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Glossary of financial terms

For both established finance professionals and students in the field, the following 17 concepts should be useful in their current and future practice.

  1. Managed investments

Managed investment is a term used to refer to pulling money from multiple investors towards one common investment goal. The pulled amount of money is further invested and controlled by a professional investment manager in different asset classes that coincide with their investment goals. An investment manager can be an organization or individual further responsible for buying and selling investment assets. These assets include shares, property, fixed interest or cash securities.

Managed funds are considered a good investment because they offer diversification, reduce the amount of paperwork and allow the access to a wide range of assets with relatively small amount of cash.

In order to buy managed funds, one has to turn to a fund manager through a financial adviser or an online broker. After a particular managed fund is selected, it can be bought or sold, while the investors keep track of their distribution.

Managed investments are suitable for those who wish to diversify their investments and transfer responsibility and decision-making to the investment manager.


  1. Superannuation

Superannuation is a long-term saving plan that provides a person with a regular income when they retire. The money the person receives is also known as super. Individuals, employers, or ideally both, pay regular contributions into the super fund during a person’s working life.

The earnings a person receives gets reinvested and the value accumulates over time.

Generally, people are unable to withdraw money before they retire or at least begin their transition to retirement, both after a set minimum age. Once they retire, they can choose to withdraw the super as a lump sum or receive it as a monthly payment.


  1. Life Insurance

Life insurance is intended to provide the insured’s family with financial security after he or she passes away. It represents a contract between the insured and the insurer, where the latter one agrees to pay a certain amount of money in exchange for a premium upon the death of the insured.

Before purchasing a life insurance policy, a person needs to consider their present financial situation and make sure that they maintain the standard of living for their dependants. This way, life insurance would be able to provide them with enough money to handle funeral cost and medical bills, as well as funds to pay off mortgage, college and other costs of living. One or more beneficiaries are paid the guaranteed sum upon the insured person’s death.

Life insurance policies are usually re-evaluated annually or when a person undergoes major life experience, such as marriage, divorce, birth of a child, the purchase of the real-estate and many more.

  1. Derivatives

A derivative represents a contract between two or more parties based upon a particular entity that can be an asset, index or interest rate. The value of the derivative is extracted from the performance, that is the future price movement of the underlying entity.

Alongside with stocks and debt, derivatives are one of three most important categories of financial instruments. They are able to mitigate multiple risks such as fluctuations in stock, bond, index and commodity prices, but also changes in foreign exchange rates and interest rates.

People use derivatives in order to speculate and protect their investments. They are an instrument used to hedge risk of one party of a contract, while simultaneously offering potential for high return to the other party.

  1. Securities

In the pre-digital era, investors would receive a paper certificate that served as a proof of a particular investment they had made. Better known as securities, these certificates denote different types of investments such as bonds, stocks, mutual funds and others.

There are two types of securities: debt securities and equity securities. Debt securities, also known as fixed-income securities that include bonds and CDs, denote the type of bonds that one purchases from a corporation or government entity, after which these organizations are in debt to the owner.

On the other hand, equity securities are most commonly stocks that provide their owners with a stake in the company upon the purchase of their stock.

Most debt and equity securities are liquid, meaning that a person is able to cash them out at his or her convenience.


  1. RG146

Regulatory Guide 146 (RG146) is an Australian financial regulation issued by the Australian Securities and Investments Commissions (ASIC). It denotes the minimum training required from the individuals in order to become sellers of financial products. After the trainee has finished with the course and officially met the RG 146 requirements, he or she is able to provide the general public in Australia with an advice on financial products.

Under RG146, an adviser falls under one of the two categories: the one providing General financial advice (Tier 2) or Personal financial advice (Tier 1).

Tier 1 refers to advice coming from an adviser who is considering an investor’s own personal financial position, whereas Tier 2 advice does not include any personal reference, but simply emphasises the benefits of the product in question. This general advice denotes promotion and/or selling a product without providing customers with any recommendation on the particular product. A product advisor is not allowed to be biased towards any group of the potential products, but solely act as the product provider.


  1. Forex trading

Forex stands for the foreign exchange market, which is the largest market in trading currencies from different countries. Forex trading is usually done through a broker or market maker, whereupon the forex trader is able to choose a currency pair they wish to change in value and place accordingly.


Forex is unique for the fact that there is no central marketplace for foreign exchange. The currency trading is conducted electronically and all the transactions occur between the traders from all around the world via computer networks. It is open 24 hours a day and is the most liquid market in the world, meaning that people are able to buy or sell currency without any restraints.


  1. Margin lending

A margin loan enables a person to borrow money in order to invest in shares, managed funds, wraps and master trust.

Margin loans are suited for dedicated investors who actively monitor and manage their investments and who have some understanding of the stock market operations. Margin loans are also perfect for those interested in a medium of long-term investment opportunities.

With margin loans, one can invest larger amounts of money and expect bigger returns. They are able to access additional funds for a particular investment and thus reach their financial goals at a faster pace. However, if the investments perform poorly, margin loans magnify the potential for losses.

