Investing Terms You Need to Know

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The financial world has some absolutely absurd terms used to make simple concepts sound extremely complex.

The goal of financial gurus is to make what they do sound complicated so you think you have to pay them because “they understand it better than you”.

In reality, the majority of financial terms that are thrown around are quite simple to understand and knowing them can save you a lot of time and money.

Understanding them will also give you an idea of what’s going on when you meet with your financial advisor, allowing you to be on the front foot and avoid getting sucked into any unnecessary costs.

Read on to boost your investing word-bank by learning exactly what these terms mean.

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Financial Terms A-Z

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Dive into these terms headfirst, save the post and refer back to it if ever you forget these words, and most importantly, enjoy learning something new!

This list IS NOT exhaustive. I’ve included the words that I hear all the time at Uni, the ones that are always thrown around at AGMs (Annual General Meetings), and some that I struggled to understand at the beginning of my investing journey.

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Personal Finance

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Appreciation:

Appreciation is the term used to describe an increase in the underlying value of an asset.

In simple words: We use the term appreciation instead of increase.

Example: The value of my house appreciated by 10% this year

Boom:

A boom is what financial analysts call a period of continued economic growth.

In simple words: If the economy has been performing really well for a while, it’s probably in a boom period.

Cash Flow:

Cash flow is the term used to describe the movement of cash.

In simple words: Cash flow simply means to have cash accessible to you.

Compound Interest:

Compound interest is the addition of interest to a principal amount.

In simple words: Compound interest is when you put your interest back into your account, rather than spending it.

Credit Score:

Your credit score represents your creditworthiness based on a numeric rating.

In simple words: Your credit score shows a lender how trustworthy you are with other people’s money.

Debt:

Debt is the term used to describe money that you have used but do not own. This money must be repaid in the future.

In simple words: Debt is any money that you have borrowed to purchase something you do not yet own.

Default:

Default is the term used to describe the failure to repay a certain loan. This gives the lender the right to whatever asset the loan was secured to.

In simple words: You default on a loan if you can no longer afford to pay that loan back.

Inflation:

Inflation is the term used to describe the gradual increase in prices over time.

This can occur when the cost of inputs involved in common final goods increases.

Inflation devalues the purchasing power of the currency that is rising.

In simple words: Like inflating a balloon, inflation pushes up prices within an economy over time.

Margin:

Margin can have two meanings in the world of finance:

Firstly, margin can refer to the gap between the cost of something and the price it was sold at – i.e. profit margin

Secondly, margin can refer to a certain level of debt lent to an individual for the purpose of investing.

In simple words: Margin can refer to either the difference between cost and revenue or an amount borrowed in order to invest.

Mortgage:

A mortgage is a type of loan that requires asset backing.

In simple words: Most people use a mortgage to buy a house. The bank lends them the money (known as a mortgage) and the borrower promises their house if they cannot repay the mortgage.

Principal:

The principal is the initial amount of capital invested or borrowed.

In simple words: Whatever you have before interest is called the principal.

RBA:

The RBA stands for the Reserve Bank of Australia. It is responsible for managing the monetary side of the Australian economy through the cash rate and exchange rate manipulation.

In simple words: The RBA controls interest rates in Australia, which then affects how much it costs to borrow money and how much you receive for holding your money in the bank.

Recession:

A recession is the term used to describe two consecutive periods of negative economic growth.

In simple words: If the economy has not been performing well, it’s probably in a recession.

Superannuation:

Superannuation is a compulsory payment that your employer must make. This balance is then made available to you on retirement to provide a new income stream.

In simple words: Super is the way the Australian government forces you to save for retirement. You can’t touch the money (in most cases) until you retire.

Taxable Income:

Taxable income is an individual’s level of income, after deductions, that the government can collect taxes from.

In simple words: Taxable income is what the government looks at when you do your tax return at the end of each financial year. Based on that number, the government will collect a certain percentage to spend on the economy.

Tax Deductions:

Tax deductions refer to any expenses incurred as a way of making money. These are taken away from your income to provide your taxable income.

