Investment Terms You Should Know

Here is a list of basic terms you need to know when discussing your investments with your financial adviser.

Alternative investments: Investments in asset classes other than the main ones (equities, listed property, bonds and cash). They include physical gold, cryptocurrencies, hedge funds, private equity, artworks and collectables.

Asset class: Type of investment, such as shares (known collectively as equities), bonds, property, cash, and alternatives such as cryptocurrency, gold coins, and collectables. Each asset class has its own risk and return characteristics.

Bond: A debt instrument issued by a government or company for a fixed term of, say, 10, 20 or even 30 years that promises a fixed or inflation-linked interest rate (called the coupon) on the capital amount invested. Bonds are traded on a secondary market, like shares.

Capital: The amount you invest, which will subsequently vary according to the investment’s selling price, if the price is determined by market forces.

Cash: Minimal-risk interest-bearing investments or instruments issued or backed by a bank. Examples are bank deposits and money market funds.

Dividend: A portion of a company’s profits distributed to its shareholders, as a fixed amount per share. Distributions are typically annually or bi-annually. Some companies do not pay dividends, and ones that do may suspend paying them under adverse conditions.

Equity: An investor’s net stake in a company as a shareholder. In investment circles, “equity” or “equities” collectively refers to shares in listed companies as an asset class. “Private equity” refers to shares in unlisted, or private, companies.

Exchange traded fund (ETF): a collective investment similar to a unit trust fund with the difference that it is traded on the stock market like a company share.

Exposure: The extent to which an investment portfolio is invested in a certain asset, asset class or geographical region, with an emphasis on risk.

Index: A measure of the performance of a specific group of assets – for example, the FTSE/JSE Top 40 Index (top 40 shares on the JSE) and the MSCI World Index (1 320 large and mid-cap companies across 23 developed market countries).

Listed property: Shares in publicly listed property holding companies and real estate investment trusts, forming the real estate sector on the stock exchange.

Net asset value (NAV): The net value of an investment fund, calculated at the end of each trading day by subtracting its liabilities (including investment costs) from its assets.

Passive fund: A unit trust fund or ETF in which the fund manager does not actively take investment decisions (as is the case in an actively managed fund) but relies on algorithms or market indices to determine the fund’s composition.

Return: The profit you make on an investment, taking into account the capital gain, if any, and income (interest or dividends paid), after costs, expressed as an annual percentage. Returns may be calculated in various ways. Collective investment schemes are required to express them as the compound annual growth rate (CAGR) with dividends and interest reinvested and costs deducted. “Real return” refers to the after-inflation return.

Risk: There are various risks to which you are exposed as an investor. Investment risk refers to the probability of capital loss, but may refer more broadly to your investment not performing as expected.

Share: A unit of ownership in a company. Companies offer different types of shares (or stocks), which defer different rights on the owner. Normally, when discussing shares, investors are talking about “ordinary” shares in a public company (one listed on a stock exchange). Ordinary shareholders typically have a right to vote at shareholder meetings and will receive profits from the company in the form of dividends, if the company is paying dividends.

Valuation: The estimated true market value of a share based on the company’s current and future profitability, as against its actual selling price, which may be higher or lower depending on investor sentiment.

Yield: The income portion of the return on a bond or share, which is distributed to investors or reinvested. The yield on a bond comes from interest payments, whereas the yield on a share comes from company profits. When share or bond prices rise, their yields fall, and vice versa. For example, a R100 bond with a coupon of 10% will yield R10. But if it is sold for only R90, the R10 interest received by the new owner represents a yield of 11.1%.