We are all experiencing unprecedented times. With more time on our hands, we tend to resort to the things that have been shelved for a long while. The world of investments can be off-putting for new investors – technicalities and jargon are used to refer to the different investment types and instruments. If you are new to investments, this article aims to close the gap and explain some of the most common terms used.

Shares/equities

Shares, also sometimes referred to as equities, represent part ownership in the company being invested in.  It is an indivisible unit of capital and the share owner is called a shareholder.  The total face value of the issued shares represent the capital of a company but may not reflect the market value of these shares.  Income received from owning shares is called a dividend. Dividends are not paid automatically; the board of directors decides whether a dividend will be paid in a particular year and how much dividend will be paid per share, often basing the decision on the previous year’s profits while keeping short-term expenditure requirements in mind. The process of selling and buying shares often involves going through a stockbroker. Share prices fluctuate  for various reasons, mainly instigated by demand and supply, interest rates, dividend policy, company management, the ecomony and political climate.  

Bonds

Unlike shares, bonds do not grant ownership rights. A bond is also known as a fixed-income security. It is a debt instrument created for the purpose of raising capital for companies and governments. They are, in essence, loan agreements between the bond issuer and the investor in which the bond issuer is obligated to pay a specified amount of money at specified future dates. A bond usually carries  a coupon. A coupon is the regular fixed return offered on the loaned capital. Bonds usually have a pre-set maturity date. This is when the issuer will return the ‘loaned’ money to the investor.

Balanced funds cater for a mixed investment strategy, having both growth and income

The company’s or country’s credit rating is one of the main factors affecting the level of coupon offered on bonds.  During the lifetime of the bond, prices will fluctuate, mainly affected by prevailing interest rates and credit quality – senior bonds usually offer better credit quality against the high- yield bonds. Another reason that drives prices is also on the demand-supply factor.

Funds

A collective investment fund or scheme are a means of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group.

Funds are often categorised per asset class. For example, an equity fund, which would be made up of shares in the majority, would be more ideal for potential capital growth. Bond funds, on the other hand would potentially provide regular income. Balanced funds cater for a mixed investment strategy, having both growth and income. 

The fund manager who makes the investment decisions on behalf of the funds’ customers is bound to follow the fund’s  investment objectives and limitations as described  in the prospectus of the specific fund.  Investors can take  advantage of the fund manager’s expertise and cost-efficient access to financial markets. Funds are normally open-ended investments where investors can buy and sell units at any time, traded once every business day.

ETF

ETFs or exchange traded funds are funds that issue shares  which are traded on a stock exchange. ETFs cover a broad range of asset classes and can give exposure to specific markets, sectors or investment strategies. Many ETFs track an index in order to provide a return. ETFs can provide exposure to a variety of asset classes such as equities or fixed income securities, instant access to international markets as well as commodities such as gold, silver and precious metals. This can help investors spread risks. ETFs often have lower costs than other types of investment funds since passively tracking an index is less expensive than active fund management. ETFs ‘behave’ like normal shares and hence can be traded at any time of the day.

Bonds and equities play a critical role in an investor’s portfolio. Owning bonds and shares helps to diversify a portfolio  but the main problem for a retail investor arises when there is the need to select from the universe of investment options available.  Financial advisers assist investors in building a structured portfolio in line with their risk profile and investment objectives.

This article is not, and nothing in it should be, construed as a recommendation in respect of investment products or services offered by the BOV Group.  Any views, assumptions or opinions expressed in this article are those of the author. Value of investments may go down as well as up and may be affected by changes in currency exchange rates. Past performance is not a guide to future performance.  

Ethelbert Perini, manager, BOV Investment Centre 

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