College & Graduate, Invest

Help! Please Explain These Investing Terms To Me Like I’m A Kid

The other day, I asked both my younger sisters on the personal finance-related topics they would be interested to know and for me to share on my blog. The conversation quickly turned into a brainstorming session. We were tossing ideas and suggestions around.

“It’ll be cool if you can talk about investing but in like a fun and easy way. I mean, I would love to start investing but I don’t have any idea of it. I think a lot of youths in Malaysia would really like to know what is investment all about but it just seems too complicated. Perhaps you can start with explaining the investing terms like you are explaining them to a kid,” my sisters said. Great idea, I thought.

Related: How Do I Manage My Money As A Fresh Grad In Malaysia?

I’ve quoted the definition from Investopedia a.k.a. the “bible of finance”, included the simplified version in case the definition confuses you even more­­–like it did to me. In case all else failed, I also explain these terms in the simplest possible way like explaining them to my 8-year-old neighbor’s daughter. The “explanation for kids” might not be 100% exact to the original meaning but just a sweet and easy way for you to get an overall idea/concept.

  1. Investing

Definition:

“The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.”

To simplify:

It’s when you set aside some of your money into something with the expectation that “something” will bring you more money.

Explain it to me like I’m a kid:

You decide you want to have more money. So, you give RM100 to your brother Jacky to help him build his ice cream stand business and hope that he can bring you RM150 when he earns some money. Your action is called investing.

  1. Capital

Definition:

“Capital refers to financial assets or the financial value of assets, such as funds held in deposit accounts, as well as the tangible machinery and production equipment used in environments such as factories and other manufacturing facilities. Additionally, capital includes facilities, such as the buildings used for the production and storage of the manufactured goods.”

To simplify:

It’s the money or other resources you own/contribute for a particular purpose such as investing or starting a business.

Explain it to me like I’m a kid:

Your money.

  1. Asset

Definition:

“An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.”

To simplify:

It’s the resources you own that are valuable or bring values to you/your business.

Explain it to me like I’m a kid:

You decide you want to open a toy shop so that you can earn money. The toys, the shop, and the truck that carry your toys to your shop are your assets.

  1. Stocks

Definition:

“A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.”

To simplify:

It’s simply a small piece of a company. When a company decides to go public and sell a chunk of itself to the general public, that chunk is called stocks. When you buy a stock, you become a co-owner of that company.

Explain it to me like I’m a kid:

McDonald’s needs money to open more stores in the world so the company sells a part of it to the public to get more money. You love McDonald’s so you bought a tiny part of it and that’s a stock you are buying.

  1. Real estate

Definition:

“Real estate is property comprised of land and the buildings on it, as well as the natural resources of the land, including uncultivated flora and fauna, farmed crops and livestock, water and mineral deposits.”

To simplify:

Basically, property like land and buildings.

Explain it to me like I’m a kid:

Your home, your dad’s office, your grandma’s kampung house.

  1. Bonds

Definition:

“A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.”

To simplify:

Investors lend money to issuers (corporates or governments) to fund their projects and in return issuers pay the investors a fixed rate of interest at a set period of time. Bonds are generally less risky compared to stocks.

Explain it to me like I’m a kid:

Your best friend Daisy (who acts like the government) wants to build a house for her dog Muffin. As she doesn’t have any money to buy any of the materials, you (the investor) lend her RM500. She promised to give you RM10 every 2 months and repay you after she finishes her dog house project.

  1. Mutual Fund

Definition:

“A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s investments and attempt to produce capital gains and/or income for the fund’s investors.”

To simplify:

It’s a type of investment that enables multiple investors to pool their money together to invest in a collection of stocks, bonds, cash or a combination of those assets managed by money managers.

Explain it to me like I’m a kid:

Mutual funds are like baskets. Each basket holds certain type of stocks, bonds, or combination of these and it’s taken care by a professional money guy.

  1. Unit trust

Definition:

“A unit trust is an unincorporated mutual fund structure that allows funds to hold assets and provide profits that go straight to individual unit owners instead of reinvesting them back into the fund. The investment fund is set up under a trust deed. The investor is effectively the beneficiary under the trust.”