In simple words: Tax deductions are what you can use to lower your taxable income, and pay less money to the government each year.

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Business

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Asset:

An asset is anything that provides value to a business and helps that business meet its financial obligations.

In simple words: An asset is something that the business could sell for money.

Examples: Inventory, Buildings, Cars

Balance Sheet:

The balance sheet is a financial statement that shows a company’s assets, liabilities, and equity.

In simple words: The balance sheet is a statement that shows what the business owns and what the business owes.

Book Value:

The book value of a business is the net value of its assets. This is found by taking all tangible assets and subtracting their accumulated depreciation.

Book value can relate to an entire business, or simply an individual asset.

In simple words: Book value is what the shareholders would get (in cash) if the business sold all of its tangible assets.

Cash Flow Statement:

The cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash in the business.

This is broken down into operating activities, investing activities and financing activities.

In simple words: The cash flow statement shows the amount of cash coming in and the amount of cash leaving a business.

Equity:

Equity refers to the value of what shareholders own within their business. This is what shareholders would receive if all assets were sold and all debts were paid off.

In simple words: Equity shows how much of a company’s assets are owned by shareholders, against how much has been purchased using debt.

To find equity, take the total value of assets on the balance sheet and subtract the total value of liabilities (debt).

Income Statement:

The income statement is a financial statement that shows a company’s revenues against its expenses. It highlights how effective a business is in converting revenue to profit.

In simple words: The income statement shows how much a business earns and then subtracts how much it pays out.

Liability:

A liability is any financial obligation a company has to meet in the future. Liabilities are typically secured by a particular asset in which the lender would gain ownership over if the borrower defaulted their payments.

In simple words: A liability is any debt within the business.

Often, the person/company that issues the debt has ownership over a certain asset if the business cannot repay the liability.

Example: Mortgage, Bank Loan, Overdraft

Liquidity:

Liquidity refers to the availability of short-term assets within a business. These are typically used to pay off short-term liabilities.

In simple words: Liquidity refers to how quickly a business can sell what it owns in order to get cash and pay off its debt.

Examples of liquid assets: Cash & Inventory

Overdraft:

Overdraft refers to a business withdrawing more cash than what it has available in its accounts.

This happens when a company’s bank balance goes below zero, known to be overdrawn.

In simple words: A business spends more cash than what it actually has in the bank.

Example: If a business has $100 and buys something for $150, the business is considered to be overdrawn by $50.

Investing

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Ask:

Ask is the price that sellers are willing to accept for a share of an asset. This is also known as the offer price.

In simple words: The ask is the price that sellers want for their share in a company.

ASX:

ASX stands for the Australian Securities Exchange. The ASX is responsible for facilitating the public trading of companies within Australia.

In simple words: You can buy and sell shares on the ASX, using a broker.

ASX 200:

The ASX 200 is an index that tracks the largest 200 companies listed on the Australian Securities Exchange. This is based on market cap.

In simple words: When someone says ” the Aussie market did quite well today”, they are probably talking about the ASX 200.

Bear Market:

A bear market is a term used to describe market conditions that point toward a decline in the overall sentiment of the market.

In simple words: When stock prices are decreasing, you’re probably experiencing a bear market.

Bid:

The bid is used to show what price the current market of buyers is willing and able to purchase an asset at.

In simple words: Bid represents what price a buyer wants to pay for a share.

Beta:

The beta of a stock represents its risk (or volatility) relative to the rest of the market in which it trades.

In simple words: A beta of 1 means that the stock moves with the market. Anything less (more) than 1 means the stock moves less (more) than the market.

Blue-Chip:

Blue-chip is the term used to describe well-established, reliable publicly traded companies. These are typically used in an investors core portfolio.

In simple words: A blue-chip stock isn’t expected to decrease dramatically over the long-term. It’s what’s known as a ‘pretty safe bet’.

Examples: Rio Tinto, NAB, Berkshire Hathaway

Bond:

A bond is the term given to ‘tradable’ debt. They can be bought and sold through an exchange and represent a fixed-income stream in the form of coupon payments.

All bonds have an expiry date, aligning with the nature of debt.

