Ever heard fund managers boast about how they outperformed their benchmark for the last decade? Maybe your financial advisor informed you that fund XYZ invests in blue chip companies – wait a second, I thought blue chips belong on the poker table? All of these clichés and buzzwords can be overwhelming and cause a great deal of confusion for the layman amongst us.
If you do not know the meaning of bps, LISP’s or gearing stay tuned as I unpack some of the financial lingos of our wonderful industry. Familiarising yourself with these terms is by no means a silver bullet in your financial world, but it will help you develop a better understanding of regularly-used jargon terms by the gurus.
Your interpretation:
Benchmark – Reaching my personal best while I am bench-pressing in the gym
Blue Chip – The most valuable chip in the game of poker
Bps – Some sort of unit used to express high-speed digital data
Gearing – LewisHamilton has mastered this technique
Hike – A long walk over a great distance
LISP – A speech impediment
What it actually means:
Benchmark – Benchmarks are used to give an indication of the performance of a fund. Fund managers use benchmarks as a compass to guide how well they are managed. Typical examples of benchmarks used are market indices like the JSE Top 40 Index, or an absolute benchmark against inflation, such as CPI + 5%.
Blue Chip – A share of a large, well-established company that has been operating for many successful years. Generally speaking, a blue chip company is among the market leaders in its sector. Some examples of common blue chip companies are Naspers, SAB and MTN.
Bps (Basis Points) – Basis points are used to rates that are less than 1%. Where 1 basis point is equal to 0.01% and 100 basis points are equal to 1%.
Gearing – The use of debt (borrowed money) for an investment. This will potentially magnify profits if used intelligently but also maximise losses when not. It is a risky game.
Hike – A sharp increase in price or cost, usually in interest rates. Recently, you would have seen the headline where the South African Reserve Bank hike interest rates.
LISP (Linked Investment Service Provider) – An administration platform which give investors access to invest in a broad range of unit trust investments from different fund managers.
Although this is just a small drop of water in the ocean – keep in mind that Rome was not build in a single day. Read the rest of our blog posts, or get in touch if you need guidance in wading through the wonderful world that is the Financial Services Industry.
