A
ACCC
Abbreviation for Australian Competition and Consumer Commission.
Accumulated Interest
Periodic interest payments which are past due and unpaid.
Accumulation Fund
Another term for Defined Contribution Fund.
Accumulation Index
A numerical index of movement in a financial market, which takes
account of both price movement (capital) and income (dividends).
Investment performance should generally be measured against an accumulation
index rather than a price index, which measures movements in price
only (not income). (See also All Ordinaries Accumulation Index).
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).
Active Market
A market in which the volume of securities traded is heavy or above
normal.
Actuary
A professional person qualified to make calculations and valuations
in respect of superannuation funds, insurance funds or other forms
of investment. Actuaries apply mathematical, statistical, economic
and financial analysis to a wide range of practical business problems,
with particular emphasis on longer term financial contracts involving
the need to incorporate assessment of risk or uncertain financial
outcomes. Actuaries operating in Australia are normally qualified
as Fellows of the Institute of Actuaries of Australia.
Age Dependency Ratio
A statistical measure of the ratio of persons above retirement age
to those below retirement age. The ratio is commonly used as a leading
indicator of the projected ageing rate of the general population.
Agent
A person employed to act on behalf of another (a principal).
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.
All Industrials Index
See All Ordinaries Index.
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.
Allocation Price
The price at which a unit in a unit trust is issued. Also known
as Purchase Price. (Opposite of Redemption Price).
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 (eg. if the index was at 2000
at a given point in time and the overall value of the shares concerned
rose by 10%, then the index would rise to 2200). Note that not all
of the companies listed on the Australian Stock Exchange make up
the All Ordinaries Index. Note also that the Index is broken into
a series of sub-indices including the All Resources, All Industrials,
the 50 Leaders and a series of sector indices such as mining, media,
transport, etc.
All Resources Index
See All Ordinaries Index.
Amortisation
Paying off an interest bearing liability by gradual reduction through
a series of instalments 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 a typical home mortgage). (See also
Credit Foncier Loan).
Analyst
A trained person who investigates all the facts concerning a security
or industry under study and reaches a dependable conclusion about
its merits that may help an investor to decide what action he or
she should take.
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.
Annualising
The expression of a rate of return over periods other than a year
converted to annual terms. For example, a compound return of 21%
over two years would convert into an annualised return of 10% per
annum, even though each annual return looked nothing like 10%. For
example, if an investment earned minus 2% in year one and 23.5%
in year two, the compound annual return would be 10%. (See also
Compounding).
Approved Deposit Fund (ADF)
A type of fund into which Eligible Termination Payments can be `rolled
over' upon a person's retirement, resignation or retrenchment. ADFs
were introduced in 1984 following changes to the tax laws affecting
lump-sum superannuation payouts, as a means of ensuring that payments
intended for retirement purposes continue to attract favourable
taxation treatment. (See also Annuity).
Arrears
a) In the case of superannuation, contributions which are overdue;
b) More generally, the term refers to money which is now due, but
has not yet been paid.
ASC
Abbreviation for Australian Securities Commission. Now called ASIC,
Australian Securities and Investments Commission.
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. Also known as Investment Mix. (See
also Strategic Asset Allocation and Tactical Asset Allocation).
Asset Allocation Model
A computer model which, given information and forecasts for the
various asset classes (return, risk, covariances), will give asset
allocations which will be most efficient in terms of the trade-off
between risk and return. (See also Optimisation).
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. (See also Net Asset Backing).
Asset Class
A broadly defined category of financial assets (eg. domestic shares,
overseas bonds, cash, etc).
Asset Consultant
A professional person engaged by investors such as superannuation
fund trustees to advise on appropriate investment strategies, asset
allocation and selection of investment managers.
Assets
The resources owned by a company, fund or individual. Cash, investments,
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.
Asset Value
The value of the assets underpinning a security. These may not be
fully reflected in the price of a security. (See also Net Asset
Value).
Asset-Weighted Average
In the context of investment performance surveys, an average derived
by comparing returns earned by fund managers where those returns
are weighted according to the managers' respective size of assets
under management. An alternative to the use of arithmetic averages.
ASX
Abbreviation for Australian Stock Exchange.
ATO
Abbreviation for Australian Taxation Office.
Audit
An independent examination of the records and operations of a company,
superannuation fund or other legal entity to check on compliance
with accounting requirements and/or regulatory standards. A conventional
financial audit is conducted to scrutinise the annual accounts of
an organisation to ascertain whether (in the opinion of the auditor)
they represent a true and fair view of the organisation's financial
status. Other types of audits might be conducted at the initiation
of management or regulatory authorities; for example, audits of
an organisation's information technology systems. Under the SIS
Legislation, audit requirements include examination of a fund's
compliance with prescribed operating standards, such as the requirement
that funds do not lend money to their members. (See also External
Audit and Internal Audit).
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 Competition and Consumer Commission
(ACCC) The Commonwealth Government agency responsible for administering
legislation concerning fair trade practices, prices surveillance,
competition and consumer protection. It was formed in 1995 by merging
of the former Trade Practices Commission and Prices Surveillance
Authority.
Australian Stock Exchange (ASX)
The national organisation for dealing in shares, bonds and certain
other securities. The Australian Stock Exchange Limited commenced
operations in 1987, replacing the previous State-based exchanges.
Authorised Capital
The maximum number of shares, valued at their par value, which a
company is permitted to issue under its rules. (See also Issued
Capital).
Authorised Dealers
A select group of companies which make up the 'official' short term
money market in Australia. Authorised dealers are utilised by the
Reserve Bank of Australia for investment of short term cash surpluses
and to stimulate trade in government securities.
Authorised Foreign Exchange Dealers
Organisations granted a general authority by the Government to buy
and sell foreign currency in Australia under the Banking (Foreign
Exchange) Regulations.
Authorised Investments
The investments which a pooled investment fund is permitted to make,
eg. under the fund's Trust Deed.
Automatic Exercise
The exercise by the clearing house of an in-the-money option at
expiration, unless the holder of the option has submitted specific
instructions to the contrary.
Average Price
The mean, or average, price obtained in the purchase or sale of
a block of securities.
Average Rate Option
fAn option structured in such a way as to allow traders to hedge
their daily exposures using a single contract which covers the entire
period of that exposure.
Average Weekly Earnings (AWE)
A measure of wage and salary levels of employees in Australia, published
monthly by the Australian Bureau of Statistics. AWE is one of the
key measures used by economists to assess the state of the economy,
particularly to gauge the overall level of activity and potential
inflationary influences. (See also Average Weekly Ordinary Time
Earnings).
