We know that trading jargon can be difficult to understand. There are plenty of investment and trading terms and it takes time to familiarize yourself with the same. At Gap Up, we have been working hard to provide a solid foundation for your trading journey. Let us take a look at some of the important investment and trading terms that would come in handy.
Investment and Trading Terms
Acquisition
When one company acquires another company via a takeover, it is called an acquisition. The company taking over will do so by buying the majority of shares or entire shares.
In the stock market, an acquisition can also refer to the purchase of a substantial number of shares of one company by another. This takeover could be part of a strategic move to gain control of the target company or to benefit from its assets, technologies, market share, or other valuable resources.
Acquisitions are commonly used as a growth strategy by companies to expand their market presence, diversify their product offerings, or achieve other strategic objectives.
If a firm purchases over 50% of shares of a target company, the firm effectively gains control of that company. Usually, investment banks act as a mediator between the firm and the acquiring company.
Read Chapter 1 of Investment and Trading Terms Now.
Asset Management Company
An asset management company (AMC) is a firm that pools funds from various clients and utilizes this capital for diverse investments. The investments may include stocks, bonds, real estate, or other asset classes. As a key pillar of the financial market, asset management companies manage and invest assets on behalf of their clients.
Through their expertise, strategic insights, and resources, they facilitate financial growth and risk management. Their primary goal is to maximize the return and minimize the risk by following an investment strategy that aligns with the financial goal and risk tolerance of the client.
Portfolio management is one of the key functions of an asset management company. They allocate assets and diversify them in line with client’s expectations. They conduct research and analysis to identify lucrative investment opportunities and adjust the asset allocation in accordance with the trends.
Apart from serving individual investors, asset management companies also manage assets of institutional clients such as insurance companies and pension funds.
Balanced Mutual Fund
Balanced Mutual Fund is one of the important investment and trading terms that you should know. This unique investment option aims to achieve the double goal of growth and stability of income. A balanced mutual fund allocates assets across different asset classes in a single portfolio.
A balanced Mutual fund usually contains a fixed allocation of funds between stocks and bonds. Bonds guarantee a fixed return most of the time. Hence, they are more stable. Stocks, on the other hand, are more volatile. The fine balance of both will guarantee a minimum return and growth.
By spreading investments across multiple asset classes, such as equities for growth potential and fixed-income securities for income generation, these funds aim to provide a balanced risk-return profile.
Balanced mutual funds maintain a predetermined mix of bonds and stocks. The ratio of this allocation may vary according to the fund’s risk tolerance, investment objectives, and market conditions. For example, a conservative-balanced fund aims to achieve income stability and, hence, allocate more funds to bonds. Whereas an aggressive balanced fund may concentrate on equities to benefit from capital appreciation.
In essence, balanced mutual funds provide diversification, convenience, and the potential for consistent returns, making them an attractive option for investors seeking a balanced approach to wealth accumulation.
Also Read: What are Mutual Funds?
Basket Trade
Basket trading involves the simultaneous purchase or sale of a predefined collection of securities, known as a basket. These baskets typically comprise stocks, bonds, exchange-traded funds (ETFs), or other financial instruments. They are grouped based on criteria such as asset class, sector, geographic region, or investment strategy.
A basket trade occurs when investment firms and big institutional traders buy or sell a group of securities all at the same time. It is generally used to purchase or sell fifteen or more stocks.
As Institutional investors and investment funds need to hold a large number of securities at the same time, they are the major beneficiaries of basket trade. In order to manage the portfolio, investment funds need to buy and sell securities in bulk to balance the price movements of a basket of stocks.
The key advantage of basket trading is risk management. By trading entire baskets of securities, investors can diversify their risk across multiple assets. This reduces the impact of adverse price movements in any single security.
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ELSS Mutual Fund
While there are multiple investment schemes available in the market, most of them are taxed according to income tax rules. Equity Linked Savings Scheme (ELSS) comes into the picture when investors look for tax benefits from investment returns. Under section 80C of the Income Tax Act, ELSS funds provide tax exemption of up to Rs. 150,000 from the annual taxable income. Recently, many taxpayers have been shifted to ELSS schemes to benefit from tax benefits.
