Financial terminology: Your A-Z jargon buster

An asset class is a group of investments with similar characteristics such as their level of risk. The four main asset types are cash, fixed interest, property and shares.  

Defensive assets are relatively low risk and less unpredictable compared with growth assets like shares or property. Cash and fixed interest are examples of defensive assets.  

The mix of defensive and growth assets in an investor’s portfolio (how diversified it is) will depend on their investment timeframe and risk tolerance. A younger investor comfortable with a higher level of risk might hold mostly (or all) growth assets, while an investor approaching retirement might hold mainly defensive assets.  

Distributions are periodic payments made by a managed fund or similar investment product to investors as a way of distributing the profits made by the fund’s underlying assets, such as shares. Investors can usually choose to take their distributions as cash payments, or use them to automatically buy more units in the fund to help their investment grow faster. Either way, distributions are assessed as taxable income and must be included in your tax return.  

Countries refer to their own investment markets as their domestic market. For example, Australia’s domestic sharemarket means all the companies on the Australian Securities Exchange (ASX), while an American investment manager would refer to the US stock market as their domestic market. 

This term refers to countries undergoing economic or political reform and with fast growing economies offering new opportunities for investment. Brazil, India, China and Mexico are examples of emerging markets.    

ESG factors may influence the attractiveness of an investment beyond the purely financial. Investment funds with high ESG criteria tend to invest to high ethical standards, so for example might avoid investing in industries and companies that: 

• harm the environment by pollution or high non-renewable energy use (Environmental) 

• employ child labour or suppress human rights (Social) 

• are not run fairly and transparently (Governance). 

ESG criteria are increasingly important to today’s investors, and many investment managers now avoid investments that perform poorly on these criteria or offer specific ESG-themed investment funds, such as CFS’s Thrive+ Sustainable Growth investment option.   

Equities is another way of referring to shares. However, the two terms aren’t identical – equity means the total ownership stake in a company (after payment of any debt) while a share or stock means a single unit of ownership.  

ETFs are similar to managed funds in that they’re available across all the main asset types as well as in more niche investment markets such as commodities or the technology industry.  

As with managed funds, ETFs pool multiple investors’ money into a single entity. The key difference with ETFs is that those pooled funds form a basket of securities that can be bought and sold on a stock exchange. The ETF’s value fluctuates in the same way as other shares, as opposed to a managed fund where fluctuations in value are reflected in changing unit prices.  

You will incur fees with almost all types of investment. These are the main types of fees you may be required to pay as a managed fund investor or super fund member: 

• An establishment fee (also called an ‘entry fee’) may be payable when you first invest in a managed fund. 

• Contribution fees may be payable every time you put more money in. 

• Management fees are charged by the fund for administration and to cover the fee charged by the investment manager for their expertise in choosing investments and deciding when to buy and sell the underlying assets to maximise the fund’s overall performance.  

• An advice fee may be payable to your financial adviser for their professional services. You’ll only pay this fee if you’ve agreed it with your adviser.  

• Transaction costs are incurred when you make additional investments into a managed fund or a withdrawal, or if you make an investment switch within your super account. These costs usually take the form of ‘buy/sell spreads’, which represent the estimated transaction costs incurred when buying or selling the underlying assets that make up the overall fund.  

• Administration fee is a fee levied by super funds for the general cost of running the fund and managing your super account. For example, this can cover expenses like the super fund’s call centre service and the cost of issuing annual statements.  

• Indirect costs are also levied by super funds and include expenses paid out of the fund’s assets, along with brokerage fees and other associated costs. They may also include the fund’s ongoing operating costs, and charges and expenses such as registry, audit, regulatory costs and for receiving taxation advice. 

Fixed interest is one of the four main asset types along with shares, property and cash. Fixed interest investments offer a set rate of interest for a specified time period, with the initial amount (the ‘principal’) repaid at the end of that time, when the investment ‘matures’.  

The fixed interest asset class covers a range of investments including bonds and term deposits. Fixed interest is classed along with cash as a defensive asset, but fixed interest investments still carry a level of risk and their values can fall as well as rise, although generally with less extreme highs and lows than share and property markets.  

Gearing involves borrowing money to increase the amount of funds available for investment and thus generate bigger returns when asset values increase. The flip side is that if the investment’s value falls, the loan amount and interest commitments must still be repaid. Gearing therefore has the potential to magnify both investment gains and losses. 

Geared investments are usually made with growth assets like shares and property. With a geared managed fund, the borrowing and loan servicing all takes place within the fund – investment returns (or losses) are reflected in the unit price, as with all managed funds. Investing in a geared managed fund doesn’t therefore put an investor at risk of being required to meet a margin call, as could happen when investments are geared via a margin loan. 

Hedging is a complex strategy investment managers sometimes use to reduce risk in a portfolio, almost like a form of insurance. Investors will buy assets they think will perform well based on how they expect markets will move in the future. They can then ‘hedge’ those investments by also purchasing assets that might perform well if their original investments do poorly - effectively betting against their own portfolio. 

