[Glossary] 4 Financial Terms That Even Financial Noobs Should Understand

Finance can be a mystifying topic. Jargons, acronyms and words that take on a completely different meaning once used in the context of finance only serves to further complicate a topic which is already difficult.

To some, understanding what the various financial terms mean can be more challenging than knowing what are the types of grapes used to make wine in different regions. For some of us, we may have seen or read about the terms before, but still have no idea what they actually mean.

In this article, DollarsAndSense.sg will try to explain in as simple a way as we possibly can on some of the finance terms that are frequently being used. Hopefully, our explanation would go a long way in making you just a little more educated in the world of finance.

(1) Deposit Insurance

In developed financial markets, most of us would put the bulk of our money in bank accounts, rather than hide it under our pillows. The reason for that is simple. We have trust that our money in these banks would be secured.

However, the truth is that no bank in the world, including Singapore banks, keeps all of their depositors’ money in their account. Money that is deposited is usually lent out by bank to borrowers, with the bank keeping only a fraction of the total deposits with them as reserves.

If a banking crisis were to occur causing people to start doubting if the money in the bank is really safe, they may rush to withdraw it. That will cause even financially sound banks to go bust if their depositors were to all demand to withdraw their money at once.

To ensure that people keep their trust in the banking system of the country even during a crisis, many developed financial markets have what is known as Deposit Insurance. Typically, what happens is that the central bank for the country would guarantee all deposits of its member bank up to a certain amount.

In Singapore, the Singapore Deposit Insurance Corporation (SDIC) guarantees bank deposits of up to $50,000 per bank per individual. While SDIC is technically a company, it is worth noting that their board is directly accountable to the Minister in charge of MAS (i.e. Tharman Shanmugaratnam)

Read Also: 5 Little Known Facts About SDIC

(2) SIBOR

SIBOR is the short-form for Singapore Interbank Offered Rate. It refers to the interest rate in which banks are willing to lend money to one another at.

Common sense would suggest that if the SIBOR rate were to increase, then borrowing in the country would naturally become more expensive, since even the banks themselves have to pay more to borrow money.

Housing mortgage rates in Singapore are typically pegged to SIBOR. When SIBOR goes up, the people with an existing housing loan taken from a bank will have to pay a higher interest rate.

(3) Basis Point

If you ever read an article about the interest rates on bonds or sovereign debt, then you probably encountered the term basis point.

Basis point is a unit of measurement referring to 1/100th of 1%. 1 basis point refers to 0.01%. 10 basis points refer to 0.1%. 100 basis points refer to 1%. It is as simple as that.

Unfortunately most of us didn’t learn that back in primary school. But now we know.

(4) Exchange Traded Funds (ETFs)

If you have been reading up on investing, you would surely have come across the term ETFs by now. You may have read articles advising you to invest regularly into the stock market through some low cost ETFs. But what do ETFs really mean?

Based on the definition provided by Investopedia, an “ETF is a marketable security that tracks an index, a commodity, bonds or a basket of assets like an index fund”.

Sounds confusing still? Let us try to explain.

What an ETF does is to try mimic the index that it is tracking. An example would be the Straits Times Index (STI) ETF. For example, if you want to invest in underlying assets within the STI (i.e. the 30 stocks on the STI), it would be extremely difficult for you to do so with the right proportion.

Instead of doing that (which is close to impossible for most of us retail investors) what you could do instead is to simply buy the ETF that is tracking the STI, which would mimic the index by buying all 30 stocks within the STI.

Prior to the introduction of ETF to the financial markets, retail investors who wanted to diversify their holdings would need to either do it themselves or engage a fund manager to do so on their behalf. Neither is as cost effective as simply buying into the ETF directly.

If you are interested in investing and don’t already know about ETFs, we suggest you find out more about it before making any investment decisions.

Read Also: How Does ETF Investing Really Work In Singapore

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