In simple words: Bond is the name given to a loan that is bought and sold by investors.

Broker:

A broker is an individual/business that facilitates trades between buyers and sellers on the stock exchange.

In simple words: The use of a broker allows you to buy and sell your shares. They take what you want to buy and find a seller that wants to sell.

Bull Market:

A bull market is a term used to describe market conditions that point toward an increase in overall market sentiment.

In simple words: If stock prices are going up, you’re probably in a bull market.

Capital Gain (Capital Loss):

A capital gain or loss refers to the resulting value of an investment. If the final value is greater (less) than the initial value, this is considered a capital gain (loss).

In simple words: If you sell a share for more than you bought it for, the difference (or profit) is considered capital gains.

Commodity:

A commodity is any raw material or primary agricultural product that can be bought and sold.

In simple terms: Anything that is in its original form and that can be bought or sold.

Examples: Oil, Copper, Gold, Silver

Common Stock:

Common stock (or ordinary shares) is the name given to regular shares of a business.

These can be bought and sold through an exchange and give the owner certain voting and profit rights.

In simple words: These are shares with no strings attached. You buy them on the stock market and sell them on the stock market.

Diversification:

Diversification is the term used to describe the mixed allocation of assets within a portfolio in order to reduce exposure toward one particular asset.

In simple words: ‘Don’t put all your eggs in one basket’. Diversification is about spreading your eggs across multiple baskets to decrease risk.

Example: Owning shares in a mining company, a tech company, a bank, some bonds, and gold.

Dividend:

A dividend describes the process of business profits being distributed to shareholders. Not all companies offer a dividend.

Dividends can be in the form of cash or new ordinary shares.

In simple words: If a business makes more money than it knows what to do with, they usually distribute the excess as dividends to regular people like you and me.

EPS:

EPS stands for Earnings per Share and shows the net profit of a business in comparison to the price of one of its shares.

This often used to determine if the price of a share is too high or at a discount.

In simple words: EPS shows you how many dollars the company makes for each of the shares you own.

If the EPS is lower than the price you bought your shares at, you probably paid too much.

ETF:

ETF stands for Exchange Traded Fund. These are a group of shares in different companies, bundled as one share. ETFs are bought and sold on the stock market.

In simple words: An ETF is a basket of different shares, bought and sold as one single share.

Ex-Date:

The ex-date is set by the stock exchange and represents the day in which shareholders of record are entitled to the next dividend within a company.

In simple words: If you purchase shares on or after the ex-dividend date, you are not entitled to the next dividend. Instead, the seller will receive the payment.

Hedge Fund:

A Hedge Fund is an investment fund that buys and sells liquid assets in a bid to beat the market or “hedge” against market risk.

In simple words: A hedge fund is simply a type of investment vehicle where you give your money to a company and they invest it for you.

Hedge funds are typically riskier than mutual funds, often available only to accredited traders.

Index:

An index tracks the performance of a particular market. This acts as a benchmark for investors to compare businesses within the same index against.

In simple words: An index shows the overall performance of a certain market, allowing you to decide whether a company is doing better or worse individually compared to the class to which it belongs.

Example: ASX 200, S&P 500, Dow Jones Industrial Average (DJIA)

Index Fund:

An index fund is a type of mutual fund that aims to buy and sell shares in a bid to replicate a specified index.

In simple words: An index fund is a simple way to buy a share of a certain market. These can also be in the form of an ETF.

Example: An Index Fund that aims to replicate the ASX200 index (the Aussie Market)

IPO:

IPO stands for Initial Public Offering and refers to the last step in converting a private company into a public company.

This is the point where a private company’s shares begin trading on the stock market, now classifying it as a public company.

In simple words: An IPO happens when a company wants to take its business public, allowing regular investors to buy and sell shares.

Limit Order:

A limit order is a type of order to buy or sell shares at a specified price.

This is different from a market order which is an order to buy or sell at the current price.

In simple words: A limit order is what you should use to buy or sell shares at a price set by you.

Market Capitalisation:

Market Capitalisation (AKA Market Cap) shows the worth of a business, determined by the stock market on which it trades.

