Money talks in a language all its own

DISCUSSIONS on the financial services industry are filled with industry-specific jargon. In an effort to demystify the industry, we shall be bringing you a series of articles to explain some of the terminology.

• Bear Market: A market in which the prices of shares decline. Generally, this is also against a background of widespread pessimism. The opposite scenario, where prices of securities are moving upward, is referred to as a bull market.

• Management Expense Ratio (MER): This is a term more commonly used in fund manager’s prospectuses. It represents the total ongoing costs of using a managed fund. It includes the total ongoing fees and expenses and is divided by the fund size over the period. This measure allows you to draw comparisons between funds for different managed investments.

• Base Metals: Non-precious metals such as copper, zinc and lead used for commercial purposes.

• Rule of 72: This is often quoted as a formula to calculate the gain or loss from an investment. Take the number 72 and divide it by an expected return and this will give you an idea of how long it will take for your assets to double in value. In measuring the impact of inflation a similar exercise can determine how long it takes to halve your asset values.

• Top Down Managers: These managers utilise a strategy that involves making investment decisions that start with a review of broad, global economic influences. They examine the likely impact of those influences on domestic economies and then filter that down to individual stocks and properties.

• Trade Weighted Index: An index that reflects the average value of the Australian dollar when compared to a selection of currencies of our major trading partners. The foreign currencies are compared with ours on the basis of the level of trade between Australia and the foreign country. It is generally seen to be a more relevant indicator than comparison to the American dollar as it more properly reflects the level of trade we have with the country.

• Beta Factor: This is a measure of risk that assesses the variability of the return from an investment or a portfolio of investments compared with the variability of return from a market portfolio. The market as a whole, by definition, has a beta factor of 1.0. Stocks with a beta less than 1.0 will see their prices rise or fall less than the market, while those with a beta greater than 1.0 will see their prices greater than the market as a whole. The higher the beta the higher the risk attached to the stock.

• Acid Ratio: In company analysis this ratio determines the financial position of a company. It compares cash and any asset the company can readily convert to cash with its debt position.

An understanding of these terms will help debunk some of the mystique that surrounds the investment management industry.

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