Profitability ratio is one of many terms that every investor should know about. Learning the language and buzzwords of investing can be daunting, but is a necessary step for success. To get the most out of your portfolio, learn the most important terms of investing so that you’re not caught off-guard.
1. Asset Allocation
A solid investment strategy will give you a roadmap of how to structure your investments. Asset allocation usually involves cash, stocks or bonds. Out of all the options, cash is the least risky, but also has the lowest return of the three.
2. Index Funds
Index funds is one of the most popular types of mutual funds you can learn about. It is low cost, and a huge part of what makes the world’s economy diverse. Once you learn how index funds work, you’ll get a general understanding of the stock market as a whole.
3. Mutual Fund
A mutual fund is a pool of money that gets invested into bonds, the money market and stocks. There are times where a single mutual fund can hold hundreds of stocks.
4. Margin of Safety
Your room for error when investing is known as the margin of safety. Knowing the actual worth of a stock will help you understand a company’s position when they’re selling off some shares.
5. Target-date Fund
Target-date funds are usually tied to your retirement date. It is an all-in-one portfolio that requires multiple years of investment to see good returns.
6. Profitability Ratio
Profitability ratio is the metric used to determine a company’s ability to earn relative to several detracting factors. This includes operating costs, balance sheet asserts, revenue and shareholder’s equity.
7. Return on Invested Capital
ROIC is the money you expect to get back from the cash you’ve invested into your business. When done appropriately, you get an accurate outlook of how well your company uses its invested money. On average, investors should aim for no lower than 10% ROIC annually.
A bond is a loan for a government entity or company. Your investment comes with a maturity date that lets you cash out that bond for big gains. If you plan properly, bonds provide a lot of interest for a low amount of risk.
9. Price to Earnings Ratio
Learning the price to earnings ratio is as simple as looking at the stock price in relation to a company’s earnings. This also works as a simple way to find out if your portfolio is overvalued in the short or long-term.
10. Expense Ratio
The annual fee you pay to have your mutual funds managed is called the expense ratio. Due to how digital trading has taken over, expense ratio may become a thing of the past. But the industry isn’t quite there yet, so get familiar with the term.
Ignorance of investment terms is one of the main things that triggers a financial meltdown. Learn how money works so that you know how to move it. Spend a little time each day learning investment terms, and your capital will grow.