When it comes to all things financial, sometimes it seems like people are talking a special language. By getting your head around some of the words and phrases most often used in the financial sphere, everything should start to make a lot more sense.
To help you out, we’ve put together a glossary of some of the key terms in the world of finance:
Asset class: This represents a group of investments that share common risk and return characteristics. The main asset classes are shares (both international and Australian), property, bonds, fixed interest and cash. Each asset class will offer a different level of return and therefore have varying degrees of associated risk. Shares and property are higher risk investments, while fixed interest and cash are lower risk.
Bear market: This refers toa financial market in which shares are currently falling in value. It’s arguable exactly how much a market has to fall in order to be considered a bear market, but a 10 per cent loss from a high point is usually considered a bear market.
Bull market: The opposite of a bear market, this term is used when share markets are continually increasing in value.
Concessional contributions: These are super contributions made from your pre-tax income and are generally taxed at only 15 per cent instead of your income tax rate. They include your employer contributions, salary sacrifice contributions and if you are self-employed any contributions for which you can claim a tax deduction.
Diversification: A principle that essentially means ‘not putting your eggs in one basket’. Diversifying your investments helps to minimise risk and maximise returns. Not all investments perform in line with each other, so investing in a variety of asset classes allows you to spread your risk.
Dividend: This is a payment made by a company to its shareholders, generally based on the company’s profits.
Franking credits: These are the taxation credits passed on to shareholders (including super funds) from companies which have already paid tax on profits before dividends are paid.
Indices/index: Provide a general measure of share market performance and are used as an indicator of the general health of the market.
Investment risk: The chance of incurring a loss from an investment. Generally, the higher the potential return, the greater the risk of loss.
Managed fund: This is a good way to achieve diversification. A managed fund pools your money with the money of other investors which is then managed by a professional fund manager. A managed fund may allow you to invest in a variety of asset classes.
Nikkei: Japan’s performance index and contains 225 top companies.
Non-concessional contributions: These are super contributions made from your after-tax income. These are not subject to contributions tax upon entry into your super fund (since they have already been taxed through your income tax).
Preserved benefits: Super benefits that cannot be accessed until a specified age and situation, for example when you are retired and aged between 56 and 60, depending on your date of birth, or you have reached age 65.
S&P 500: This indicates the United States performance index and represents 500 of the largest corporations in America.
Salary sacrifice: An amount of pre-tax salary that you can decide to contribute to super instead of taking it as part of your regular cash salary. This is in addition to the compulsory super guarantee contributions that are made by your employer on your behalf.
Shares: Also known as equities. When you buy a share, you are buying a portion of that company. If that company performs well, as a shareholder, you benefit by growth in the value of the share and often also by receiving dividends.
Superannuation (super): The system where you set aside funds during your working life to fund your retirement. The Commonwealth Government supports this system by requiring employers to contribute super payments on your behalf and enforcing regulatory controls to keep your money safe.
The All Ords: This stands for the All Ordinaries index which is made up of the weighted share price of about 500 of the largest Australian companies and provides the predominant measure of the overall performance of the Australian share market.
The FTSE (referred to as ‘the footsie’): The FTSE is the UK’s performance index and contains 100 top companies.
Financial advice makes a difference
Hopefully, with this basic guide, you feel a little more familiar with the world of finance-speak. Nevertheless, we are always her to help decipher the jargon and to help you make the most out of your financial circumstances.
Call Bridges Lake Macquarie to make an appointment with a Bridges financial planner. Your initial consultation is complimentary and absolutely obligation-free.
Bridges Financial Services Pty Limited (Bridges). ABN 60 003 474 977. ASX Participant. AFSL No 240837. This is general advice only and does not take into account your objectives, financial situation and needs. Before acting on this advice, you should consult a financial planner.