Investing has its own vocabulary. Some terms are straightforward. Others are jargon that makes simple ideas sound complicated. A few are genuinely technical concepts that require precise definition.
This glossary defines common investing terms in plain language, with an Australian context where relevant. The goal is clarity, not comprehensiveness. If a term is not here, it may be defined in the article where it first appears.
This is general educational information, not personal financial advice.
A#
Asset Allocation#
The mix of different asset classes (shares, bonds, cash, property) in a portfolio. Asset allocation is one of the primary drivers of both risk and return over time.¹ The appropriate allocation depends on individual circumstances, time horizon, and goals.
Asset Class#
A category of investments that share similar characteristics and behave in broadly similar ways. The four main asset classes are shares (equities), bonds (fixed interest), cash, and property. Each has different risk and return characteristics.
ASX (Australian Securities Exchange)#
Australia's primary stock exchange, where shares, ETFs, and other securities are bought and sold. The ASX 200 is a commonly referenced index of the 200 largest companies by market capitalisation listed on the exchange.
B#
Brokerage#
The fee charged by a broker to execute a trade on your behalf. Brokerage can be a flat fee (e.g., $5 per trade) or a percentage of the transaction value. It applies to both buying and selling, which means a round trip (buy then sell) incurs two fees.
Buy/Sell Spread#
The difference between the price at which you can buy an asset and the price at which you can sell it at the same moment. This spread represents a transaction cost, even though it is not listed as a separate fee. Wide spreads increase the cost of entering and exiting investments.
C#
Capital Gain#
The increase in value of an asset from the time of purchase to the time of sale. A capital gain is only realised (and taxed) when the asset is sold. Unrealised gains exist on paper but have not yet triggered a tax event.
Capital Gains Tax (CGT)#
A tax on the profit made when selling certain assets, including shares and property. In Australia, CGT is not a separate tax; it is added to your assessable income and taxed at your marginal rate. Assets held for more than 12 months may qualify for a discount.² The ATO provides detailed guidance on CGT obligations.
CHESS (Clearing House Electronic Subregister System)#
Australia's system for recording share ownership. When you buy shares through a CHESS-sponsored broker, you receive a Holder Identification Number (HIN) and your name appears on the share register as the legal owner. This differs from custodial models where the broker or platform holds shares on your behalf.
Compound Interest (Compounding)#
The process by which returns generate further returns over time. When investment earnings are reinvested, they begin earning returns of their own. This creates exponential growth over long periods. Compounding works both ways: fees and costs also compound, reducing wealth over time.
Correlation#
A measure of how two investments move in relation to each other. Assets with high positive correlation tend to rise and fall together. Assets with low or negative correlation tend to move independently or in opposite directions. Diversification is more effective when assets have low correlation.
Cost Base#
The amount you paid for an asset, including purchase price and certain acquisition costs. The cost base is used to calculate capital gains or losses when the asset is sold. Accurate record keeping is essential for determining tax obligations.
Custodian (Custodial Holding)#
An arrangement where a third party holds assets on behalf of investors. With custodial brokers, shares may be registered in the name of the custodian rather than the individual investor. This differs from CHESS sponsorship, where investors appear directly on the share register. Both models are legal; they have different portability and counterparty risk characteristics.
D#
Diversification#
Spreading investments across multiple assets, sectors, or regions to reduce the impact of any single investment performing poorly. Diversification does not eliminate risk or prevent losses; it reduces concentration risk. During market-wide downturns, diversified portfolios can still decline significantly.
Dividend#
A payment made by a company to its shareholders, typically from profits. Dividends provide income in addition to any capital gains. Australian dividends may come with franking credits attached.
Drawdown#
A decline in the value of a portfolio from its peak to its lowest point before recovering. A drawdown of 30% means the portfolio has fallen 30% from its highest value. Drawdowns are a normal part of investing, though they can be emotionally difficult to experience.
DRP (Dividend Reinvestment Plan)#
A plan that automatically uses dividend payments to purchase additional shares rather than paying cash to the investor. DRPs can simplify the reinvestment process but create additional record-keeping complexity for tax purposes, as each reinvestment creates a new parcel with its own cost base.
E#
Equity#
Another term for shares or ownership in a company. "Equities" refers to the share market generally. Equity can also refer to the portion of an asset you own outright (e.g., home equity is the value of your home minus any mortgage).
ETF (Exchange-Traded Fund)#
A type of investment fund that trades on a stock exchange like a share. ETFs typically hold a basket of assets (shares, bonds, or other investments) and can be bought and sold throughout the trading day. Many ETFs track an index, though actively managed ETFs also exist.³
F#
Franking Credits (Imputation Credits)#
Tax credits attached to dividends paid by Australian companies that have already paid company tax on their profits. Franking credits can reduce the tax payable on dividend income or, in some cases, result in a tax refund. The effect depends on the investor's marginal tax rate.² This system is unique to Australia and a few other countries.
G#
Growth Asset#
An asset class expected to provide returns primarily through capital growth rather than income. Shares and property are typically classified as growth assets. Growth assets tend to have higher expected returns and higher volatility than defensive assets.