The amount that a person can borrow is determined by the securities in their portfolio, a credit limit based on an assessment of their financial position and their Loan to Value Ratio.


  1. Risk management

Risk management is the process of identifying, analysing and evaluating loss exposures, as well as monitoring risk control in order to minimise the impact of a potential loss. Risk management occurs every time an investor or fund manager analyses and attempts to quantify the potential for losses in a particular investment and further take appropriate action in relation to their risk tolerance and investment objectives.

The loss is most commonly a result of financial risks (e.g. cost of claims, liability judgments), operational risks (labour strikes), perimeter risks (weather change, political change) or strategic risks (management changes, loss of reputation).

Risk management is concerned with all risk exposures and not only the ones that can be ensured. Inadequate risk management may result in severe consequences for both companies and individuals.


  1. ASIC

ASIC represents Australia’s markets, corporate and financial service regulator. It is an independent Commonwealth Government body administered and set up under Australian Securities and Investments Commission Act 2001 (ASIC Act).

ASIC regulates Australian companies, financial services, organisations, markets and professionals who deal with superannuation, insurance, credit, deposit and investment in general.

ASIC is required to maintain and improve the performance of the financial system, effectively administer the law by going through shortest procedures possible, enforce the law and give effect to it, as well as receive process and store information about companies that are later made public.


  1. Self Managed superannuation funds

Many people prefer to be in control over their own super and manage their own retirement fund. In this case, they decide to open their own, self-managed superannuation fund. It represents a trust structure that manages retirement savings on behalf of its members.

Being in control of one’s own super is demanding and complex, as they have to carry out the role of the director or the trustee. This involves important legal duties, setting and following a particular investment strategy, keeping comprehensive records and arranging an annual audit by a licensed Self Managed Superannuation Funds (SMSF) auditor.

In order to run an SMSF, a person has to own a large amount of money, financial experience, a plenty of time to research investments and manage his or her fund, as well as to organise his or her life insurance.

One of the reasons one might choose to manage his or her own super may lie in the fact that it opens up new investment opportunities. However, such responsibilities involve significant time and effort and SMSFs are suitable for people who have extensive skills in financial and legal matters.


  1. CPD points

Continuing Professional Development (CPD) courses are specifically designed for financial planners by FPA’s expert team. It is an ongoing professional development program tailored to maintain and improve the skills of financial planners by granting them CDP points.

After taking part in the CPD course, a financial planner possesses knowledge of industry experts, improves his client communication and contains highly relevant content that they will be able to implement into their everyday business life.


  1. Paraplanner

A paraplanner is a person who works together with a Financial Planner or Advisor and handles preparation and administration of a Financial Plan or Report for a client, as well as other multiple non-client facing tasks.

Paraplanning is considered a relatively new position in the industry and it was created in order to shift the focus from financial planners towards customers in order to better identify their investing needs.

Depending on the needs of a particular Financial Planner or a Financial Adviser, a paraplanner has to have a range of different skills. However, all paraplanners have to be excellent report writers and statistics analysts. Additionally, excellent paraplanners typically have great management, interpersonal and IT skills and are able to conduct research for appropriate investments and providers.


  1. Statements of advice

Statement of Advice (SOA) represents a document a financial adviser gives to a client that sets out client’s situation, goals and adviser’s financial recommendations.

A statement of advice aims to ensure that the client is given enough information that will enable them to fully understand the advice they have received from the financial service provider (FSP). Statements of advice are written with specific circumstances in mind, so each one differs from the other depending on the particular situation. However, certain details cannot be omitted, such as client’s personal details, adviser’s details, the advice given to the client, information upon which the advice is based, fees and charges, as well as all the interests, associations and relationship that might have influenced adviser’s recommendation.

A Statement of Advice has to be clear, concise and effective. This means that the SOA has to be brief, expressed in plain language and has to promote the understanding of the adviser’s recommendations.


  1. Australian Training Framework, AQTF

In order to become a Registered Training Provider (RTO), a VET training provider has to meet a set of compliance Standards and Essential Conditions called Australian Training Framework (AQTF). AQF provides one unique framework for all Australian qualifications that are recognised both in Australia and internationally.

AQTF assures nationally consistent and high-quality training for the clients of Australia’s vocational education and training system. Once an RTO is audited, he or she is officially recognized as a professional who possess relevant qualifications for delivering their services.


  1. Stockbroking

A stockbroker can stand for either a firm or individual agent that executes purchase and sale orders an investor submits. A stockbroker charges a fee or a commission for their services after every trade they perform.

Stockbroker trade in the market on their client’s behalf. For this reason they have to possess a deep knowledge of the client’s financial situation, provide them with investment advice or research and finally, keep detailed records for tax purposes.

A stockbroker is needed when a person decides to invest in individual stocks. With a professional stockbroker, a client goes through the entire process of transaction with an expert advice.