Investing For Beginners – Definitions
“Equity”, “Debt” & “Fixed Income”
In this article we’re aiming to educate those who, like us at one point, may not have a background in finance or who may be interested in investing but are looking for a place to start. We’ll define three different terms that are essential to understanding investing.
In a previous article titled “The Key to Generational Wealth Part 1”, we defined “equity” as the value of one’s ownership in an asset, so when you hear the word equity, think ownership. Equity is what you get when you buy a share of a company. You're literally buying a small piece of that business. Imagine your favorite coffee shop is expanding and you buy a small share in it. When the company grows and does well, so does the value of your investment. If it struggles, your equity might go down in value.
“Debt”, when it comes to investing, is basically lending your money to someone else and getting paid back with interest. That could be a company or a government/municipality, to name a few. When you buy a bond, for example, you're letting the issuer borrow your money in exchange for regular payments. For example, if you invest in a government bond, you’re essentially loaning money to the government. In return, they pay you interest over time and give you your original amount back at the end of the term.
“Fixed income” refers to investments that provide regular income. You could think of it like steady paychecks from your investment portfolio. The term typically refers to investment vehicles such as Bonds, Treasury securities, and Certificates of Deposit (CDs). For example, let’s say you invest in a bond that pays you $100 in interest income every six months, that’s fixed income!
To summarize:
· Equity = ownership
· Debt = lending
· Fixed Income = steady payments
You don’t need to know everything to get started, you just need to start learning, one concept at a time. The more comfortable you get with these three terms, the better prepared you'll be to make smart investment choices.
