SINGAPORE — How well do you know financial terms? There are a lot of buzzwords financial advisors and experienced investors use that are crucial to know, and yet is confusing and intimidating to the novice investors.
This is part of a series where Yahoo Finance Singapore will share about the whys and hows of investing. In this fifth part, we highlight five common terms that financial experts have listed as important and asked several young people, who have no financial background and have never invested before, to see if they actually know what these terms mean.
1. Blue Chip
Financial experts have defined ‘blue chip’ as ‘large, reputable and financially sound corporations listed on the stock markets’. Examples of blue-chip stocks include DBS, OCBC, Apple and Amazon.
Here’s what young adults think "blue chip" means:
“I really don’t know what this means... All I can think of is food, like some kind of biscuit?” - Cheryl Pek, 22, full-time social media creative
“Blue chips sound like they are very expensive stock shares.” - Jolanda Goh, 22, freelancer
“I’m not sure, are they funds that are frozen and cannot be used? Because, blue?” - Isaac Hong, 25, final year undergraduate
2. Bear/Bull Market
A bear market occurs when there’s been a significant, continuous fall in stocks or another asset, usually at least 20 per cent. Bear markets are characterized by investors’ pessimism and low confidence. In contrast, a bull market is an extended period when prices for stocks or other assets are steadily on the rise. Bull markets are usually accompanied by high investor confidence and a strong overall economy.
Here’s what the young people think ‘bear/bull market’ means:
“A cycle relating to the stock market and investment growth” - Jamel Chan, 23, undergraduate
“Bear market means that the economy is bad and bull market means that the economy is good, which is when you should start investing. Wait, or is it the other way around?” - Jolanda Goh, 22, freelancer
“Wa, does this mean a highly competitive and saturated market since bears and bulls are intimidating and scary?” - Isaac Hong, 25, final year undergraduate
A dividend is the distribution of profits by a corporation to its shareholders. This means that when a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders.
Here’s what the young people think "dividend" means:
“I think this is the total amount investors have to pay to companies for holding onto their shares, and if I’m not wrong, it’s done on a quarterly basis.” - Ryan Chua, 20, waiting to enter university
“I think I know this! Is it the base payment to shareholders?” - Jamel Chan, 23, undergraduate
“The fixed amount of money distributed to each stakeholder” - Isaac Hong, 25, final year undergraduate
4. Index Fund
An “index fund” is a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index, according to investor.gov. The S&P 500 Index, the Russell 2000 Index are just a few examples of market indexes that index funds may seek to track. A market index measures the performance of a “basket” of securities (like stocks or bonds), which is meant to represent a sector of a stock market, or of an economy.
Here’s what the young people think "index fund" means:
“Hmm, I think this is a fund that follows the top investment companies, which usually give good financial advice for their clients too.” - Ryan Chua, 20, waiting to enter university
“Okay I don’t know what this means too but I’m guessing it’s the initial startup fund for investments?”- Cheryl Pek, 22, full-time social media creative
“Is this like some ‘calculator thing’ for stocks?” - Jamel Chan, 23, undergraduate
5. Compound Interest
Compound interest is calculated on the original or principal amount and also on the accumulated interest of previous periods, and can thus be regarded as "interest on interest." This can be illustrated by using basic math: if you have $100 and it earns 5 per cent interest each year, you'll have $105 at the end of the first year. At the end of the second year, you'll have $110.25. Not only did you earn $5 on the initial $100 deposit, you also earned $0.25 on the $5 in interest, according to investor.gov.
Here’s what young people think "compound interest" means:
“I’m guessing that this is the total interest whenever you loan something?” - Cheryl Pek, 22, full-time social media creative
“Compound interest allows me to earn interest on top of my previous month’s interest. So it’s like additional interest on top of the interest I’m already earning from my investment plans.” - Jolanda Goh, 22, freelancer
“Oh, this is the additional cash that is earned for a set of money set aside in a bank or fund. If I remember correctly, the formula for this is $P(1+r/100)/n.” - Isaac Hong, 25, final year undergraduate
Importance of financial literacy
Do these responses surprise you? Did you even know what these terms mean?
According to OCBC’s Financial Wellness Survey 2020, millennials’ top priority is to grow their wealth, yet, 42 per cent of them don’t know the best way to do so. Financial experts have attributed this to the lack of financial literacy among youths these days.
“Knowledge is the best defence against the unpredictable stock market,” shared Asheesh Chanda, CEO of Kristal.AI, a digital-first private wealth platform in Singapore.
“When you are armed with knowledge, you will find it much less scary to get started on your investment journey.”
Chanda recommends young investors to talk to those who have experience in the stock market, read newspapers and reputable investment articles, and attend knowledge sharing sessions or tutorials.