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These are terms you may come across when trading.
A share represents a unit of ownership in a company. When you buy shares of a company, you become a shareholder, which means you own a part of that company. Listed shares can be bought and sold on stock exchanges, and their value can fluctuate based on the company's performance and other market factors.
Listed shares are also known as stocks or equities.
Securities are a broad term for financial instruments such as equities (shares), debt (bonds) and derivatives (options or futures).
Derivatives are financial instruments whose value is derived from the value of an underlying asset, index, or rate. They are essentially contracts between two or more parties, and their price is determined by fluctuations in the underlying asset. Here are the main types of derivatives:
Derivatives are used for various purposes, such as hedging risk, speculating on price movements, and gaining access to otherwise hard-to-trade assets or markets.
A stock exchange is a marketplace where stocks (shares of ownership in companies) and other securities are bought and sold. It provides a platform for investors to trade securities in a regulated and organized manner.
Australian securities are traded on the ASX (Australian Securities Exchange). The USA has the two largest stock markets NASDAQ (National Association of Securities Dealers Automate Quotations), NYSE (New York Stock Exchange). The Japan Exchange Group, Shanghai Stock Exchange, Hong Kong Exchange and London Stock Exchange are also other notable international stock markets.
Markets or Stock Markets are defined into Domestic, which defines the local market in which the trader resides and International/Global Markets, which are those that sit outside the trader’s residency.
Stock markets are further characterised as either, developed or emerging.
Developed market is defined as a mature financial market and stable with lower volatility and is already highlight industrialised and established. Examples include USA, Australia and Japan.
Emerging market is defined as a less mature or growing market with higher volatility and risk but is viewed as rapidly growing markets with future potential. Examples include China, India and Brazil.
Exchange Traded Fund (ETF) is a managed fund that can be traded on the stock exchange like individual shares, and lets an investor invest in a group of companies, assets or industries in one simple trade. This could help spread risk, as the performance of just one company or investment assets is not being relied on. ETFs are investments generally grouped under a common theme i.e. technology, health or emerging markets. They are similar in nature to managed funds.
Trading refers to the buying and selling of financial instruments, such as shares, bonds, commodities, currencies, and derivatives, with the aim of making a profit.
Settlement is the process of making or receiving a payment for buying or selling a share or any other financial instrument i.e. bonds or derivatives. When trading, investors are usually required to link their trading account with a settlement account, which is an account that allows them to transact on their trade. A T+2 settlement, means that settlement will occur two trading days after the trade is placed (money is deducted for a buy, and money is funded when a sell occurs)
CHESS stands for the Clearing House Electronic Sub register System. It's an electronic system used by the Australian Securities Exchange (ASX) to manage the settlement of share transactions and to maintain the electronic register of shareholdings.
Brokerage or brokerage fee is a fee paid to the broker for services that allow the investor to execute a trade (buy or sell) i.e. using a trading platform – electronically or phone assisted).
Dividends or earnings distribution are payments made by a company to its shareholders, usually in the form of cash or additional shares in the company. They represent a portion of the company's earnings that is distributed to shareholders as a reward for their investment.
Index or Indices are a way of tracking performance of a specific groups of stocks representative of a segment of the market or broadly the market. For example, the ASX / S&P200 is an index that looks at the top 200 largest listed companies on the ASX, which is a broad market index that covers 80% of the market. This is used as an indicator with a high degree of confidence as to how the Australian share market is broadly performing. Similarly, there are other indices such as the Dow Jones, All Ordinaries and S&P500.
There are also ETFs or managed funds that invest into the shares represented by an index, these are known as Index funds.
Foreign exchange, also known as FX, Forex or currency exchange, is the market in which currency is traded/exchanged. Foreign exchange is often traded in a decentralised market and is done so in various combinations in pairs for example, AUD/USD (Australian dollar and United States dollar) or USD/EUR (United States dollar and the Euro) or AUD/JPY (Australian dollar and Japanese Yen).
