Glossary

An accumulating ETF (Exchange-Traded Fund) is a type of ETF that reinvests any dividends or interest generated by the underlying assets back into the fund. 🔄

This leads to an increase in the net asset value (NAV) of the ETF over time, allowing investors to benefit from the power of compounding without having to manually reinvest their dividends.

For example, consider an accumulating ETF that tracks the S&P 500 Index. Instead of distributing dividends to its investors, the ETF would reinvest those dividends back into the fund, increasing its NAV and, consequently, the value of each share.

Fun fact: Accumulating ETFs are particularly popular among long-term investors 🌱 who want to maximise their returns by taking advantage of compounding effects. These ETFs can be an efficient way to grow your investment over time, especially if you have a low-risk tolerance or prefer a more passive investment strategy. 🛀

Active investing is an investment strategy where fund managers or investors actively make buy and sell decisions in an attempt to outperform the market or a specific benchmark. 📈

It typically involves continuous research, market analysis, and trading, with the goal of generating higher returns than passive investing strategies, such as index tracking. 

Fun fact: Active investing can be exciting and potentially rewarding, but it can also be riskier and costlier than passive investing due to higher trading fees and the potential for human error. 😅 Research has shown that over the long term, many active investors fail to consistently outperform passive investment strategies, which has fueled the ongoing debate between active and passive investing proponents. 🥊

For example, an active investor might analyse a company's financials and industry trends to determine whether its stock is undervalued. If the investor believes the stock has growth potential, they might purchase it with the expectation that its price will rise in the future.

After-hours trading refers to the buying and selling of securities outside of the standard trading hours of the major stock exchanges.

This occurs on electronic communication networks (ECNs) that match buyers and sellers directly, bypassing the traditional exchange. After-hours trading allows investors to react to news and events that occur outside of regular market hours, which can be advantageous for those seeking to capitalise on opportunities. 🌙

For example, a company may release its earnings report after the market closes. Investors who want to trade on this information can do so during after-hours trading, potentially taking advantage of price movements before the market opens the next day.

Fun fact: After-hours trading used to be exclusive to institutional investors, but with the development of ECNs and advancements in trading technology, retail investors now have access to this extended trading session as well. 💡

Algorithmic trading, also known as algo trading or automated trading, involves using computer programs and complex algorithms to execute trades in financial markets.

These algorithms are designed to make decisions based on predefined parameters or rules, such as market trends, price fluctuations, and trading volumes. Algorithmic trading can be used to execute various strategies, including high-frequency trading (HFT) and arbitrage. 🖥️

For example, an algorithm may be programmed to buy a stock when its 50-day moving average crosses above its 200-day moving average, signaling a bullish trend.

Fun fact: Algorithmic trading has become increasingly popular in recent years, with some estimates suggesting that it accounts for around 70% to 80% of the trading volume in US equity markets. This high prevalence is due to its ability to execute trades rapidly and accurately, reducing human error and emotional biases. 📊

Alpha is a measure of an investment's performance relative to a benchmark, like an index, indicating how well a portfolio manager or an investment strategy has outperformed the market. 📈

It's often used to evaluate the skill of active fund managers, as a positive alpha indicates that the investment has outperformed the benchmark, while a negative alpha means it has underperformed.

For example, if a mutual fund has an alpha of +3, it means the fund has outperformed its benchmark by 3% during a specific period.

Fun fact: Alpha is the first letter of the Greek alphabet, and in finance, it symbolises the beginning or the "first mover" advantage. 🏆 This implies that skilled investors who can consistently generate positive alpha are considered to have superior stock-picking or market-timing abilities compared to the average market participant.

An American Depository Receipt (ADR) is a negotiable financial instrument that represents ownership in a specified number of shares of a foreign company's stock. 🌐

ADRs are traded on US stock exchanges, allowing US investors to invest in foreign companies without having to buy shares directly on a foreign stock exchange. They are created by US banks that hold the underlying foreign shares and issue corresponding ADRs.

For example, a US investor interested in owning shares of a European company could buy ADRs of that company on a US stock exchange instead of purchasing the shares directly on a European exchange.

Fun fact: ADRs were introduced in the 1920s to help US investors overcome the challenges of investing in foreign markets, such as currency conversion, language barriers, and differing settlement practices. 🏦 Today, ADRs make it easier for investors to diversify their portfolios with international exposure.

Amortisation is the process of gradually reducing a debt or spreading the cost of an intangible asset over its useful life.

In the context of loans, it refers to the systematic payment of principal and interest over a specified period, allowing the borrower to fully repay the debt by the end of the term. In accounting, it pertains to allocating the cost of an intangible asset, like a patent or trademark, over its useful life. 📆

For example, if a company takes out a 5-year loan for $100,000 with a fixed interest rate, the amortisation schedule would outline the monthly payments required to repay the loan in full by the end of the 5 years.

