Investment glossary

This is a quick reference guide to some common investment terminology. Like most professional fields, investing is laden with words and concepts that are not commonly used in other contexts, or take on particular meanings in relation to investments.

Below are some key terms you may encounter as you read about the ways your retirement savings are invested, the ways investment decisions are made and the things that affect investments in the short-term and the long-term.

annualised returns
An annualised return is a rate of return per year calculated from the earnings of a longer or shorter period. Annualised returns may be useful for comparing longer term investments in which annual returns can vary widely.
An increase in the value of an asset.
asset class
An asset class is simply a group of investments that have similar characteristics, behaviours and rules.
A benchmark is an independent indicator against which the performance of an investment portfolio can be measured, typically an index comprising similar assets. The performance of the benchmark serves as a reference for the performance of the investment. An appropriate benchmark will reflect the asset mix, amount of risk, cost and scale of the investment being measured.
consumer price index (CPI) 
A measure of the consumption expenditure of metropolitan Australian households to record changes in time in the purchasing power. It is calculated using the weighted average price of common consumer goods and services (eg food, medical expenses, transport).
defensive assets
Defensive assets have a lower investment risk but usually provide lower returns over the longer term in comparison to growth assets.
A financial instrument whose value is ‘derived’ from an underlying asset such as a share, commodity or index. Common types of derivatives include options and futures contracts.
A decrease in the value of an asset.
Diversification is a risk management technique that mixes a variety of investments within a portfolio as a means of spreading risk. It can be achieved by investing in a mix of assets.
A payment to shareholders of a company in order to share the company’s profits.
emerging markets
Emerging markets are the economies and stock markets of countries experiencing rapid growth and industrialisation.
exchange rate
A ratio of one country’s currency in comparison to another country’s currency.
growth assets
Growth assets have a greater level of short term investment risk, with the possibility of higher returns over the longer term in comparison to defensive assets.
Preparing for a negative event to lessen its impact, usually by investing in a related security. Hedging will not stop the negative event.
A statistical measure of change in the value of a market, asset class or industry sector. The value of an index increases or decreases with changes in the value of the underlying security or sector it’s measuring. Some of the key indexes are the S&P/ASX300 Accumulation Index, Shanghai Composite Index, Nikkei Index, S&P500 and MSCI Emerging Markets.
investment portfolio
The total collection of an investor’s assets which may include shares, property, derivatives and cash.
market sectors
Investment markets are categorised into groups often based on industries to enable informed decisions about specific investments. These sectors include small cap, mid cap, large cap, energy, materials, financials, health care, property trusts, industrials, resources, and telecommunications.
Investment returns are the change in value of an investment during a period. Returns can be positive (increased value) or negative (decreased value). The ratio representing the change in value of an investment over a period of time may be used to compare different assets and different times.
Investment risk relates to the likelihood that the value of your investment may not continuously accumulate, and may even fall in value, especially during times of investment market downturns.
An investment fund where no steps have been taken to limit the effect of currency fluctuations on overseas investment returns.
Unitisation is similar to buying and selling stocks, with unit prices changing frequently. Unit prices are set each week based on the value of the investments assets, less any liabilities, and divided by the number of units in that option.
unit prices
The value of an asset as a single component of the whole.
Volatility refers to the changes in the returns of an investment between periods. Volatility reflects both the scale of the difference between an investment’s highest and lowest returns, as well as the period between those peak values. The returns of the most volatile investments can vary a lot and frequently. The least volatile investments yield almost identical returns across any timeframe.

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