These terms are specific to managed funds.
A managed fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a diversified portfolio of assets, such as shares, bonds, property and unlisted assets. A managed fund gives the investor access to a range of assets and can be structured in various combinations of growth assets and defensive assets to suit a variety of investor profiles. It offers investors access to investments ordinarily reserved for large scale investors.
Assets in simple terms are resources owned by an individual or non-individual (i.e. business, government) that have economic value and provide future benefit.
Assets are categorised into six classes:
Defensive Assets such as Cash or Fixed income, are assets that are stable and have predictable, but low returns and have a low risk profile.
Growth Assets such as Equities, Property, Alternative investments and Commodity, are assets that have the potential to generate higher returns but are also considered volatile and have a higher risk profile.
Exposure informs the investor of what types of assets the managed fund is invested into by category such as geographic or by sector. For example, a managed fund that is 100% invested in international shares may choose to provide investors with more transparency by providing a percentage breakdown of their investments by geographic location i.e. 50% Australia, 40% USA, 5% Europe and 5% Asia. Similarly, by sector this could mean percentage of investment in Transport, Utilities or Energy etc.
Investment performance refers to the measurement of how well an investment or a portfolio of investments achieves its financial objectives over a specific period. It is typically evaluated based on returns, risk, and other relevant metrics. For example, if the managed fund objective was to achieve a return of 5% over 5 years adjusted for inflation, performance would be whether the funds investment have produced returns that meet, does not meet, or exceed the return target (accommodating for any inflationary changes) over that specific investment timeline.
Diversified funds are managed funds that look to spread their investment across various asset classes to spread the risk. Depending on the risk profile of the fund, this will be invested in a way to meet the growth and defensive asset balance. For example, for a fund that is considered high growth, they may choose to invest 80% into growth assets such as shares, property, alternative assets or commodities and 20% in defensive assets such as cash and fixed income, similarly if it were conservative they may choose to invest 70% in defensive assets versus 30% in growth assets.
Single asset funds, invest 100% (or generally over 95%) into a single asset class like equities or property or fixed income. The fund manager will take the approach to utilise their expertise in a specific asset that they specialise in and make highly informed investment decisions.
Hedging is an investment strategy that looks to prevent against potential losses by taking certain actions to offset this. For example, if you invest for a certain period but would like to protect yourself against a sudden decline due to uncertainty in the market, you may choose to hold a right to sell that investment for a pre-determined price. For example, you buy an investment in for $100, with a view that this will grow in value to $200, however you also put in place an option to sell it at $150 if the investment value were to fall below your initial investment of $100; there are of course costs involved in these arrangements, however it has effectively protected you from a market downturn.
Geared investments involve borrowing money to invest in assets with the aim of amplifying potential returns. An example of this is where an investor invests $5,000 of their own money, the fund manager will also borrow the same amount (for example 2% p.a. interest) to increase the return potential, investing a total of $10,000. If the investment has a net return of 5% p.a., the investor will have achieved $500 in returns instead of $250. The fund manager will also be required to pay back the $5,000 borrowed amount plus 2% interest ($100) for a total of $5,100, which leaves the investor with a net return of $400; resulting in a gain of $150 more than if the investment was not geared. This also comes with a risk of amplifying losses if the investment were to perform negatively.
Risk-adjusted returns are a way demonstrating the overall return you will receive on an investment against the amount of risk involved. This is a way of showing returns of investments across a level playing field. Using the Sharpe ratio as an example, if investment A performs at 10% but investment B performs at 8%, in real terms Investment A provides an extra 2% in performance. However, if you consider that Investment A has had greater volatility than investment B this would mean that across the same timeline, at any given point investment B would offer more consistent / reliable returns. There are other methods to use this such as Alpha, Treynor Ratio and Sortino Ratio.
These are common terms you may across when investing.
