• Janina Slawski, Principal Investment Consultant

Key Investment terms that are useful to know

For many of us, investment is not something that we deal with in our everyday lives and it can therefore feel intimidating. Knowing basic terms, however, can help you:

  • sort through some seemingly complex terminology used in the investment world

  • feel that you know enough to understand the basics of your own investments

  • ask some questions that could significantly increase your understanding of your investments

Cash, bonds, property and equities

Let’s start with basic asset classes. These are investment building blocks that your money can be invested in. The main asset classes are cash, bonds, property and equities.

  • Cash is money you have invested in a bank account and on which you earn interest.

  • A bond is basically a loan that the bondholder has lent to the government or a company. A bond usually pays a fixed rate of interest over a fixed period of time and at the end, the original amount is paid back to the bondholder.

  • Property is investment into “bricks and mortar” or buildings that will be rented out to deliver a rental income as well as a potential increase in the value of the underlying property over time.

  • Equities or shares are the certificates that represent partial ownership of a company listed on the stock exchange. Anyone can invest in the company by buying shares. There’s no agreement to repay the amount you invested when you bought the equities (as there is for bonds). You hope to benefit through the dividends that might be paid out to you and through the earnings retained in the company that should reflect over time in an increase in the price of the equity or share.

Most investment portfolios are made up of a combination of cash, bonds, property and equities. There are some variations:

  • The companies underlying the equities are based in South Africa or another region.

  • The coupons on the bonds are fixed or vary with interest rates or inflation.

  • The government, a state-owned entity or municipality, or a privately owned company issue the bonds.

Listed or unlisted

Another key variable that may be introduced into an investment portfolio is whether investments are listed or unlisted. Listed assets are listed on a stock exchange, and prices are quoted daily based on the prices agreed by buyers and sellers on the exchange. Unlisted assets, however, are investments that are not listed on any stock exchange. Their value is determined periodically (for example quarterly) based on an agreed method of valuing the underlying assets.

Unlisted assets are usually expected to be owned for longer time periods. If an investor wants to sell earlier than this longer time period, it is often more difficult to find a buyer and to know in advance what value you will receive if you can sell the assets. However, the price of the unlisted assets is a lot less variable and usually you would earn an increased return for being willing to invest over a longer time.

You might also find the term “public market assets” used to describe listed assets, and “private market assets” used to describe unlisted assets that are not listed on public markets.

Some more complex concepts

Now that you understand the basics of the assets that will go into your investment portfolio, it is useful to consider some more complex concepts that you will frequently hear referred to in investment discussions.

Alpha or beta

You will often hear people talk about “market beta”. This is the impact of overall market returns on an underlying asset. This means an equity may go up and down in value because of factors that are specific to that equity, such as a good dividend payment, or a change in company management or news that is good or bad about the company’s prospects. Often these individual company factors are, however, swamped by overall market factors. Therefore, equities in a company that is not doing that well may do less well than other equities in the market, but still increase in value because overall equity values are going up. This overall market impact is called the “market beta”.

“Alpha” measures the extent to which an asset has outperformed or underperformed relative to a market measure, often referred to as an “index”. The market measure will generally be chosen in advance and referred to as the benchmark against which an asset’s performance will be measured. If an asset earns more than the benchmark, then it is referred to as having earned alpha relative to that benchmark.