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Make your money work: 17 investment terms to know now
MandyP
Community Coordinator
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Becoming an investor means getting to grips with dozens of new terms, some of which are easy to understand, while others are shorthand for more complex company strategies. From divestments and divestitures to bear hugs and buybacks, these are the terms you should know to make your money work better than ever for you in 2021.

 

  1. Exchange traded fund: A type of fund that holds multiple underlying assets. Its share price fluctuates throughout the day as it is bought and sold on an exchange. In 2000, index-tracking company Satrix launched South Africa’s first ETF, followed by two sector-specific ETFs in 2002: Satrix Indi and Satrix Fini.
  2. Dividends: A portion of an organisation's profit paid out to investors. They can choose to reinvest the dividend or receive a cash payout.
  3. Dividend yield: A percentage reflecting the amount of money paid to shareholders for owning shares divided by the company’s current stock price.
  4. Year-to-date return: The profit or loss from an investment since the first day of trading in the current calendar year, used to assess the performance of stocks. Not to be confused with the annual return, which is the average increase of an investment each year over a specific time period, useful for comparing investments and measuring performance.
  5. Market cap: Short for market capitalisation, this is a company’s worth determined by the stock market – a sum market value of all owned shares. Amazon’s current market cap is $1.661-trillion, while Netflix’s is $245.421-billion.
  6. Price-to-earnings ratio: The P/E ratio is a company's share price relative to its earnings per share. A high P/E ratio could mean that the company’s stock is overvalued. The average P/E ratio for the S&P 500 ranges between 13 and 15.
  7. Stock split: When a company’s board of directors chooses to divide its existing shares into multiple shares to lower the trading price of its stock. J.P. Morgan does this often with its ETFs.
  8. Reverse split: The opposite of stock splits – when an organisation decreases shares to boost their value, reducing the number of stocks shareholders can own.
  9. Rights issue: When a company invites shareholders to buy discounted shares for a period in order to raise money, such as for expansion or acquisition. Sasol considered doing so in late 2020 in order to raise $2-billion for debt repayment.
  10. Buyback: When a company buys shares back from shareholders to limit the available shares, increase their value, shift controlling stakes and more. Technology investor Prosus made a record-breaking buyback in 2020, buying $1.37-billion of its own shares and $3.63-billion of Naspers’ shares – the largest share buyback in the history of the Johannesburg Stock Exchange (JSE).
  11. Bonus issue (also known as a scrip issue): An offer of free shares to existing shareholders to distribute more shares, avoiding an increase in the dividend payout.
  12. Reverse takeover: A process that allows private companies to become publicly traded without going through an initial public offering (IPO). The New York Stock Exchange itself did this in 2006, acquiring Archipelago Holdings to create the NYSE Arca Exchange. It then renamed itself and started trading publicly.
  13. Spinoff (also known as a spin out): Selling new shares of an existing business to create an independent company that is worth more than it would’ve been as part of the larger business. This is what Naspers did in 2019 when it spun off Multichoice for R42-billion.
  14. Vertical merger: A merger of companies positioned at different stages of a production process, creating a more valuable entity with more control of its own supply chain. In 2005, Google completed a vertical merger with Android in a $50-million deal.
  15. Divestment: When a company sells assets or subsidiaries (in the form of spinoffs, equity carve-outs or direct sales), usually to streamline operations. Electronics company Philips has divested many of its divisions (such as its chip division, NXP) in order to maintain focus areas like health technology.
  16. Divestiture: When a company disposes of assets by sale or exchange to cut costs, repay debts or enhance shareholder value – or through bankruptcy.
  17. Bear hug: Similar to a hostile takeover, a bear hug is an unsolicited offer from a company to buy the shares of another for a far higher per-share price than the company is worth in the market. If the ample offer isn’t accepted, shareholders may sue.

 

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Sources: Investopedia.com, Satrix.co.za, Ycharts.com, Sowetanlive.co.za, Businesslive.co.za, Businessblueprint.com, News24.com, Dealroom.net and Wikipedia.org.

The Standard Bank of South Africa is an authorised financial services provider (FSP 11287).

 

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