Diversification is a strategy which invests across a variety of investments or assets allowing the investor the ability to manage / reduce the risk of poor performance in a single asset investment. For example, consider an investment portfolio with 30% invested in shares, 20% in Fixed income and 50% in direct property; if an economic event occurs that only affects shares, the remaining 70% of the investment portfolio will have been protected from the event by diversifying.
Holdings refer to a list of underlying individual investments for an individual investor, a managed fund or ETF.
Shareholdings – refers to shares an investor holds in a company or companies.
Portfolio holdings – may refer to any variety of investments held in the portfolio such as shares, bonds, property, options or futures.
Liquidity is how quickly and easily you are able to convert your investment into cash. For example, listed shares are considered liquid as they can be sold and convert the value of the sale into cash quite readily, whereas direct property on the other hand may not be so easily sold and converted to cash.
Risk in investment effectively refers to the possibility of a negative outcome. For example, market (systematic) risk refers to the possibility an investor may experience losses due to poor performance of the financial market. There are many types of risk, such as interest rate risk, currency risk, liquidity risk; all of which are factors that need consideration and management as part of a good investing strategy.
Volatility is the amount the price varies from the average trading price over time. For example, if you hold shares in two different listed companies, and price of share A is $5 on day one by drops to $3.50 on day four and then jumps to $8 a week later, compared to price of share B which is $5 and only drops to $4 on day four and rises to $6 a week later.
Due to the large variation in price over the same timeframe, share A would be considered more volatile than share B.
An investment timeline, or investment horizon, refers to the length of time an investor expects to hold an investment before taking the money out. This period can range from a few months to several years, depending on the investor's financial goals, risk tolerance, and the nature of the investment.
Here are some common types of investment horizons:
Capital is the amount you invest. A gain or loss is the increase or decrease in the value of your Capital. For example, if you buy 100 shares in a company for $5, your initial capital invested is $500. If the price of the shares increases to $10, you have doubled the value of your capital investment, making a capital gain. The opposite applies for a capital loss.
Inflation is the increase in the cost of goods and services. It is commonly represented by the CPI (Consumer Price Index). Inflation is an important indicator of how the economy is performing, often Central Banks such as the RBA (Reserve Bank of Australia) will use interest rates as a mechanism to manage inflation. The RBA, for example, aims to keep CPI in the target range of 2-3% in line with average wage growth.
Margin loan is when an investor borrows money to invest in shares, using any existing investments as collateral. For example, an investor may have an existing portfolio of shares worth $10,000 and use those shares as collateral to borrow an additional $10,000 to invest in more shares. This is also a form of gearing investments.
A blue chip share is a share in a well-established company with a record of stable earnings over a long period, typically a market leader or among the top companies in its sector.
Net worth is a measure of an individual's or entity's financial health, representing the difference between total assets and total liabilities. In simpler terms, it is what you ‘own’ minus what you ‘owe’.
Compounding is the process of reinvesting any income generated by your investing, to maximise any future gains. For example, if you were to invest in a company and any dividends you receive, instead of cashing it out as an income, you elect to reinvest and purchase more shares in the same company to increase your stake in the company and increasing the possibility of greater returns in the future.
Basis point (also referred to as ‘bips’) is a unit of measure to describe the percentage change in value or rate of a financial instrument. One basis point is equal to one-hundredth of a percentage point.
1Bp = 0.01%
10Bps = 0.10%
A Bear market is when prices of securities (shares, bonds, etc) are on a downward trend usually marked by a 20% decline from a recent high in the market.
A Bull market is when prices of securities are on an upward trend usually marked by a 20% increase from a recent low in the market.
A common theory of symbolism of a Bear is in relation to the way it attacks, which is downward using its claws, whereas a Bull will attack upward using its horns, both being severe impact in the way they strike.
This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. As the information has been provided without considering your objectives, financial situation or needs, you should, before acting on this information, consider if it is appropriate to your circumstances. You should consider seeking independent financial and/or tax advice before making any decision based on this information.
The information in this article and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its publication but no representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made in this article.
