Investor Glossary

Australian Investment Research Services believes in de-mystifying the jargon associated with Financial Markets, Economics and Investing in general. Financial decision making, while more an art than a science, can be made more straightforward by understanding the central theories and concepts that drive markets. These core issues, involving the interaction of risk, return and time are presented in an easy to read format. Subscribers also get access to explanations of the mechanics of the Currency, Fixed Interest, Money Market, Stockmarket and Commodity markets. It is important to acknowledge that each of these broad market classes has its own set of trading characteristics. These differing rules, regulations and most importantly participants impact significantly on the performance of these individual market groups.

Investment Basics: Financial decisions are bound by three immutable factors; Risk, Return and Time. Understanding these core principles allows for a more effective and disciplined approach to the investment or risk management process. The central theme is that no "free lunches" exist in the financial markets over the medium to longer term. To earn an above average return a higher than normal risk exposure must also be taken. The forces of so called "arbitrage" ensure that all financial opportunities reflect this relationship of risk, return and time. The concept of arbitrage reinforces the fact that economic theory provides the underpinnings for the operation of the financial markets.

Currency: These markets perform an important economic function. They enable trade to occur betweens countries through exchange of different national currencies. The exchange rate is seen by policy makers as the key external price from which to assess the relative health of the economy. The level and rate of change of a given currency is an important determinant of the success or otherwise of Government policy, company profitability and investment opportunities in general. The recent 1997-98 Asian / Emerging market crisis has increased the attention paid to these type of issues.

Fixed Interest: The bond market forms an integral part of the capital markets through which Governments and Corporations borrow funds to support their activities. The market for debt capital is influenced by a range of variables such as the credit quality of the issuer (borrower), expectations regarding inflation over time and the general strength of the economy. Bonds also serve as an important asset class through which investors can diversify their portfolios. These securities give access to an alternative income stream via coupon payments and the potential for capital gains while offering a generally lower risk profile than equity investments.

Money Market: The money market covers a range of interest rate deposits & securities that are generally less than 12 months to maturity. The price of these instruments is responsive to the level of liquidity in the economy which is ultimately set by the operations of the central bank. Monetary policy is conducted through control of the overnight cash rate which sets the interest rates on shorter dated floating rate debt and thereby business borrowing costs. The money market is seen as the lowest risk asset class with the highest liquidity, in the case of cash management products, but as a consequence offers a lower rate of return except in certain unsustainable situations as occurred in Australia in the late 1980’s when cash rates where above 18.00 %.

Stockmarket: The market for equity allows companies to raise capital and to diversify the risk of ownership. The investor in buying shares is exchanging funds for access to the potential earnings stream associated with the product and services sold by the company. Shares provide access to income via dividends and capital gains through increases in the company share price. Company management, the particular characteristics of the industry the business competes in, the capacity of the company to innovate and the wider macroeconomy all play roles in determining the survival of an individual business entity. The risk in this activity is that the company will not survive and the investor as part owner of the business will loose their original capital. The stockmarket by nature of the higher risks involved offers the highest returns over the longer term.

Commodities: These markets cover the price for Coffee, Beef, Gold, Oil, Copper and Wheat to mention just a few. They form the first raw inputs into the business production process. These prices as business inputs have a major influence on inflation in the economy and thereby Government policy. Over the last five years or so commodities such as base metals have been viewed increasingly as another asset class, admittedly high risk, for institutional investors such as the hedge funds. Commodity markets are obviously crucial for the Australian economy with around 65 % of export income still derived from mining or rural sources. Gold has been the star performer in this regard. It is now Australia’s second biggest mining based export product.

Subscribers get access to a resource that helps explain the investment environment

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