Ever get confused by the language of investing? You’re not alone. Like anything, investing has a lot of different words with different meanings. We’re here to help.
Let’s start by decoding some everyday words. Here are 10 investing terms to help you get going, and some examples of how you might hear them.
1. Asset (investment asset)
An asset is something you own that has value. Think cash, shares, bonds, property – or even gold. Assets can go up and down in value but are owned with the expectation that they will provide an investment return over time.
Example: I’m invested in a KiwiSaver Growth Fund, which includes assets like Property, New Zealand fixed interest and Australasian shares.
2. Returns
Returns are the money you make (gain) or lose (loss) on any investment. Returns can be in the form of income, like rental income on a property, or interest on a term deposit; and can also come from an increase (or decrease) in the value of the asset over time (also called a capital gain). Returns can be expressed as a dollar value or as a percentage.
Example: Jane invested $1,000 and a year later her investment was worth $1,050 – so she had a 5% return.
3. Shares (also known as stocks or equities)
Stocks, shares and equities all mean the same thing – ownership of a piece of a company. When you buy shares in a company you effectively own a small part of that company, like a small slice of the big pie.
Example: My investment in the Fisher Funds KiwiSaver Scheme Growth Fund includes shares in companies like Fisher & Paykel Healthcare and Mainfreight.
4. Bonds
Bonds are issued by governments or companies when they want to raise money – effectively they’re a loan that investors make to the business or government. When you buy a bond, there’s a set period of time when you’ll get your money back, and a certain interest rate you’ll be paid over the life of that loan. Bonds are also referred to as ‘fixed income’ or ‘fixed interest’ investments.
Example: I decided to invest in a 10-year government bond because it offers a stable interest rate and lower risk compared to some other investments.
5. Portfolio
A portfolio is a collection of investment assets designed to generate returns. A portfolio might include things like shares, bonds, fixed income investments or property. The purpose of an investment portfolio is to diversify your investment across different types of assets to achieve your financial goals – which could be growth, income, or preserving the value of your investment – while managing risk.
Example: My portfolio includes my KiwiSaver account, some Microsoft shares, a managed fund and my rental property.
6. Diversification
Diversification in investing is about spreading money around multiple assets to reduce risk. It’s the old story about not putting your eggs in one basket. The goal of diversification is to limit the impact of any single asset performing poorly. If one asset experiences a decline, others in your portfolio may remain stable or even increase in value, helping to balance any potential losses.
Example: To minimise risk, my investment strategy is diversified to include a mix of shares, bonds and property.
7. Risk
Risk in investing can refer to the both the volatility and day-to-day change in the value of an investment, and the likelihood that the actual returns on an investment will differ from what you expected.
All investments carry some degree of risk, and typically, a higher risk generally means higher potential returns over time, but more ups and downs along the way. For example, investing in shares is likely to give you a higher return in the long run, however shares also come with more risk of losses than say fixed interest investments.
Example: Because I’m not comfortable with big moves in my KiwiSaver balance, I chose to invest in a Conservative Fund, which usually offers lower risk than a Growth Fund.
8. Volatility
Volatility is a normal part of investing and refers to how much and how quickly the value of an investment or market might change. High volatility means the price of an asset moves up and down dramatically over a short period, while low volatility means more stable price movements with smaller changes in value. Over the long term, volatility tends to average out, meaning that the short-term price changes of an asset may become less significant over time.
Example: The stock market's high volatility this year made it challenging for investors to predict short-term gains and losses.
9. Investment timeframe
Your investment timeframe is the amount of time you plan to hold your investment before you want to access your money or achieve your financial goal. Understanding your investment timeframe helps determine how much risk you can afford to take, and which types of assets are appropriate for your investment portfolio. Typically, the longer your investment timeframe, the more volatility you can endure, allowing you to pursue higher returns.
Investment funds have a suggested minimum investment timeframe which can help you choose which type of fund to invest in.
Example: Michael was planning to use the money in his managed fund to help purchase his first home in four years’ time. He chose to invest in a Conservative Fund which had a minimum investment timeframe of three years.
10. Units
When you invest in a managed fund (for example, KiwiSaver), you buy ‘units’ that represent a portion of the fund’s total assets. They go up and down in value reflecting the overall performance of the fund.
Example: Janet invested some money in a Conservative Fund. This bought 500 units that are currently valued at $1.99 each. These units will increase or decrease in value, so her account balance will go up and down.
Any questions? Just ask.
We know investing can feel complicated sometimes, but don’t let that hold you back. Give us a call on 0508 347 437, chat to us online or drop us an email. We’re here to help!