Let us see what this tax saving fund is all about in detail.
An Equity Linked Savings Scheme (ELSS) is a type of investment fund focused on stocks and comes with a compulsory lock-in period of three years. Any profits earned from this scheme after the three-year lock-in period are considered Long Term Capital Gains (LTCG) and are subject to a 10% tax rate if the gains exceed Rs. 1 lakh.
ELSS funds are equity funds with diverse portfolios. They focus on buying shares from various types of companies, big and small, across different industries. The goal is to make your money grow over a long time. The people managing the fund pick the stocks based on a lot of research to make sure they get the best returns while managing risks.
Gilt Funds
Gilt funds or government security funds are mutual funds that primarily invest in government funds issued by state or central governments. These funds offer investors a combination of stability, income, and liquidity and are hence considered one of the safest investments. Gilt funds focus on capital preservation and income generation.
It is a suitable investment path for conservative investors who want to preserve their capital and gain a comparatively higher return than the traditional savings method.
Gilt funds primarily invest in sovereign bonds backed by the respective government. This sovereign guarantee makes gilt funds a less risky and trustworthy option. These funds have a fixed interest rate and fixed -either long or short-term. The predictable, stable investment income of this kind makes the gilt fund an easy option for investors without much market knowledge.
Money Market Instruments
Money market instruments are financial tools designed for short-term financing purposes with the objective of enhancing the liquidity of businesses.
Money market instruments are easy to turn into cash when needed, which helps investors manage their money effectively. They’re usually traded through brokers or mutual funds rather than directly by individuals.
Money market instruments play a crucial role in facilitating the smooth functioning of capital markets by providing liquidity to financial institutions, corporations, and governments.
Types of money market instruments include treasury bills, commercial paper, certificates of deposit, repurchase agreements, and banker’s acceptances.
Net Asset Value
Net Asset Value (NAV) is a fundamental concept in investment analysis, providing investors with valuable insights into the underlying value and performance of mutual funds, ETFs, and other investment vehicles.
Net Asset Value (NAV) is the total value of all the assets a fund owns, like stocks and bonds, minus what it owes. This number is then divided by the total number of shares people own in the fund.
The total value of the fund includes securities such as bonds, stocks, and cash equivalents held within the fund’s portfolio. Liabilities include fees, expenses, and any outstanding debts owed by the fund.
Dividing the net value of assets by the number of shares outstanding yields the NAV per share, which reflects the intrinsic value of each unit of ownership in the fund.
Penny Stocks
This is yet another important investment and trading term. The share of a company that remains low-priced for a comparatively longer period at a stock exchange is called a Penny Stock. Such companies have low market capitalization. It is risky to invest in such companies because of their lack of liquidity.
Speculators tend to hoard them for hefty margins, which will ultimately lead to an increase in their market prices. They earn huge profits after selling these shares at high prices. Those who purchase these shares will ultimately fetch huge losses since the price increase of these stocks is intentional manipulation.
At their core, penny stocks represent shares of small companies with limited market capitalization. These companies often operate in volatile industries or are in the early stages of development, making their stock prices susceptible to rapid fluctuations.
Performance Bond
A performance bond is a financial instrument commonly utilized in various industries, particularly in construction, real estate development, and government contracts. It serves as a type of guarantee that a contractor will fulfill their obligations as outlined in a contract. Essentially, it assures the project owner(obligee) that the contractor (Principal) will complete the project according to the terms and conditions laid out in the contract. If the contractor fails to perform, the bond can be called upon to compensate the obligee for any losses incurred due to the contractor’s non-performance.
Apart from the obligee and principal, there is a third party, a company, that ensures the contractor’s performance by providing a bond. This third party is known as the surety.
To get a performance bond, you need to talk to a surety company to see if you meet their requirements. They’ll work with their broker to figure out how much they’re willing to bond you for based on things like your credit, experience, and finances. This isn’t a promise to bond a particular project, though. It just tells contractors the biggest project they’re qualified to bid on.
If you have not read our previous blogs, you can see our previous posts introducing the alphabet of trading and investment here:
