It’s Sunday evening and you have no plans. So you decide to have a relaxing personal time. You select the trending series on Netflix, order the whopper from burger king.
The environment is all set. Little did you know that you are heavy consumers of US market companies like Netflix, McDonald’s, burger king, apple, etc.
Today Indians are increasingly interested in becoming the owners of such companies. But before investing in US stocks straight away, let’s break down a few stock market terminologies that are being widely used.
Asset Allocation: Asset allocation is simply a ratio that suggests a division in an investment portfolio among various asset categories, such as stocks, bonds, and cash. Also known as asset mix, it is basically the balance between your stocks & bonds.
Here’s a fact widely believed: your age can determine the ratio between bonds & stocks. For instance, if you are 30 years old, you should have 70% stocks along with 30% bonds investment. Likewise, if you are 60 years old, your portfolio can have 40% of stocks & 60% bonds.
Please note this is not a strict rule but a general idea investors follow. Fundamentally, the younger you are, you can take more risks while the older you should stick to fewer risks.
Bull/Bear Market: Stock markets are in constant flux. Hence it becomes important for any investor to understand when comes the favorable timings to buy US stocks. A bull market occurs when investment prices rise for prolonged periods and confidence is soaring. While a bear market occurs when there is a fall in stock prices by 20% or more for a sustained period of time.
Compound Interest: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein. Compound interest accelerates wealth growth.
In addition to earning returns on your investment, you also earn returns on those returns. For example, if you have invested $1000 dollars and your monthly return value is $1200. In the forthcoming compounding period, you will be earning returns of $1200.
Index: Index is nothing but a behavior indicator of a market. BSE & NSE are two popular market indices in India. Similarly, there are NASDAQ and S&P 500 that suggest the US market behavior.
You must have heard of index investing quite often. Index investing is a passive investment strategy of simply mirroring the market by replicating the broad market indices.
S&P 500: The Standard & Poor’s 500 Index, also known as the S&P 500, measures the market behavior of the 500 largest public companies in the United States. By reporting the risks and returns of the largest stocks, it shows the performance of the stock market companies. In general, it is used as the benchmark by investors to evaluate their investments.
The above are just some of the terminologies you can learn about US stocks in order to get started. Aside from researching & understanding terminologies, modern-day tools such as an investment tracker app can recommend investments based on your financial goals and also help maintain your portfolio.