Average Weekly Ordinary Time Earnings (AWOTE)
Similar to Average Weekly Earnings except that overtime earnings
are excluded, making it a less volatile measure in the short term
but a less accurate measure in the long term.
AWOTE
Abbreviation for Average Weekly Ordinary Time Earnings.
B 
BAD Tax
Aptly named abbreviation for Bank Accounts Debit Tax, a federal
government tax on withdrawals from bank accounts by cheque.
Basic Rate
Applied to loans commonly called 'No Frills Loans' which have are
generally cheaper than Standard Variable Rate Loans but do not have
features such as a redraw facility or mortgage offset.
Basis
The price difference between the actual or spot commodity and derivative
market valuations. (See also Basis Risk).
Basis Point
A measurement of fluctuation of an investment, equal to 1/100 of
one percent.
Basket Option
An option constructed around a series of different commodities,
securities or currencies. For example, a currency basket option
gives its holder the right to buy (call) or sell (put) a specified
basket of foreign currencies in exchange for a fixed price (denominated
in the investor's native currency) at a specified future date. Currency
basket options have become prominent in modern portfolio management
practices, as they allow investors to hedge all or most of their
foreign currencies simultaneously, often at lower cost than would
be incurred for individual option contracts on each currency.
Bear
Someone who believes the market will decline. (Opposite of Bull).
Bearer Bond
A bond made payable to its holder (bearer).
Bear Market
A market in which prices decline sharply against a background of
widespread pessimism. The opposite of Bull Market. Bear markets
are generally shorter in duration than bull markets.
Bear Spread
In relation to options markets, any spread in which a decline in
the price of the underlying asset will theoretically increase the
value of the spread. (Opposite of Bull Spread).
Below Par
A price below the face value (par value) of a security.
Benchmark
An index or other market measurement which is used by a fund manager
as a yardstick to assess the risk and performance of a portfolio.
For example, the All Ordinaries Accumulation Index is a commonly
used benchmark for Australian share portfolios.
Benchmark Portfolio
A model portfolio which is developed to provide a standard for measuring
the manager's risk/ return performance, and to reflect the investor's
preferred level of risk over a complete market cycle. A benchmark
portfolio will typically include individual sector indices as benchmarks
for each asset class held within the portfolio.
Beneficial Interest
The entitlement to receive benefits generated by assets held in
another party's name, such as a Trustee. (See also Beneficiary).
Beneficiary
The person or organisation which is entitled to receive the benefits
generated by an asset, where the asset is legally registered in
the name of another party, such as a Trustee.
Benefit
In relation to superannuation, the entitlement (eg. pension, lump
sum, annuity) received by the member after his or her employment
has ceased.
Bid
The price offered for a commodity, currency or investment instrument
which is desired to be purchased.
Bid-Asked
Often referred to as a quotation or quote. The bid is the
highest price anyone has indicated that he or she will pay for a
security at a given time, and the asked is the lowest price anyone
will accept at the same time. Also known as Bid-Offer.
Bid Price
The highest quoted price that any prospective buyer will pay for
a security at a particular point in time. The `bid price' is the
actual market price for a share, regardless of the price of the
last sale.
Bid Rate
The exchange rate at which bank is willing to buy a currency in
exchange for another.
Bill of Exchange
An unconditional order in writing requiring the party to whom it
is addressed to pay a certain sum on a fixed date in the future.
Bills of exchange are negotiable instruments, usually maturing within
six months, and sold at a discount to face value. The party to whom
the bill is addressed, and who accepts it, is known as the acceptor
and assumes primary liability to pay on maturity the face value
of the bill to its holder. The drawer who issues the bill is liable
should the acceptor fail to pay. If the bill has been endorsed by
a third party, such as a bank, the endorser is liable should both
the acceptor and the drawer fail to pay. See also Bank Bill.
Blue Chip
Referring to 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.
Bond Interest Coverage
A measure of bond safety, calculated by dividing total income by
the annual interest on bonds.
Bond Ratings
A system for measuring the relative creditworthiness of bond issues
using rating symbols, which range from the highest investment quality
(least investment risk) to the lowest investment quality (greatest
risk). (See also Investment Grade Bonds).
Bond Tender
A procedure for selling bonds through the seeking of written bids
from institutions. In Australia, sales of Commonwealth bonds have
occurred through a periodic tender system since the early 1980s.
Bonus Shares
Shares issued free by a corporation to its existing shareholders
on a pro rata entitlement basis.
Books Closing Date
The date a share registry is closed off after the declaration of
a dividend, for the determining of the amount to be paid to each
shareholder.
Book Value
The net dollar value at which an asset or security is carried on
a balance sheet. In portfolio accounting, book value generally refers
to the price paid for the security, as opposed to its current worth
or market value.
Broker
An agent who handles investors' orders to buy and sell securities,
commodities, insurance policies or other property. For this service,
a commission is charged which, depending upon the broker and the
amount of the transaction, may or may not be negotiated.
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.
Buffer
The amount by which the LVR can be exceeded after which a margin
call is made.
Building Society
A type of non-bank financial institution, established principally
for the purposes of providing bank-type savings vehicles and home
finance to individual borrowers. Building societies are regulated
by the Australian Financial Institutions Commission and individual
State-based supervisory bodies.
Buy-back
a) In relation to managed funds or prescribed interests, a requirement
on the investment manager to repurchase units from unitholders seeking
to redeem part or all of their investment, even in cases where redemptions
cannot be met by liquidating the assets of the fund; b) In relation
to derivative markets, an offsetting purchase to 'cover' or liquidate
a short sale.
Buyer's Market
A condition of the market in which there is an abundance of goods
available and hence buyers can afford to be selective and may be
able to buy at a lower price than had previously prevailed. (Opposite
of Seller's Market).
Buying Hedge
The purchase of futures contracts to protect against the possibility
that commodities or financial instruments which will be needed in
the future will increase in cost.
Buy Order
An order given to a broker or a bank authorising the purchase of
a specified quantity of securities or commodities.
Buy/Sell Differential
The difference between the buying and selling price of a security.
(See also Spread).
C
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). (See also Put Option).
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 gains tax is indexed
so that nominal increases in value due to inflation are not taxed
as well. The taxation regime also allows capital losses to be offset
against other taxation liabilities (eg. income tax) in certain circumstances.
Most pooled superannuation trusts accrue either fully or in part
the liability for capital gains tax on the assets held even though
those gains may not yet be realised.
Capital Growth
Appreciation in the capital or market value of an investment, as
opposed to income which may be received from the investment from
time to time, eg. dividends in the case of share investments.
Capital Guaranteed
Referring to an investment product, normally offered by a life insurance
company, which includes some form of guaranteed return of capital.
