Investment terms

Investment terms

The financial world can be a confusing place.

View our list of investment terms to help you understand the world of investment.

Please use the + to see the definitions of the investment terms listed below. 

A - B

Absolute return - A return provided by a share or portfolio which is not measured relative to another share or benchmark index.

Accelerated Depreciation Scheme - A method of depreciation used for accounting or income tax purposes which allows greater deductions in the earlier years of the life of an asset.

Active Investors - Investors who purchase shares in companies and continuously monitor the performance of the companies in order to provide returns, as opposed to passive investors who buy shares based on index weighting.

Active share - A measure of the percentage difference between the portfolio holdings and index constituents. A higher percentage reflects a higher divergence from the index.

Addressable market - Addressable market (or available market) is the market demand for a product or service

Antitrust laws - Regulations that encourage market competition by limiting the market power of any particular firm. 

B-Corps - Companies certified by the non-profit B Lab which meet rigorous standards of social and environmental performance, accountability and transparency. B Lab is a non-profit organisation headquartered in Wayne, Pennsylvania, which created, and awards, the B Corporation certification. 

Bear market - A market where prices of assets are falling.

Benefit Corporation - A Benefit Corporation is a term used in the US for a form of legal corporate incorporation, which involves a high degree of transparency around sustainability issues, and has a material positive impact on society and the environment. This includes a binding legal commitment on directors to consider the interests of all stakeholders, not just shareholders.

Book value - The value of an asset according to its stated value on the balance sheet of a company.

Bond - Debt investment in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of activities and projects. 

Bottom of the pyramid - The poorest group in a society.

Bottom-up - Analysis of a company focused principally on its management, franchise and financials, rather than the broader industry in which it operates, or macroeconomic factors, such as economic growth.

Bubble - Conditions in an asset market where valuations are extended to excessive levels.

Build-own-operate contract - A form of project deliver method. Usually for large-scale infrastructure projects, where a company receives a concession from the public sector to finance, design, construct, own and operate a facility stated in the concession contract.

Bull market - A market where price of assets are rising.

C - D

Capacity management - Controlling the level of flows in terms of assets under management of a fund management company.

Capital account - The part of the balance of payments which records all transactions made between entities in one country with entities in the rest of the world. These transactions consist of imports and exports of goods, services, capital, and transfer payments such as foreign aid and remittances. 

Capital expenditure (capex) - Expenditure applied by a company to acquire, upgrade, and maintain physical assets such as property, buildings, industrial plant, technology or equipment.

Carbon sequestration - stores carbon dioxide in solid and dissolved forms to prevent it from entering the Earth’s atmosphere.

CFPS CAGR (cash flow per share compound annual growth rate) - A measure of the rate of growth of a company’s cash flow.

Change multiplier effect - Intensive change caused by complex economic and political factors, such as population change, environmental problems etc.

Circular economy - An economic system aimed at eliminating waste and the continual use of resources.

CleanTech - CleanTech companies seek to increase performance, productivity and efficiency by minimising negative effects on the environment. 

Compound annual growth rate (CAGR) - A statistic that measures the compound annual return of metrics over a set period of time, assuming gains are reinvested (i.e. compounding effect).

Concession zone - A territorial area over which a company has been granted regulatory approval to provide a given service, generally for a limited period of time.

Currency peg - Fixed exchange rate mechanism, with the domestic currency usually fixed at a specific rate to the US dollar.

Cyclical - Sensitive to movements of the economy (expansion and contraction).

Dividend - A payment by a company to its shareholders.

Derivative - A tradable security whose value is derived from the actual or expected price of an underlying asset.

Developed markets or economies - Countries with relatively high levels of economic growth and security are considered to have developed economies.

Discounted Cash Flow (DCF) - A valuation method used to estimate the attractiveness of an investment opportunity. 

Discount rate - The interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.

E - F

EBITDA (earnings before interest, tax, depreciation and amortisation) - A measure of a company’s operating performance without having to factor in financing decisions, accounting decisions or tax environments. Amortisation, like depreciation, is the practice of reducing the value of an asset to reflect its falling value over time, but is usually applied to non-tangible assets like brands.

Emerging markets or economies - Emerging markets (or EME, for the emerging market economy) are economies of countries that are in the progress of becoming a developed country and typically are moving toward mixed or free markets. Emerging market economies often have lower per capita income than developed countries, and often have liquidity in equity markets, are instituting regulatory bodies and exchanges, and see rapid growth.

Environmental, social and governance (ESG) - This refers to a set of criteria by which a company is judged by investors. Environmental criteria consider how it performs on environmental issues. Social criteria consider how it manages relationships with employees, suppliers, customers and the communities in which it operates. Governance deals with a company’s management, executive pay, audits, internal controls and shareholder rights.

