Martin Brühl has embarked on his year as RICS President with a focus on investment risk management.
Here we introduce you to 10 terms you may need to know about investment and risk.
Investment risk is the probability of losses occurring relative to the expected return on a particular investment.
There is a trade-off between risk and reward. For additional risk, a greater reward is expected by an investor, and vice versa.
NAV stands for ‘Net Asset Value’. It is the valuation of an asset divided by the number of shares held in it.
For example, a £1 million building with 1 million shares would have a NAV of £1.
Market capitalisation is the total market value of outstanding shares for a publicly traded company.
It is equal to the share price times the number of shares outstanding.
FTSE stands for the Financial Times Stock Exchange 100 Index. FTSE is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalisation.
It is seen as a gauge of prosperity for businesses regulated by UK company law.
Other well known indices include Dow Jones and NASDAQ in the USA, Nikkei in Japan, and DAX in Germany.
The Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange. It allows smaller companies to float shares within a more flexible regulatory system than applies to the main market.
AIM helps smaller companies raise the capital they need to grow.
A burn rate is the cash spent per month by an organisation or fund. The burn rate feeds into assessment of investment risk. Investors look at how long it would take a fund to use up its resources if no new capital were to come in.
When the burn rate begins to exceed forecasts, or revenue fails to meet expectations, the usual step is to reduce the burn rate e.g. by reducing overheads.
Closed-end fund (or closed-ended fund)
A closed fund has a fixed number of shares to issue. Additional shares can’t be issued according to investor demand.
Shares are only purchased and sold in the market, usually in stock exchanges.
Their price depends on supply and demand. So shares can be sold above (premium) or below (discount) the NAV.
An open-ended fund is a collective investment scheme which can issue and redeem shares at any time.
The shares only trade over the counter at NAV.
Liquidity is how quickly you can get your hands on your money. Liquidity is useful for emergencies and to help seize new investment opportunities quickly.
If you have too much liquidity in a fund, an investor won’t be earning much of a return. However, too little liquidity and a fund can go under.
Yield indicates the level of earnings from an investment. It defines money earned over a time period usually presented as a percentage.
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