Wondering what all that investing jargon means? Stay up to date on the terms you read, hear and see.
Definitions by letter in alphabetical order
This implies that there are people or teams that are handling the investment process manually or actively. This means they are buying, selling, as per their disgrection. This is the opposite of passive investing where investments are more automated and rules based to follow a index tracking a certain market. It's kind of like humans vs AI, which the AI being lower cost and less emotional. In most cases you pay more in fees for the investment product as there are more people and processes involved that need to be paid for.
An investment is usually in a type of asset. An asset has some type of value and is owned with an expectation it will make more value (aka money). A property is an asset, cash is an asset and shares are a type of asset that you can buy into as an investor.
This is a tactic that investors use to manage their risk.
Investors would balance the amount of assets they own (cash, shares, property) so that the risk of investing is aligned with their timelines or goals.
For example – an investor might invest only half their money in shares, leaving the rest in cash so that they can make potentially better gains from shares (while being higher risk) without risking all their money. This might be applied if there is a shorter timeframe to needing the money.
A type of fixed income asset. A bond is like a loan that is leant out to a browwer, like an IOU. You’ll find government bonds and corporate bonds are prominent types of bond ivnestments. These two use bonds to borrow money and use to finance projects. You can buy bonds directly or in ETFs and count as part of the fixed income asset that might make up your portfolio.
These are created from a surge in prices for a particular asset – like property or an individual shares. In 2021, there was a massive surge in demands for the company GameStop and it’s shares. The company itself was valued way over what it was worth and consequently the price fell, indicating the bubble had burst.
Bubble’s can also happen in property markets and commodities like petrol.
Bear or bull market
These are terms to indicate the conditions of the market.
A bear market is one that is in decline. Technically its when a market (like the ASX200) falls 20% from recent highs. Bear markets are signs that the economy linked to the market is in decline as well.
A bull market is the opposite and occurs when a market is on the rise.
There is more positivity with the economy of the market in these conditions with people having more money to spend and strengthening the economy.
A broker is a company that acts as your middleman to buying shares. A bit like a grocery store for stocks and shares.
You would traditionally pay the broker a set fee or price (called brokerage) that would then get you a parcel of shares (that you determine) in order to become a part owner of that company.
Today, most brokers are available on the internet and trades can be done online. Previously phone was the most common method of trading with brokers in person.
This is the profit you make from selling an asset or investment, if any.
For example if you buy an investment for $1000 and sell it for $2000 then you have made a $1000 capital gain. This takes into assumption that there are no other costs involved.
There are tax implications for this capital gain, depending on a number of things including how long you held the investment for.
When you buy shares on the ASX directly via an online broker they are most likely CHESS sponsored. This means the ASX has a record of you owning these shares.
It also means a fair amount of paperwork will be coming your way.
Before you have a recession or depression you have a correction. This is where the an investment falls 10% or more from its most recent high.
It is common to have corrections in the market and this is why there is higher risk in investments like shares or property where corrections can occur without warning.
A digital asset where ownership is stored in a digital database. Treated like the digital version of physical currency, some forms can be used to make purchases.
Similar to how AUD, USD, Yen and Pounds are forms of physical or fiat currency – Bitcoin, Ethereum and Litecoin are crypto currencies.
You can add crypto currency as a type of asset to your investment portfolio.
A strategy you can use to average out the amount of money you put into an investment.
It can reduct the volatility of investing all in at one point of time and consistency buys the investment through highs and lows.
For example – If you were wanting to invest $10,000 you could invest that all in one go, or dollar cost average it over a year so that you added $833 per month.
There are pros and cons to doing DCA, with a con being you are waiting longer to invest but a pro being you do not need to worry about the time you make your initial large investment.
A diversified investment portfolio contains a mix of different assets, products so that you can limit your risk to any one single stock or investment.
The idea is that you own more companies or shares across more sectors, countries, assets or products so that you reduce risk.
It also means you reduce your risk of gaining returns in any one stock as all your money invested is spread across multiple.
You can diversify with as few as three investments in three different companies.
Some ETFs have hundreds or even thousands of companies, meaning you have significant diversification.