The nature of the guarantee varies in format but is, typically,
a 'promise to pay' by the life insurance company itself, i.e. there
is no external guarantor. Interest earnings are not generally guaranteed
in advance. (See also Capital Protected, Capital Stable).
Capital-Indexed Bonds (CIBs)
A form of indexed bonds whose proceeds on maturity are linked to
movements in the Consumer Price Index, and which pay a small coupon
rate eg. 1% per quarter of the variable final amount. (See also
Indexed Annuity Bonds).
Capitalisation
The sum of the total amount of various securities issued by a corporation,
multiplied by the price of those securities. Capitalisation may
include bonds, debentures, preference shares and ordinary shares.
Similarly, the capitalisation of the share market is the sum of
the value of listed shares. (See also Market Capitalisation).
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-Back Pension
Another term for allocated pension.
Cash Commodity
The actual physical commodity as distinguished from futures contracts
based on that commodity. Also called Spot Commodity.
Cash Dividend
A dividend paid on a security in cash or by cheque.
Cash Management Trust (CMT)
A pooled investment vehicle for investors who would not individually
have access to the professional money market. By pooling funds from
various sources, larger volumes of higher yielding short-dated securities
can be purchased and the resulting higher returns can then be returned
to the trust members. CMTs generally restrict themselves to negotiable
instruments of a duration of no longer than six months. As these
securities are highly liquid, a CMT can accommodate cash flows,
both in and out, on a daily basis, thereby offering small investors
a flexibility not present in a traditional fixed rate term deposit.
Commission
The broker's basic fee for purchasing or selling securities (or
property) as an agent. This fee is generally negotiated. Also known
as Brokerage. A percentage based fee applied against a client’s
investment assets.
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 complies with the operational standards
specified in the SIS Regulations and is thereby eligible to receive
concessional taxation treatment. (See also Regulated Superannuation
Fund).
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 comparisons of the relative cost of living
over time, and is used as a measure of inflation. (See also Average
Weekly Earnings).
Contract
An agreement between individuals, companies or other entities which
binds each party and is legally enforceable. Contracts are used
in many facets of business and investment markets, including areas
such as employment, engagement of investment managers and service
providers, and transactions of securities. (See also Futures Contract,
Management Agreement).
Contributions Tax
The 15% tax levied on certain contributions to superannuation funds.
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 Bonds).
Coupon Payments
The periodic interest payments on a bond.
Coupon Rate
The annual value of a bond's coupon payments, expressed as a percentage
of the bond's par value.
Covariance
A measure of the degree to which two variables move in relation
to each other. A positive covariance means that both variables tend
to be above or below their mean at the same time.
CPI
Abbreviation for Consumer Price Index.
Cumulative Rate of Return
A rate of return covering (generally) more than one year. If a fund
earns 15% in the first year, 36% in the second year and -7% in the
third year, its cumulative return is 45.45%. Its annual average
compound return, by comparison, is 13.3%. It is always advisable
to look at the individual annual returns which make up cumulative
and compound returns in making judgements about the quality and
consistency of returns.
D
Dealer
An individual who places orders to buy or sell securities. A Dealer
is now known as an Australian Financial Services Licensee or AFSL.
Debenture
A type of debt security backed by the general credit of the issuer
and not by a specific security.
Deductible
Referring to expenses which can be offset against taxation liabilities.
Certain contributions to superannuation funds, for example, are
tax deductible up to prescribed limits.
Defined Benefit Fund
A superannuation fund in which the benefits to be paid to the member
are defined in advance of the member's retirement. The benefit is
usually expressed as a proportion (eg. two-thirds, or 75%, etc)
of the member's salary on retirement. In these funds it is generally
the company or sponsor of the fund (rather than the member) which
carries the risk as to the ability of the fund to meet its liabilities.
Opposite of Defined Contribution Fund, or Accumulation Fund.
Discounting
The process of calculating the present value of a stream of future
cash flows.
Discount Rate
The discount expressed as a rate per cent per annum related to the
face value of a bank bill or promissory note. (See also Yield).
Discretionary Account
A trading account over which an investor gives a broker authority
to effect transactions without prior reference to or approval of
that client.
Diversify
To spread your risk.
E
Earnings Before Interest and Tax (EBIT)
A measure of a company's total annual earnings before deduction
provisions. EBIT is one of the key measures used by investment analysts
to assess corporate performance.
Earnings Per Share (EPS)
A measure of a company's performance, calculated by dividing the
company's net operating profit after tax divided by the number of
shares on issue. What the investor actually receives in the hand
is known as Dividends Per Share, which is the proportion of earnings
actually paid to shareholders. (See Payout Ratio).
Earnings Rate
The rate of return on funds invested, usually expressed in terms
of percent per annum.
Earnings Yield
A ratio found by dividing a company's earnings per share by its
current share price. The reciprocal of the price-earnings.
Eligible Service Period (ESP)
The period of time spent in the employment of a certain employer,
or in membership of a certain superannuation fund, for the purposes
of calculating an Eligible Termination Payment.
Eligible Termination Payment (ETP)
A payment made to an employee upon retirement, resignation, retrenchment
or disablement, and capable of being 'rolled-over' into investments
such as Approved Deposit Funds in order to defer and minimise taxation
liability. Examples of ETPs include superannuation lump sum payments
and redundancy payments. (See also Deferred Annuity).
Emerging Markets
Financial markets in countries with developing economies, where
industrialisation has commenced and the economy has linkages with
the global economy. The financial markets in these countries are
immature compared to those of the world's major financial centres,
but are becoming increasingly sophisticated and integrated into
the international markets. These markets provide potentially high
returns but are subject to high risk and volatility. Current examples
would include Indonesia and Mexico. (See also Tiger Economies).
EPS
Abbreviation for Earnings per Share.
Equity
a) a synonym for a share (as distinct from fixed interest) investment;
b) The interest or value which an owner has in an asset over and
above the debt against it.
ESP
Abbreviation for Eligible Service Period.
Establishment Fee
Also called Application Fee. Fee which covers basic costs in setting
up loan from initial interview to loan drawdown. Some lenders choose
to absorb this fee.
Ethical Investment
An investment approach which which takes into account considerations
other than solely the financial return potential of particular investments.
An ethical investment policy might include, for instance, a decision
to avoid investing in certain sectors (eg. alcohol and tobacco),
or to positively favour investments in others (eg. companies which
manufacture environmentally-friendly products).
ETP
Abbreviation for Eligible Termination Payment.
Excessive Component
A component of an individual's Eligible Termination Payment
which exceeds his or her Reasonable Benefit Limit. Excessive components
of ETPs are taxed at the maximum marginal tax rate.