EPS (earnings per share) - The portion of a company’s profit allocated to each outstanding share of common stock.

ESG (Environmental, Social and Governance) - ESG criteria are a set of standards for a company’s operations. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.

ETF (exchange traded fund) - A type of investment fund that is traded on a stock exchange and tracks an index. 

‘Externalities are internalised’ - Making companies pay for externalities (costs such as pollution which are not a usual cost of business).  

Fabless - A tech company which designs microchips but contracts out their production, rather than owning its own factory. 

Fintech - Financial technology (Fintech) is used to describe new technology that seeks to improve and automate the delivery and use of financial services.

Foreign debt - Debt denominated in a foreign currency, usually US dollars.

Free-float/ownerless company - A company not owned by a family group with a broad range of shareholders.

G - K

GDP (gross domestic product) - The monetary value of all the finished goods and services produced within a country’s borders in a specific time period. 

GDP per capita - The amount of GDP (gross domestic product) relative to a country’s population.

Gearing - Refers to the ratio of a company's debt-to-equity (D/E). Gearing shows the extent to which a firm's operations are funded by lenders versus shareholders.

Generic drug - A medicine that contains the same active substance as an originally marketed brand medicine which is produced by a manufacturer other than the company that developed the original brand.

Global Financial Crisis - The financial crisis of 2007–2008, also known as the GFC, the Great Recession or simply the 2008 financial crisis. It is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s

Golden share - A share in a company which can outvote all other shares in certain specified circumstances, and is often held by a government organisation.

Greenwashing - Conveying a false impression, or providing misleading information, about how a company's products or processes are environmentally sound.

Growth stocks - Companies expected to grow earnings strongly in the future

Hard currency earner - When the income of a company is denominated in a currency which is regarded as lower risk, such as US dollars or euros

Headwinds - Conditions which slow company growth.

Information ratio - also known as appraisal ratio, measures and compares the active return of an investment compared to a benchmark index relative to the volatility of the active return. It is defined as the active return divided by the tracking error.

Intellectual property - Creations of the mind, such as inventions, literary and artistic works and designs, as well as symbols, names and images used in commerce

Internet of things - The interconnection via the internet of computing devices embedded in everyday objects, enabling them to send and receive data.

Initial public offering (IPO) - The process of offering shares of a private corporation to the public in a new stock issuance.

L - N

Leveraging up - An increase in a company’s amount of debt.

Licence to operate - The ongoing acceptance of a company or industry’s business practices and operating procedures by its employees, stakeholders and general public.

Local debt - Debt denominated in a country’s domestic currency.

Long-term structural trends - Fundamental long-term changes in, for example, the economy or environment.

Macroeconomic fluctuations - Changes in macroeconomic variables, such as GDP, unemployment or productivity.

Market cap - The value of a company traded on the stock market. 

Modern Monetary Theory - An economic theory concerned with currency and unemployment.

Moody’s and Fitch - International ratings agencies which measure risks associated with countries and companies.

Negative working capital (or cycle) - When cash comes into the business faster than it goes out. 

Net cash - A company’s total cash minus total liabilities when discussing financial statements.

Net debt - A measure of debt held by a company.

NGO - Non-governmental organisation.

O - P

OECD (Organisation for Economic Co-operation and Development) - An international organisation that works to build better policies to improve people’s lives. 

Oligopoly - When a market is shared between a few firms which are able to maintain higher prices as a result.

Opioid crisis - A scandal in the US which involved the sale of prescription opioid painkillers amid a nationwide overdose crisis.

Overweight - A position larger than the benchmark index weighting in a stock.

Paris Agreement - The Paris Agreement sets out a global framework to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. It also aims to strengthen countries’ ability to deal with the impacts of climate change and support them in their efforts. The Paris Agreement is the first-ever universal, legally-binding global climate change agreement, adopted at the Paris Climate Conference (COP21) in December 2015.

Passive investment - An investment strategy that follows the weighting of companies in a benchmark index, as opposed to an active one.

Physical metrics - Measurements based on ‘real’ assets of a company, such as plant and machinery or property, rather than human capital (workforce) or intangible assets, like brands or trademarks.

Picks and shovels - Investing in the underlying technology needed to produce a good or service, rather than the final output. The term refers back to the gold rush of the 19th century when those who made the best returns often sold ‘picks & shovels’ to gold prospectors, rather than prospecting for gold.

Pluralism - Having different points of view or multiple political parties.

Price/book ratio (P/B) - The ratio of a company’s market value to its book value where the book value is the company’s assets expressed on the balance sheet. A lower ratio could mean that the company is undervalued.

