We have created a guide to some of the terms often used in finance to help you make more sense of what you are seeing and reading.
- Acid Test – Also known as the “Quick Ratio” use a companies balance sheet to determine if the company has enough short term assets to cover its short term liabilities
- Acquisition – An acquisition is when one company purchases a controlling stake or all of another company’s shares to gain control of that company
- Alpha – is a term used to measure an investment fund’s or investment strategy’s ability to beat a particular benchmark. This could be a market index or industry average.
- Asset – Assets are a resource with some form of economic value. Stocks, Bonds, Property and even Crypto are all considered assets.
- Assets under management – Assets under management (AUM) is the combined market value of all the assets that a fund manages on behalf of their clients
- Balance sheet – are a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time
- Bear Market – Typically describes a pessimistic outlook of a particular stock or market. A market is known to hit “Bear Market” territory when you see a decline of 20% or more from its recent highs
- Beta – is a measurement of volatility of a particular share or portfolio compared to the market as a whole
- Blockchain – is a specific type of database or ledger that stores data in digital blocks that are chained together. As new data comes in it is entered into a new block. Once the block is filled with data it is chained onto the previous block, which makes the data chained together in chronological order to allow for transparency
- Bonds – a bond is a loan made by an investor to a borrower that is usually a government or company. Bonds will have an end date when the principal of the loan is due to be paid back in full to the bond owner and typically include regular interest payments at fixed intervals throughout the life of the bond
- Bull Market – Typically describes a time of great optimism where prices of assets are rising or expected to continue rising.
- Capital – is a very broad term that really describes anything that delivers value to its owner. Money itself is often referred to as capital but assets of a business can also be referred to in this way
- Compound Annual Growth Rate (CAGR) – is the annualised average rate of growth between two specific time periods measured in years
- Compound Interest – interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Often thought of as “interest on interest,” and will make a sum grow or “compound” at a faster rate than the standard interest rate.
- Consumer Price Index (CPI) – Used to measure the price fluctuations associated with the cost of living
- Debt – Money borrowed by one party from another this could be a bank, a credit provider or even another person. Individuals will use debt as a vehicle for making large purchases that they could not afford under normal circumstances think of this like a car or a house
- Debt to Equity Ratio (D/E) – a ratio used to calculate a companies leverage. This ratio is often used to understand how a company is financing their operations
- Diversification – A risk management strategy that utalises a wide variety of assets and assets types to avoid being over exposed to one particular asset or risk
- Dividend – is a distribution of some of a companies earnings, paid out to eligible share holders
- Earnings – what profits a company is left with after all the operating costs of running the business are removed
- Earnings Per Share (EPS) – is calculated as a company’s profit divided by the outstanding shares of its common stock. This number serves as an indicator of a company’s profitability.
- Environmental, Social, and Governance (ESG) – are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs within sustainability and the impact is has on the planet. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay and shareholder rights
- Equity – typically refers to the ownership right or amount of equity you may hold in a company
- Exchange Traded Fund (ETF) – A type of security that tracks a particular index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can. Exchange traded fund are open ended meaning that you buy and sell the ETF from the fund provider.
- Fiat Currency – a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
- Fiduciary – A person or organisation that acts on behalf of another person or persons, with a responsibility to put their ‘clients” interests ahead of their own. Being a fiduciary requires being bound both legally and ethically to act in the other’s best interests
- Financial technology (Fintech) – As it sounds it a really a combination of a financial company and a technology company, the term is used to describe new tech that seeks to improve and automate the delivery and use of financial services
- Fiscal Policy – government policy that specifically refers to spending or taxation policy to influence macro economic conditions like employment or GDP growth
- Fixed Income – typically refers to assets that pay a fixed interest or dividend date until its maturity date
- Futures – are a type of derivative financial contract that obligate the buyer to purchase the underlying asset at a set price at a agreed date int he future.
- Game Theory – a social or strategic theory that all players acting in their own best interest will achieve an outcome that is not necessarily best overall. The key to game theory is that one player’s payoff is contingent on the strategy implemented by the other player.
