Investment Terms Glossary
Absolute return is the return that a fund or asset achieves over a certain period of time. This measure looks at appreciation or depreciation, expressed as a percentage.
Alpha is defined as the return on a fund or asset in excess of the required rate of return. Alpha is most commonly used as the term to represent the excess return of a fund relative to its benchmark (see Benchmark).
This term describe investments which do not easily fall into the traditional asset classes. Real estate and commodities are examples of alternatives. See Real estate, Commodities.
An asset class is a group of investments that have similar financial characteristics. Traditional asset classes include cash, equity securities (shares or stocks) and fixed-income securities (bonds). See Equity securities, Fixed-income securities.
This is a standard against which the characteristics or performance of a fund can be measured. Typically market indices are used for this purpose. See Index.
Beta is a measure of the volatility of an asset to movements in the overall market index within which it is contained. The beta of a fund is a measure of its volatility relative to its benchmark. See Benchmark, Index, Volatility.
A common name for Fixed-Income Securities. See Fixed-Income Securities.
Is the amount of return an investor realises on a fixed-income security. See Fixed-income securities.
A term commonly used to define natural resources and agricultural assets such as gold, oil and corn.
Is an assessment of the ability of a borrower to pay back a loan or debt. Credit ratings are normally applied to fixed-income securities (see Fixed-income securities) and range from highest (least likely to default) to lowest (most likely to default). See Default.
Is a failure to meet the legal obligations of a loan. For example when the issuer of a fixed-income security fails to pay the promised interest or the principal when due, the issuer has defaulted or is said to be in default.
Derivatives are financial instruments whose value depends in some way on the value of other, more basic, underlying financial assets or indices. There are many types of derivatives, with the most common being futures, options and swaps. See Index, Futures, Options, Swaps. They allow users to manage exposure to underlying financial assets without actually owning them.
Is a term used to describe the broadening of investments to reduce an over reliance on particular assets or risks.
A dividend is a payment made by a company to its equity security holders usually as a distribution of profits. A dividend is an example of an income payment. See Equity securities.
The dividend yield is a measure of the dividend per equity security divided by the price of each equity security. See Dividend, Equity security.
Duration is a way of measuring how much fixed-income security prices are likely to change if and when interest rates move. Securities with high duration are more sensitive than those with low duration. Fixed-Income security duration, measured in years, is the length of time it takes to wait for the amount an investor paid for the security to be repaid.
Are instruments that signify an ownership position in a company and are commonly called stocks or shares.
Emerging markets are those in countries that are less economically developed.
Are instruments that signify a loan made by an investor and are commonly called bonds. Fixed Income securities are issued by sponsoring entities which may include companies, institutions and governments. They are normally issued with defined regular income payments (coupons) and a date at which the principal of the loan will be repaid.
The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-theclock.
A type of derivative instrument. A future is a contract giving the owner the right to buy or sell an underlying asset at a specified future date and at a specified price.
A hedge is a strategy intended to protect against loss by buying assets or securities whose prices are expected to move in the opposite direction to those of the assets being held.
An index is an indicator of trends in the market or economy that they represent. For example a stock market index is a measurement of the value of that stock market.
Is the rate at which prices are rising over time.
Investment grade/Non-investment grade
A level of credit rating (see Credit rating) that indicates that a fixed-income security has a relatively lower/higher risk of default. See Default.
Regular, fixed (sometimes inflation-linked) payments made by fixed-income security issuers to holders, or, by institutions with whom cash is deposited to those depositors.
Liquidity refers to the ease with which investors are able to buy and sell their assets and convert them into cash.
A macro environment is the condition that exists in the economy as a whole, rather than in a particular sector, region, industry or company (the micro level). The macro environment is closely-linked to the general business cycle as opposed to the performance of an individual business sector.
The total market value of all of a company's outstanding shares. Market capitalisation is calculated by multiplying the number of a company's shares by the current market price of one share.
Net (in the context of performance data)
Performance data calculated after any deductions, i.e. costs, tax etc.
Is a type of derivative instrument. An option is a contract giving the owner the right, but not the obligation, to buy or sell a specified amount of an underlying asset at a specified price within a specified time.
Private equity is money invested in companies not publicly traded on a stock exchange. Private equity is a form of alternative investment..
Real estate refers to physical property, including land and the buildings on it.
Real Estate Investment Trusts (REITs) are a type of company listed on a stock market, which owns and manages real estate. See real estate.
Is a type of derivative instrument. A swap is an agreement between two parties to exchange assets. Most swap contracts involve an agreement to exchange a series of future cash flows based on those assets.
Tracking error indicates how much variability there exists between individual measurements that make up the difference in return between a fund and the index against which is it benchmarked. See Index, Benchmark.
Underweight/Overweight refers to a situation where a fund holds less/more of a particular asset or security when compared to the index against which it is benchmarked. See Index, Benchmark.
Volatility is a statistical measurement of the extent to which an asset, fund or index’s price fluctuates. Volatility is often used as a measurement of risk. See Index.
Is the income return on an asset such as the income or dividend received from holding a particular security. It is usually expressed as a percentage rate based on that security’s cost or current value. See Dividend yield, Bond yield.