Investing in ASX shares is a highly lucrative pastime, especially if you have a long-term approach to building wealth. However, many potential investors in ASX shares are put off by all the jargon that comes with the territory. Between earnings, dividends, indices, yield and 52-week highs, there are definitely a lot of funny words to get your head around.
So here are some basic terms that you should be familiar with if you’re trying to get into ASX shares, and what they mean.
- The ASX: The ASX stands for Australian Securities Exchange (the formal name of our stock exchange) and is another way of saying ‘Aussie stock market’.
- Dividend: a cash payment made to the owners of a company (the shareholders). Dividend yield (another common term) refers to this payment as a percentage of a company’s share price – for example Commonwealth Bank of Australia (ASX: CBA) currently has a dividend yield of 5.28%. This means its owners received $5.28 in dividends for every $100 of CBA shares they owned this year.
- Earnings per share (EPS): This measures how much cash is leftover per share after the company receives its revenue and deducts its costs. Often shares are valued by this number, as it reflects how much money the company is making. Most investors like to see steady growth in EPS, as it shows a business is healthy and growing.
- Indices/Indexes: These are the numbers you will hear on the news as they reflect the overall health of the stock market as an average. In Australia the most common indices are the S&P/ASX200 (Index: ^AXJO)(ASX: XJO) and the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO). Over in the US, there’s the Dow Jones Industrial Average and the Nasdaq, which are also commonly quoted.
- Payout Ratio: This is a common metric dividend investors like to look at. The payout ratio refers to the percentage of a company’s earnings that it pays out as a dividend. If it’s low, it generally means the company in question has a lot of room to grow the dividend in the future. If it’s high, it’s a sign that the level of dividend payments may be unsustainable, and the payout might be in danger of being cut in the near future.
Whilst there are a plethora of names, acronyms and jargon involved in investing, I hope clearing up some of the more common terms has been helpful. The financial services industry often likes to complicate things as it’s in their best interests, but often complex-sounding words have a simple meaning. So don’t let these terms put you off investing! It’s all part of the fun.
The post Here are some must-know terms for investing in ASX shares appeared first on Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019