This is found by taking the number of shares outstanding and multiplying this by the current market price of a share in that company.

In simple words: Market Cap tells you the size and value of a company on the stock market.

Mutual Fund:

A mutual fund is similar to a hedge fund in that it is an investment fund that invests money for other investors.

The difference is that mutual funds are typically less risky and more commonly available to regular investors.

In simple words: A mutual fund is a good investment option if you want a certified fund manager to invest your money for you, at a small annual fee.

Penny Stocks:

A penny stock is a term used to describe a company that trades at a share price less than $1.

These typically have a small market cap and can also be referred to as small-cap stocks.

In simple words: Penny Stocks get their name because of their very low share price. These are typically riskier than “blue-chip” stocks, giving them their reputation as speculative investments.

P/E Ratio:

P/E stands for Price to Earnings and shows the price investors are willing to pay for a share in that company, relative to their current revenue.

The P/E ratio shows how many years investors are willing to wait until the company’s revenue will be equal to their share price, relative to shares outstanding.

In simple words: This highlights whether or not investors think the company will grow and improve in the future.

Record Date:

The record date is set by the company and represents the cut-off date for entitlement to the next dividend.

Once the record date is set, the stock exchange can set their ex-date in accordance with their rules and regulations. This is usually set to be one business day after the record date.

In simple words: the record date is what the company considers to be the cut-off for who gets their next dividend. If you want to receive the next dividend payment, you have to own shares before this date.

REIT:

REIT stands for Real-Estate-Investment-Trust and is similar to an ETF. A REIT allows an investor to purchase a share in a company that owns a real estate portfolio. This provides an investor with the opportunity to own a portion of multiple properties, creating diversification.

The father company trades on the stock market and pays the investor an annual distribution relative to their rental income.

In simple words: A REIT is a way to invest in real estate through the stock market. This provides you with an income stream and possible share price appreciation.

Short Selling:

To short a stock means to sell shares that you do not yet own, with the hopes of buying those shares back in the future for a lower price.

This allows the investor to make money when the share price falls.

In simple words: Short selling means to bet against the share price of a company. If the share price increases, you pay a regular premium until it drops again.

Speculative:

Speculative is the term used to describe an investment where the investor is speculating the outcome.

Essentially, a speculative investment is one in which the investor hopes it will pay off, knowing that there is a high chance it won’t.

In simple words: A speculative, or speccy, is what’s used to describe a stock that has a high risk of failure or a high level of uncertainty surrounding it.

Spread:

Spread is the difference between the ask price and the bid price. A higher spread typically means lower volatility, at the cost of lower liquidity.

The middle of the spread often represents the current stock price.

In simple words: The spread shows whether or not buyers and sellers agree on a certain price level.

S&P 500 Index:

The S&P 500 (Standard & Poor’s) is an index made up of the largest 500 public companies (by market cap) in America.

This is often considered the benchmark for international market investing and sets the tone for trading each day.

In simple words: When someone says “the US market did quite well today”, they are probably referring to the S&P 500 Index having a good day.

Volatility:

Volatility is the term used to describe how much a share price fluctuates over time.

It is the rate at which a company’s share price increases or decreases for a given set of returns.

In simple words: Volatility shows you how much a share price changes over time. This can be used to determine the potential gains (and losses) resulting from an investment.

Volume:

Volume is the term used to describe how many shares are traded over a given time frame.

Typically, volume is expressed as a daily figure which highlights the number of shares traded on that day.

In simple words: Volume shows you how many other people are buying and selling shares on any given day.

Yield:

Yield refers to the income generated on an investment, relative to the initial investment, described in percentage terms.

In simple words: Yield shows you how much money you are getting from an initial investment.

This is most commonly used to describe the dividend in terms of your investment. A dividend yield shows what the dividend is as a percentage of the current stock price.

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There you have it! A list of (what I think is) the most important financial terms and what they mean in the simplest way possible.

Save this post, refer back to it whenever you need to, share it and help your friends out.

If you are confused about any of these terms or want to learn what another term means, leave a comment down below or email me and I’ll do my best to explain it further!