Important words you need to know
Income: For your everyday Mo, income is the amount of money you take home at the end of the day or month. This money can come from your salary, a side gig, or return on an investment you made.
When it comes to businesses, calculating income is a lot more complicated—but, we’ll only be sticking to individuals today.
Budgeting: A budget is a financial plan—You take a specific period of time (usually a year) and, you see how much you are making (your income), how much you spending, and how much you have left (if any) during that year. Budgets are super helpful when it comes to managing personal finances over both the short and long term.
A popular example budget would be:
- 50% spent on essentials – rent, food, and transportation
- 30% spent on wants – dinners out, new shoes, and trips
- Now, you’ve got 20% left – it’s time to invest that in your future.
Investing: Investing is money spent on buying an asset that you hope will generate income or that you can sell later on at a higher price. For example: If you buy a cow as an investment, you can make money from selling it’s milk or you can sell the cow at a higher price in the future.
Emergency Fund: An emergency fund is money you have set aside for a rainy day. As the name suggests, you have it in case of emergency only. A decent emergency fund would have enough money to cover about 6 months of your expenses.
Stock Market: At its core, the stock market functions like a big auction house where buyers and sellers make trades. As the name suggests, the object of these transactions are stocks.
In Egypt the main stock market is called EGX (Egyptian Stock Exchange)
Stocks: Stocks are the building blocks of a company, when we buy stocks we own a little piece of this company.
For a company, issuing stocks is a way to raise money. For an investor, buying stocks is a way to grow their money.
Dividends: Dividends are a way that companies give back to their shareholders. They are your share of a company’s distributed profits based on how many stocks you own. More profit for the company means more dividends for shareholders.
Capital Gains: Capital gains is the buying and selling of stocks at a profit. Basically, buying the a stock and then selling it later at a higher price.
Stock Market Index: Indexes are like a stock market scoreboards. If you wanna know how the stock market is doing, you follow what is happening to its index.
EGX 30 is the most followed index in Egypt, it takes the stock price of the 30 most liquid companies in EGX (that means the 30 companies that have the highest number of transactions in a day)
Return: Your return lets you know how well your investment is doing, it is the money made or lost on an investment over a period of time. You take the amount of money you put into that investment and compare it with how much money you made or lost (your profit/loss). Looking at return helps you compare different investment opportunities.
For example: If you bought 10 stocks for 1,500 EGP and one year later these 10 stocks were worth 2,000 EGP. Assuming the company did not distribute any profits and you were able to sell these stocks you will make the original 1,500 EGP you paid + another 500 EGP in profit. This would be 33.3% return on your investment over a year.
Risk: Just like there is a potential return with every investment, there is also a potential risk. The risk is the degree of uncertainty that an investment might not make the expected return or even lose money. Every investment comes with different degrees of risk and return.
Portfolio Diversification: An investor’s portfolio includes all the financial assets they have invested. Portfolio diversification is spreading out these investments over different assets classes or different industries. This is a risk management strategy to soften the blow if one industry drops.
A portfolio can be diverse because it has many different kinds of assets—for example, stock, bonds, commodities, currencies, cash equivalents, etc… A portfolio can also be diverse if it has stocks that are spread across different sectors/industries. For example: having stocks in a bank, a pharmaceutical company, and a real-estate company.
Compounding: When you make gains on your investment, this surplus money can be reinvested to further increase your earnings.
EGP Cost Averaging – ECA: When investments happen in regular increments, the investor captures prices at all levels, from high to low. These periodic investments effectively lower the average cost per share.