Ten terms to learn when you start investing

CommSec CommSec

4 January 2019

This article was written with contribution from Ramzy Kaur, International and Derivatives Market Dealer, CommSec.

When you’re new to investing, it can take a while to get to know all the jargon. Sometimes a word or phrase might sound familiar, but it can mean something slightly different in the context of investing.

To help you make sense of it all, here are some of the terms that you’ll probably come across when you’re researching shares or learning about investing concepts.

1.      Asset

An asset is a resource that has economic value. Generally speaking, an asset is expected to deliver current and/or future benefits for its owner. Different types of assets includes current, fixed, financial and intangible assets.

An asset class is a group of assets with similar characteristics and behaviour in the marketplace. Assets within the same asset class are generally subject to the same laws and regulations. The expected level of risk and return can vary across different asset classes.

The main asset classes are equities, stocks, fixed income, bonds and cash equivalent or money market instruments.

Asset allocation is the process of splitting an investment portfolio into different asset classes. This process involves reviewing your investment goals, risk tolerance and investment timeframe against different asset classes.  

2.      Broker and brokerage

A broker is an individual or a firm that helps you place your trades in the share market. Brokers can be execution-only or full service.

Execution-only brokers don’t give trading advice and they’re generally cheaper to trade with. A full service broker is what most people would regard as a “traditional broker”. Full service brokers offer advice and administrative help for a higher fee-paying account.

CommSec is generally an execution-only broker, although CommSec Advisory can provide advice for clients who prefer a full service broker.

Brokerage is the fee or commission charged by a broker to execute a trade. Brokerage may be charged as a fixed dollar value or a percentage of your trade value.

Execution-only brokers generally have fixed brokerage fees, while full service brokers may negotiate brokerage fees depending on the level of service provided.

3.      Share trading

Share trading is a term used to describe the process of buying or selling shares in a company listed on a market or exchange.

For example, shares in companies such as Woolworths, Telstra, and Qantas, are available for public investors to buy or sell through Australian markets such as the Australian Stock Exchange (ASX) and/or Chi-X stock exchange. 

You can also buy or sell shares in companies listed on overseas markets. For example, shares in companies such as Apple, Tesla, or Google, can be bought or sold on US markets such as the NASDAQ, NYSE, and AMEX.

4.      Capital

When it comes to share trading, the term capital refers to any available cash and assets that help to shape your investment strategy.

It’s possible for capital to depreciate in value over time. In terms of share trading, this depreciation can come from the cost of maintaining such capital (costs might include interest expenses or charges on holding cash). The value of the asset you have invested in can also depreciate in value over time due to a range of factors such as inflation, corporate actions, price movements, and more.

5.      Diversification

Diversification is a strategy investors can use to potentially reduce their exposure to risk.

Basically, diversification means to spread your investment across a variety of asset classes, sectors or markets. It’s a bit like the old phrase “don’t put all your eggs in one basket”. The general idea is that if one of your investments performs poorly, the effect on your overall portfolio is softened by the possibility of your other investments performing well.

Some investments may have a “built-in” diversification feature. For example, some managed funds and exchange traded funds are structured in a way that the investments are already spread out across different stocks, sectors and markets. Before you invest in a fund, you should always research the different stocks, sectors and markets invested in by the fund to make sure they align with your investment strategy.

6.      Equity

Equity describes the investment you have made to buy and own a share of a publicly listed company. This is also sometimes referred to as “equity investment” or “equity security”.

Find out more about what buying shares means for you as an investor.

7.      Investment portfolio

An investment portfolio is essentially a list of all your investments. Your investment portfolio can include stocks, bonds, cash, property or other investments.

The structure of your investment portfolio will change as your investment strategy evolves over time. You might adjust it in line with changes to your risk appetite or investment goals.

8.      Investment strategy

An investment strategy is simply a plan for your investment. Each individual will have a strategy specific to their personal risk appetite and investment goals.

9.      Market risk

Market risk (also known as systematic risk) is the risk you take when you invest in financial markets.

Market risk is often related to the broader economic environment, and will be affected by things like changes in interest rates or an economic recession. It can also be affected by changes in the political landscape or even natural disasters. You will often read about these events in newspapers and analyst reports.

As an investor, you can’t really control the things that contribute to market risk. You can potentially reduce your exposure to market risk by diversifying your portfolio, but it’s difficult to avoid it all together.

10.      Investing vs trading

The general difference between investing and trading is how long you plan to hold an asset. For example, if you buy a stock with the intention of selling it immediately once you have made a profit, your behaviour would be considered as trading in nature (as opposed to a long-term investment).

Traders usually have shorter term trades, and are sometimes referred to as “day-traders”.

Find out more about the differences between investing and trading.


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