Investing Terms (A-Z)

Actively Managed Fund
• Actively managed funds are mutual funds and/or ETFs where managers of the fund actively buy and sell securities to earn higher returns than an index/benchmark (like the S&P 500). These funds have higher fees (because here is more buying and selling occurring).

• In finance, assets are real, financial, or intangible. Real assets are physical assets that include commodities, real estate, land, natural resources, equipment, and machinery. Financial assets are real or virtual contractual claims of rights or ownership and includes stocks, bonds, and mutual funds etc. Intangible assets are not traded conventionally like other assets but rather add value in the form of patents, intellectual property, branding, copyrights, and trademarks etc. Real and financial assets are more common among individual investors.

Asset Allocation
• Asset allocation and diversifying your portfolio are similar concepts but asset allocation is focused on the selection of asset classes (stocks, bonds, property etc) and the individual securities within each class (to further diversify to lower risk/increase return).

Assets Under Management (AUM)
• The market value of assets that are being managed by a financial institution or person. Investors use AUM to determine the size of a company or fund and for comparison.

Bear Market
• Declining prices in financial markets (typically by 20%).

• Bonds are debt securities that are issued by governments and corporations that typically pay interest (fixed income) over the time they are held. They issue them to raise money for funding or stimulate economic growth.

Bull Market
• Rising prices in financial markets (stock market, bond market, property market etc.) for an extended period of time. E.g., the stock market was bullish from 2009- 2020 and the annualised return on the S&P 500 was 17.1%

Basis Point (bps)
• One basis point is 0.01% and 100 basis points is 1%. In finance it is a commonly used measurement to describe the percentage change in financial assets and yields in interest rates.

• Capital is cash or liquid assets that individuals or businesses have access to. Individuals use capital to acquire financial assets and businesses use capital to fund investing, growth, and innovative activities that provide positive returns.

Capital Gain
• A capital gain is made when the price you paid for an investment rises. E.g., if you bought a stock for $50 and 1 year later the share price is $90, a capital gain of $40 has been made. A capital gain is not realised until the investment is sold, and you have received the cash for it.

Capital Loss
• A capital loss occurs when the price you paid for an investment declines. E.g., if you paid $50 for a stock and 6 months later the market value was $45, a $5
capital loss occurs. If you hold your investment, it is an unrealised capital loss.

Capital Market
• The capital markets consist of the primary market (where securities are first issued e.g. IPOs) and the secondary market (where previously owned securities are traded). Assets in capital markets are typically stocks, bond and derivatives and are held long term (1 year or more).

Compound interest
• When interest earned on an investment is added to the principal (invested amount) to earn interest. One of the most important concepts to understand in
finance because it explains mathematically how wealth accumulates over time.

For example, a $100 investment that earns 10% p.a. will be worth $110 at the end of the year, $10 interest has been earned and is added to the principal ($100) to earn interest in year 2.
– Year 2 $110 earning 10% = $121 (see how the $10 of  year 1 interest gave an extra $1 or 10% in year 2..Compound Interest Baby!!)
– Year 3 $121 earning 10% = 133.10 (Extra $2.1 of interest this year)
– … and so on. You can see the investment compounding due to interest earning interest.

• Diversifying is a popular risk management strategy that involves investing in different assets and asset classes in a portfolio to increase returns and reduce
risk. A diversified portfolio may include stocks, property, bonds, and commodities or example.

• Dividend payments are a percentage of profits made by the company that can be paid yearly, semi-annually, and quarterly. The amount a shareholder receives in dividends will depend on how much the company is paying per share, and how many shares are held by the investor. Investors seeking income from their investments prefer dividend stocks over growth stocks.

Dollar Cost Averaging (DCA)
• Investing equal amounts over time no matter what the price of a security is. For example, you invest $400 a month each month, when the price of a share is high fewer shares will be bought, and when they share price is low more shares will be bought. The objective is to avoid the complexity of timing the market and buying shares periodically so that the price you end up paying is averaged out over time.

Economic cycle
• The economy is cyclical, which means we experience HI’s and LOWs in the economy. Phases in the economic cycle include expansion, peak, contraction, and trough, which reflect changes in spending/saving, employment, interest rates, and inflation. When there is growth in the economy (expansion) there is typically lots of spending, low interest rates, low unemployment etc. and in a contractionary period there may be less spending (more saving), high interest rates, and higher unemployment. Understanding the economic cycle helps reduce emotional reactions (like greed or FOMO) so that we can continue to invest accordingly.

• Equity represents ownership, when you buy stocks you own equity in those companies, when you put a deposit down for a house, the deposit amount is your
percentage of equity (as you pay off your mortgage your equity increases). Equity investments typically provide higher returns but also carry higher risk.

