The more uncertainty there is in global financial markets, it seems the more voices there are using complicated language and jargon to try to predict the future and explain the past. In this article, Edward Mainwaring-Burton from Black Swan Capital addresses general financial terms and how they are used when people are talking about the financial markets.
The problem with jargon is that it tends to put people off obtaining information, and can hinder them from making the most appropriate decisions for themselves. Further, it's hard to understand your options when everything appears to be in code.
We believe that transparency and clarity is important, and that expats should have access to plain language and clear explanations when it comes to finance.
Here are some common terms to help you better navigate financial spaces:
Stocks / Shares / Equities / Actions
Stocks, shares, equities and actions are all just different ways of saying a small portion of a big company that you can buy or sell. If you invest in this asset class, you are most often holding "shares", that is a share (or a small part) of a company.
A public company is one that has its shares on a stock exchange, where the shares are traded. You may also hold shares in a private company. This is where the company is not publicly traded, also called listed, on a stock exchange. In short: a share is a piece of ownership.
Market
A market is a physical or virtual place where assets are bought or sold (AKA: trading). Stock markets are then places where publicly-traded companies buy and sell their assets. These markets in particular are reported in the news as well as regular reports, with increases and decreases in their index (see below).
Index
This is a sample collection of stocks on the exchange or all the stocks in a particular category. For example, the CAC40 is a selection of 40 companies traded on the French stock exchange that broadly represent the French economy. Whereas the S&P500 represents the 500 biggest companies in the US by market capitalisation, which is the value of a company that is traded on the stock market.
Bonds / Debt instruments / Fixed interest
Bonds, debt instruments and fixed interest are different words for saying that you are lending money in exchange for pre-agreed returns. For example, a government bond is where you lend money to the government and they promise to pay you a set rate of return every month or year, and at the end of the set period of time, you will receive your initial investment back.
A corporate bond is the same format, but you are lending to a corporation instead. A bond is like an IOU (an informal document acknowledging debt); the more trustworthy the issuer, the lower a return you can expect.
Commodities
These are useful materials that can be traded, either because they can be used by consumers (soft commodities like coffee or cotton), used by industry (hard commodities like iron and coal) or used to store valuable items, like gold.
Funds / Collectives
A fund / collective is a type of investment that is made up of selected investment assets or units. For instance, investors from different companies can put capital into a Collective Investment Fund (CIF) by buying shares or stocks from that specific fund. You can buy and sell units in these funds at a certain price, often called a unit or share price.
There are many types of funds, with different combinations of assets within them, including shares, bonds and other asset types. Active funds employ a strategy of human or automated decision-making in order to try to beat the overall performance of a particular market or index.
Exchanged-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) hold a range of assets - like a fund - but are traded on a stock exchange like a share. There are specific ETFs for different parts of the financial markets as well as very broad ones known as index or tracker funds.
Index funds
Index funds, also known as index trackers, are set up to follow the performance of a particular stock market index or sector. Index funds / trackers may present themselves in the form of a fund or an ETF. They are often called "passive funds" because they are designed to follow an index without involving analytical decision-making.
Liquidity
Liquidity refers to a company's ability to access an asset which can be converted into immediate cash. If your investment is liquid, it means that you can have access to the cash in your investment in a timely manner - without exit restrictions or penalties.
Market cycles
Finally, markets tend to follow cycles, they go up and down in the short term but historically have tended to increase in value over time. When you are reviewing your investments, look at them within the context of your long-term goals and not just at their potential short-term performance. Also, past performance is no indication of future returns, and all investments carry risk. Always seek regulated, professional advice regarding your investment decisions.
Are there any terms on this list that are missing or that you would like explained further? Perhaps you've been reviewing your investment reports and feel unsure. Black Swan Capital will be happy to help you break through the jargon and to give you financial advice. Contact them at [email protected] to see what they can do for you.