H#
HIN (Holder Identification Number)#
A unique identifier assigned to investors who hold shares through the CHESS system. The HIN links the investor to their holdings across multiple companies. Shares purchased through different CHESS-sponsored brokers can be consolidated under a single HIN.
I#
Index#
A measure of the performance of a group of securities. The S&P/ASX 200 tracks the 200 largest companies on the ASX. The MSCI World Index tracks large and mid-cap companies across developed markets globally. Indices serve as benchmarks for comparing investment performance.
Index Fund#
A fund designed to replicate the performance of a specific index by holding the same securities in the same proportions. Index funds are a form of passive investing, as they do not attempt to select individual securities or time the market.
Inflation#
The rate at which the general level of prices for goods and services rises over time. Inflation erodes purchasing power: $100 today will buy less in the future if prices increase. Real returns are returns adjusted for inflation.
L#
Liquidity#
The ease with which an asset can be converted to cash without significantly affecting its price. Cash is highly liquid. Listed shares are generally liquid. Property is illiquid. Liquidity matters when you need to access funds quickly or during market stress.
LIC (Listed Investment Company)#
A company listed on the stock exchange that holds a portfolio of investments. Unlike ETFs, LICs can trade at a premium or discount to their underlying net asset value. LICs are typically actively managed and have different fee structures than ETFs.
M#
Managed Fund#
A pooled investment vehicle where multiple investors' money is combined and managed by a professional fund manager. Managed funds can invest in shares, bonds, property, or a mix of assets. Unlisted managed funds are bought and sold directly with the fund, not on an exchange.
Marginal Tax Rate#
The rate of tax applied to the next dollar of income earned. In Australia, income tax is progressive: higher income is taxed at higher rates. Investment income (dividends, interest, capital gains) is typically added to other income and taxed at the marginal rate.
Market Capitalisation (Market Cap)#
The total market value of a company's outstanding shares. Calculated by multiplying the share price by the number of shares. Large-cap companies are generally more established; small-cap companies tend to be more volatile.
MER (Management Expense Ratio)#
The ongoing annual fee charged by a fund, expressed as a percentage of assets. An MER of 0.50% means the fund charges $50 per year for every $10,000 invested. The MER is deducted from returns automatically and includes management fees and most operating costs.³ Lower MERs leave more returns for investors over time.
N#
Net Asset Value (NAV)#
The total value of a fund's assets minus its liabilities, divided by the number of units on issue. NAV represents the underlying value of each unit in a fund. ETFs trade close to NAV; LICs can trade at premiums or discounts.
P#
PDS (Product Disclosure Statement)#
A legal document that provides information about a financial product, including features, fees, risks, and the issuer. Reading the PDS before investing is essential for understanding what you are buying.⁴
Preservation (Superannuation)#
The rule that superannuation contributions and earnings generally cannot be accessed until a condition of release is met, such as reaching preservation age and retiring. This makes super an illiquid long-term investment.
R#
Real Return#
The return on an investment after adjusting for inflation. If an investment returns 7% and inflation is 3%, the real return is approximately 4%. Real returns measure the actual increase in purchasing power.
Rebalancing#
The process of adjusting a portfolio back to its target asset allocation. Over time, different assets grow at different rates, causing the portfolio to drift from its original allocation. Rebalancing involves selling assets that have grown beyond their target and buying those that have fallen below.
REIT (Real Estate Investment Trust)#
A company or trust that owns or finances income-producing real estate. REITs trade on stock exchanges (A-REITs in Australia) and provide exposure to property without requiring direct ownership.
S#
Spread#
See Buy/Sell Spread. Can also refer to the difference between interest rates (e.g., the spread between the RBA cash rate and mortgage rates).
T#
TMD (Target Market Determination)#
A document that describes the target market for a financial product: who the product is designed for and who it is not suitable for. TMDs are required by law and help consumers determine whether a product is appropriate for their circumstances.⁴
Total Return#
The complete return on an investment, including both capital gains and income (dividends, interest). Total return provides a more complete picture than price return alone.
V#
Volatility#
The degree to which the price of an investment fluctuates over time. High volatility means prices move up and down significantly. Volatility is a measure of short-term fluctuation, not permanent loss. Investments can be volatile and still produce positive long-term returns.
W#
Withholding Tax#
A tax deducted at the source on income paid to foreign investors. When Australians invest internationally, foreign governments may withhold tax on dividends. Some of this may be reclaimable or creditable against Australian tax, depending on tax treaties.
Summary#
This glossary covers the most common terms Australian investors encounter. Understanding the vocabulary does not replace understanding the concepts; the articles in this learning pathway explain each concept in depth. When a term appears in an article, this glossary provides a quick reference for its meaning. Investing involves learning a new language, but the ideas behind the words are often simpler than they first appear.
Sources#
- Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of portfolio performance. Financial Analysts Journal, 42(4), 39-44. https://doi.org/10.2469/faj.v42.n4.39
- Australian Taxation Office. (2024). Capital gains tax. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax
- ASIC MoneySmart. (2024). Exchange traded funds (ETFs). https://moneysmart.gov.au/managed-funds-and-etfs/exchange-traded-funds-etfs
- ASIC. (2024). Design and distribution obligations. https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-274-product-design-and-distribution-obligations/