What do these investment terms even mean?

‘Investment’ is such a loaded word. If you’re not already from that world, reading about it is likely to make you even more confused. You need A to understand B to understand C to understand D.

Here’s an attempt to explain some of these terms in as clear a manner as possible.

1. Technical analysis/Fundamental analysis

The analysis people use in making an investment decision. An investor usually favours one over the other. By default, most of us probably start out doing FA subconsciously.

Technical analysis (TA) is better for those not intimidated by numbers and graphs, and who prefer short-term trading (hours and days as opposed to months or years).

There are equations they can use to calculate and predict whether the stock/commodity/currency/similar will go up or down in value, and by how much.

TA is maths and patterns. To a certain degree, what is being traded doesn’t matter, the profit potential does. TA is an easy skill to learn, but difficult to master.

Mistakes can be very costly because leveraging is common. Leveraging is when the platform allows you to make bigger trades than what you actually have in your account. Say you have RM100, and the platform allows 1:10 leveraging. This means you can make a RM1,000 trade. TA is very popular among forex (foreign currency) traders.

TA can be used as a long-term trading tool too. An example given is the Kondratieff Wave which can be used to predict economic booms and recessions.

Image credit: Scoopnest.

Fundamental analysis (FA) on the other hand is for those who keep up with current events, news and updates. Using a bit of applied macroeconomics, FA is when you take into account the bigger picture.

FA is usually for long-term investing decisions, when you must consider the “who”, “what”, “why”, “when” and “how”.

FA can be used for all, if not most types of investments. For example, stocks. A good investor doesn’t blindly buy, they consider the following:

  • Is the company sound? Do they have good management? Do they have a large amount of debt?
  • Will the current economic climate support their growth? Any world events that might form a threat to its growth? If yes, how likely is that to happen?
  • What is the market demand, and will it grow? How?
  • And more.

2. Hedge/Hedging

“How do I protect the value of my wealth in case my country’s currency drops?” This is how people usually start thinking about hedging.

Everyone needs fiat (government-issued money) to stay alive. Hedging is when you convert a part of that money in another store of value – another currency is common – to protect or increase the value of the money.

People usually factor in liquidity – how easily can it be converted back to their own money. Therefore, gold (and silver) and currencies (USD, GBP, EUR, crypto), among others are popular options.

3. Arbitrage

Buy low, sell high at its finest. This is when a trader takes advantage of different prices in different markets, so they buy low in X and sell high in Y. It’s used when trading commodities, securities and currencies.

  • Commodities: Raw material or agricultural products like palm oil and copper.
  • Securities: Things that mean you “own” part of a company or institution. Examples are stocks and bonds.
  • Currencies: Examples are fiat currencies (MYR, USD, GBP) and cryptocurrencies.

As an analogy: You buy 1,000 TVs in Malaysia at RM1,000 each. You know you can sell it for RM1,300 each in Russia. You sell it and make RM300,000 on the difference in price.

People are usually secretive about arbitrage opportunities as they want to keep the advantage to themselves. If others find out, they’d do the same and the extra supply will push prices down, lowering the profit potential.

4. ROI (Return on investment)

This investment term simply means – how much you get back on the money you put in. It’s calculated in percentages.

For example, you purchased RM1,000 worth of stocks in Company X. It performed well and a year later, the value of your stocks is now RM1,100. Your ROI for this investment is therefore 10%.

ROI is a very common term and can be used for all types of investments.

5. Equity

Equity means different things in different contexts. But as an investing term, you can think of it as something like “ownership”.

For example, Malaysia now has equity crowdfunding (ECF) right? The government has regulated this to help Malaysian businesses get more sources of funding, aside from the traditional route of using one’s own money or taking out bank loans.

When you invest in this, you are essentially picking which companies you believe will do well in the future, in return for a stake in the company.

6. Options and Futures

So trading is, in simple terms, buying and selling. Options are when the buyer gives the seller the opportunity to make the purchase at X price for a specific time frame.

Futures are similar, but for X price at a later date.

7. IPO/ICO

Stands for Initial Public Offering and Initial Coin Offering respectively. The latter is relatively new, and so far only exists in blockchain-related tech companies and institutions.

Funds are (by right) raised to expand and scale the company. People are excited about new IPOs and ICOs because in many cases, if they’re popular/a solid company, the ROI can be quite good after the end of the sale.

You might have seen IPOs in the news, going like, “Shares in Company A were oversubscribed by x”. This means there were more shares than available for sale; a bragging point for Company A.

  • IPO: The first time a private company offers its shares to the public. Regulated.
  • ICO: The first time a tech company offers their own in-platform cryptocurrency to the public. Unregulated and risky.

8. Bull and bear markets

A way to describe if the market (stocks, usually) is unusually good or bad.

A bull market is when overall stock prices go up in value (bulls use their horns to lift up their opponents) while a bear market is when overall stock prices go down in value (bears take down their opponents).

Bull statues are common in financial districts. Wall Street in New York has a famous one, and closer to home you can find one at Bursa Malaysia.

Bear markets are not necessarily bad. Some people wait for bear markets to buy stocks in good companies at a cheaper price, in preparation for the next bull run.

No one is really sure which point they are in during bull or bear markets; analysts might make predictions, and often experts will contradict each other.

9. Pump-and-dump

A situation where the value of a financial instrument (stocks, etc) is artificially inflated, then nosedives, fast.

The people who do it or can identify it will sell off their stocks while the ones caught unawares will be left with worthless stocks.

There are regulations in place to stop this from happening, but in unregulated markets like cryptocurrencies, a lot of people have lost money.

Unethical people do this by releasing and promoting false positive statements. This is why you have to research the company you want to buy into and make sure none of the people affiliated have a history of pumping and dumping.

Image credit: MicroCapClub

This article first appeared in ringgitohringgit.com

Suraya is a corporate writer-for-hire and the blogger behind personal finance website Ringgit Oh Ringgit. She is more of a minimalist, less of a consumerist, a konon DIY enthusiast, a let’s-support-small-businesses-over-big-corporations kinda girl. Prior to her current role, she worked in various capacities within the non-profit industry.