The level of your own diversification is up to you, whether it be 3 or 3000 stocks.
A dividend is a pay out or distribution of profits back to the shareholder.
Businesses are able to either payout their profits back to shareholders or reinvest them back into the company.
For example – a company might generate a 10% return over a year, and pay out 5% as a dividend. A company can also pay a dividend even when the stock price goes down.
Some investors look for strong dividend paying companies to provide them an income, even if its irrespective of growth.
Whether a business pays a dividend or not is not reflective of how profitable or successful the company is.
DRP (dividend reinvestment plan)
This is a function that allows you to automatically reinvest your dividends into more of the companies stock when they are paid out.
Benefits are that you don't need to process or pay for this transaction and you add more holdings of the stock you already own.
Sometimes, though the amount of dividends recieved does not cover the amount needed to buy more stock. eg. a Dividend of $50 is unable to buy a stock if it costs say $60 at the time. In this situation the money is held until a dividend is paid out next.
DRP is optional and will need to be managed via your CHESS sponsor – maybe ComputerShare or Link Market Services.
An exchange traded fund is a collection of stocks or shares in the one fund. These are normally themed for areas like geography (VAS – Australian shares, VGS – International Shares), sector (NDQ technology stocks) or a type of specific need (VHY – high yield).
Within each ETF can be hundreds or thousands of individual stocks. These ETFs normally mimic an index fund.
A way of investing that focuses on the values of social, envronmental and responsible impacts.
An entire article on the topic is available here.
When you buy an ETF there is normally a fee that is the cost of owning or having the fund. This is sometimes called the expense ratio or MER (management expense ratio)
Another term for stocks or shares.
An index is a measure to track performance of a group of assets in a standard way. These indexes might have rules or parameters set to define what is included in the index.
Some popular index examples are the S&P 500. The group of assets included are 500 large companies found on the US stock market.
The ASX200 is similar, but only include the top 200 companies on the ASX in Australia.
ETFs or traditional index funds mostly follow a specific index, including ownership of all the companies within that index.
Modern portfolio theory
You've likely seen this term is thrown around by funds or investing products to explain the fact there is some kind of theory behind the way they compile their offer.
The reality is its a theory from a man named Harry Markowitz. He put together this theory on how you can build a portfolio that minimises or reduces your risk.
The evolution since has meant we get these investment products that are “conservative”, “balanced” or “growth” which are all built with different levels of risk.
This is considered like your collection of investments. Could be one stock, could be 50. Could included property, apps, crypto, a business. Anything that you own primarily so that it can grow and make you money can be bundled into your investment portfolio.
This is more important to the DIY investor who manages the buying and selling of specific investments.
What this is is a way to keep your portfolio balanced to your ideal profile.
For example if you had $100,000 in cash and invested $50,000 in shares then you woud have a a 50/50 portfoio spit of cash and shares. If you wanted to keep it this way you would need to rebalance.
This is needed becase the cash and shares will grow differently. Shares might grow 10% to $55,000 and cash grow only 2% to $51,000 over a year.
After a year you'd have $106,000 and the split of cash and shares is now 52/48.
To rebalance back to 50/50 you would need to sell some shares, or hold off buying more until your cash grew back to the same amount (which might not happen).
This in ivnesting is considered an event. It technicaly occures when there is a massive decline in the economy over a few months. It affects many things on top of the economy like jobs, production, politics or business.
If there is a recession you will know about it. In the news, media, and throughout your daily life.
This is the amount of uncertainty you have in an investment.
The more you stand to gain the more you stand to lose.
Banks for example will give you a low interest rate (in comparison to other investments) but the risk of not getting your money back when you need it is low.
Shares on the other hand are considered a higher risk type of investment as they can potentially boom and double in value, or drop just as hard to lose significant value.
Have a read of my investing strategy article to learn more.
Most companies on the stock market are placed in a sector. these include
- Consumer Discretionary
- Consumer Staples.
- Health Care
- Information Technology
You will find companies assigned to a sector as a general means of grouping them. You can invest in specific sectors through ETFs like NDQ (IT) or IXJ (Healthcare).