Jargon buster: Share investing edition
Written and accurate as at: Nov 14, 2018 Current Stats & Facts
Language is an important conduit for the transmission of information from one person to another.
Notably, when we are the receiver, the words that are used, and our understanding of them, can help us to not only derive meaning from what is being said, but also evaluate its relevance to our own personal circumstances and subsequently make appropriate decisions where applicable moving forward.
With this in mind, many industries utilise jargon (‘technical words’) when disseminating information. The finance industry is no exception in this regard.
For example, you may come across finance-related jargon in the finance section of the news, share market summaries and investor reports. Importantly, we are conscious of this fact, which is why we have put together an article to help you understand some of the commonly used finance-related jargon in the share investing environment.
Share investing jargon busters
- Alpha. A measure of the performance of a share against its benchmark, such as a market index (e.g. the All Ordinaries or the S&P/ASX 200). For example, a share with an alpha of 4 means that it performed 4% better than the market index.
- Basis point. A unit of measure to describe percentage change, for example, in the value of a share or market index. One basis point is equivalent to 1% of 1% (0.01%).
- Bear market. The share market is currently experiencing a downtrend, which is commonly associated with a fall in share prices.
- Beta. A measure of the relationship between the price of a share and the movement of the market index. For example, a share with a beta of 2 means that it will move 2 points for every 1 point that the market index moves and vice versa.
- Bid. The price at which someone is prepared to buy shares. The opposite to offer.
- Blue chip. Large, industry-leading companies with an extensive history of profitability and stability.
- Broker. A person that executes buy and sell orders of shares on someone’s behalf in exchange for a ‘brokerage’ fee.
- Bull market. The share market is currently experiencing an uptrend, which is commonly associated with a rise in share prices.
- Buy back. When a company repurchases existing shares to reduce the number of shares on issue.
- Call option. A contract that gives someone the right to buy a share at a particular price within a specific time.
- Debt to equity ratio. The extent to which a company is financed by debt, calculated by dividing total debt by shareholder equity, times 100.
- Discount. When a share is trading at a price less than its fair value. The opposite to premium.
- Dividend. The share of company profits paid to shareholders. Dividend income is typically taxable income to the shareholders.
- Dividend reinvestment plan (DRP). An arrangement offered by a company that allows shareholders to reinvest their dividends in additional shares in lieu of receiving the dividends in cash.
- Dividend yield. The dividend return from an investment, calculated by dividing the dividend per share by the current share price. This is also referred to as the annual yield.
- Earnings yield. The company earnings per share divided by the share price.
- Ethical rating. A rating placed upon a company by a research house after their assessment of that company’s alignment to things such as environment, social and governance considerations.
- Exchange. A market in which different investments, such as shares are able to be issued and traded. For example, the Australian Stock Exchange (ASX).
- Fair value. An estimate of the price a share should sell at in an efficient market.
- Franked dividend. The amount of dividend paid by a company out of profits on which the company has already paid tax. The shareholder is entitled to an imputation credit, or reduction in the amount of income tax that must be paid, up to the amount of tax already paid by the company.
- Initial public offering (IPO). A process whereby a private company raises capital through the sale or offering of its shares for the first time to the public via an exchange, such as the ASX. Following an IPO, a company is ‘listed’ on the exchange, and its shares can be traded.
- Investment market cycle. Often used to explain the trends and patterns that emerge with regards to assets and their movements over time. An investment market cycle consists of four cyclical phases. When overlayed with the share market, these phases can generally be illustrated as follows:
- Recovery/bull run (rising share price).
- Boom/peak (highest share price).
- Downturn/bear run (falling share price).
- Slump/trough (lowest share price).
- Liquidity. The ability to quickly and easily convert an asset to cash. Australian shares are a relatively liquid investment, for example, an investor can typically expect to sell shares and receive the proceeds within a number of days.
- Margin lending. A gearing arrangement that can be used to borrow to invest into shares.
- Market capitalisation. The market value of a company’s outstanding shares, calculated by multiplying a company's shares outstanding by the current market price of one share.
- Market index. A measure of the movement in value of the market or various sectors of the market. For example:
- The All Ordinaries is a market index containing the top 500 listed companies on the ASX. This market index is considered a total market barometer for the Australian share market.
- The S&P/ASX 200 is a market index containing the top 200 listed companies on the ASX. This market index covers roughly 80% of the total Australian share market capitalisation.
- Moving average. A share’s average price-per-share during a specific period of time. This is often used to gauge the direction of the current trend of a share’s price.
- Offer. The price at which someone is prepared to sell shares. The opposite to bid.
- Premium. When a share is trading at a price more than its fair value. The opposite to discount.
- Price to earnings ratio (P/E ratio). The P/E ratio represents the number of years it will take to recover the price you've paid for the share based on current variables remaining stable, calculated by the price of the share divided by the earnings per share.
- Put option. A contract that gives someone the right to sell a share at a particular price within a specific time.
- Returns. Shares can provide two forms of return for shareholders, namely, shares can pay income in the form of dividends and/or the price of the share can change in value (capital gain/loss).
- Sector. A group of shares that are in the same industry. Shares within the ASX are typically classified according to 11 sectors. For example, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate, telecommunication services and utilities. However, others can include, for example, A-REIT and Financial Ex-A-REIT.
- Share (or ‘equity’). Part-ownership in a company.
- Spread. The difference between the bid and offer price of a share.
- Takeover. The acquisition of a controlling interest in a company through the purchase of shares.
- Trading volume. The number of shares traded during a particular time period.
- Volatility. A measure of the amount of fluctuation in price. This can be in relation to the price movements of a share or the share market in general.
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