Essential Terminology

7 minute read

|16 Jul 2024

Investing Terms to Know

Investing can appear complicated, especially if you’re just starting out. That’s why we’ve compiled the top 34 most common and most important terms to help familiarise yourself with the world of investing.

1. Share

A share represents ownership in a company. When you purchase shares of a company, you become part owner and therefore have a claim on that company's assets and earnings. Shares are traded on stock exchanges like the ASX, and their prices fluctuate based on supply and demand, the company's performance, and broader market volatility. You can buy shares through stock exchanges, online share trading platforms like CMC Invest, traditional brokerage firms, direct stock purchase plans, or robo-advisors.

2. Bond

A bond is a fixed-income investment where you loan money to a government or corporation for a set period at a predetermined interest rate. Bonds are used by entities to raise capital, and you will receive periodic interest payments (coupons), as well as the return of the principal amount upon maturity.

3. ASX

The Australian Securities Exchange (ASX) is Australia's primary stock exchange.

4. All Ordinaries

The All Ordinaries is an index representing the performance of the top 500 companies listed on the ASX. It acts as an overall view of the Australian stock market by tracking the price movements of various companies across several sectors.

5. Portfolio

A portfolio is the collection of investments you hold. It can include various asset classes such as stocks, bonds, mutual funds, commodities, real estate and more.

6. Asset allocation

Asset allocation is the process of dividing your investment portfolio among different asset classes such as stocks, bonds, cash, and real estate.

7. Diversification

Diversification is a risk management strategy that involves spreading your investments across different assets, sectors or regions. The goal of clients who adopt this strategy is to reduce the concentration of risk in any single investment.

8. Risk tolerance

Risk tolerance refers to a person’s willingness to accept the fluctuations in value and potential losses of an investment. Risk tolerance varies from person to person, and it’s usually influenced by your specific financial goals, the amount of time you want to spend investing, and your predictions for the viability of any particular investment.

9. Dividend

A dividend is a portion of a company's earnings distributed to its shareholders. Dividends are often paid in cash on a per-share basis.

10. Market capitalisation

Market cap is the total value of a company's outstanding shares. It is determined by multiplying the company's share price by the number of shares in circulation. Market cap is used to classify companies into different categories (large-cap, mid-cap or small-cap) based on their size.

11. Index

An index is includes a list of stocks that make up a particular sector, industry or exchange. A popular one to consider is the ASX200 which includes the 200 largest Australian companies by market cap.

12. Bull market

A bull market is a period of sustained rising prices and optimistic investor sentiment.

13. Bear market

A bear market is the opposite of a bull market. This is a prolonged period of declining stock prices and negative investor sentiment.

14. Exchange-Traded Fund (ETF)

An ETF, or Exchange-Traded Fund, is a type of security that pools together various assets such as stocks, commodities, or bonds. Unlike traditional investment funds, ETFs can be traded on the stock exchange, allowing investors to buy and sell them throughout the trading day.

15. Managed fund

A managed fund, also known as a mutual fund, is an investment vehicle where funds from multiple investors are pooled together and managed by a professional fund manager. They give you access to a diversified portfolio of securities and are managed by experts who make investment decisions on behalf of the fund itself.

16. Volatility

This is the degree of variation in the price of an investment. Highly volatile investments experience significant price swings, while low-volatility investments are more stable in their prices.

17. Blue-chip stocks

Blue-chip stocks are shares of large, well-established, and financially stable companies with a long track record of reliable performance. They are often leaders in their respective industries and are often have a strong track record of profitability.

18. Initial Public Offering (IPO)

An initial public offering (IPO) is the process through which a private company becomes publicly traded by offering its shares to the general public for the first time. IPOs allow companies to raise capital and give investors an opportunity to purchase shares in a company early.

19. Market order

A market order is an instruction to buy or sell a security at the prevailing market price. When placing a market order, the execution is guaranteed, but the exact price at which the trade is executed may vary slightly depending on market conditions.

20. Limit order

A limit order is an instruction to buy or sell a security at a specified price or better. It lets investors set the specific price they are willing to buy or sell at, ensuring you don’t pay more or receive less than the predetermined price.

21. Yield

This is the income generated by an investment, usually expressed as a percentage of its cost or current value. Yield can come in the form of interest, dividends or rental income – depending on the type of investment.

22. Capital gains

Capital gains are the profits realised from selling an investment for more than the amount you bought it for. In other words, it’s the difference between the selling price and the cost basis of the investment. Be aware that capital gains are subject to taxation in Australia, so do your research and follow the ATO’s requirements.

23. Dollar-cost averaging

Dollar-cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. By investing consistently over time, people hope to minimise market volatility while benefitting from buying more shares when prices are low.

24. P/E ratio

The price-to-earnings (P/E) ratio is a valuation metric used to assess the relative value of a company's stock. It’s calculated by dividing the market price per share by the company's earnings per share. A P/E ratio can be helpful when you want to work out whether a stock is overvalued or undervalued compared to its earnings.

25. Compound interest

Compound Interest is the way to earn interest on both the initial amount of your investment and the accumulated interest from previous periods. Over time, compound interest can boost your investment returns because interest is earned not only on the principal but also on any prior interest.

26. Risk-reward ratio

The risk-reward ratio is a measure used to assess an investment's potential return relative to its risk level. It compares the expected gain of an investment against the possible loss. A higher risk-reward ratio means potentially higher return but also more risk.

27. Liquidity

Liquidity is the ease with which an investment can be bought or sold. The most liquid investments can be converted into cash quickly.

28. Inflation

Inflation is a rate that tracks when the price of goods and services rises. Ultimately, inflation erodes the purchasing power of your money. For instance, the same amount that might be able to buy plenty of goods and services today, probably won’t be able to buy as many of the same things in the future. That’s why some people adopt a strategy of investing in assets that outpace inflation to grow the true value of their portfolio.

29. Margin

A margin refers to borrowing money from a broker to buy securities. The margin lets you grow your potential returns by leveraging your investment capital, but also increases your potential losses. You’ll need to maintain a sufficient margin cushion to meet margin requirements.

30. Short selling

Short selling is a strategy used by some investors – typically those with plenty of experience – to profit off a declining stock price. It involves borrowing shares from a broker and selling them in the hope of repurchasing them at a lower price in the future. Short selling is a high-risk strategy that requires careful timing and a broad understanding of market dynamics.

31. Penny stocks

‘Penny stocks’ is a colloquial term for the shares of smaller companies with low market caps. These companies tend to trade at lower prices. Penny stock are highly speculative and can be subject to significant price volatility – which is why they attract investors looking for high risks and high returns.

32. Return

Return is the profit or loss of any given investment, often expressed as a percentage.

33. Dividend yield

This financial ratio represents the annual dividend income generated by an investment relative to its price. The dividend yield is calculated by dividing the annual dividend per share by the market price per share, and it can provide insights into the income potential of dividend-paying stocks.