Glossary of Key Terms for the Investment Industry
Asset Allocation: The process of distributing investments across various asset classes such as stocks, bonds, alternative markets, and cash equivalents to optimize risk and return based on an investor's objectives and risk tolerance
Basis Point (bps): A unit of measurement used in finance to describe the percentage change in a financial instrument. One basis point is equal to 0.01% (1/100th of a percent).
Blue Chip Stocks: Stocks of well-established, financially stable companies with a history of consistent performance and typically large market capitalizations.
Bonds: Debt securities issued by governments or corporations, where investors lend money to the issuer in exchange for periodic interest payments and the return of the bond's face value at maturity.
Commodities: Physical goods such as gold, silver, oil, wheat, or coffee that are traded on commodities exchanges. Investors can gain exposure to commodities through futures contracts, ETCs, or commodity-specific mutual funds.
CPI – The Consumer Price Index (CPI) measures the change in the prices (inflation/deflation) of goods and services contained in a basket of consumer items. Central banks pay close attention to this figure when makinh interest rate decisions. A reading stronger than forecast will generally be good for the local currency e.g. Euro CPI beats estimates ~ EUR/USD moves higher. The U.S. has an additional, alternative inflation data point called the PCE Price Index which is very similar to CPI; it is the preferred inflation gauge the Federal Reserve look at when analysing price pressures.
Cryptocurrencies: Digital or virtual currencies that use cryptography for security and operate on decentralized networks based on blockchain technology. Examples include Bitcoin, Ethereum etc.
Derivatives: Financial instruments whose value is derived from the value of an underlying asset, index, or interest rate. Common types of derivatives include options, futures, forwards, and swaps.
Dividends: Payments made by a corporation to its shareholders from its earnings. They are typically distributed quarterly and represent a portion of the company's profits.
Exchange-Traded Fund (ETF): A type of investment fund that trades on stock exchanges, holding assets such as stocks, commodities, or bonds. ETFs offer diversification and typically have lower expense ratios compared to mutual funds.
GDP (Gross Domestic Product) - Gauges the inflation-adjusted value of all goods and services produced within the economy. It is the most comprehensive measure of economic activity and an important indicator of economic health. A reading stronger than forecast will generally be good for the local currency e.g. Euro GDP beats estimates ~ EUR/USD moves higher.
Index Fund: A mutual fund or ETF that aims to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average, by holding the same securities in the same proportions.
Liquidity: The ease with which an asset can be bought or sold in the market without significantly affecting its price. Highly liquid assets can be readily converted into cash without substantial price discounts.
Market Capitalization: The total value of a company's outstanding shares, calculated by multiplying the current share price by the total number of shares outstanding.
Mutual Fund: An investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities managed by professional portfolio managers.
Options: Financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) within a specified period.
Pension Funds: Structures such as Personal Retirement Savings Accounts (PRSAs) or occupational pension schemes, provide a tax-efficient way to save for retirement. Pension funds typically offer a range of investment options, including equities, bonds, and property.
Private Equity: Investments in privately held companies or non-publicly traded assets, typically made by institutional investors or high-net-worth individuals. Private equity funds acquire, invest in, and manage companies with the aim of achieving high returns.
Real Estate: Real estate can offer opportunities for capital appreciation and rental income on underlying investments. Investors can buy residential properties, commercial properties, or invest indirectly through Real Estate Investment Trusts (REITs) listed on the Stock Exchanges.
Risk Tolerance: An investor's willingness and ability to endure fluctuations in the value of their investments in pursuit of higher returns. It is influenced by factors such as investment goals, time horizon, and financial situation.
Socially Responsible Investing (SRI): Investors interested in ethical and sustainable investing can explore SRI funds and initiatives in Ireland. These investments focus on companies with strong environmental, social, and governance (ESG) practices.
Stocks: Ownership shares in a publicly traded company, representing a proportional claim on the company's assets and earnings. Stocks offer potential capital appreciation and may pay dividends.
Venture Capital: Financing provided to early-stage, high-potential startups by venture capital firms or investors in exchange for an equity stake. Venture capital is often sought by companies with innovative business models or disruptive technologies.
Volatility: A statistical measure of the dispersion of returns for a given security or market index, indicating the degree of fluctuation in prices over a specific period. Higher volatility implies greater uncertainty and risk.
Yield: The income generated by an investment, usually expressed as a percentage of the investment's cost or current market value. It can refer to dividends from stocks or interest payments from bonds.