Demystifying finance

Couple understanding financial termsJargon 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.

Investment terminology

  • 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.


Lending terminology

  • 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.

 

If there is anything else you would like explained about the world of finance, please ask us.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

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