To simplify:

A unit trust is similar to a mutual fund. In Malaysia, we use this term rather than mutual fund.

Explain it to me like I’m a kid:

(Refer to mutual fund, think of it as the same thing–the basket.)

  1. Exchange-Traded Fund (ETF)

Definition:

“An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.”

To simplify:

An ETF trades like a stock except that it spread your money out over a larger batch of stocks, compared to you buying a specific stock.

Explain it to me like I’m a kid:

You walk into a pasar pagi with your mom. Instead of buying a whole fish (represent a stock), your mom buys a bundle of seafood which consists of only the fish head, a few prawns, and two crab craws (represent an ETF), as they cost about the same.

  1. Dividend

Definition:

“A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.”

To simplify:

It’s method of profit sharing to the shareholders of a company, typically paid out at the end of each quarter of the year, or every half a year, or once a year, depending on the company.

Explain it to me like I’m a kid:

You have been investing in your brother Jacky’s ice cream stand business and he now has stable revenues. To reward you, Jacky gives you angpao (dividend) every 3 months from the profits he earns.

  1. Diversification

Definition:

“Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.”

To simplify:

“Don’t put all your eggs in one basket.”

Explain it to me like I’m a kid:

You want to make sure all your 10 eggs will not break at the same time during the delivery from your grandpa’s farmhouse to your house, and because the road is rutted and rocky, you decided to put 3 in a red basket, 3 in a blue basket and the rest in a brown basket. In case one basket falls off from your grandpa’s bike, you’re still thankful you have the remaining two baskets.

  1. Portfolio

Definition:

“A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds.”

To simplify:

It’s the collection of all of your investments that can be made up of stocks, bonds, ETFs etc.

Explain it to me like I’m a kid:

It’s like a result book in your school. You pick the subjects you want to take and you get to see your result for each subject you took after exams.

  1. Compound interest

Definition:

“Compound interest (or compounding interest) is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.”

To simplify:

It’s when interest is added to the original amount of money you put into savings or investment, and the interest that has been added also earns interest. It can be thought of as “interest on interest”.

Image from Investopedia

Explain it to me like I’m a kid:

When you push down a snowball from the top of the hill, the snowball gets bigger and bigger collecting the snow along the way. That’s the concept of compound interest.

  1. Broker

“A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.”

To simplify:

It’s the middleman who arranges trades between the buyers and the sellers. In exchange, he/she charges a fee or commission.

Explain it to me like I’m a kid:

Say, you’re interested in buying stock of a hat company because you’re a big fan of their trendy hats, aunt Anna helps you to buy it because you have no idea how and where to start. Aunt Anna charges you 5% for helping you to do so. Aunt Anna is the broker.

  1. Ask

Definition:

“Ask is the price a seller is willing to accept for a security, which is often referred to as the offer price.”

To simplify:

The lowest price a seller is willing to agree on for a trade.

Explain it to me like I’m a kid:

(The definition itself is pretty clear but go on and read the “explanation for kids” if you want to) You want to sell your secondhand toy, the lowest price you are willing to offer is RM10. That’s your ask price.

  1. Bid

Definition:

“A bid is an offer made by an investor, a trader or a dealer to buy a security, commodity or currency.”

To simplify:

The highest price an investor will agree to pay for a trade.

Explain it to me like I’m a kid:

(The definition itself is pretty clear but go on and read the “explanation for kids” if you want to) You are going to buy a pair of shoes and you let the sellers know the highest price you are willing to pay is RM50. That’s your bid price. If the seller’s ask price meets your bid price, then the transaction will be completed.

Let me know if this article has helped you to get a better picture of these baffling investing terms. Also, comment down below if you want me to explain any other terms you have in mind as I might do a Part 2 for this. 🙂

Image from Pexels

3 thoughts on “Help! Please Explain These Investing Terms To Me Like I’m A Kid

      1. Haha, I didn’t mean that you have a shopping addiction or that you have trouble managing your finances like Becky did in Confessions of a Shopaholic. But some of the best scenes for me was when she made sense of all the financey stuff for readers who didn’t get finance and money at all. You’re like Becky in that sense. I used to avoid reading stuff about money and finance simply because everything was sooo hard to understand and make sense of.

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