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15 Terms To Learn Before You Start Investing

When it comes to money, we get that it's pretty frustrating seeing lots of terms and words out there, you think might apply to you, but that you don’t actually understand.

May 19, 2020


Your Personal Finance Glossary


When it comes to money, we get that it's pretty frustrating seeing lots of terms and words out there, you think might apply to you, but that you don’t actually understand.

We’re all guilty of jargon. I bet most men wouldn't have a clue what GHD, halter neck or shellac mean. It’s not too hard to crack the financial jargon code.  Here are 15 terms I wish someone had explained to me.


Asset Class

An asset class is used to describe a group of assets which act similarly in the marketplace. There are quite a few different asset classes with the main ones being equities (or shares), property, fixed income, bonds, alternatives, infrastructure and cash.


Asset Allocation

Asset allocation is simply how much of your money (usually written in a % amount) you divide into different asset classes - remember asset classes are described above. 

For example, you could split your investment assets as follows: 15% cash, 15% fixed interest; 10% property, 35% Australian shares and 25% overseas shares.  This is an asset allocation. Not as complicated as the term sounds, is it?

ASX 200

The ASX (Australian Securities Exchange) is the main exchange for Australia’s shares. The ASX200 is a benchmark index, used as a reference point to measure the performance of Australian shares. The ASX 200 is made up of the largest  200 companies (shares) listed on the ASX, in Australia. As at May 8, 2020, the ASX200 figure was 5,401.  The ASX200 and the All Ords are the most common benchmarks used to track the performance or movements up and down in shares.


Brokerage

Brokerage is the name of the type of fee charged by a broker. The fee can either be a fixed amount or a percentage, of the amount you are using to buy or sell shares.

Execution-only brokers normally charge a fixed and set brokerage fee while a full service broker can negotiate on brokerage fees - this is generally based on the level of service and advice they have provided you. 


Depreciation

Depreciation refers to an asset losing its value due to wear and tear as it’s used. Depreciation is also an accounting term which describes the method of allowing the cost of an asset (think fixtures and fittings in a property or machinery to operate a business) to be expensed and allocated over the lifetime of the asset, rather than just in the year its bought. This method of accounting may result in tax benefits for the purchaser.


Dividends 

Dividends are a type of investment income paid to an investor for owning shares in a company.  The money is generally paid out from the company’s profits or reserves on a half-yearly or yearly frequency. 

Most dividends in Australia have an amount classified as ‘franked’ or known as an Imputation credit.  This means tax has already been paid on the income, to the ATO (Australian Taxation Office) so the shareholder gets a tax credit meaning they don't have to pay tax on it again.  This imputation credit can be of value to certain investors.


Equity

Equity is another word used to describe a share, derived from the term of ‘ownership’.  Think ownership of a company in the context of a share, or it could also describe the portion of ownership of a property.  For example, you own a property worth $400,000, it has a mortgage of $250,000, so that equates to owning equity of $150,000. (ie $400,000 - $250,000 = $150,000).

Exchange Traded Fund

An exchange traded fund (ETF) is basically a managed fund that is listed on the ASX, the same way a company share is.  Using an ETF is a low-priced way to get access to diversified investments in the form of a managed fund, or access to an index such as the ASX200 or the MSCI (which holds international shares). You can buy or sell an ETF on the ASX.


Leverage

Leverage is when you borrow funds to pay for the purchase of an asset.  By using leverage you are using someone else’s money (usually a bank’s) to buy an asset with the aim to grow your wealth faster than if you didn't borrow any money.  Leverage can increase the risk of your investment strategy but can also enhance your long-term returns.


Managed Fund

Managed funds are a type of investment that pools individual investors money into one big fund. That one fund is then controlled and invested by a professional investment manager who makes the decisions about which investments to buy, sell and hold within the pool of funds. 

These types of investments make it easy for investors to have diversification in their portfolio either diversification of a range of shares, or other asset classes.  Investors in managed funds receive regular distributions (similar to interest or dividend income) as a return.  The managed fund issues the investors ‘units’ in the fund and the unit price can go up and down, reflecting the value of the pool of funds.  Your superannuation is similar to how a managed fund works.


Market correction

Market correction refers to a 10% or more (but less than 20%) decline in the price of a stock index. It is called a correction because the decline will then correct itself and return back to it’s normal price - that’s what’s happened historically if you look back over time.  These corrections can be seen as a healthy response to the markets when valuations get too high. Corrections can last anywhere between days and months, or even longer. 


Monetary Policy 

The monetary policy basically sets and influences the nation’s interest rate, also referred to as the ‘cash rate’.  This action, in turn will affect economic activity and things like employment, demand for goods and services and inflation (price rises) in the economy.  In Australia, The Reserve Bank is responsible for the monetary policy. 


Negative gearing

Gearing in the context of investment properties, is when you borrow money to invest. Negative gearing in particular is essentially when you’ve rented out your property and the rental return is less than the cost of your interest repayments and other expenses of the investment property.  It means you're making a loss on the property. Why would you want to do this? Many investors enjoy tax benefits on having a negatively geared investment.


Share Broker 

A broker is a person or company that buys or sells shares on your behalf and charges a fee to do it. The broker will be either be:

  • Instruction-only (ie you tell them what you want to buy or sell);
  • Full service (this means they provide you the recommended shares to buy or sell); or 
  • Online (like netbanking, you go online to transact the buy/sell share order).

If you’re just getting started, we recommend looking for an online broker to minimise your costs.


Volatility 

Volatility is a measurement of the rise and fall of an asset's price. High volatility means the asset’s price goes up and down a lot. Essentially, the measurement of volatility can help you gauge how risky an investment may be judging by it’s fluctuations in its price or valuation.  There are complex ways to calculate this using standard deviations, but simply you can look at trends in the price movement over a 12 month or 3 year period by searching on google or the ASX website (for Australian shares). 


Are there any more terms or jargon you want to learn? 

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Warmest,

Karen Eley is a financial coach with more than 20 years’ experience as a financial adviser. Through her business, Women Talking Finance, she helps women to be confident and knowledgeable about all things finance. Karen translates complex financial concepts into simple digestible ideas.

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