Alpha, beta, equity, volatility… what does it all mean? Studies show that many people are discouraged from investing because of the unfamiliar language financial advisers and investment managers tend to use, so here’s a glossary of commonly used investment terms and what they mean for you.
“Financial literacy is extremely important, especially because South Africa’s economy is struggling, which will have a direct impact on many people’s pockets. Being financially savvy can help people understand the basic principles of finance, gearing them to navigate this ever-changing financial landscape, manage their risks more effectively, and potentially even avoid financial pitfalls,” says Sheldon Friedericksen, chief financial 0fficer of Fedgroup.
Friedericksen decodes the following jargon:
– Actively v passively managed funds
To outperform the market, actively managed funds require a team of professionals or fund managers to track the performance of an investment portfolio. They regularly make buy, hold or sell decisions based on investment analysis on stocks and industries, research and forecasts to ensure that the returns exceed the performance of the overall markets. Passive management (sometimes called ‘indexing’) is the opposite of actively managed funds, and refers to a buy-and-hold strategy designed to mirror the returns of the overall market, ignoring day-to-day fluctuations of the market.
– Appreciation v depreciation
Appreciation is used to describe assets that are expected to be worth more in the future. These include stocks, bonds, currencies, or real estate. Assets that gradually decline in value, such as cars or computers, are said to depreciate (go down) in value over time.
– Bonds v stocks
Bonds are debt while stocks are shares in a company. Bonds are considered a safer investment while stocks (also known as equities or shares) are riskier because should the company fail, equity investors are the last to receive payments.
– Balanced fund v independent stock and bond funds
A balanced fund is a diversified fund made up of a mixture of different asset classes such as stocks, property, bonds, cash and other securities. By investing in different asset classes, the risk is reduced while still providing capital appreciation. Investing in either independent stock or bond funds exposes you to both price and interest rate fluctuations. Bond funds have the potential to deliver a modest income while stock funds are volatile but can generate the highest profits.
– Dividends v returns
Dividends are cash payments made to stakeholders, based on the cost of investment, current market or face value. Returns, on the other hand, are what you earn on an investment over a certain period and accounts for interest, dividends and an increase in the share price. It can be positive or negative.
– Money market v capital market
The money market is a short-term lending system that allows borrowers to access the cash they need and lenders to earn more money. The capital market is geared for long-term investing. Companies issue bonds and stocks to raise capital to grow their business, and investors get to share in that growth. In comparison, the money market carries less risk while the capital market can be more rewarding.