Exchange Traded Fund (ETF)
• Like mutual funds, ETFs are traded on exchanges (like the stock exchange) and are easily accessible to individual investors. They are a pool of investors’ funds that buy and sell assets within a portfolio, for example iShares U.S. Technology (IYW) is an ETF (portfolio) that holds shares in U.S. electronics, software, hardware, and information technology companies.

Financial Intermediaries
• Are financial institutions that act as the middleman between issuers of financial instruments and buyers of financial instruments. They include banks, insurance companies, credit unions, mutual funds, investment banks, and hedge funds etc. Financial intermediaries play a fundamental role in finance as they connect savers and borrowers so that businesses and individuals have access to debt and equity investments. For example, if you deposit money at a bank, you are a saver, if you need a loan or mortgage from the bank, you are a borrower. A critical component of finance is that capital flows from savers to borrowers to fund
investments, economic growth, innovation, and liquidity.

Financial Statements (Balance sheet, Income statement, Cash Flow statement)
• Financial statements are universal documents that provide an insight to the financial performance and profitability of a business. These documents report
revenue, expenses, equity, liabilities, assets, loans, salaries paid, and much more.

They can be hard to look at (because numbers put people off) but are essential when understanding if a business is managing its capital efficiently to remain
solvent and expand.

• An index is a basket of securities (could be stocks, bonds etc) that are used as benchmarks to compare returns to. For example, common stock market indexes include the S&P 500, Dow Jones Industrial Average, and the Nasdaq. You can’t invest in an index directly, you invest in a fund that tracks the index, (VOO tracks the S&P 500).

• Inflation is the general increase in price of a basket of goods and services over time. In NZ inflation is measured by the Consumer Price Index (CPI) and is managed by the Reserve Bank of NZ for a target range of 1-3% per year. Inflation erodes the purchasing power of your money (because goods and services get more expensive) so $100 in 2022 buys less in 2023.

Investment portfolio
• Is a collection of financial assets that is held to generate positive returns. Investors seek to: generate/grow income, preserve capital, reduce taxes, and manage risk.

• Liabilities are debts of an individual or corporation that must be repaid. Theyinclude loans, accounts payable, lease agreements, student loans, mortgages, credit card debt, and overdrafts etc.

• Liquid assets can be sold quickly, easily, and without much/any loss in value. Illiquid assets often take time to sell, incur high selling fees, and you may not receive full value. Liquid assets have many buyers and sellers in a market, like stocks, foreign exchange etc., and illiquid assets are investments like property,
collectibles, and art.

Market Sentiment
• Is used to describe investors attitude and expectations of financial markets, specific assets, or asset classes and the direction of price movement. Investors can have bullish, bearish, or neutral sentiments that are generally affected by the performance of domestic and international economies, geopolitical news, social media, and financial reports etc. Investors use market sentiment to anticipate price movements of an asset, for example, if investors are bullish on XYZ stock, the expectation is that prices will rise. We have seen this in the technology sector and investors continue to be bullish on tech stocks as they innovate and provide value to consumers and shareholders.

Mutual Fund
• Mutual funds allow you to invest in a portfolio with different types of securities, instead of investing in each individual stock or bond (which can be time consuming and expensive). Investors’ money is pooled together by professional fund managers to buy the assets in the portfolio, they manage the assets in the portfolio (for a fee) so that the fund earns market returns or above market returns. Investors buy shares in mutual funds because they provide diversification, access to professional fund management, and reduce research.

Passively Managed Fund
• Passive funds attempt to earn market returns by tracking a specific index/benchmark. These funds are popular because they have low management
fees (as there is less buying and selling of securities) and have higher historical returns than active funds.

• Risk in investing is the uncertainty of future returns. All securities have varying levels of risk and carry different types of risk.

Risk Tolerance
• How much risk an investor is willing to take on. Your risk tolerance and ability to withstand the volatility of an investment will determine what type of assets you will invest it. Investors are typically conservative, balanced, or aggressive.

Simple Interest
• Interest is earned only on the principal amount. No interest earned in previous years (or months) gets added to the principal to earn interest.

• A stock or share (they mean the same thing!) represents an ownership in a company, investors buy stocks with the hope that the price of the share will rise over time and a capital gain will be made, some stocks also pay dividends which is a periodic payment from profits made. Stocks are bought and sold on stock exchanges and are a way for individuals to invest and corporations to raise funds.

• The prices of assets rise and fall, and the larger the rise/fall in price, the more volatile an investment is. Different investments carry different levels of volatility
which can be measure statistically

This Post Has One Comment

  1. Sophia

    This is really helpful, thank you.

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