing

A strategy characterized by investing in companies that exhibit above-average growth potential.

Value Investing

The strategy of investing in stocks that appear underpriced or have great potential for future appreciation.

Momentum Investing

A strategy where investors buy stocks that are rising and sell when they show signs of slowing down.

Technical Investing

A strategy that uses past market data, primarily price and volume, to forecast the direction of prices.

Income Investing

A strategy focused on generating income from investments rather than capital appreciation.

Employer Contribution Plan

A retirement plan where both the employee and employer contribute to the employee's account.

Active Management

An investment management strategy where specific investments are selected with the objective of outperforming a benchmark.

Passive Management

An investment strategy that aims to match the performance of a market index rather than outperform it.

Time Horizon

The length of time you plan to hold an investment before taking the money out.

Return on Investment (ROI)

A measure used to evaluate the efficiency or profitability of an investment, calculated as a percentage of the cost of the investment.

Loss Aversion

The tendency to prefer avoiding losses to acquiring equivalent gains.

Dollar Cost Averaging

An investment strategy where the total amount intended for investment is divided across periodic purchases.

Swing Trading

A trading strategy that involves holding positions for several days to weeks, focusing on trends and momentum.

Day Trading

A strategy involving multiple trades within a single day, focusing on short-term market movements.

Capital Gain

The profit realized from selling a capital asset for more than its original purchase price.

Short-Term Capital Gains Tax

The tax on profits from selling a capital asset owned for one year or less, treated as regular income.

Long-Term Capital Gains Tax

The tax on profits from selling a capital asset owned for more than one year, at a rate of 0%, 15%, or 20% depending on income.

Market Risk

The risk of losses due to changes in market prices.

Concentration Risk

The risk arising from overexposure to a single investment or type of investment without diversification.

Inflation Risk

The risk that inflation will erode the real returns of investments.

Liquidity Risk

The risk that an asset cannot be traded quickly enough in the market without impacting its price.

Credit Risk

The risk of default on a debt that may arise from a borrower failing to make required payments.