- Gross Domestic Product (GDP) – the total monetary or market output of all the finished goods and services produced within a country’s borders for a specific time period. GDP can be worked as as:
GDP = C + I + G + NX
(GDP = Consumption + Investment + Government Spending + Net Exports )
- Gross Profit – the profit a company makes after deducting the relevant costs associated with making and selling its products or services
- Gross Margin – expressed as a percentage, calculated by taking the companies gross profit divided by its revenue
- Hedge – an investment that is made with the intention to reduce risk of an adverse movement in a particular asset. You might hedge by taking an offsetting position against an asset you already own.
- Hyperinflation – a term used to describe rapid, excessive, and out-of-control general price increases in an economy. if inflation measures the rate of increase of general prices hyperinflation starts to occur when those prices changes are in excess of 50% per month
- Income Statement – one of the main 3 financial statements the income statement reports on a companies revenues and expense for a specific period
- Inflation – the decline in purchasing power of a particular currency over time. Inflation is measured via the CPI indexs’s basket of goods and measure the increases in cost of living
- Interest Rate – is that rate of interest that a lender charges a borrower for the privilege of their money. The interest rate on a loan is typically shown on an annual basis known as the Annual percentage rate (APR)
For a borrower the interest rate is the rate they will need to pay back and for the lender the amount they will receive
- Initial Public Offering (IPO) – the first time a private companies offers shares to its company to the broader public
- Job’s growth – a figure measured by the Australian Bureau of Statistics (ABS) that tracks how many jobs are created on a monthly basis
- Keynesian Economics – a macroeconomic economic theory of total spending in the economy and its effects on output, employment, and inflation. Developed by Bristish economist John Maynard Keynes the theory is that by increasing government expenditures and lowering taxes it will stimulate demand and lift and economies output
- Knowledge Economy – In a knowledge economy, a significant component of value consists of intangible assets such as the value of its workers’ knowledge or intellectual property.
- Leverage – often refers to the amount of debt an individual or company uses to finance their assets
- Limit Order – a limit order is used to lock in a specific price you wish to pay for a particular share, by using a limit order you are guaranteed to pay only your specified price or less but the guarantee of the order being filled is not if the share price never reaches your specified price
- Line of Credit – a pre approved borrowing limit that can be utilised at any time the borrow needs. The borrower can take money out as needed until the limit is reached, and as money the money is repaid, it can be borrowed again in the case of an open line of credit
- Liquidity – refers to the easy with which a particular asset can be converted into cash without affecting its price. The most liquid asset of all is cash itself.
- Loan to Value Ration (LVR) – often used in lending to determine the amount necessary to put in a deposit and whether a lender will extend credit to a borrower.
A LVR ration is calculated bu dividing the the amount borrowed by the value of the assets the loan is being used for and is expressed as a percentage
- Macroeconomics – economics that is concerned with the big picture and generally looks at whole economies. Macroeconomics studies economy-wide issues like inflation, economic growth, GDP and unemployment levels
- Management Fees – Money paid to investment managers and/or investment advisers in exchange for managing investments
- Margin – is the collateral that an investor has to deposit with their broker or an exchange to cover the credit risk the holder poses for the broker or the exchange. Margin operates like a loan you pay back with your earnings.
- Market Capitalisation – The value of company that totals up all shares outstanding by the companies share price to give it an overall valuation
- Mergers and Acquisitions (M&A) – a general term that describes the consolidation of companies or assets
- Monetary Policy – policy set by a countries central bank that controls the overnight cash rate
- Mortgage – A loan you take out to buy a piece of property, where the piece of property is the collateral.
- Net Asset Value (NAV) – represents the net value of a fund or company and is calculated as the total value of the entity’s assets minus the total value of its liabilities
- Net Profit – The total profit left over for a company after all operating expenses have been paid
- Net Worth – The total value of an individuals assets, income, investments, property – minus the total amount of their debt.
- Open Market Operations (OMO) – refers to the practice of a central bank buying and selling bonds along with other securities, on the open market in order to regulate the supply of money that is on reserve in a particular economy
- Organisation of the Petroleum Exporting Countries (OPEC) – refers to a group of 13 of the world’s major oil-exporting nations. OPEC is a cartel that aims to manage the supply of oil in an effort to control the price of oil within world markets.
