With markets having powered ahead in recent years, in general people are happier talking about the performance of their investment portfolio. After all, it’s easier to talk about gains than losses! But we’ve noticed some conversations shifting towards consolidation of gains as the prospect of a turn in markets probably moves closer all the time. We’re not in the business of trying to time markets, but help investors to take a long-term perspective with their investments and to build a portfolio that matches your own attitude to risk.
But back to those conversations… We know there is a huge amount of terminology and jargon surrounding investments, so we thought we’ll help you sound like an expert the next time those conversations start up again.
Here are some terms that you might hear (or use!) and what they mean.
Active/passive investment: These are different approaches to portfolio management. Active management is where an individual manager will attempt to outperform through wise asset / stock selection. A passive investment approach is where a manager simply mirrors an index, such as a stock exchange index.
Annual dividend/yield: The dividend is the amount paid out to shareholders during a year, usually based on a share of the profits. The dividend yield is calculated by dividing the dividend amount paid on each share by the share price itself.
Asset class: This is a group of similar types of assets that make up an investment portfolio. The most common asset classes are equities (shares), bonds, property, cash and commodities.
Bear market: This usually refers to a fall of at least 20% from a market peak over a period of time.
Bonds: These are loans made by investors to companies or governments, in return for a fixed rate of interest and a return of the original capital at the maturity date of the bond.
Buyback: When a company believes its shares are under-priced and also has excess cash available, they will often look to buy back their shares and then enjoy the profits themselves when the shares rise in value. This is a way of returning value to other shareholders, as after the buyback, there are now less shares in circulation, increasing existing shareholders’ share of the business.
Correlation: The degree to which two securities tend to move in the same direction. A well-diversified portfolio will have lots of non-correlated assets.
Correction: Smaller than a bear market, this term is usually used in relation to a 10% drop in share prices.
Cyclical stock: The stock of a company whose performance rises and falls depending on the economic environment. For example, luxury car manufacturers saw big profits during the boom of the early 2000s… with much leaner times after 2008.
Defensive stock: Different to the above, defensive stocks aren’t impacted to the same extent by the economic environment as their demand doesn’t fall away. Companies that produce basic foods, energy suppliers and healthcare stocks are often considered to be defensive as there is a demand for these products in all economic conditions.
Equities: Shares, stocks – different names but the same thing. They represent a partial ownership of a business.
Economic moat: This is a relatively recent term, introduced by the investment guru Warren Buffett. He used it to describe a sustainable competitive advantage enjoyed by a company over its competitors.
Hedge: This is a strategy used to offset some of the risks in an investment. Companies use hedging to protect themselves against risks such as currency movements or possible future price rises of a key raw material.
Leverage: The use of borrowings to increase an investment impact. Great when a market rises, a disaster when a market falls. Remember property debts in Ireland in the early 2000s...
Market capitalisation: Market cap for short, this is the total value of the shares of a company. This is calculated by multiplying the number of shares outstanding by the share price.
Premium/discount: These terms are used to describe an exchange traded fund (ETF) that is trading above (premium) or below (discount) its net asset value, or bonds trading above or below their face value.
Real return: The actual return when the impact of inflation is included. An investment that grows by 3% in a period of inflation of 3% delivered no real return.
Sectors: These are used to describe different areas of an economy, such as financial services, construction, healthcare, technology and industrials. A well-diversified share portfolio will usually contain stocks from a wide range of sectors and geographical regions. The reason being to avoid having “all your eggs in one basket”.
Stock Exchange: There are locations, not always physical ones, where shares are traded.
Volatility: A measure of the degree to which a fund's performance fluctuates. The basic rule is the higher the volatility, the greater the risk an investor is taking in search for higher returns from their investment.
Yield curve: This portrays the rate at which interest rates change when evaluating bonds with shorter maturities to those with longer maturities.
Of course this is not an exhaustive list, there certainly is no shortage of investment terminology. But we hope that these often used and sometimes misunderstood terms will help you shine in those investment conversations!