Terms of the Share Market

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The Australian market has been great for those with the nerve to ride out its ebbs and flows. Though the second biggest collapse in history has happened, investors who stuck it out are now starting to see some substantial gains. With the markets offering such potential for profit, more and more investors are looking to throw their proverbial hats into the ring. The issue here is that you want to always make sure that you understand what you’re getting into.

This article is going to overview some of the key terms of the Australian share market, and what they might mean for you.

All the terms that you should know within the Australian share market

All Ordinaries Index – This is the successful investor’s measure of choice for assessing current market trends and performance. It is focused around the market’s moves that have been made by the top 500 companies of the country.

Australian Securities eXchange (ASX) – The ASX is both a general name for the Australian Securities Exchange and a specific company that can be traded on the same Exchange!

ASX200 – The ASX200 is an index that is similar to the All Ordinaries Index. Some managers prefer this or the S&PASX 200 index because they focus on 200 companies (rather than 500) and thus give a more focused view.

Bear Market – The term bear market typically describes a market where the prices are continually falling.

Bull Market – The term bull market typically describes a market where the prices are continually rising. We can look to 2010 as an example of this.

Cash Flow – Cash flow is a critical indicator of company health. A company can be as profitable as it wants, but still lack the cash flow to sustain itself if it isn’t managed efficiently.

Contracts For Difference (CFD) – Contracts for Difference are newer ways to invest. It should be noted though that they are riskier and more volatile, though the potential benefits can balance this out.

Saffer has been quoted as saying that they’re “almost like a bet, to exchange the difference between the opening and closing prices of the share or index”.

Dividends – Dividends are the term given to describe the payouts a client gains as a benefit to holding shares in a company. It is measured in percentages of shares.

Franking/dividend imputation – This is the tax credit connected to dividends that allow holders to redeem a tax rebate in some cases. It comes out to approximately 30% of the taxation rate of the company.

Options – These handy elements of the share market ensure an investor can reserve the right to sell or buy at a specific price, but at a later date. They tend to be the most common derivative seen on the markets according to Saffer.

Price/Earnings (P/E) Ratio – The P/E ratio is another company health indicator that compares the value of the company to its profit, to give investors an idea of the value therein.

The benefit here is that the P/E ratio is easy to use, and can be a great way for beginners to see the potential value (or lack thereof) in a company they’re considering.

Short Selling – This is a term used to describe the situation wherein investors are essentially selling shares they don’t yet own (but intend to), for the purpose of trying to get a better buy back price.

Stop Loss – This is a standing command that can be given to financial managers to indicate the lowest comfortable price you are happy with on a share. If you give a stop loss command, the adviser will sell off stocks if they reach that share to protect you from further losses.

Underlying Profit – The underlying profit is the “bottom line” version of a company’s earning potential. Companies often try to make their headline profits look more favourable than they actually are, using sales or write offs to try to tempt future investors. This is not an option with underlying profits as an indicator, making them the preferred indicator for many investors.