Common Investing Terms
The process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash. Have a look at your super account to learn more about how your money is deployed across the various asset classes.
An asset class refers to a group or category of investments that share similar characteristics and behave in a similar way within financial markets. Asset classes are typically classified based on their risk-return profiles, underlying characteristics, and market dynamics. They provide investors with a way to categorize and diversify their investment portfolios. Again, check out your super account and see which of these
Common asset classes include:
Equities/Shares/Stocks: Represents ownership shares in publicly traded companies. Stocks offer potential capital appreciation and may pay dividends.
Fixed Income/Bonds: Debt instruments issued by governments, municipalities, or corporations. Bonds pay periodic interest to investors and return the principal amount at maturity.
Cash and Cash Equivalents: Highly liquid and low-risk instruments, such as treasury bills, money market funds, or savings accounts, that provide a store of value and short-term stability.
Real Estate: Physical properties, such as residential, commercial, or industrial buildings, as well as real estate investment trusts (REITs) that invest in real estate properties or mortgages.
Commodities: Raw materials or primary agricultural products, such as gold, oil, natural gas, agricultural products, or industrial metals.
Alternative Investments: Non-traditional asset classes, including hedge funds, private equity, venture capital, real estate partnerships, or derivatives.
Foreign Currencies: Investments in foreign currencies, which can be used for currency trading or to hedge against currency risk.
Each asset class has unique risk and return characteristics, responds differently to market conditions, and offers distinct opportunities for diversification. Investors often allocate their capital across different asset classes based on their financial goals, risk tolerance, and investment time horizon. The combination of asset classes in a portfolio is known as asset allocation, which aims to balance risk and potential returns.
A market condition characterized by a prolonged period of falling prices, usually defined as a decline of 20% or more from recent highs. It is typically accompanied by investor pessimism and a lack of confidence in the economy. Have a look at a chart of what happened in March 2020 to see a recent example.
Blue Chip Stocks
Shares of large, well-established companies with a history of stable earnings and dividends. These stocks are sometimes considered to be less volatile and lower risk compared to smaller companies. But they will go down when the market goes south. See Bear Market.
A fixed-income investment that represents a loan made by an investor to a government or corporation. The bond issuer (a government or corporation) promises to repay the loan on a specified maturity date and pay periodic interest payments to the bondholder. I often say that when you invest you can own it or loan it. You can own shares in companies or loan money to governments and/or corporations. This asset class is often referred to as Fixed Income.
A market condition characterised by a prolonged period of rising prices and investor optimism. It is typically associated with economic growth, increasing corporate profits, and high investor confidence.
The profit realised from selling an investment for a higher price than its purchase price. Capital gains are taxable and can be either short-term (if the investment was held for one year or less) or long-term (if held for more than one year). Talk to an accountant for more details on the tax treatment.
A distribution of a portion of a company's earnings to its shareholders, usually in the form of cash or additional shares of. Dividends are typically paid on a regular basis, such as quarterly or annually. There's more details in the blog post: Dividend Investing in Australia: A Beginner’s Guide
Exchange-Traded Fund (ETF)
A type of investment fund that trades on stock exchanges, similar to individual stocks. ETFs are designed to track the performance of a specific index, sector, commodity, or asset class. An example of a basic ETF is one that is comprised of the top 200 stocks on the ASX - the ASX200 index. If you think of one unit in that ETF as 100 lego blocks, about 11 of those blocks will be BHP, 8 blocks will be Commonwealth Bank of Australia, Coles and Woolies around 3 blocks. That is called weighting.
Not all ETFs are the same. Make sure that you understand the ETF thoroughly before committing your money. Especially thematic or commodity ETFs. Stick to the basics if you're new to investing.
The process of valuing a particular company using the financial information provided in the annual and half-yearly reports. It also takes into account market and economic conditions, company management, and forces acting on the industry sector. See Technical Analysis.
