Investing jargon can be extremely confusing, especially If you are new to the investing world. Investing your hard-earned money and trying to make the right decisions if you are unclear about the terminology can be daunting. I am fairly new to investing and here are some of the investing terminology explained for beginners that helped me start my share portfolio journey.
- Stock market aka share market – A stock market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment in the stock market is most often done via stockbrokerages and electronic trading platforms.
- Stock/Share – A stock or share is a security that represents the ownership of a fraction of a corporation. Basically if you buy some telstra shares for example, you are the owner of a tiny part of the company.
- Broker – In order to buy shares you will need to use a form of online broker. The broker will facilitate your purchase for a fee (brokerage fee). Some of the more well known brokers included commsec, selfwealth & pearler. Prior to internet brokerage people used to have to make trades over the phone or through a human stock broker. (Thank god for the internet) In mordern times investing has become so much more accessible to regular people thanks for the internet.
- Chess Sponsored – This is an important one. A broker that offers Chess Sponsored shares means that the ASX is keeping track of the shares that you own. When you purchase shares through a Chess Sponsored broker you own them directly and you will be provided with a HIN – Holder Identification Number. If you purchase shares through a broker that is not Chess Sponsored, it means that the broker is holding the shares on your behalf. If that company was ever to go bankrupt then the ownership of the shares is not crystal clear. The takeaway is, always ensure the broker you are using to invest is chess sponsored.
- ETF – Exchange Traded Fund. If you have been in any form of finance blog or youtube channel you will have probably heard the term ETF. An ETF is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can. … ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. There are ETF’s that track an index such as the ASX200 or the S&P500 or their are ETFs that focus on a sector like technology. In simple terms, instead of buying $1000 worth of shares in one company you could invest that $1000 into an ETF such as VAS that tracks the top 300 companies in Australia. This really spreads out your risk, which is why ETF’s have become so incredibly popular in the past five years.
- P/E Ratio – The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). P/E ratios are used by investors and analysts to determine the relative value of a company’s shares. A high P/E ratio could mean that a company’s stock is overvalued, or else that investors are expecting high growth rates in the future. Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator.
- Market Order vs Limit Order– When purchasing shares you can decide to do an at Market Order or a Price Limit Order. Market orders mean that the transaction will be executed as soon as possible and you will buy the shares for at market price. This can mean that there might be some fluctuation in the price you buy the shares at. Limit orders set the maximum or minimum price that you are willing to purchase the shares at. Personally when I invest I use limit orders.
- Dollar Cost Averaging – DCA investing is the process of buying shares consistently over a period of time. For example investing $2000 every month for the next 5 years is called dollar cost averaging. The reason people do this is the avoid the risk of investing a large lumpsum into the market at the wrong time. The idea is that you are more likely to get more of an average price per share when you invest this way.
- Dividend– A dividend is a payment (usually quarterly) that will be paid out to investers at a price per share. For example if you have shares in the ETF VAS and they are going to pay you 0.65 cents per share and you own 100 shares of Vas (about 10K worth) Then you would receive a dividend of $65. The dividend rate will fluctuate and sometimes companies will not pay any dividends at all. A Dividend is basically a small share in the profit from the company you have invested in.
- Dividend Yield -The dividend yield is the current yield of a common stock at its present dividend rate.
- Capital Gain – refers to a realised profit made after selling an asset that exceeds the prices of purchase. In the context of shares if you bought shares for 10K and then sold them five years later for 20K you have made a capital gain of 10K. Keeping in mind that you don’t actually make a capital gain until you sell the asset. Capital gain events are also subject to tax in Australia so speak to an accountant.
- Bear market – A bear market is a prolonged period of falling stock prices, usually marked by a decline of 20% or more. A market in which prices decline sharply against a background of widespread pessimism, growing unemployment or business recession. The opposite of a bull market. (There is the belief that 2022 will be the start of a bear market but who knows)
- Bull market – Any market in which prices are advancing in an upward trend. In general, someone is bullish if they believe the value of a security or market will rise. The opposite of a bear market.
- Diversification -Diversifying your investments should be part of everyone’s investment strategy. It is basically equivalent of the saying “don’t put all your eggs in one basket”. You need to spread the risk around and this is why ETFs are so popular. It also does not just refer to shares. Diversifying your porfolio can refer to having a mix of shares, property and cash etc.
- Blue chip shares – Blue chip’ is a term that’s used to describe the shares of a leading company that is considered to be a strong name in their industry and whose products or services usually dominate their respective markets. Think about Woolworths, Telstra, Commonwealth bank etc. These are huge, longstanding, profitable companies that are unlikely to go anywhere any time soon.
- Market capitalization – The market cap of a company is figured by multiplying its current share price by the number of shares outstanding. The largest companies have market caps in the billions.
- Emerging market- Emerging markets are in countries where the stock market isn’t as developed as the stock market in more developed countries, like the US. An emerging market is found in a country that is transitioning from developing to developed.
- Inflation- We have been hearing a lot of this word in 2022. Inflation is when there is an increase in the price of goods and, as a result, your purchasing power decreases. For example 10 years ago when I worked in a bakery a meat pie was $3.80 now that same meat pie is $5
- IPO, or Initial Public Offering – is the first time a private company offers its shares to the general public to raise capital.
- S&P 500 & ASX200 -These are examples of market indexes. The S&P 500 is an index of the 500 publicly traded companies in the U.S, many of which are technology firms or financial businesses. The ASX200 consists of the top 200 listed companies on the Australian Securities Exchange based on market capitalization (how much they are worth). Some of the ETF’s that you can purchase will track these specifically.
- Superannuation fund– If you are employed in Australia you should have a super fund. It is a long-term investment which grows over time. For most people, super begins when you start work and your employer starts paying a percentage of your salary or wages into a super fund account for you. Your super fund invests and manages this money for you until you retire. Then once you reach the age of 65 you are able to access your super and spend the cash or hopefully you will be able to draw a super pension from the yearly returns that the investments generate.
If you are at the beginning of your investment journey, there is so much to learn. The good thing is that there is a wealth of knowledge and free resources available online to make you feel informed enough to take the plunge. Investing doesn’t mean putting all your money on black and hoping for the best. You can do your research, assess your financial situation and start out small. Over time if you are consistent your investment should grow and you will start to see the benefits.