Exercise
The act of converting an option into its underlying commodity
or security.
Exposure Risk
The risk associated with investments in a particular industry
sector, country, company, etc. Assessments of exposure risk are
routinely conducted by responsible investors, as some risk element
is inherent in all forms of investment other than cash.
External Audit
Examination of an organisation's financial records and
operations by an independent, external party. (See also Audit, Internal
Audit).
External Manager
An organisation (eg. an investment management company)
engaged to manage and invest funds on behalf of a client (eg. a
Government authority or trustees of superannuation.
Extrinsic Value
The price of an option less its intrinsic value. The entire
premium of an out-of-the-money option consists of extrinsic value.
It is therefore the option's time value.
F
Factor
An aspect of the investment environment which influences
returns on financial assets. (See also Common Factor).
Fair Market Value
a) The price at which a buyer and seller agree to conduct
a transaction; b) The value of an option or futures premium according
to a mathematical model.
FBT
Abbreviation for Fringe Benefits Tax.
Fifty (50) Leaders Index
A share price index measuring price movements in 50 leading
stocks listed on the Australian Stock Exchange. (See also All Ordinaries
Index).
Financial Analyst
An expert trained to advise on the risk and return characteristics
of investments and on the management of investment portfolios.
Financial Asset
Any asset that can be securitised, i.e. represented by
a written certificate (eg. a share certificate or bond) that establishes
a claim on the issuing person or organisation.
Financial Futures
Futures contracts concerned with transactions of financial
instruments, as distinct from physical commodities. Financial futures
available in Australia include bank bill futures, Share Price Index
(SPI) futures and Commonwealth bond futures. The essential value
of financial futures is that they allow investors to hedge against
adverse movements in interest rates or share prices. Financial futures
can also be used by speculators who, while having no involvement
as buyers or sellers in the underlying securities, can trade in
futures as a means of profiting from expected price movements.
Financial Market
A generic term for the markets in which financial securities
are traded, eg. stock exchanges, futures exchanges, currency markets.
(See also Capital Markets, Money Market).
Financial Planning
The process of providing comprehensive advice and assistance
to a client for the purpose of meeting a client's financial needs
and life goals. The process normally includes six steps: data gathering,
goal setting, identification of financial issues, preparation of
written options and recommendations implementation of the client's
decision, and periodic review and revision of the plan.
Financial Planning Association of Australia
(FPA)
The national body representing professionals who specialise
in giving financial planning advice, with 700 members, including
320 principal members (licensed dealers or investment advisers).
FPA funds an independent cost-free Complaints Code of Ethics and
Rules of Professional Conduct and holds the exclusive licence in
Australia to confer the international designation of Certified Financial
Planner.
Firm Offer
An offer to sell a security at a definite price with the
understanding that it will hold good for a certain period of time.
(See also Firm Bid).
Firm Price
A stated price which the maker of a firm bid or firm offer
is obliged to meet if the bid or offer is accepted within the specified
time.
Fiscal Policy
The aspect of Government economic policy dealing with tax,
welfare payments and government expenditure. (See also Monetary
Policy).
Fixed Assets
See Assets.
Float
a) In relation to currencies, the exposure of the currency
to fluctuations in market forces rather than having a fixed value
set by government; b) In relation to companies, the decision to
put a company's shares on offer to the public (See also Initial
Public Offering, Placement).
Floating Rate
An interest rate which moves in line with market or benchmark
rates instead of remaining constant for the life of a loan.
FPA
Abbreviation for Financial Planning Association of Australia.
Franked Dividends
Dividends on shares with imputation credits attached. A
company is able to declare that a percentage (up to 100%) of a dividend
is franked depending on the amount of tax the company has already
paid. If a company pays the full company tax rate, the dividends
are fully franked. (See also Dividend Imputation, Imputation Credit).
Friendly Society
A type of mutual organisation first established in the
nineteenth century. Many friendly societies have now come to operate
in a similar manner to life insurance companies. Friendly Societies
fall under the supervision of the Australian Financial Institutions
Commission.
Friendly Society Bond
An investment product similar to an insurance bond, issued
by a friendly society. Originally invested only in cash and similar
investments, these bonds now include investments in fixed interest
securities, equities, property and a whole range of risk assets.
(See also Insurance Bond).
Fringe Benefits Tax (FBT)
A tax on non-salary benefits that is paid by employers
on behalf of their employees. Such benefits may include everything
from parking to company cars and subsidised home mortgage payments.
Front End Fee
A fee charge to a borrower at the commencement of a loan,
or a commission levied on an investor to buy into a unit trust.
Also known as front-end load.
FTSE
Abbreviation for Financial Times Stock Exchange Index,
the United Kingdom equivalent of the US S&P500 Index and the
Australian All Ordinaries Index. The FTSE lists the 100 largest
public companies traded on the London Stock Exchange. Usually referred
to in the trade as 'Footsie'.
Fund Manager
See Investment Manager.
Fund of Funds
See Master Fund.
Futures
See Futures Contract.
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. (See also
Financial Futures).
Futures Option
An option (either put or call) on a futures contract.
FX
Abbreviation for Foreign Exchange (i.e.currency) dealing.
FX Option
Another term for Currency Option.
G
Gilt Edged
Low risk investments with high security.
GNP
Abbreviation for Gross National Product.
Goods and Services Tax (GST)
A tax on individual goods and/or services, which is added
on to the retail price of those goods or services. Goods and services
taxes are often advocated as a means of increasing savings in the
economy as an alternative to income taxes, which are perceived to
penalise savings and to reward spending. Also known as Consumption
Tax or, in some countries, Value Added Tax.
Gross Domestic Product (GDP)
A measurement in dollar terms of the aggregate goods produced
and services provided within an economy over a year and excluding
income earned outside the country. Considered one of the main yardsticks
of the health and vitality of an economy. (See also Gross National
Product).
Gross National Product (GNP)
An economic statistic which includes GDP plus any income
earned by residents from their overseas investments, minus income
earned within the domestic economy by overseas residents.
Growth Assets
A general term for assets such as shares and property,
which provide investment returns, (comprising both capital growth
and income), which outperform inflation. Growth assets compare to
debt securities such as fixed interest and/or cash investments.
Growth Fund
An investment portfolio which aims to achieve an above
average rate of after-tax income and capital growth over the medium
to longer term, while adopting a medium risk profile. A growth fund
typically comprises a balanced portfolio of equities, fixed interest,
property and cash.
Growth Investor
One who seeks capital gain from expected further growth
in company earnings. Typically, growth investors care less about
price/earnings ratios and other valuation measures and more about
earnings growth.
GST
Abbreviation for Goods and Services Tax.
Guarantee
A requirement, eg. under a contract, to perform an obligation
or to discharge a liability of another party in the event that the
party fails to do so itself. The provider of the guarantee is known
as the guarantor. Note that in the case of some capital guaranteed
products, the guarantee is often only as good as the guarantor's
surplus of assets over liabilities. (See also Indemnity).
Guarantor
The entity, which accepts ultimate responsibility for the
repayment of the loan.
H
Hang Seng Index
The principal Hong Kong Share Price Index, equivalent to
the Australian All Ordinaries Index.
Headline Inflation
The published overall inflation rate, unadjusted for non-economic
factors, as opposed to underlying inflation.
Hedge Fun
A type of investment portfolio under which the fund manager
is authorised to utilise a number of higher risk investment techniques,
including using derivatives, short selling and borrowing funds to
generate a higher return. Hedge funds have become particularly common
in the United States but are not prominent in the Australian investment
scene at present.
Hedge Ratio
A ratio, usually expressed as a decimal between 0 and 1,
representing the likely movement in an option premium for a given
move in the underlying market price of the relevant commodity, currency
or investment instrument. The hedge ratio indicates how much of
the underlying asset to hold against an option position in order
to achieve a riskless state. (See also Delta).
Hedging
The practice of undertaking one investment activity in
order to protect against loss in another, eg. selling short to nullify
a previous purchase, or buying long to offset a previous short sale.
While hedges reduce potential losses, they also tend to reduce potential
profits. Typical hedges include currency forwards and share and
bond futures.
Historical Volatility
The actual volatility, ie. variability in price, exhibited
by an underlying instrument over an established period of time.
Holding Company
A company which owns and exercises a controlling interest
in another company or companies.
Holding Period
The length of time a security is held.
Hyperinflation
A state of excessive inflation.
I
Imputation Credit
Taxation credits which are passed onto shareholders who have received
franked dividends in relation to their shareholdings. (See also
Dividend Imputation).
Income Tax Assessment Act (ITAA)
The Commonwealth legislation governing income tax, payable by Australian
taxpayers.
Incorporation
The legal process by which a company is established.
Indemnity
A legal agreement under which one party agrees to pay for losses
incurred by another. (See also Guarantee).
Indexation
A means of adjusting the level of wages, prices, etc. by linking
them to a selected measure, such as the level of inflation.
Indexed Annuity Bond (IAB)
A form of indexed bond which provides a steadily-increasing stream
of principal and interest payments to the holder, with a cashflow
structure similar to that of a conventional mortgage. (See also
Capital-Indexed Bonds).
Indexed Bonds
Bonds which are issued with an interest rate or maturity value which
is indexed to inflation rather than being fixed when the bond is
issued. The most common varieties are Capital-Indexed Bonds and
Indexed Annuity Bonds.
Index Fund
A portfolio of securities structured in such a way that its value
will closely follow a nominated market index, eg. an equity index
fund may be designed to track the All Ordinaries Index. There are
three main methods in use: a) Replication, which involves buying
every security in the Index in the correct proportion; b) Stratified
sampling, which selects a sample of stocks according to simple criteria,
such as size and industry grouping, to achieve an approximate tracking
at lower administrative cost; and c) Optimised sampling, which uses
a more sophisticated statistical approach involving a risk-matching
process to design the best sample of stocks for any particular desired
level of tracking accuracy. A fund structured by this method is
known as an optimised index fund. Index funds can be designed for
equities (domestic or overseas), bonds, or property trusts.
Industrial Shares
Shares of companies engaged in the production or sale of goods or
services, as distinct from resource or mining companies. Industrials
make up about two thirds of the Australian sharemarket by market
capitalisation. (Resource shares make up the other third). These
industrial shares are classified as the Industrial Sector in the
All Ordinaries Index.
Industry Fund
A superannuation fund which is industry or union-based. Industry
funds commenced general operation in 1987 following the incorporation
of superannuation entitlements into many industry awards, although
the Seafaring, Stevedoring, Storemen and Pulp and Paper industries
have long-standing industry superannuation funds. Examples of industry
funds are C+BUS (for Building Unions and the Construction Industry),
HESTA (for the Health industry) and REST (Retail Employees' Superannuation
Trust). (See also Award Superannuation).
Inflation
An increase in the level of prices of goods and services in the
economy. It is typically measured by examining a basket of goods
and services (eg. by the Consumer Price Index). (See also Headline
Inflation and Underlying Inflation).
Inflation Hedge
A type of investment whose value can be expected to increase in
a time of rising inflation. Indexed bonds are considered a good
inflation hedge over the long term.
Initial Public Offering (IPO)
The first sale of shares of a company to the public.
Insolvency
The inability of a corporation to pay debts as they fall due owing
to an excess of liabilities over assets.
Insurance
A contractual arrangement under which one party (the insurer) agrees
to pay an amount of money to another (the policy holder) on the
occurrence of a defined event, in return for payment of a premium
(eg. life, disability, professional indemnity).
Insurance and Superannuation Commission (ISC)
The Commonwealth Government body with the main responsibility for
regulation of the insurance and superannuation industries. Under
the SIS Legislation the ISC assumes responsibility for certain aspects
of superannuation regulation formerly conducted by the Australian
Securities Commission (eg. disclosure requirements for public offer
funds). APRA (Australian Prudential Regulatory Authority) and ASIC
(Australian Securities and Investments Commission) are the new bodies
which replaced the ISC and ASC respectively.
Insurance Bond
An investment product issued by life insurance companies which,
if held for ten years or more, is not subject to further taxation
on its final proceeds. An insurance bond policy does not necessarily
include any life insurance cover for its holder. (See also Friendly
Society Bond).
Insurance Council of Australia (ICA)
An industry association established in 1975, representing
general insurers in Australia. The main role of the ICA is to promote
discussion of industry issues, lobby government and promote the
industry to the community. (See also Life Investment and Superannuation
Association).
Internal Rate of Return (IRR)
The rate of discount which needs to be applied to make
the net present value of an investment equal to the price paid.
Intrinsic Value
a) The actual money value which an object possesses in itself (ie.
its value in relation to unsatisfied demand). As applied to securities,
intrinsic value is the basic worth of a corporation, as calculated
by its past record and potential earning power; b) In relation to
a call (put) option, the amount by which the exercise price is less
(more) than the market price. It is the value of an option if it
is exercised immediately.
Investment
An asset acquired for the purpose of producing income and/or capital
gains for its owner.
Investment Manager
An organisation that specialises in the investment of a portfolio
of securities on behalf of individuals and/or organisations subject
to the guidelines and directions of the investor. Investment managers
offer both pooled investment products and individual portfolios
to a range of clients including superannuation funds, institutions
and individual investors.
Investment Mix
See Asset Allocation.
Investment Philosophy
The set of principles or systems used by investors to govern the
way they manage portfolios. Sometimes confused with investment style,
which tends more to be associated with the level of risk in the
portfolio.
Investor
A person whose principal purpose is to invest money prudently and
productively over the longer term with the investment objectives
being achievement of a reasonable return and capital appreciation
to preserve purchasing power. The opposite of a Speculator, who
will sacrifice safety of principal for the possibility of larger
gains.
IPO
Abbreviation for Initial Public Offering.
ITAA
Abbreviation for Income Tax Assessment Act.
J
K
L
Leading Indicators
Economic variables which are seen as anticipatory of future trends
or expectations (eg. share prices, currency movements), as opposed
to indicators which are based on retrospective or historical statistics.
(Opposite of Lagging Indicators).
Lease
An agreement between two parties allowing one party to use an asset
(eg. property) owned by the other party, for a specified time period,
in return for a series of payments.
Leaseback
A property transaction in which the seller remains in possession
of the property as a tenant after completing the sale and delivering
the deed.
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.
Liabilities
a) Debts (plus, in the case of companies, dividends due to shareholders).
Opposite of Assets; b) A stream of obligations (eg. pension payments).
Life Insurance Act
The 1945 Commonwealth legislation which is the main source of regulation
of Australia's life insurance industry.
Life Insurance Company
A financial institution with the main business of providing insurance
against death and disability through households investing funds
with the company. Life insurance companies also operate superannuation
funds.
Limited Liability
A form of company structure under which shareholders' liabilities
are limited to the value of their shares in the company, even when
the debts of the company actually exceed that value.
Liquid Assets
Assets held as cash, or in the form of securities which can be converted
into cash swiftly and with minimal capital loss (eg. short-term
bank bills). (See also Liquidity).
Liquidation
The winding up of the affairs of a company, including sale of its
assets, settlement of its liabilities (if possible) and payment
of any remaining cash to shareholders. (See also Receivership).
Liquidator
A person appointed, usually by a court, to conduct the winding-up
of a company and the liquidation of its assets. (See also Administrator
and Receiver).
Liquidity
a) The ability of an investment to be easily converted into cash
with little or no loss of capital and minimum delay. An example
of a highly liquid asset is a short-term bank bill or promissory
note, while property is a relatively illiquid investment. For many
securities, the degree of liquidity depends on the depth of the
secondary market for that security; b) The maintenance of cash and
reserves by a financial institution to fund withdrawals by depositors,
unitholders or clients.
Liquidity Risk
The risk that an investment may not be easily converted into cash
with little or no loss of capital and minimum delay.
Liquid Market
A market where selling and buying can be accomplished with ease,
due to the presence of a large number of interested buyers and sellers
willing and able to trade substantial quantities at small price
differences.
Listed Property Trust (LPT)
See Property Trust.
Listed Security
A security which is traded on an exchange for the organised buying
and selling of securities (eg. shares on the stock exchange, or
futures on the futures exchange). Listed securities are usually
more liquid than unlisted ones owing to the existence of such an
exchange. (See also Secondary Market).
LPT
Abbreviation for Listed Property Trust.
Lump Sum
In relation to superannuation, a benefit payable in cash rather
than as a pension or annuity.
Lump Sum Reasonable Benefit Limit
See Reasonable Benefit Limit.
Lump Sum Tax
The taxation payable on the lump-sum component of a superannuation
payout.
M
Macro Economics
Economic analysis concerning broad trends and influences on the
economy, such as the interaction of fiscal and monetary policies,
GDP, balance of payments, etc; as opposed to micro economics, which
focuses on individual units such as companies and markets to assess
their influence on the economy.
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.
Margin
a) A deposit lodged with an exchange or clearing house as collateral
to cover adverse movements in market prices of an open position;
or b) In foreign currency markets, the difference between the buying
and selling rates of a foreign exchange quotation. (See also Spread).
Marginal Tax Rate
The rate of tax payable on the top proportion of income derived
by a person.
Market Capitalisation
The sum of the total amount of various securities issued by a corporation,
multiplied by the current market price of those securities. It is
a measure of a company's capitalisation in strictly market price
terms, as opposed to the price those securities could fetch off
market.
Market Cycle
A business cycle concerned specifically with rises and falls in
market activity, as measured by an index. Market cycles generally
correspond to the economic clock, with periods of heavy purchasing
indicating growth, and periods of heavy selling indicating recession.
Market Value
The current value of an item or security, as opposed to its book
value. (See also Mark to Market).
Master Fund
An investment vehicle that enables individual investors or small
superannuation funds to channel money into one or more underlying
investments most commonly wholesale or retail pooled funds operated
by professional investment managers. Master funds can generally
be categorised into three distinct types: a) discretionary funds,
where the individual investor selects the underlying investment
product(s) from a list drawn up by the master fund manager; b) fund
of funds, where the investor selects a general risk profile (eg.
growth, capital stable) but the master fund manager selects the
underlying investments from among a range of products managed by
external managers; and c) feeder funds, which operate similarly
to fund of funds arrangements, but with the master fund manager
also being responsible for managing the underlying investments.
Master funds which are structured as prescribed interests are commonly
referred to as Master Trusts. However, the term master fund encompasses
the broader scope of the industry including products offered by
life insurance companies.
Maturity
The date on which a loan, bond, mortgage or other debt or security
is due to be repaid.
Maturity Date
The date upon which the issuer of a bond repays principal to the
bond's holder.
Maximum Deductible Contribution
The maximum amount a person is permitted to pay into a
superannuation scheme from his or her personal income. This contribution
is indexed annually to average weekly ordinary time earnings (AWOTE).
Means Test
An evaluation undertaken by the Government to assess if a person
is eligible for social security payments, such as the age pension.
The test assesses income and assets with the lower being the basis
for determining the social security payment.
MER
Abbreviation for Management Expense Ratio.
Modern Portfolio Theory (MPT)
The theoretical constructs that enable investment managers
to classify, estimate and control the sources of risk and return.
In popular usage, the term encompasses all notions of modern investment,
as well as portfolio theory. The end objective is to select optimal
combinations of assets to produce the highest returns for a given
level of risk, or the least risk for a given level of return.
Morgan Stanley Capital International Index
See MSCI Index.
Mortgage Insurance (MGI)
Some lenders may provide up to 95% of funds for a loan if you agree
to take out mortgage insurance (MGI). This figure is a one off payment
usually made at the time of settlement. The figure is not easy to
calculate being based on variables such as the loan amount, the
value of your property and the exact LVR (i.e. the figure between
80% & 95%).
MPT
Abbreviation for Modern Portfolio Theory.
MSCI Index
Abbreviation for Morgan Stanley Capital International Index, a series
of country indexes of equity prices. The MSCI World Index is one
standard for comparisons of international equity performance, although
there are others, including the Frank Russell and Financial Times
indices.
Mutual Fund
An American term for certain forms of collective investments. Mutual
funds are similar to Australian unit trusts in that individual investors
are entitled to an interest in a portfolio of securities, but different
in the sense that they are offered through a corporate legal structure
rather than through a trust arrangement.
N
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 offset 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.
Net
The figure remaining after all necessary deductions have been taken
away. Opposite of Gross.
Net Asset Backing
Total shareholders' funds in a company (ie. total assets less total
liabilities) divided by the number of shares on issue. (See also
Asset Backing).
Net Asset Value
Total assets of a company less total liabilities. A more refined
measure is Net Tangible Assets, which do not include intangible
items like goodwill.
Net Present Value (NPV)
The current value of a stream of income discounted by a factor (usually
inflation) over the period of an investment.
Net Profit
The profit earned by a company less expenses such as tax and interest
on borrowings. (See also Earnings Before Interest and tax.
Net Realisable Value
The current market price of an asset after deducting the costs of
selling it.
Net Tangible Assets (NTA)
See Net Asset Value.
Non-Complying Fund
A superannuation fund which fails to meet the prerequisites
for concessional taxation treatment under the SIS Legislation. (See
also Complying Fund).
O
Offer
The price at which a person is willing to sell. (Also known as Ask).
Off Market
Relating to a transaction which occurs outside a formal market eg.
transactions in unlisted securities or transactions involving listed
shares which were not executed on a stock exchange. Off market transactions
are conducted through negotiation rather than an 'auction' system.
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 than that amount)
is forfeited. (See also Call Option and Put Option).
Option Buyer/Taker
The party who obtains the right conveyed by an option.
Only the option buyer has a right to exercise the put or the call
option. Opposite of Option Writer.
Option Premium
The dollar amount paid to the seller (writer) for an option. This
amount is determined generally by supply and demand, duration of
the contract and volatility of the underlying share price.
Option Strategy
The implementation of a market strategy through the use of option
derivatives.
Option Trade
The purchase or sale of an option.
Option Writer
A person usually an investor with a large portfolio who sells put
and/or call option contracts to other investors. The primary objective
of the option writer is to obtain capital gain or income or to purchase
stock in the future at lower than current market prices. In recent
years, large financial institutions have been showing more interest
in writing options against their portfolios as a way of earning
more and establishing the prices at which they will buy or sell
stocks.
Ordinary Shares
Securities which represent an ownership interest in a company. If
the company has also issued preference shares, both have ownership
rights. The preference shareholder normally is limited to a fixed
dividend, but has prior claim on dividends and, in the event of
liquidation, assets. Ordinary shareholders assume the greater risk,
but generally exercise the greater control and may gain the greater
reward in the form of dividends and capital appreciation. If the
company is wound up, the ordinary shareholders generally rank behind
secured creditors, including debenture holders, in the liquidation
process.
Outperformance
Achievement of a higher investment return than a benchmark or other
measure against which that return is being compared. For example,
an equity fund would be said to have outperformed the All Ordinaries
Index if the fund achieved a 5% return against a 3% return by the
Index over the same period. (Opposite of Underperformance).
Overweight
Having a greater exposure to a particular sector or stock in an
investment portfolio, compared with a neutral or benchmark position.
(Opposite of Underweight).
P
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 tilted portfolios. (Opposite of Active Management).
Pension
A regular periodic payment to a person, either by the Government
(i.e. social security) or as a superannuation benefit.
Pension Fund
a) A superannuation fund in which benefits are payable as an income
stream during retirement rather than (or as well as) by way of a
lump sum payment; b) The term used in the United Kingdom and United
States for retirement savings plans generally (i.e. the US equivalent
of superannuation funds).
Pension Reasonable Benefit Limit
See Reasonable Benefit Limit.
Personal Superannuation Plan
An arrangement, often in the form of a policy from a life
insurance company, under which individuals can make superannuation
contributions without the need for employer contributions.
Pooled Superannuation Trust (PST)
A superannuation trust which complies with certain conditions
set out in the SIS Legislation and Regulations, and into which complying
funds may place their investments.
Portability
In relation to superannuation, the ability to switch benefits from
one fund to another, or from a superannuation fund into a rollover
fund (eg. upon a change of employment).
Portfolio Construction
The process of identifying which asset classes to invest in, and
in what proportions.
Portfolio Insurance
An investment strategy which aims to ensure a minimum rate of return
while allowing the investor to benefit from the positive returns
generated by investment in a risky portfolio. (See Dynamic Hedging).
Portfolio Manager
A person or organisation engaged to manage investment portfolios
and make investment decisions on behalf of others.
Portfolio Optimisation
The process of selecting an investment portfolio that minimises
risk for a given level of return, taking account of a) expected
return; b) variances of expected return; and c) covariance of return
with every other security under consideration.
Preference Shares
Shares which rank before ordinary shares in the event of liquidation
of the issuing company and usually receiving a fixed rate of return
on the unfranked investment. (See also Ordinary Shares).
Present Value
The current value of an investment which matures in the future,
after discounting the maturity at an assumed rate of interest and
adjusting for the probability of its payment or receipt.
Preservation
The maintenance of superannuation benefits and/or eligible termination
payments in superannuation or rollover funds until retirement. Under
current laws, some benefits are subject to compulsory preservation
until retirement (i.e. they must be preserved in a superannuation
or rollover fund, and cannot be withdrawn beforehand). (See also
Vesting).
Price-Earnings Ratio (PE Ratio)
A stock's market price divided by its current or estimated future
earnings per share; a fundamental measure of the attractiveness
of a particular security versus all other securities as determined
by the investing public. The lower the ratio relative to the average
of the sharemarket, the lower the (market's) profit growth expectations.
Also called Earnings Multiple.
Primary Market
The market in which securities are sold at the time they are first
issued. (Opposite of Secondary Market).
Professional Indemnity
A form of insurance against negligence or defalcation by a professional
adviser (eg. a lawyer or an accountant). Also known as PI Cover.
Investment managers and custodian companies generally take PI cover
as well.
Proper Authority
An instrument under the Corporations Law which signifies the responsibility
of a securities dealer or investment adviser for acts of an employee
or agent. Proper authorities are required to be provided to certain
categories of employees of fund managers sharebrokers and investment
advisers. (See also Dealer's Licence).