Investment funds are sometimes described as ‘hedged’ or ‘unhedged’, particularly international share funds where hedging can be used to offset the risk of currency movements eroding investment returns.  

In the financial world an index is a hypothetical portfolio of shares or other securities that reflects a segment of a financial market, such as the 100 biggest companies or the companies in a specific industry such as mining. The main sharemarket indexes are usually based on ‘market capitalisation’, in which a company’s size is calculated by multiplying its share price by the number of shares it has issued.  

Index funds are types of managed funds where the investment manager builds a portfolio that tracks the ups and downs of a particular market index such as the ASX 200 or ASX Small Ordinaries index.  

Index funds are therefore said to be ‘passively managed’, unlike ‘actively managed’ funds where the investment manager is more actively choosing which securities to buy and sell with the aim of exceeding a pre-set benchmark or index. For this reason, fees tend to be higher with actively managed funds.  

International markets represent investment opportunities in overseas countries. Australian investors can choose from a huge variety of managed funds that invest around the world, either with an Australian investment manager with global expertise or with an investment manager from another country.  

Global investing therefore offers huge diversity and investment opportunity but comes with an additional potential for volatility via currency risk, where investment returns in the target country (even if very good) can be offset by adverse changes in the value of the Australian dollar relative to the other country’s currency. Investment managers sometimes use a complex technique called hedging to reduce this currency risk.  

An investment manager can be an individual or organisation who manages the pool of investors’ money. A large organisation (such as CFS) typically has an in-house team of investment specialists with expertise across all the main asset types such as cash, fixed interest, shares and property as well as expertise in more niche or unusual investments. This team makes the key decisions for each of the investment funds they manage, such as when to buy and sell assets within the fund and what the investment mandate will be.  

So-called multi-manager funds are made up of several investment managers from different organisations – brought together and managed in a single fund by the in-house investment team. These ‘outsourced’ investment managers are chosen for their track record and expertise in a specific asset type such as global fixed interest, or in a niche area such as technology shares, Asian sharemarkets or small companies.  

A listed company is one that issues shares for trading on a stock exchange (and is therefore ‘listed’ with all the other companies on that exchange). Listed companies are also known as public companies, because anyone who wants shares can buy them.  

A listed investment company invests in financial assets (typically shares), but is itself listed on a stock exchange where its shares can be bought and sold. An LIC enables you to invest in a range of securities within one product and so buy into a diversified portfolio for a small initial investment. In this respect an LIC is similar to a managed fund or exchange traded fund (ETF).  

A margin loan is a way of creating a geared investment portfolio, in which you borrow funds to increase the amount of money you can invest and thus potentially generate bigger returns (and potentially greater losses).   

Unlike a geared managed fund in which the borrowing takes place within the fund and any losses are reflected in the unit price, a margin loan can be taken out by an individual who bears full responsibility for the interest payments and repaying the loan. The big risk with margin loans is that if the value of the investment portfolio falls below a predetermined level plus a small margin, the lender will make a ‘margin call’ and demand that the borrower provide additional funds to make up the shortfall. 

A PDS is a document that providers of financial products must make available to prospective investors or purchasers. In effect, a PDS is a guide to a product (such as a managed fund) and must contain certain information such as the product’s key features, fees, benefits and risks, as well as how to buy into the product or investment.  

You should always read a PDS before deciding whether to invest in a fund or other product. They’re also a good place to look if you have a question about your investment.  

In investing, a security is a portion of an asset (such as a parcel of shares) that may fluctuate in value and can be bought, sold or traded on a financial market such as a stock or commodities exchange.  

Short selling, or ‘shorting’, is a high-risk investment strategy which involves selling a security (such as a certain number of shares) that the investor doesn’t own, in the belief that its value is going to fall. The investor borrows the shares from a third party (typically a broker) and sells them, only to buy an identical number of shares later (for less money) and return them to the lender, thereby making a profit. However, if the value of the shares increases instead, the investor may lose a lot of money. 

The opposite of short selling is called ‘long selling’ or ‘going long’ and is the more traditional investment strategy. It involves an investor simply buying an asset in the expectation that its price or value will rise.  

Stocks is another name for shares or equities. 

A term deposit enables you invest a sum of money for a set time frame (a ‘term’) and receive a specified rate of interest.  

A unit price is the value of one unit in a managed fund, super investment option or other investment structure.  

Unlike share prices which can fluctuate virtually in real time (while the stock exchange is open), unit prices are calculated once daily, at the end of each business day. The price is calculated by dividing the net asset value (the value of the fund’s assets minus fees, expenses and tax) by the number of units on issue. Positive investment returns will push the net asset value up, increasing the unit price – and vice versa. 

Unitisation is the process of dividing ownership of the collective assets in a managed fund or other investment structure by allocating units in the fund to each investor in proportion to the size of their investment.