A statistical measure used to track the performance of a group of securities, such as stocks or bonds. Examples of popular stock market indexes (indices?) include the ASX200, The Dow Jones Industrial Average, the S&P500 and the NASDAQ.
Initial Public Offering (IPO)
The first sale of shares in a private company to the public, marking its transition from private to publicly-traded. IPOs are often accompanied by significant media attention and can seem to provide investment opportunities for the public but are also traps for the uninitiated. Proceed with caution. It's not that simple making what's known as a "stag" profit.
Listed Investment Company (LIC)
A type of investment company that is listed and traded on a stock exchange. These companies pool funds from individual investors and use the capital to invest in a diversified portfolio of assets such as stocks, bonds, real estate, venture capital, infrastructure, and other securities. LICs typically have a professional fund manager who makes investment decisions on behalf of the company and its shareholders.
LICs are closed-ended funds, meaning they have a fixed number of shares. Thinking about the lego block analogy in ETFs above, an LIC has a fixed number of blocks. An ETF is open-ended, the more people that invest in that fund, the bigger the lego block castle becomes. When investors sell units the lego castle gets smaller. An LIC has a fixed number of blocks that are actively managed.
The ease with which an investment can be bought or sold without causing significant price movements. High liquidity assets, such as stocks and large-cap companies, can be easily traded, while low liquidity assets, such as real estate or small-cap stocks, may be more difficult to buy or sell.
An investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed funds are managed by professional fund managers and offer investors the opportunity to access a diversified portfolio with a relatively small investment. Keep in mind that the vast majority of actively managed funds underperform their benchmark at some time or another. Check this out if you don't believe me - SPIVA® Australia Year-End 2022 - SPIVA | S&P Dow Jones Indices (spglobal.com).
While we hear a lot about ETFs, Managed Funds are the 800 pound gorillas in the investing jungle. The vast majority of funds under management in Australia are invested in Managed Funds. They are also closed-ended and slightly less liquid than ETFs or LICs.
These are complex financial products to be avoided if you have no experience in the share market. I include this in the glossary by way of warning. There are many trading schemes pumped on social media that promise high returns for following a particular methodology, most often using technical analysis. These are to be avoided along with CFDs. Don't be taken in by high-pressure sales techniques.
Options are financial derivatives that give investors the right, but not the obligation, to buy or sell an underlying asset, such as stocks, at a predetermined price within a specific timeframe. Options can be used for speculation, hedging, or generating income. If you are new to investing avoid at all costs.
A collection of investments held by an individual, organization, or fund. A well-diversified portfolio typically includes a mix of different asset classes to spread risk and potentially enhance returns.
Return on Investment (ROI)
A measure of the profitability of an investment, calculated as the gain or loss generated relative to the amount invested. ROI is expressed as a percentage and can be used to evaluate the performance of different investments or compare investment opportunities.
An investor's ability to withstand fluctuations in the value of their investments without selling them in response to short-term market movements. Risk tolerance is influenced by factors such as financial goals, time horizon, and personal temperament. You may have heard me raving on the podcast about the difference between how ordinary folk like us define risk, with how the financial services industry defines risk. We think of risk as the possibility of doing all our dosh. The industry has many definitions of risk. However, it mainly refers to the volatility, or movement in the price of an investment in different market conditions. Risk tolerance therefore means how much you can stomach seeing your portfolio in the red before you panic and sell.
Stock or Share
A type of security that represents ownership in a company. Shareholders are entitled to a share of the company's assets and earnings, typically through dividends and capital appreciation.
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts. Technical analysts believe that all of the factors that contribute to the value of a listed company are reflected in the price. See Fundamental Analysis.
A measure of the price fluctuations or variability of an investment's returns over time. High volatility indicates significant price swings, while low volatility suggests more stable price movements.
The income generated by an investment, usually expressed as a percentage of the investment's cost or current market value. Yield can refer to different types of income, such as interest from bonds, dividends from stocks, or rental income from real estate.
What confusing financial jargon
would you like explained?
I'll include in the glossary or in an episode