Financial terms for dummies. This will make you smarter

Performance

When people talk about the “performance” of, say, a managed fund, they are simply giving an indication of the historical returns - that is, how well the fund has performed over the past several years.

This information is often used to make predictions about the future but beware: predictions must always be viewed with caution because past performance is no guarantee of future returns.

Think how good the first Sex and the City movie was compared to the sequel.

It’s also important to ensure that financial apples are not being compared with financial oranges; make sure that if you’re comparing funds, they are similar in nature.  Better yet, seek professional advice on what would be best for you based on your personal circumstances.

Risk Profile

Despite how it sounds, a “risk profile” is not the criteria you and your girlfriends should apply to a first date. Although dating can be a risky game at times.

Instead, risk profile is a term used by financial planners to describe the type of investor their client is (aggressive, balanced or conservative – more on this below) so they can form a financial plan that suits the individual and ensure any investments are in line with the client’s risk profile.  

The risk profile takes into account how comfortable a person is with risk and volatility, how long they are investing for, what other investments they have and what goals they are hoping to reach. OK, so a little similar to assessing a first date.

Aggressive

For once in your life, to be described as “aggressive” isn’t a bad thing.

In the world of finance, to describe someone as “aggressive” means they are the type of person who is comfortable with taking risks when investing in growth assets, that is shares and property.

You might surprise yourself as to how aggressive you actually are. That property purchase you made may have been aggressive.

Essentially an aggressive investor is someone prepared to put their money on the line for the expectation of higher longer term profit with the risk of bigger losses along the way.

Balanced

A “balanced” investor is someone who is moderately comfortable with risk, kind of like someone who is enjoying a balanced diet – munching on the carrot sticks and occasionally devouring a chocolate bar.

These types can handle a degree of ups and downs in their investment returns from year to year.  This is because they appreciate that the market fluctuations of growth assets should result in higher returns in the medium to long term.

And similar to a diet’s ups and downs, if you get back on track you eventually receive better returns. 

Conservative

Has nothing to do with wearing a pearl necklace or a political party.  “Conservative” instead describes investors who are not very comfortable with risk – they’re the types who can’t sleep at night if there is too much uncertainty in their investments. 

They prefer a cautious approach to investing that focuses on minimal risk. The portfolio for a conservative investor is likely to include a higher percentage of defensive assets, which includes cash and fixed interest. 

Salary Sacrifice

Although it might sound like you’re giving away your hard earned money, this couldn’t be further from the truth.  

When you “salary sacrifice” you access pre-tax dollars which can be used to make additional contributions into superannuation or provide for various other benefits ranging from car loans to personal computers. Your employer may even let you get that must-have Apple iPad.

Not all employers can or do offer the full range of salary sacrifice options, so check first to see what your employer offers. 

Unit

While it may describe the measure of alcohol in those tasty cocktails you enjoy, “unit” is also the way companies listed on a stock exchange divide their capital into equal parts of denomination. Each unit is called a share. 

A managed fund goes a step further and packages up shares from numerous companies in a trust.  The package is then divided into equal units and depending on the combined value of the shares in the trust, a price per unit (or unit price) is determined.

Each investor in that managed fund is designated a number of units depending on how much they invest and what the unit price is at the time of investment. For example, if you invested $150 in vodka shares when the unit price is $1 per unit, you will be designated 150 units in that managed fund. That’s a few more cosmopolitans with the girls.

Liquid

”Liquid” (or liquidity) is a term used to describe when a market has a high level of trading activity characterised by the ability to buy and sell with relative ease.  Think eBay or Cudo and how easy that has made buying and selling.

Shares for instance are generally highly liquid, whereas direct property may take longer to sell and is therefore relatively less liquid.

Bull and bear market

Fortunately a “bull and bear market” isn’t a place where you can buy and sell dangerous animals.

A bear market simply refers to a decline in share prices, usually for a period of a few months, whereas a bull market is a situation where share prices are rising.

Here’s an easy way to remember - a bear will swipe its paws downwards, while a bull will raise its horns up.