Fun fact: The word "amortisation" comes from the Old French word "amortir," which means "to deaden" or "extinguish." In the financial context, it's about extinguishing the debt or the cost of an asset over time. 💡 Amortisation schedules can be a helpful tool for borrowers to visualise how their loan payments are allocated between principal and interest, helping them better understand their debt repayment progress.

An annuity is a financial product sold by insurance companies that provides a stream of income to the buyer, typically for retirement purposes. 🏖️

Annuities can be structured in various ways, such as immediate or deferred, fixed or variable. The buyer makes either a lump-sum payment or a series of payments into the annuity, and in return, the insurance company guarantees a steady income stream, either for a fixed period or for the buyer's lifetime.

For example, a retiree might purchase an immediate annuity with a lump-sum payment to receive monthly income for the rest of their life.

Fun fact: Annuities have been around for centuries. 📜 In ancient Rome, annuities were used by the government to provide lifetime incomes for military personnel and their families as a form of pension. Today, annuities remain a popular retirement planning tool for those seeking guaranteed income streams.

Arbitrage is a trading strategy where investors take advantage of price differences for the same asset across different markets or exchanges. 📈

They buy the asset where it's cheaper and sell it where it's more expensive, making a profit from the price difference.

For example, if a stock is trading at $100 on Exchange A and $101 on Exchange B, an arbitrageur would buy the stock on Exchange A and simultaneously sell it on Exchange B, pocketing the $1 difference as profit.

Fun fact: Arbitrage opportunities can be short-lived as the market tends to correct price discrepancies quickly. To take advantage of these fleeting opportunities, some traders use sophisticated algorithms and high-speed computers 🖥️ to identify and execute arbitrage trades in milliseconds!

An asset is something of value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefits. 💰

Assets can be tangible, like property, vehicles, or machinery, or intangible, such as intellectual property, patents, or goodwill.

Examples of assets include cash, stocks, bonds, real estate, and even collectibles like artwork or rare stamps.

Fun fact: The word "asset" comes from the Old French term "asetz," which means "enough" or "sufficient". 📚 In finance, assets are considered valuable resources that can help an individual or business meet its financial goals, making them "sufficient" for generating income, reducing liabilities, or enhancing overall net worth.

Asset allocation is the process of dividing your investments among different asset classes, like stocks, bonds, and cash, to balance risk and reward. 📊

The goal is to create a well-diversified portfolio that matches your investment goals, time horizon, and risk tolerance.

For example, a young investor with a high-risk tolerance might have an aggressive asset allocation, with 80% in stocks for growth, 15% in bonds for stability, and 5% in cash for liquidity. Or an equal allocation among stocks, US government bonds, gold and cash if he is conservative.

Fun fact: Studies have shown that asset allocation is one of the most important factors in determining long-term investment success. 🌟 It's even more crucial than individual investment selection or market timing!

An asset class refers to a group of investments that share similar characteristics, behave similarly in the market, and are subject to the same laws and regulations.

The main asset classes are stocks, bonds, commodities, cash, and real estate. Investors often diversify their portfolios across different asset classes to manage risk and optimise returns.

For example, a balanced portfolio might include stocks for growth potential 📈, bonds for income and stability, real estate for long-term appreciation 🏠, and cash for liquidity and safety.

Fun fact: Some investors also consider alternative investments like collectibles, and cryptocurrencies 💎 as separate asset classes, although these often come with higher risks and different market dynamics compared to traditional asset classes.

Asset management is the professional management of investments on behalf of clients, typically institutions or individual investors.

It involves the process of analysing, selecting, and overseeing various financial instruments, such as stocks, bonds, and real estate, with the goal of maximising returns while managing risks. Asset managers may also provide other services, like financial planning and portfolio diversification. 💼💰

For example, BlackRock, one of the world's largest asset management firms, manages a diverse range of investment products, including mutual funds, exchange-traded funds (ETFs), and separately managed accounts, catering to both retail and institutional investors.

Fun fact: The asset management industry is enormous, managing trillions of dollars globally. In 2020, the total value of assets under management (AUM) for the top 500 global asset managers exceeded $100 trillion for the first time. 🌍💵

Assets Under Management (AUM) refers to the total market value of investments managed by a financial institution, such as a mutual fund, hedge fund, or asset management firm.

It is an essential metric for evaluating the size and success of these firms, as higher AUM typically indicates greater investor trust and management expertise. AUM can fluctuate due to market performance, fund inflows, and redemptions. 📊💰

For example, BlackRock, as of September 2021, had over $9 trillion in AUM, making it one of the largest asset management firms globally.

Fun fact: Vanguard, another prominent investment management firm, became the first company to surpass $1 trillion in AUM for its index-tracking funds in 2020, reflecting the growing popularity of passive investing strategies. 🌟