- Overdraft – A deficit that occurs when you withdraw an amount of money from an account that exceeds the account balance
- Passive Investing – A hands-off investment strategy where the investor sets up a portfolio to reflect a stock index, often through ETFs and LICs.
- Price to Earnings Ratio (P/E) – The measure of how a company’s current stock price relates to its current earnings per share.
- Prospectus – A document that details the characteristics of a particular security with the purpose of educating investors before a company goes public (IPO). It is required by most exchanges around the world before going public
- Proxy – A person who is allowed to represent someone else in legal or financial matters. Often a Proxy can be granted your voting rights in lieu of you being able to vote
- Quantitative Easing – a form of unconventional monetary policy in which a central bank purchases longer-term bonds and securities from the open market in order to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet.
- Quick Ratio – measures a company’s ability to meet its short-term obligations with its most liquid assets
- Rally – A consistent period of growth in stock prices
- Real Estate Investment Trust (REIT) – a public company that owns a series of properties that generate income. Investors can buy shares to gain exposure to real estate
- Rebalancing – Periodically buying and selling assets to keep the proportion of stocks, bonds, and other assets in your investment portfolio in line with your preferred amount of risk
- Recession – A prolonged period 2 or more consecutive quarters of declining economic activity.
- Refinance – to replace a loan such as a mortgage or personal loan, with a different loan that has a better interest rate or other more favourable terms.
- Return on Investment – is a measurement of how much a particular asset has grown in value since you bought it relative to how much you paid for it
- Return on Equity (ROE) – measure of financial performance calculated by dividing net income by shareholders’ equity
- Risk Tolerance – The measure of how much market fluctuation an investor is willing to take within their investment portfolio. Risk tolerance depends on many factors, including how close a person is to retirement, what other goals they may use the money for, and their general disposition
- Short Selling – When an investor borrows shares from a lender and immediately sells them because they foresee the stock price going down. If the price does go down, the investor can buy shares at the lower price and pocket the difference
- Spread – The difference between the ask price and the bid price of a security.
- Standard Deviation – Standard deviation measures the dispersion of a dataset relative to its mean.
- Stock – A type of investment that, when purchased, gives the purchaser a partial ownership of the company. Also known as a share or equity.
- Stop Loss – A stop-loss order is an order placed with a broker to buy or sell a specific stock once the stock reaches a certain price. A stop-loss is designed to limit an investor’s loss on a given assets position
- Tax Deduction – A factor that lowers the amount of income you pay taxes on, which in turn can reduce the amount of taxes you pay
- Technical Analysis – a trading strategy employed to evaluate investments and identify trading opportunities by analysing statistical trends gathered from trading activity, such as price movement and volume
- Time Horizon – the period an investor holds/plans to hold an asset before selling it.
- Time Value of Money – a financial principle that states that money received or earned now is always worth more than money earned in the future, due to the nature of compound interest and inflation
- Trust – A financial instrument that allows a trustor to designate a trustee to hold on to and/or manage assets for a beneficiary
- Underlying Asset – are the financial assets upon which a derivatives price is based
- Underwriter – an underwriter is any party that evaluates and assumes another party’s risk for a fee, which often takes the form of a commission, premium, spread, or interest
- Unicorn – is a term used in the venture capital industry to describe a privately held startup company with a value of over $1 billion
- Valuation – the amount of money a private company is said to be worth. It can be calculated in a variety of ways
- Volatility – a measure of how quickly and how significantly the price of something, often a stock, changes over time. More volatility generally means more risk for investors.
- Volume – the number of shares that were bought and sold in a particular period of time
- Warrant – a form of derivative that give the right, but not the obligation, to buy or sell a security, most commonly an equity, at a certain price before a pre determined expiration. The price at which the underlying security can be bought or sold is referred to as the exercise price or strike price
- Yield – The earnings an investment returns to its owner, expressed as a percentage. Yield can include interest and dividends
- Yield Curve – a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates
- Zero Sum Game – a situation in game theory in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero.