Glossary...
Accumulation Fund
A superannuation fund in which the benefits received by members are determined by adding investment earnings to the contributions made by them or on their behalf (as distinct from a Defined Benefits Fund, in which the benefit payable is fixed in relation to salary at or near retirement). Also known as a Defined Contribution Fund.
Active Management
A style of investment management which seeks to attain returns above a set benchmark by asset allocation and stock selection. (Opposite of Passive Management).
ACTU
Abbreviation for Australian Council of Trade Unions.
Aggressive Portfolio
A portfolio which is significantly different from the index (or its benchmark) and which is designed to provide above-average returns by taking above-average risk. Typically, such portfolios have a relatively high exposure to equity investments.
Allocated Pension
A type of retirement income arrangement under which an individual invests a lump sum and then draws down an annual pension to a value he/she sees fit, taking account of his/her own expected cash flow needs and life expectancy. If the drawdown is greater than investment earnings, then part of the initial capital sum is used to make up the difference. Unlike a traditional pension or annuity, an allocated pension can therefore provide the retiree with continual access to the capital sum invested, and allows any balance to be passed on to beneficiaries upon the death of the individual concerned. (Also called Cash Back Pension).
All Ordinaries Accumulation Index
An accumulation index measuring movements in both the price (capital) and dividends (income) of the major shares listed on the Australian Stock Exchange. (See also All Ordinaries Index).
All Ordinaries Index
A share price index measuring the market prices of the major stocks listed on the Australian Stock Exchange. The index is calculated continuously, and expressed as a number which allows overall market fluctuations to be quickly gauged.
Alpha
The return a security or a portfolio would be expected to earn if the market rate of return were zero. A positive alpha indicates that an investment has earned on average a premium above that expected for the level of market variability. A negative alpha would indicate that the investment received on average a premium lower than that expected for the level of market variability. Sometimes alpha is used as a performance indicator. (See also Beta, Delta).
Amortisation
Paying off an interest bearing liability by gradual reduction through a series of installments comprising both principal and interest components, as opposed to paying it off by a single lump-sum payment. A technique for gradually extinguishing a liability or capital expenditure over a period of time (eg. as in typical home mortgate). (See also Credit Foncier Loan).
Annual Benefit Statement
A report from the manager or trustees of a superannuation fund, advising members of details of their accrued and future benefits in a fund.
Annual General Meeting (AGM)
The yearly meeting between the directors and shareholders of a company, at which shareholders are asked to elect the directors, discuss any shareholder resolutions and approve the operating and financial results of the past year.
Annuity
An arrangement under which periodic payments are made to a person in return for the investment of a lump sum, usually for the purpose of providing retirement income. (See also Allocated Pension, Deferred Annuity).
APEC
Abbreviation for Asia-Pacific Economic Co-operation Group.
Appreciation
a) Generally, an increase in the value of an asset;
b) In relation to foreign exchange transations, the rise in the value of a currency in terms of another currency or currencies.
Approved Deposit Fund (ADF)
A type of fund into which Elibible Termination Payments can be "rolled over" upon a person's retirement, resignation or retrenchment.
Arbitrage
Taking advantage of countervailing prices in different markets - eg. the purchase of an asset for a low price in one market and its sale for a higher price in another.
ASFA
Abbreviation for Association of Superannuation Funds of Australia. A national industry association established in 1961 to promote the interests of superannuation funds and their trustees and members.
Asia-Pacific Economic Co-Operation Group (APEC)
An international grouping of nations in East Asia and North America established to advance regional interests and promote free trade policies around the world.
Ask Price
The price at which the holder of a security is prepared to sell that security. (See also Offer).
Asset Allocation
The apportionment of an investment portfolio among different asset classes (shares, bonds, property, cash and overseas investments) from time to time in accordance with the investment outlook of the investor or investment manager.
Asset Backing
The value of a company's assets standing behind its issued shares. Some companies may have a strong asset backing even if the dividends they pay on shares are relatively low.
Asset Class
A broadly defined category of financial assets (eg. domestic shares, overseas bonds, cash, etc).
Assets
The resouces owned by a company, fund or individual. Cash, investment, money due, materials and inventories are called current assets; buildings and machinery are known as fixed assets; and patents and goodwill are known as intangible assets. Opposite of liabilities.
ASX
Abbreviation for Australian Stock Exchange.
Australian Bureau of Statistics (ABS)
The Commonwealth Government body responsible for the collection and publication of statistical data on a wide range of matters, including economics, demographic trends and census figures.
Australian Council of Trade Unions (ACTU)
The national organisation for Australia's trade union movement.
Average Weekly Earnings (AWE)
A measure of wage and salary levels of employees in Australia, published monthly by the Australian Bureau of Statistics.
AWOTE
Abbreviation for Average Weekly Ordinary Time Earnings. (See Average Weekly Earnings).
Balanced Fund
An investment portfolio which diversifies its holdings over a range of asset classes which typically include shares, fixed interest, property, overseas securities and cash.
Balance of Payments
A record of a nation's position in relation to financial transactions with all other nations. Balance of Payments figures are made up of both current account items (eg. imports and exports) and capital account items (eg. borrowings and investments). In Australia, Balance of Payments figures are published monthly by the Australian Bureau of Statistics.
Balance Sheet
A key financial statement showing the nature and amount of a company's assets, liabilities and capital on a given date.
Bankruptcy
A declaration by the Federal Court to place all of an individual's assets and liabilities with an official receiver to liquidate and distribute to creditors, according to prescribed legal guidelines. Bankruptcy can be declared if an individual's liabilities exceed his or her assets and/or accounts can not be paid. It should be noted that bankruptcy applies to an individual; the equivalent status for a corporation is receivership or liquidation.
Bear Market
A market in which prices decline sharply against a background of widespread pessimism. The opposite of a Bull Market. Bear markets are generally shorter in duration than bull markets.
Beneficial Interest
The entitlement to receive benefits generated by assets held in another party's name, such as a Trustee. (See also Beneficiary).
Blue Chip
The shares of a leading company which is known for excellent management and a strong financial structure. The term has become a generic one for quality securities.
Bond
A debt security issued by such entities as corporations, governments or their agencies (eg. statutory authorities). A bond holder is a creditor of the issuer and not a shareholder.
Bourse
A vernacular term for a stock exchange, derived from the French work meaning "purse".
Broker
An agent who handles investors' orders to buy and sell securities, commodities, insurance policies or other property.
Brokerage
A fee charged by a broker for the execution of a transaction; or alternatively an amount per transaction or a percentage of the total value of the transaction. Sometimes also referred to as a commission or fee.
Bull Market
An advancing market. The opposite of Bear market.
Business Cycle
An irregular but recurring period of indeterminate scope and origin embracing expansion, prosperity, recession, and recovery. (See also Economic Clock).
Call Option
An option which gives its holder the right but not the obligation to purchase an asset at a predetermined date (maturity date) for a predetermined price (exercise price).
Capital Gain/Loss
The difference between the sale price of a capital asset and its cost.
Capital Gains Tax
A tax on the increase in the capital value of investments, payable when the capital gain is realised.
Capital Guarantee
An investment product, normally offered by a life insurance company, which includes some form of guaranteed return of capital.
Capital Protected
A type of investment portfolio which is managed in such a way as to reduce or eliminate the risk of capital losses, usually through the use of quantitative techniques such as protection overlays.
Capital Stable
A term usually describing unitised investment vehicles which have a high fixed interest and/or cash component. This creates a relatively stable unit price compared with balanced funds, which typically have a higher exposure to equity markets. Capital stable funds should also be distinguished from capital guaranteed funds, which in fact offer a (usually retrospective) promised return to the investor, and from capital protected, which aim to produce a certain minimum return while allowing a controlled participation in the expected higher gains from growth assets.
Cash
a) Generally, coin and note currency of a country in circulation and deposited in cheque acounts and other deposits that are available on short notice;
b) One of the asset classes invested in as part of a typical balanced investment portfolio.
Cash Management Trust (CMT)
A pooled investment vehicle for investors who would not individually have access to the professional money market.
Collar
A loan facility in which both maximum and minimum interest rates are specified. The maximum rate acts as a cap, while the minimum rate is a floor below which the interest rate will not be allowed to fall.
Commercial Property
Property intended for use or occupancy by retail and wholesale businesses (eg. stores, office buildings, hotels and service establishments).
Commodity
A tradeable item that can generally be further processed and sold; including industrial (metals), agricultural (wool, wheat, surgar, etc) and bulk (coal, iron ore) goods. Commodities are important to the Australian economy as they account for the majority of our exports.
Commutation
In relation to superannuation benefits, the process of converting a pension or annuity into a lump sum.
Compliance
Procedures undertaken at regular intervals or on an on-going basis to ensure internal and external controls and regulations are complied with.
Complying Fund
A superannuation fund which comples with the operational standards specified in the SIS Regulations and is thereby eligible to receive concessional taxation treatment.
Compounding
The arithmetical process of determining the final value of an investment or series of investments when compound interest is applied ie. when interest is earned on the interest as well as on the initial principal. Investment returns are typically compounded, so two consecutive periods of 10% returns results in a compound return of 21%.
Consumer Price Index (CPI)
An index measuring the prices at various times of a selected group of goods and services which typify those bought by ordinary Australian households. It allows comparisions of the relative cost of living over time, and is used as a measure of inflation (See also Average Weekly Earnings).
Contributions Tax
The 15% tax levied on certain contributions to superannuation funds.
Convertible Notes
Securities which are convertible into the ordinary shares of a company at a prescribed price or ratio at specified times at the option of the holder.
Corporate Bond
An instrument written under seal whereby a company acknowledges that a stated sum is owed, which it will repay at a specified date. The company is also obliged to pay a stipulated amount of interest to the bondholders.
Corporate Trustee
A superannuation fund trustee which has been incorporated as a company. Incorporpation of a trustee board may occur to meet the Constitutional Corporation provisions of the SIS legislation. Alternatively, it may exist because the trustee is a professional Public Trustee Company or the employer-sponsor of the fund has established a special company to take on the responsibilities of trusteeship. Individuals appointed to exercise fiduciary responsibilities in corporate trustees are called Trustee-Directors.
Coupon
A certificate attached to a bond, representing an obligation to pay interest on the bond. Not to be confused with the yield, which varies as interest rates move. (See also Zero Coupon Bond).
Credit Risk
the risk of suffering loss due to another party defaulting on its financial obligations.
Cum Dividend
A share or unit in a unit trust which is trading such that buyers rather than sellers qualify to receive the next divident payment, which amount is usually reflected in the price of the security in question. (Opposite of Ex-dividend).
Currency Risk
Risk of incurring losses in relation to the value of overseas investments as a result of movements in international exchange rates.
Debenture
A type of debt security backed by the general credit of the issuer and not by a specific security.
Debt Ratio
The extent to which a company's total assets are financed with borrowed funds (ie. borrowings divided by total assets). An important financial statistic.
Debt Security
A security representing borrowed funds that must be repaid by the issuer (eg. bonds, certificates of deposit, debentures). If the Government issues bonds, it is borrowing funds. Purchasers of the bonds are thus lenders to the Government.
Deductible
Expenses which can be offset against taxation liabilities. Certain contributions to superannuation funds, for example, are tax deductible up to prescribed limits.
Depreciation
The writing-down of the cost of an asset systematically over the life of that asset.
Derivative/s
Securities that derive their value from another security, (eg. futures and options).
Earnings Yield
A ratio found by dividing a company’s earnings per share by its current share price. The reciprocal of the price-earnings ratio.
Fixed Interest
Income which remains constant and does not fluctuate, such as income derived from bonds, annuities and preference shares. Any debt security which has a fixed flow of income is known as a fixed interest security.
