A
Alpha – Measures the historical outperformance of a fund (added value) over a benchmark. A higher alpha indicates better relative performance compared to the benchmark.
Assets – Various forms of property (bonds, shares, term deposits, commodities, real estate, etc.).
B
Bear Market – A market where stock indices have dropped 20% or more from their peak. Generally, it refers to a market with a downward trend in prices.
Benchmark – An indicator representing the market in which a fund invests. It is usually one of the market indices or a combination thereof. Comparing a fund’s performance to its benchmark helps evaluate the quality of fund management.
Beta – An indicator of a fund’s sensitivity to the performance of its benchmark. A positive beta implies that an upward or downward movement in the benchmark triggers a “beta multiple” change in the fund’s value in the same direction.
Blue Chips – The largest companies in a specific market.
Bond – A security granting its holder the right to demand repayment of the principal amount and interest (coupons) by a specified date. By purchasing a bond, the bondholder (investor) lends money to the issuer.
Bull Market – Defined as a 20% increase from the previous low. Simply put, it’s a market where prices are rising.
C
Capital Gain – The difference between the purchase and selling price of a financial instrument.
Confirmation – A statement confirming the execution of a trade or transaction, including all its parameters.
Correction – A decline of more than 10% in stock markets, occurring historically every 11 months on average. It can result from profit-taking, economic downturns, temporary panic, etc. Corrections are not reasons to panic but opportunities to reinvest at favorable prices.
Coupon – The interest paid by a bond issuer to the bondholder.
Currency Risk – The risk to an investor when investing in funds or stocks denominated in a currency other than their reference currency. For example, Slovak investors investing in foreign funds or stocks may face exchange rate risk. If the euro strengthens, the value of foreign-currency funds or stocks diminishes when converted back.
Custodian – A bank that ensures the management company operates in compliance with applicable laws. It is responsible for correctly determining the net asset value and share price. It acts independently and solely in the interest of the fund’s investors.
D
Diversification – The allocation of an investor’s funds across different asset types (e.g., stocks, bonds) to reduce risk. Vertical diversification refers to spreading investments among various asset types, while horizontal diversification involves distributing investments within a single asset class (e.g., stocks of different companies or sectors).
Dividend – The share of a company’s profit distributed to shareholders. In mutual funds, it refers to the portion of fund earnings paid to unitholders.
Dollar Cost Averaging – Averaging the purchase price of shares. Primarily used in equity fund investments, it involves investing a fixed amount at regular intervals. This strategy reduces the average purchase price, especially for volatile assets, and creates potential for higher returns.
E
Entry Fee – A one-time fee charged by the management company when issuing mutual fund units.
ETF (Exchange Traded Fund) – An open-end collective investment scheme traded on one or more exchanges. Similar to mutual funds, ETFs provide access to a portfolio of securities (e.g., stocks, bonds, commodities, or real estate). Purchasing an ETF means owning a small portion of a securities portfolio designed to track a specific market index, offering similar risks and returns as the index.
Exit Fee – A fee charged during redemption (withdrawal of funds) from a fund. Most management companies do not charge this fee.
F
Fund Price – The value of a single share, representing the price at which shares can be bought or sold. It is calculated as the ratio of the net asset value to the total number of shares. The value of an investor’s holdings is determined by multiplying the current fund price by the number of shares. For example, 1.2345 (price) x 100,000 (shares) = 123,450 (current investment value).
I
Inflation – Represents the decline in the real value of money over time. For investors, achieving returns higher than the inflation rate (the rate of price increase) is essential.
Index – An indicator representing the performance of a specific market. Examples include the S&P 500 index (comprising 500 large-cap U.S. companies) and NASDAQ (reflecting the performance of technology firms). A fund manager’s goal is to outperform the index.
Investment Horizon – The recommended duration for holding an investment. Higher volatility (value fluctuations) requires a longer investment horizon.
Investment Strategy – An investor’s plan for how long they will invest, their financial goals, the instruments they’ll invest in, and the amount invested.
IPO (Initial Public Offering) – The process in which a company publicly offers its shares on the capital market for the first time.
K
KID (Key Information Document) – A document providing essential information about an investment product, including its characteristics, risks, costs, returns, and time horizon, enabling investors to compare and understand the product’s suitability.
L
Liquidity – The speed at which invested funds can be converted into cash.
M
MiFID – A directive regulating financial institutions’ conduct toward investors, aiming to enhance investor protection and information transparency.
Mutual Fund – A pool of assets managed by an investment company, comprising contributions from multiple investors. Mutual funds can be open-ended (allowing investors to invest or withdraw funds anytime) or closed-ended (set up for a fixed period).
N
Net Asset Value (NAV) – Represents the value of all assets owned by a mutual fund as of a given date minus the fund’s liabilities. It serves as the basis for calculating the value of the fund’s shares.
P
Performance Fee – A fee in addition to the management fee, rewarding portfolio managers for above-average fund performance. The conditions for this fee include positive fund performance exceeding the benchmark or performance threshold, with the fund’s net asset value surpassing the High Water Mark (the highest value previously achieved for calculating the performance fee).
Portfolio – A collection of financial assets, such as stocks, bonds, real estate, or cash, owned by an individual or institution to achieve specific financial goals. A well-constructed portfolio balances risk, return, and the investor’s time horizon, leveraging diversification to minimize risk and optimize returns.
Prospectus – An official document detailing an investment product, including its strategy, risks, costs, returns, and legal terms. It ensures transparency for investors before making an investment decision. The simplified prospectus is a condensed version designed for easier understanding by average investors and is freely available at the management company’s and custodian’s offices and online.
R
Redemption – The process of returning mutual fund units to investors, effectively “withdrawing money” from the fund.
Reference Currency – The currency in which an investor tracks their investment’s return. For Slovak investors, the reference currency is typically the euro.
Risk – The uncertainty that an investment will not yield the expected return or may result in a loss. Risk can be mitigated through asset diversification.
(Un)Realized Profit/Loss – Between the purchase and sale of a security, its value fluctuates. Investors can track these changes to determine their investment’s value and whether they are making a profit or a loss. However, profits or losses are only realized when a sale order is executed, and the investor receives the money.
S
Share – A security that represents a share of ownership in a company. A shareholder (owner of the share) has rights to participate in the company’s management, receive a share of the profit (dividend), and a portion of the company’s liquidation value.
Stock – A security that represents a share of ownership in a company. A shareholder (owner of the share) has rights to participate in the company’s management, receive a share of the profit (dividend), and a portion of the company’s liquidation value.
Share Purchase Price – The price at which an investor buys a share, consisting of the current price and a fee.
Y
Yield to Maturity (YTM) – The return an investor receives by holding a bond until its maturity, assuming interest rates affecting the bond’s value remain constant until maturity.
YTD (Year-To-Date) – Refers to performance from the beginning of the year to the current date.