winter 2012

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The power of language


Understanding investment jargon

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In the fields of both medicine and finance, the use of specialized words and phrases challenges professionals to ensure they are using the power of language to increase comprehension, while communicating complex concepts.

By MD Physician Services

Have you ever noticed how words can bring people closer together, but used the wrong way they can sometimes drive us apart?

In the fields of both medicine and finance, the use of specialized words and phrases challenges professionals to ensure they are using the power of language to increase comprehension, while communicating complex concepts.

In this article, we explore the meaning of two terms investors may have been hearing frequently over the last few months: “risk-on/risk-off trading”, and “safe haven” assets.

Understanding risk-on/risk-off trading What is a “risk-on/risk-off” investing environment? Investors who have been following the financial news over the past few years will probably have heard this phrase, which is used to describe current market sentiment as either “risk-on” or “risk-off”.

Here is what this phrase means: During a risk-on market sentiment, investors are optimistic and more willing to take risk in exchange for the potential of higher returns. This means that riskier assets, such as equities, tend to rally (or gain in value) together while safe-haven assets like bonds fall. Conversely, when the market sentiment is risk-off, investor pessimism prevails, and investors move to lower-risk investments.

The phenomenon of trading environments described as either risk-on or risk-off can be understood as a legacy of the increased market correlations that developed during the financial crisis.

Understanding safe-haven assets

Because of the rise of risk-on/risk-off trading environments across global markets, investment assets are now often primarily identified along a spectrum of risk at one end, as “risky” or, at the other, as “safe haven” in nature.

As noted above, risk-on trades take place during periods of optimistic market sentiment, when investors are more willing to take risk in exchange for higher expected investment returns.

In contrast, in a risk-off environment, investors move towards “safe havens,” or perceived lower-risk investments which offer more liquidity, coupled with the likelihood of lower returns. The term “safe haven” is used to describe the investments that gain in popularity during risk-off trading environments.

Where to go for more

Whether you have encountered the specific investing phrases discussed in this article or not, as an investor it can be useful to understand the specialized terms you might encounter over time.



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