There are so many words in the personal finance lexicon that it can sometimes feel impossible to keep up. That said, welcome to The Wealth Edit’s “Weekly Words,” where we introduce you to increasingly complex personal finance vocabulary words so your vernacular grows along with your personal finance knowledge. If you have any questions about any of these terms, reach out!
Blockchain
- A specific type of database that differs from a typical database in the way it stores information.
- A database is a collection of information that is stored electronically on a computer system.
- Blockchain stores data in blocks that are then chained together.
- As new data comes in, it is entered into a fresh block. Once the block is filled with data, it is chained onto the previous block. This chains the data together in chronological order.
- It is commonly associated with Bitcoin as blockchain, though invented in 1991, had its first real-world application via Bitcoin in 2009.
- Bitcoin uses blockchain as a means to transparently record a ledger of payments.
- The goal of blockchain is to allow digital information to be recorded and distributed, but not edited.
- It can be used not just for recording a ledger of payments, but for other data points as well, like votes in an election, deeds to homes, product inventories, and more.
Hedge Fund
- A hedge fund is an actively managed investment pool whose managers use a wide range of strategies, often including buying with borrowed money, in an effort to beat average investment returns for their clients.
- Hedge funds are considered risky alternative investment choices.
- They require a high minimum investment or net worth – meaning only wealthy clients can participate.
- Compared to mutual funds (which we’ll cover next week), hedge funds are lightly regulated and risky.
Margin
- Margin is the money borrowed from a broker to purchase an investment.
- It’s the difference between the total value of an investment and the loan amount.
- To “margin” or “buy on margin” is to use the money borrowed from a broker to purchase securities. To do this, you must have a margin account rather than just a standard brokerage account.
- A margin account is a brokerage account in which the broker lends the investor money to buy more securities than what they could otherwise buy with the balance in their account.
- Margin investing can be advantageous in cases where the investor anticipates earning a higher rate of return on the investment than what she is paying in interest on the loan.
Thanks as always to our friends at Investopedia for helping us clarify these sometimes confusing terms. Stay tuned for more Weekly Words next week!
