Jargon in any industry often confuses and confounds those who do not deal with it every day. Think about your computer. IT specialists seem to speak a different language. But investing shouldn’t be a minefield of gobbledygook that stops you understanding what your money is doing. Here we’ve taken some of the more commonly used financial terms and explained them in simple, everyday language.
- Bull market: A market that is exhibiting a significant price rise and is buoyed by optimism.
- Bear market: A market that is exhibiting a significant decline in prices and seems to be driven by pessimism.
- Growth assets: Asset classes (including shares and property investments) that have the potential for investment growth and which often carry greater volatility.
- Defensive assets: Asset classes (including cash and fixed interest investments) with limited or no potential for growth. Although they generally provide good levels of income and are often associated with lower volatility.
- Hedging: The process of protecting an investment from possible capital losses.
- Price/earnings ratio: A measure based on the multiple of earnings it would take to pay for an investment. For example, if a share costs $3.00 and the earnings on the share is $0.30 per year, the P/E Ratio would be 10; or you are paying 10x earnings.
- Gearing: The practice of borrowing to finance an investment purchase.
- Negative gearing: The situation that occurs when the costs of borrowing for investment purposes exceed the investment income earned.
- Margin loan: A loan used to buy additional investments using existing investments as security for the loan.
- Loan-to-value ratio (LVR): A measure of the size of the loan against the value of an investment expressed as a percentage. For example, if you had a portfolio valued at $100,000 on which you owe $60,000, the LVR would be 60%.
- Margin call: When the value of a portfolio funded by a margin loan falls below a specified level, the lender can place a margin call. This is a demand that the investor provide additional security to the loan (by way of cash or other investments) to restore the LVR.