Price/earnings ratio (P/E) - The ratio of a company’s share price to its earnings per share.

Price/Free Cash flow (Price / FCF) - A valuation metric that indicates a company’s ability to generate cash revenues (which can be used to repay debt, pay dividends or re-invest). Price/FCF is calculated by dividing the share price of the company by its free cash flow per share. 

Principles for Responsible Investment - A United Nations-supported international network of investors working together to implement its six aspirational principles. Its goal is to understand the implications of sustainability for investors and support signatories to facilitate incorporating these issues into their investment decision-making and ownership practices.

Proprietary trading - When a trading desk at a large financial institution (brokerage firm or investment bank) uses the organisation's own capital and balance sheet to conduct financial transactions.

Provisions - Amounts put aside by a bank to cover bad debts.

Proxy vote - Refers to a ballot cast by a single person or firm on behalf of a company’s shareholder who may not be able to attend a shareholder meeting.

Q - R

Quantitative Easing (QE) - An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.

Quantitative models - Is a technique that uses mathematical and statistical modeling, measurement, and research to understand behaviour.

Quant fund - An investment fund where the managers run computer-based models to determine whether to buy/sell stocks.

R&D - Stands for research and development.

Rainbow washing - Making products appear more aligned and targeted to the colourful icons of the United Nations Sustainable Development Goals.

Related party transaction - A deal or arrangement made between two parties who are joined by a pre-existing business relationship or common interest, and may create a conflict of interest

Renewables - A natural resource or source of energy that is not depleted by use, such as water, wind or solar power.

Rent-seeking - An attempt to boost profits by manipulating political or regulatory connections.

Reserve currency - A large quantity of currency maintained by a central bank or major financial institution to prepare for investments, transactions and international debt obligations, or to influence a domestic exchange rate.

Resolutions - Propositions put before the directors or members of a company to vote on. 

Return on capital (ROC) - A measure of the profitability of a company relative to the amount of capital invested by shareholders and other debtholders.

Return on Equity (ROE) - A measure of the net income of a company as a percentage of shareholders equity. Used to analyse the ability to generate profit and efficiency of company management.

Rights issue - An invitation to existing shareholders of a company to purchase additional new shares in the company at a discounted price.

Risk-free rate - The risk-free rate of return refers to the theoretical rate of return of an investment with zero risk. In practice, the risk-free rate of return does not truly exist, as every investment carries at least a small amount of risk.

Rube Goldberg machine - Named after American cartoonist Rube Goldberg, is a chain reaction-type machine or contraption, intentionally designed to perform a simple task in an indirect and overly complicated way.

S - T

Secondary issue - A sale of new or closely held shares of a company that has already made an initial public offering (IPO).

Shanghai-Hong Kong Stock Connect - A cross-boundary investment channel that connects the Shanghai Stock Exchange and the Hong Kong Stock Exchange.

Sharpe ratio - the performance of an investment compared to a risk-free asset, after adjusting for its risk.

SubprimeA credit classification referring to lending of higher risk.

Sustainable development - Economic and social development without using up the world’s natural resources. It aims for high human development with a sustainable environmental footprint.

Sustainable Development Goals (SDGs) - A collection of 17 global goals designed to be a ‘blueprint to achieve a better and more sustainable future for all.’ The SDGs were set in 2015 by the UN and intended to be achieved by 2030.

Sustainable finance - Taking account of environmental, social and governance (ESG) considerations when making investment decisions. 

Sustainable investment - Investing which takes account of sustainable development issues, such as environmental issues and corporate governance concerns. 

SWOT analysis - A process which identifies a company’s strengths, weaknesses, opportunities and threats.

Tangible assets - Assets which have a physical form, like property, computer equipment or factories, as opposed to intangible assets, like brands and trademarks.

Tailwinds - Conditions favourable to a company’s growth.

Top-down - An investment philosophy focused on trends in the economy as a whole rather than a company level (bottom-up).

Total addressable markets - the total revenue opportunity available to a product or service

Tracking error - Amount by which the return of a stock differs from the index.

Trading commission - The fee charged by a brokerage company when buying or selling shares in a company. 

Transfer pricing - Refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control.

U - Z

Underweight - A position less than the benchmark index weighting in a stock.

Utility-scale solar photovoltaics - Solar power generation at a large scale.

Value stocks - Companies which may not grow earnings, but whose share price does not reflect the value of its assets.

VIE (variable interest entity) - A business structure in which an investor has a controlling interest despite not having a majority of voting rights.

Wage arbitrage - Describes how a company benefits from lower wage costs in other geographical locations, often associated with global outsourcing

Warrant - A financial derivative which moves in price more than the underlying security.