David Child, the treasurer of the Australian Investors Association, is convinced that there is a "club of people who sit down and come up with terms" to confuse and confound investors.
"I'm sure people are frightened off by it," he says of financial jargon.
"I think most people don't want to expose their own lack of understanding so they would much rather nod than ask the question and, of course, the trick is to ask about anything that you don't understand, to ask for a simple English explanation."
The problem becomes self-perpetuating; people do not understand the issues so they are afraid to ask what specific words mean. Because they do not ask, they do not understand their investments or the reason for good or bad returns. And on it goes.
The chairman of the Australian Shareholders Association, John Curry, says some financial planners assume their clients "have more knowledge than they really do".
He believes some financial advisers simply cannot be bothered with long-winded explanations: "There's also an element of, 'look, my time is precious. If you don't understand what earnings-per-share growth is, you're hardly worth dealing with'."
Mr Child says no investor should put up with that. They should expect full, transparent and detailed explanations.
"Transparency and disclosure are words that are bandied about but the disclosure of anything isn't only about mentioning it, it's making sure that the person you're talking to actually understands," he says.
"Any adviser worth his salt should really only want to deal with those people who do understand what he's saying. Otherwise they're not an adviser, they're a salesperson."
So here are a few oft-used, little-understood, but really-not-that-difficult-to-grasp concepts explained as simply as we can.
Allocated pension: An annual, monthly, quarterly or six-monthly pension extracted from a lump sum investment placed with a superannuation fund or in a retirement savings account. The pensioner, or owner of the allocated pension, has access to the entire sum and the pension is calculated on the basis of cash flows and life expectancy, with minimums and maximums set by law. Pension payments continue until the money runs out. Compare with annuity.
Annuity: A regular income stream that draws on an investment paid over a lifetime or for a set period (possibly indexed to inflation). Each payment comprises a portion of the original investment, plus interest. Compare with allocated pension.
Bond: A certificate of debt, generally issued by a corporation, government or government agency. The bond holder is paid interest throughout the life of the investment, which is generally at least five years.
Capital gains tax: Tax imposed on profit from the sale of investment assets.
Churning: The practice of recommending clients buy and sell investments when there is no benefit to the client. A broker benefits by earning increased commission or brokerage. The term is also applied to financial planners who move clients' funds around to increase the commissions they receive.
Cum-dividend: With dividend. Entitles the buyer of a share to the current dividend, provided they hold the share until the date the dividend is declared. The share price is generally higher, reflecting the attached dividend. Compare ex-dividend.
Debenture: Unsecured debt, meaning if the company issuing the debenture goes bust the debenture holder may not get their money back. Generally a long-term obligation. Debentures are also sold by companies as fixed term investments.
Depreciation: Spreading the value of an asset over its useful life, reflecting the fact that an asset, such as a computer, will decline in value over time. Because it is a non-cash business expense, it can be offset against income on a tax return.
Diversification: Spreading risk by investing in different markets, locations and different fund managers. A basic tenet of investing. Never put all your eggs in one basket.
Equities: Company shares, stocks. They all mean the same thing.
Ex-dividend: Without dividend. If a share price is ex-dividend, it means the seller, and not the buyer, is entitled to the dividend which has been declared but not yet paid. Compare with cum-dividend.
Franked dividends: Dividends paid out of a company's after-tax profits. It entitles the shareholder to an "imputation credit", which means they pay less tax on their share income. The reduction is capped at the amount of tax paid by the company. Dividends can be partially or fully franked. Compare with unfranked dividend.
Growth investor: An investor who selects assets that are expected to provide capital growth, often in addition to income. Compare with value investor.
Hedging: Investing in one asset specifically to offset potential risks in others.
Managed funds: A vehicle where the funds of a large number of small investors are pooled and managed as a single portfolio. Managed funds invest in property, shares, cash, fixed interest and other assets, or a combination of asset classes, either directly or though another managed fund.
Outperform: A share or other investment that performs better than the rest of the market. Compare with underperform.
Price-to-earnings ratio: The figure reached when a share price is divided by earnings per share, current or projected. The higher the ratio, the more expensive the share. The PE ratio allows investors to compare one company with another. It can also be used to work out how many years it will take an investor to recoup their outlay.
Reasonable benefit limit: The maximum amount a super fund member can receive from super with tax concessions. The RBL changes every year.
Retail investment products: Funds that can accept investments from individuals, that is, they are available at a retail level.
Salary sacrifice: A "sacrificed" portion of pre-tax income, reducing the individual's taxable income and therefore tax paid. An employer directs the sacrificed amount to super savings for that employee.
Trailing commissions: Commissions paid to financial advisers by fund managers, banks or other financial institutions for placing funds in particular investments. The commissions are paid for as long as the money remains in the fund.
Trusts: A structure that allows a trustee to manage an investment on behalf of the trust's beneficiaries.
Underperform: A share or other investment that performs worse than the rest of the market. Compare with outperform.
Unfranked dividends: Dividends paid out of a company's untaxed profits. Investors must pay their marginal tax rates on these dividends. Compare with franked dividends.
Value investor: Invests in shares priced below their intrinsic value (a subjective calculation that largely depends on the valuation method) and sells when the share price significantly exceeds that value. Compare with growth investor.
Yield: The income paid on an investment, usually expressed as a percentage of investment value or purchase price. In shares, it is the value of dividends as a percentage of the last sale price of the shares, for property it is rent and with debt securities, such as bonds, it is interest earned on the investment.
References: The Australian Investors Dictionary, edited by Richard Harrison. Dictionary of Australian Investment Terms, by Roger Goldsmith, et al. Understanding the Sharemarket. A Dictionary of Financial Terms, Money Magazine. Dictionary of Investing, by Jerry M. Rosenberg Dictionary of Australian Investment Terms, The Australian Financial Review. Managed Funds, by Paul Clitheroe with Chris Walker.
