Being a beginner in investment can be hard work; there is so much to learn before you can become a professional investor. Once you learn the basic though, you’ll start to realise just how beneficial investments can be for you. There are loads of things that you can take a look at if you wanted to learn some more about investment. For example, you could take a look at Bitcoin News Today for more information. However, the best place to start is by learning the terminology, then you can start to figure out how it all fits together, how to choose what to invest in and how to make the most out of your investments. Here, we run through four of the most popular investment phrases and what they mean, so that you can start to make your moves in the industry.
Return on Invested Capital
You’ll often see return on invested capital summarised as ROIC and it is usually represented by a percentage. This percentage is the return you should expect from your cash investment, and it can be calculated by subtracting any dividends from the net income, then dividing that total by the total capital. In simpler terms, take the money you’ve received and minus any expenses you’ve paid, to find your real profit. Then to find the percentage figure you divide the expenses by the profit for example, £100 of expenses divided by a profit of £200 makes a 50% return on invested capital. ROIC is used as an indicator of how safe a company is to invest in, as it reflects how well they use the money that is invested in them to make more. Generally speaking, as an investor you’re looking for an ROIC of 10% per year which has been increasing up until the point of your investment.
Margin of Safety
Investments are unpredictable; therefore, investors have to put some systems in place to try to control their potential losses if things don’t go their way. The main way in which they do this is to pay less than the advertised price for shares in companies. Companies give themselves a sticker price which is usually more than what they are really worth, furthermore, investors only want to pay half of the real worth. It’s the same as negotiating down the price of an antique object in case it doesn’t sell for as much as you hope it will.
Dollar Cost Averaging
Another trick that investors use to control their losses is to buy shares in a certain company once a year, regardless of their current value but always spending the same amount on them. The idea behind this is that you will average out the money you have spent on each share, as some years you’ll be able to buy for example, 100 shares with the money and another year you may only be able to buy 10. This is an alternative to simply restricting yourself to only buying shares in a company when they are cheap.
Payback Time, as the name suggests, is the amount of time it takes you to make back the money you initially spent on your investment, from that investment. As a general rule of thumb, investors tend to aim for a maximum of eight years payback time. There is an easy calculation to work out payback time; you simply divide your investment by the amount of money the business makes in a year.
There is a lot to consider when investing and sometimes it can feel overwhelming however, if you get to grips with the terminology first you will soon be able to piece together the whole puzzle and make some profitable choices. When it comes to deciding what to invest in, the most exciting prospect right now is cryptocurrency. Most people are too frightened to invest as it is decentralized, therefore the price of shares is still affordable. It is set to become our only form of currency therefore the potential gains are huge for investors. So, this is something that you might want to take a look in to.
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