Investing opens up a whole new world of phrases and jargon, many of which can be complicated. We explain some of the terms you’re likely to come across in simple language, so that you can have a better understanding of your investments, including those in your super.

Asset

An asset is simply something of value you invest in and which should ideally earn you money, especially over the long-term. Assets are often divided into asset classes, such as overseas shares, local shares, property and bonds. Each of these asset classes tends to behave differently and brings with it a different level of risk and potential reward.

Blue chip

A blue chip company is an established organisation with a strong history of earnings and profits. Blue chip stocks are often regarded as more stable and as carrying less risk than other shares. They’re also often less affected by economic conditions, although that may not always be the case. In return for this perceived safety, blue chip stocks tend to be relatively expensive and tend to grow at a slower rate than other shares. Examples of blue chip stocks could include BHP Billiton, Telstra and the Commonwealth Bank.

Bonds

Bonds are used by both governments and companies to raise money. When you buy bonds, you’re buying a portion of the government’s or company’s debt in return for a stable interest payment (also referred to as coupon payments).

All bonds have a defined term, at the end of which, the loan principal is paid back. However, they can be traded in the meantime so that ownership can change.

Generally, the more secure the organisation issuing the bond, the lower the interest rate. For instance, Australian government bonds tend to pay a low interest rate.

Bull and bear markets

Stock markets are often described in terms of ‘bulls’ and ‘bears’. A bull market is a rising market, in which investors are confident. In a bear market, investors are more fearful and the value of shares falls.

Investors themselves can also be described as ‘bullish’ or ‘bearish’, depending on their outlook for the market or a particular share.

Diversification

All investment comes with risk but one of the main ways you can mitigate it is through diversification. To diversify, you can invest in different shares, different asset classes, different sectors and different markets. The concept behind this is that each of them will move in different ways - if one falls another may rise to offset or minimise any losses.

All of our super options use diversification as a strategy for preserving your money and reducing risk.

Dividends

Some companies - especially well-established ones - will pay their shareholders a percentage of any profit they make. This is known as a dividend. Dividend-paying shares are especially attractive to investors looking to live off the income their investments produce. Traditionally, Australia’s big four banks and large mining companies have paid investors a reasonably large and reliable dividend - although that may be under threat in light of COVID-19.

The ratio of a dividend compared to its stock price is often referred to as yield. For instance, a $100 share that paid a dividend of $5 would mean a share has a yield of 5%. When you look up the details of any stock, this figure will usually be included based on the share’s most recent dividend and its current market price.

Franked dividends

Sometimes, companies will pay tax on their profit before they pay dividends to investors. When this happens, they’re referred to as “franked dividends”. Franked dividends can bring tax advantages for investors. That’s because the Australian government tries to avoid double-taxing profits so they take any company tax that’s been paid into account when they work out how much tax the investor also needs to pay on any income from shares.

Index

A market index is a group of shares used to measure how a particular market is performing. Common indexes you’re likely to hear about include the:

  • ASX200, which measures the share prices of the largest 200 companies listed on the Australian Stock Exchange
  • S&P500, which measures 500 large companies listed on US stock exchanges
  • Dow Jones Industrial Average, which measures just 30 large companies on US stock exchanges
  • Nasdaq Composite, which measures a wide range of common stocks listed on the NASDAQ, a New York exchange geared towards technology companies. 

Infrastructure

When you invest you aren’t limited to putting your money in shares, property and cash. One investment that’s become popular in the past 20 or so years is infrastructure. With an infrastructure investment, you put your money into a large project or public resource, such as a toll road, bridge or utility. In return, you get a share of the stable cashflow that asset then produces. Because infrastructure tends to be more immune from market fluctuations than many other assets, it’s generally considered an investment that produces lower returns for less risk.

Market capitalisation

The market capitalisation of a company is the value of a company on the share market. You can calculate a company’s market capitalisation by multiplying its share price by its total number of shares.

A company’s market capitalisation doesn’t always reflect its real value in terms of profit on loss, but is more an indicator of what investors are prepared to pay. For this reason, some investors also use different measures, such as book value to value companies. This takes into account a company’s liabilities as well as its assets and stock value.

P/E ratio

A P/E ratio, or price-to-earning ratio, measures the value of a company’s shares compared to the money it earns. For instance, a company whose shares are valued at $100 and earns $10 a share will have a P/E ratio of 10. A high P/E ratio can be a sign that the market expects a company to grow. For instance, tech companies often come with high P/E ratios. However, it can also be a sign a company is overvalued.

Portfolio

A portfolio is a group of assets taken together. It can include shares, bonds, property, infrastructure and more. Every one of our super options represents a different portfolio of investments. Within each portfolio, your money will be invested in different asset classes at different ratios, depending on its investment aims and level of risk you’re willing to take on.

Securities or stocks

The terms securities and stocks are often used interchangeably and are just another way of saying shares. Public companies (that is, companies listed on a stock exchange) divide ownership of their company into shares which can then be bought and sold. That means when you own stock or securities, you essentially own a small part of a company.

Volatility

The value of every asset can move up or down. When an asset is volatile these movements are likely to happen more sharply and rapidly. Generally, higher risk assets tend to be more volatile but also present greater opportunities for growth. For instance, shares tend to be more volatile than property, which in turn is more volatile than cash or infrastructure.

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