Fundamental Analysis
Analysis of share values based on factors such as sales, earnings and assets that are 'fundamental' to the enterprise of the company in question. These factors are considered in light of current share prices to ascertain any mispricing of the shares.
Futures Contract
An obligation to make or take delivery of a specified quantity and quality of an underlying asset at a particular time in the future and at a price agreed when the contract was executed.
Gearing
a) A measure of indebtedness, ie. The extent of borrowings as against the equity held by a person or company in an asset;
b) The ability to increase exposure by investing in futures contracts without making the underlying cash available.
Hedge Fund
A type of investment portfolio under which the fund manager is authorized to utilize a number of higher risk investment techniques, including using Derivatives, Short Selling and borrowing funding to generate a higher return.
Imputation Credit
Taxation credits which are passed onto shareholders who have received franked dividends in relation to their shareholdings. (See also Dividend Imputation).
Junk Bond
A high risk, high yield debt security rated below triple B.
Leverage
a) A synonym for gearing (eg. Using derivative investments to over-invest a portfolio); or
b) The use of an asset as security for a borrowing.
Management Expense Ratio (MER)
A ratio expressing the management, trustee and certain other expenses of a collective investment fund as a proportion of the net asset value of the fund.
Negative Gearing
The purchase of an investment using borrowed funds, where the interest on the borrowing exceeds the income derived from the investment. For tax purposes, this negative net income can be off against income gained from other sources. Negative gearing is most often associated with purchases of investment real estate, but can also apply in the case of shares or managed investments.
Open-End Fund
A fund in which participants buy and sell at a unit price based on the appraised value of total assets. Participants can leave and enter at any time and assets may be continually added to the fund. (Opposite of Closed-End Fund).
Option
An agreement which conveys the right to the holder to buy (receive) or sell (deliver) a specific security at a stipulated price and within a stated period of time. If the option is not exercised during that time, the money paid for it (but no more that that amount) is forfeited.
Passive Management
A style of investment management that seeks to attain performance equal to the market or index returns. In pure index funds, no judgements are made about future market movements, although more sophisticated managers usually offer titled portfolios. Opposite of active management.
Quotation
Often shortened to “quote”. The highest bid to buy and the lowest offer to sell a security in a given market at a given time.
Rally
A brisk rise following a decline in the general price level of the market or an individual share.
Salary Sacrifice
The portion of pre-tax salary of an employee that is given up in exchange for additional contributions by the employer to the employee’s superannuation.
Short Selling
The sale of a security that is not yet owned, in the expectation that its price will fall so that it can be bought back later at a profit.
Tactical Asset Allocation
A process by which the Asset Allocation of a fund is changed on a short term basis to take advantage of perceived differences in relative values of the various asset classes. A variation of asset allocation around a benchmark. (See also Strategic Asset Allocation).
Undeducted Contribution
Superannuation contributions after 30 June 1983 for which no tax deduction was claimed.
Value Investor
One who seeks to buy shares when they are underpriced and to take profits when they appear overvalued. The Price/Earnings Ratio is a key valuation measure.
Warrant
A certificate giving the holder the right to purchase shares of stock at a stipulated price within a specified time span, or in some cases, indefinitely. Warrants are sometimes attached to other securities as an added purchase inducement and may be traded separately after issue. They are similar to call options.
Yield
The return on an investment expressed as a percentage. Alternatively, the profit or income that an investment or property will return; the money derived from any given business venture, usually expressed as an annual percentage of the initial investment. Straight yield (or running yield) relates cash flow to price paid and does not take into account any gain or loss principal. Amortised yield (or redemption yield) relates the sume of both cash flow (interest payments) over the life of the security and any gain or loss at maturity to the initial amount invested. (See also Yield to Maturity).
Zero Coupon Bonds
Discounted bonds which are issued with no coupon, ie. There is no periodic income payment, and the yield to the bondholder is derived from the capital value of the bond at its maturity.
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