Do you know your alpha from your beta? How about the difference between growth and value? Is it best to be bottom-up or top down?
If any of those terms leave you scratching your head, then you’re not alone. The investment world is full of jargon that can make everything seem overly complicated.
Here, we try to decipher some of the most commonly used words and phrases that you’re likely to come across and explain what they mean to your investments.
A simple one to start. A stock-picker is someone that selects specific companies in which to invest. Their task is to learn all about the businesses they’re considering, analyse their finances and decide whether it’s worth investing.
2. Bottom-up and top-down
This is nothing to do with how we get dressed, but all about how a fund manager goes about choosing their investments. Bottom-up means a fund manager focuses more on the qualities and prospects of individual companies. Conversely, top-down is when they concentrate on broader macroeconomic environment factors, such as the likely impact of central bank interest rate movements.
3. Market cap
Again, nothing to do with the latest head gear, this term helps you understand the size of a company and refers to the total value of its shares. It’s calculated by multiplying the number of shares available with their price on the stock market. For example, a company with a million shares priced at £10 each would have a market capitalisation – or market cap – of £10m. This indicates whether it’s a large, medium or small sized company.
For a motorist this might mean give way. For siblings wrestling it might mean give up. But for investors it is simply a calculation of how much income an investment has generated in the form of interest (from cash or bonds), dividends (from shares) or rent (from a property) in relation to the price paid. The calculation is shown as a percentage.
5. Basis points
Basis points or “bps” are a precise financial measurement that’s often used to explain interest-rate movements more accurately and eliminate confusion. One basis point is the equivalent of 1/100 of one per cent – or 0.01 per cent – so is very small. A real-life example is when you hear that the Bank of England has raised interest rates from 2.5 to 2.75 per cent – this is a 25bps rise.
6. Alpha & Beta
As well as being the first two letters in the Greek alphabet, these are two key measurements of the performance of a stock or a fund. Alpha is the additional return of an investment over and above its chosen benchmark – how well a UK equity fund has done when compared to the FTSE 100, for example. Beta, meanwhile, is basically the movement of the stock market. A “beta of one” means you are performing exactly as the market does. A beta greater than one suggests your investment is more volatile, and a beta of less than one, less volatile.
7. Buy side and sell side
You be forgiven for thinking these terms are the people either side of a till… and in a way they are. Buy side refers to institutions such as asset managers that are involved in buying assets. Conversely, sell side includes business such as brokers and investment banks that are involved in selling assets.
8. Value and growth
These are two distinct styles of investing. Both have roles to play in an investor’s portfolio, depending on the person’s goals. Value investing is focusing on buying stocks that you believe have good prospects, but which are out of favour with other investors. This tends to mean the shares are cheaper than the company’s intrinsic value. Growth investing, meanwhile, means buying into companies whose earnings are expected to increase rapidly and potentially their margins and profits too. Such stocks can often be found in fast-developing areas, such as technology.
Cold French fries anyone? In fact, blue-chip is the name for large, well-recognised, respected and financially-sound companies that are frequently traded by investors on global stock markets. You’ll often hear “blue-chip” mentioned in the same breath as the FTSE 100 index. Blue-chip stocks are often viewed as being attractive and reliable investments, which have been around for a number of years and weathered many economic ups and downs.
10. Overweight and underweight
We might well be told we are one of these after a visit to the doctor. But in the investment world, these terms help explain a fund’s positioning in different stocks or sectors in comparison to its broader benchmark index. If a fund manager is “overweight” with a particular company, this means they have a higher proportion in the stock as they expect it to do particularly well. Conversely, if they are “underweight”, this means they don’t share the confidence in its prospects and won’t have so much exposure.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.