BSB107: Personal Finances

Asset Classes

The broad type of investment you make.

Property, Shares (Equity), Index Funds, Bonds (fixed-income securities), Cash equivalents, Commodities (e.g. oil), Cryptocurrency, artworks and other.

Blue Chip companies

Companies that are well established, known, stable and secure. Nationally recognized and expected to be financially sound.

Bonds

Investments in companies or governments that pay interest. From the issuers’ perspective, they are borrowing money from the public, so this is sometimes referred to as debt. Usually lower risk than shares. Also known as fixed-income securities.

Commodities

A basic good that is interchangeable with others of the same type, such that they can be easily traded on an exchange. E.g. gold and oil.

Compound Interest

Interest calculations where the interest is capitalized (added to the investment), at the end of each period. Future interest calculations are based on the revised total, so interest amounts increase from one period to the next. For borrowings, this means that interest charge decreases as the loan is paid off.

Concentrated portfolio

The opposite of a diversified portfolio. A more focused strategy, investing in a few particular companies. Carries higher risk, higher return.

Diversification

Having a variety of different investments to reduce risk. Only works if the investments are not perfectly correlated. Can reduce risk, but also limits the ability to make abnormal returns.

Dividend

A payment made by a company to its shareholders. Unlike interest, the amount of a dividend is not determined by rate, but by profits. Aka distribution

Equity

In relation to investing, equities are shares in a company.

Can also reflect the excess of the value of an asset (usually property) over any loans secured against it. E.g. if a home-owner’s house increases in value, while the loan is paid off, then equity increases.

Fundamental analysis

Selecting stocks based on an analysis of the company’s intrinsic value. Relies on a detailed consideration of the company’s history and prospects, including its financial statements and broader economic considerations. If our estimate of value is higher than the current share price, we recommend buying the stock.

Future Value (FV)

The value of an investment or loan at a specific point in the future.

Excel formula: =FV(rate, nper, pmt, [pv], [type])

nper = no. of periods

pmt = amount of regular payments if any

pv = present value

type = 0

Growth Stocks

Companies that are expected to grow at a faster rate than the industry average. Could be risky.

Index Funds (Exchange Traded Funds or ETFs)

Funds that track the performance of the market or a specific sector. They typically have low fees and reflect a passive investing strategy.

Inflation

A general increase in the price of goods and services, which means that the purchasing power of $1 decreases overtime. If your investment return is less than the rate of inflation, you are effectively losing money.

Market Capitalism

The total dollar market value of a company’s shares (i.e number of shares issued x share price. An indicator of the size of the company).

Determining number of periods in an investment or loan

Excel formula = nper(rate, pmt, pv, [fv], [type]

Passive vs Active Investors

Passive: Investors who put their money in a fund that does the investing for them (for a fee)

Active: investors who actively search out particular stocks to buy, and sell them if they are underperforming

Ponzi scheme

A fraudulent investment scheme where funds are not actually invested, but the funds received from new investors are used to pay the (fake) returns to existing investors. The scheme collapses when new investors drop or when enough existing investors want to withdraw their funds.

PMT

Excel formula to determine the amount of regular payments:

= PMT(rate, nper,pv,[fv],[type])

Place a minus sign before formula if you want to show a positive figure.

Present Value (PV)

The value of an investment or loan now.

PV=FV(1+i)ⁿ

=PV(rate, nper, pmt, [fv], [type]

Principle value

The amount invested or borrowed. Sometimes referred to as the capital.

Sectors

The stock market can be broken down into different sectors (e.g. energy, health care, financials and industrials). The ASX has 11 Sectors, 25 Industry Groups, 77 Industries and
174 Sub-industries. There are 2,300+ companies listed on the ASX.

Shares

A share is a stake in the ownership of a business. For public companies (whose shares are traded), however, a share represents a right to the net assets of a company and to any dividends that are declares. Shareholders are those who have shares in a company. Also known as stocks and equities.

Value Stocks

Companies that are currently trading at a discount (i.e. the current share price is less than what they are worth), based on an evaluation of the fundamentals of the company.

ESG Integration

Environmental, Social, Governance.

The incorporation of ESG factors into an investment process.

Impact Investing

Investing with the intention to generate a positive, measurable social and/or environmental impact alongside a financial return. Hybrid of charity and investing. Traditional investors may not agree even though there is a market rate return - is it not the governments responsibility?

Philanthropy

Giving money (or time) to help those in need

Screening

A process for determining which investments are or are not permitted in a portfolio. Can be negative or positive

Socially Responsible Investment

Investing in order to make a positive social impact.

Stewardship

Exercising rights and influence to protect and enhance overall long term value for clients and beneficiaries. Focus is on being a good long-term owner of common assets. Assets can be economic, social or environmental.

Sustainable Development

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Thematic Investing

A portfolio of assets, chosen via a top-down process, that are expected to benefit from specific medium to long term trends. Based on the idea that specific trends are driving risk and return. Examples, climate change shifts, ageing population, sustainable agriculture.