Reference.
Investing Glossary
Plain English definitions of investing terms, with Australian context where relevant. If a term is not here, it may be defined in the article where it first appears.
A
- Asset Allocation
- The mix of different asset classes (shares, bonds, cash, property) in a portfolio. Asset allocation is one of the primary drivers of both risk and return over time.
- Asset Class
- A category of investments that share similar characteristics. The four main asset classes are shares (equities), bonds (fixed interest), cash, and property.
- ASX
- Australian Securities Exchange. Australia's primary stock exchange where shares, ETFs, and other securities are bought and sold. The ASX 200 is an index of the 200 largest companies.
B
- Brokerage
- The fee charged by a broker to execute a trade. Can be a flat fee or percentage of transaction value. Applies to both buying and selling.
- Buy/Sell Spread
- The difference between the price at which you can buy an asset and the price at which you can sell it at the same moment. This spread is a transaction cost.
C
- Capital Gain
- The increase in value of an asset from purchase to sale. Only realised and taxed when the asset is sold.
- Capital Gains Tax (CGT)
- A tax on the profit made when selling certain assets. In Australia, CGT is added to assessable income and taxed at your marginal rate. Assets held over 12 months may qualify for a discount.
- CHESS
- Clearing House Electronic Subregister System. Australia's system for recording share ownership. With CHESS sponsorship, your name appears on the share register as the legal owner.
- Compounding
- The process by which returns generate further returns over time. When earnings are reinvested, they begin earning returns of their own, creating exponential growth over long periods.
- Correlation
- A measure of how two investments move in relation to each other. Diversification is generally more effective when assets have low or negative correlation.
- Cost Base
- The amount paid for an asset, including eligible acquisition costs and later adjustments. It is used to calculate a capital gain or loss when the asset is sold.
- Custodian
- A third party that holds assets on behalf of investors. In a custodial model, the custodian may appear on the register while the investor remains the beneficial owner.
D
- Diversification
- Spreading investments across multiple assets, sectors, or regions to reduce the impact of any single investment performing poorly. Does not eliminate risk but reduces concentration risk.
- Diworsification
- Adding investments that increase overlap, fees, or complexity without materially improving diversification.
- Dividend
- A payment made by a company to its shareholders, typically from profits. Provides income in addition to any capital gains. Australian dividends may include franking credits.
- Drawdown
- A decline in portfolio value from peak to lowest point before recovering. A 30% drawdown means the portfolio fell 30% from its highest value.
- DRP
- Dividend Reinvestment Plan. Automatically uses dividend payments to purchase additional shares rather than paying cash. Creates additional record-keeping complexity for tax.
E
- Equity
- Ownership in a company. The terms equity, equities, and shares are often used interchangeably when referring to company ownership or the share market.
- ETF
- Exchange-Traded Fund. An investment fund that trades on a stock exchange like a share. ETFs typically hold a basket of assets and can be bought and sold throughout the trading day.
F
- Franking Credits
- Tax credits attached to dividends from Australian companies that have already paid company tax. Can reduce tax payable on dividend income or result in a tax refund. Unique to Australia.
G
- Growth Asset
- An asset class expected to provide returns primarily through capital growth rather than income. Shares and property are typically growth assets with higher expected returns and higher volatility.
H
- HIN
- Holder Identification Number. A unique identifier for investors who hold shares through the CHESS system, linking the investor to their holdings across multiple companies.
I
- Index
- A measure of the performance of a group of securities. The S&P/ASX 200 tracks the 200 largest companies on the ASX. Indices serve as benchmarks for comparing investment performance.
- Index Fund
- A fund designed to replicate the performance of a specific index by holding the same securities in the same proportions. A form of passive investing.
- Inflation
- The rate at which prices rise over time. Inflation erodes purchasing power: $100 today will buy less in the future if prices increase.
L
- Liquidity
- The ease with which an asset can be converted to cash without significantly affecting its price. Cash is highly liquid; property is illiquid.
- LIC
- Listed Investment Company. A company listed on the stock exchange that holds a portfolio of investments. Unlike ETFs, LICs can trade at a premium or discount to their underlying value.
M
- Managed Fund
- A pooled investment vehicle in which investors' money is combined and managed according to a stated mandate. Unlisted managed funds are bought and sold with the fund rather than on an exchange.
- Marginal Tax Rate
- The tax rate applied to the next dollar of taxable income. Investment income and taxable capital gains can affect the marginal rate that applies to an investor.
- Market Capitalisation
- The market value of a company's outstanding shares, calculated by multiplying the share price by the number of shares on issue.
- MER
- Management Expense Ratio. The ongoing annual fee charged by a fund, expressed as a percentage of assets. An MER of 0.50% means $50 per year for every $10,000 invested.
N
P
- PDS
- Product Disclosure Statement. A legal document providing information about a financial product including features, fees, risks, and the issuer.
- Preservation
- The superannuation rule that generally prevents benefits being accessed until a condition of release is met, such as retirement after reaching preservation age.
R
- Real Return
- The return on an investment after adjusting for inflation. If an investment returns 7% and inflation is 3%, the real return is approximately 4%.
- Rebalancing
- Adjusting a portfolio back to its target asset allocation. Involves selling assets that have grown beyond their target and buying those that have fallen below.
- REIT
- Real Estate Investment Trust. A company or trust that owns or finances income-producing real estate. A-REITs trade on the ASX and provide property exposure without direct ownership.
T
- TMD
- Target Market Determination. A document describing who a financial product is designed for and who it is not suitable for.
- Total Return
- The complete return from an investment, combining price changes with income such as dividends, distributions, or interest.
V
- Volatility
- The degree to which an investment price fluctuates over time. High volatility means prices move up and down significantly. Not the same as permanent loss.
W
- Withholding Tax
- A tax deducted at source on income paid to foreign investors. When Australians invest internationally, foreign governments may withhold tax on dividends.
Sources
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