What is investment banking and how can it help you achieve financial freedom? When building a retirement fund, it is vitally important to learn the different types of investments that can be used to maximize wealth. As such, if you want to enter the market, you need to at least familiarize yourself with the following investment terms. Here are some frequently asked questions about investment banking and other financial terms.
FAQs to Help You Understand What Investment Banking Is
In this article:
What Is Investment Banking?
An investment bank is a financial institution that serves individuals, corporations, and companies. They serve as the middleman between the investor and the company, and as such, an investment bank has two key aspects: buy and sell.
The sell side of an investment bank helps companies go public and sell shares in the market. The investment bank will help determine the IPO, as well as whether they should increase or decrease a share’s cost. The buy side of an investment bank gives sound financial advice to institutions or individuals that purchase investment services and assets.
What Is an Investment?
Investments come in different forms across varying industries. Generally, investment is any asset, tangible or intangible, which you can use to generate future income. For example, a meat dealer may purchase a well-maintained cargo truck for their deliveries. In this example, the truck is an investment, because the owner will use it to run his business.
Another example would be stocks. Let’s say that Investor A purchases 100 shares of Company B, shelling out almost $3,000. Company B says that investor A will receive dividends corresponding to the amount of units they purchased, which makes this is an investment because investor A acquired an asset that may potentially increase their capital’s worth.
What Is Investment Income?
Investment income is the return on your initial investment. This comes in various forms, such as interest payments, dividends, or capital gains. Take note that investment income only includes the gains exceeding your initial investment. If your initial investment was $3,000, but your take-home is $2,500, then your investment income is -$500. Simply put, it must be an increase in wealth for it to be considered income.
What Is Investment Interest Expense?
An investment interest expense is the amount paid on loan proceeds which were initially used for the purchase of the said investment or security. This amount is mandatory but limited to the amount you gain from your asset.
What Is Investment Spending?
Investment spending is the use of your money to purchase capital goods necessary for your business. This includes purchasing machinery, land areas, or infrastructures. Investment spending is limited to these types of assets; they do not include the purchase of bonds, securities, or stocks.
What Is Investment Capital?
Investment capital is the amount of money needed to reach certain financial goals. The amount of money you initially allot is the investment capital, and it is the basis from which you measure whether money is being gained or lost. Similarly, the money acquired by a company for the purpose of business expansion may also be called an investment capital. Simply put, any amount of money you use to purchase an investment/asset is an investment capital.
What Is Investment Management?
Investment management is the act of tracking market changes of assets within a specific portfolio. You can do this on your own or with the help of a professional investment adviser. The main point of investment management is to make sure your money is not at risk, so having an adviser will often make it easier to manage your assets confidently.
What Is Investment Grade?
An investment grade is the score given to a corporate or municipal bond that indicates how well they perform. Investors use this score to determine how well a company performs when paying dividends. The score is based on the company’s previous dividend returns and overall performance. In layman’s terms, the investment grade is a rough measurement of how stable an investment vehicle is.
What Is Investment Risk?
The investment risk is the probability of losses an investor may incur on a specific asset, which means that it is the level of uncertainty as to whether an asset can deliver the initially projected returns. It’s important for an investor to gauge the investment risk before purchasing an asset. Assets with lower risks generally appear more attractive, since they are more likely to remain stable.
After learning about these different investment and finance terms, it’s time to put this knowledge to use! There are many different investment vehicles which can help achieve your long-term needs such as retirement, estate transfer, or insurance planning. Also keep in mind that it is often considered of benefit to consult with a trusted investment adviser before you decide to purchase an asset. Remember: the key to financial freedom is to start investing as early as you can!
Did we miss any financial and investment banking terms? Post them in the comments section below!