Public Offer Fund
A type of superannuation fund which, under the SIS Legislation,
is required to comply with certain regulatory requirements, including
the need to have a corporate trustee, to meet certain disclosure
requirements and to establish a policy committee to advise the trustee
directors. Public offer funds include superannuation products marketed
directly to the public and master trusts, although other funds can
obtain public offer fund status either by their own choice or by
declaration by the Insurance and Superannuation Commission.
Public Sector
The part of the economy which is made up of Government (Commonwealth,
State and Local) enterprises and activities. The public sector includes
public service departments, essential services such as health, education,
transport and defence and utilities, such as electricity and water
authorities. (See also Private Sector and Statutory Authority).
Purchase Price
See Allocation Price.
Purchasing Power
The extent to which a sum of money or benefit can retain its ability
to purchase physical assets. Investors generally aim to improve
or at least to preserve the purchasing power of their money or assets
against increase in the inflation rate over time.
Put Option
An option giving its purchaser the right, without the obligation,
to sell an asset at a specified price (the exercise price) at any
time between the purchase of the option and its expiry date. (See
also Call Option).
Q
Quantitative Management
An approach to investment management which seeks to use statistical
or numerical methods to create efficient portfolios, with the optimum
risk/return trade-off. Quantitative managers generally attempt to
add value by exploiting pricing anomalies, or by providing particular
levels of risk control, rather than by subjective forecasting of
market behaviour.
Quartile
A statistical measure dividing a sample into four numerically equal
groups. Thus, 'top quartile' means the top 25% of a given sample.
(See also Decile, Percentile).
R
Rate of Return
The income yield earned in relation to a capital amount invested.
RBA
Abbreviation for Reserve Bank of Australia.
RBL
Abbreviation for Reasonable Benefit Limit.
Realise
To sell an asset (usually when it appears to have appreciated to
the maximum extent that can be reasonably expected).
Real Return
An inflation-adjusted return. (See also Nominal Return).
Reasonable Benefit Limit (RBL)
The maximum benefit which members of superannuation funds are permitted
by the Government to receive on a concessionally taxed basis either
as on lump sum (Lump Sum Reasonable Benefit Limit) or a pension
(Pension Reasonable Benefit Limit). From the commencement of the
SIS Legislation on 1 July 1994, RBLs are set at a flat dollar amount
for all retiring members (previously the limit was calculated by
reference to the member's salary prior to retirement). More generous
RBLs apply in respect of pension benefits than lump sum, reflecting
the Government's policy of encouraging the provision of benefits
as an income stream and reducing opportunities for double dipping.
Recession
A significant slowdown in the economy, but not of the same severity
or duration as a depression. The term recession is sometimes used
in a more technical sense to refer to a period in which a nation's
GDP declines over two consecutive quarters.
Redemption Fee
A fee charged for the redemption (ie. withdrawal/cashing in) of
units in a unit trust. Also known as Back-end Load.
Redemption Price
The price at which an investor can withdraw his or her units in
a unit trust. Opposite of Allocation.
Redemption Yield
See Yield.
Redraw Facility
A redraw facility allows you to make additional repayments on your
mortgage, and then have access to the additional repayments if you
need to. Make sure you understand the conditions attached to the
redraw facility that can include a minimum amount and a fee every
time you use it.
Reserve Bank of Australia (RBA)
Australia's central bank; came into being in 1959 when the central
banking activities of the Commonwealth Bank of Australia were transferred
to the new entity. The RBA's role combines that of guardian of the
financial system and confidant to the Federal Government. It has
responsibility for the banking system and authorised dealers, as
well as overseeing the activities of Australia's financial markets.
Reserves
a) The proportion of a company's profit not distributed to shareholders
as dividends; b) An account kept aside by the trustees of a superannuation
fund to cover declines in asset values or investment returns.
Retail Investment Products
Investment funds that are structured to accept investments from
individuals. These funds are pooled and invested by an investment
manager. A number of different types of funds exist aimed at meeting
the investment requirements of individuals. (Opposite of Wholesale
Investment Products).
Retirement Savings Account (RSA)
A vehicle for superannuation savings, akin to a bank account, which
can be selected by employees as an alternative to conventional superannuation
funds.
Rollover
a) In relation to superannuation, the transfer of an eligible termination
payment into an approved deposit fund, deferred annuity or superannuation
fund prior to retirement in order to defer or (if the rollover remains
in place until at least minimum retirement age) avoid the requirement
to pay lump sum tax; b) In relation to banking, the renewal of a
loan or extension of a deposit at defined intervals, normally including
a revision of the interest rate charged or paid.
RSA
Abbreviation for Retirement Savings Account.
S
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.
SEATS
Abbreviation for Stock Exchange Automated Trading System, the screen-trading
system adopted by the Australian Stock Exchange.
Secondary Market
Any market in which existing securities are traded (as distinct
from the primary market, in which securities are first issued).
The Stock Exchange is the secondary market for share trading.
Sector
A group of securities that share common characteristics (eg. resources
sector, textiles sector, etc).
Sector Range
The maximum and minimum investment permitted in a particular sector
in a balanced investment portfolio. An important aid for investors
in ensuring diversification in managed funds.
Sector Trust
A trust fund that only invests funds in a particular sector or segment
of the Australian or international market. The investments of balanced
portfolios operated by some fund managers are often held in the
form of units in a range of different sector trusts.
Secular Trend
A long-term trend either up or down in the price or level of a commodity,
price structure, inflation rate, etc, which is not influenced by
seasonal variations or distortions.
Secured Creditor
A person or organisation which has lent funds on the security of
specific assets of the debtor. In the event that the debtor defaults
on its obligation the secured creditor may be entitled to have the
assets in question sold to recover the debt. (Opposite of Unsecured
Creditor).
Security
a) In relation to financial markets, the paper right to a (generally
tradeable) asset. In this context the term includes Bills of Exchange,
bonds, share certificates or any other interest-bearing paper traded
on financial markets; b) An asset pledged to ensure the repayment
of a financial obligation (eg. loan), and forfeited in the event
of a default on that obligation.
Security Analysis
a) The process of assessing the prospective future benefits of a
security, the conditions under which those benefits will arise,
and the likelihood of those conditions occurring or persisting;
b) Examination of the value of assets put forward as security for
a loan or other financial accommodation.
Security Valuation Model
A model for calculating the price at which a security should sell.
Typically based on the precept that the value of a security is the
sum of the present value of the estimated future income stream.
Security value is the market value of a stock times it's LVR.
Share Capital
The capital of a company subscribed by its shareholders. (See also
Authorised Capital).
Share Certificate
A piece of paper representing legal evidence of ownership of a stipulated
number of shares in a company. Also known as Scrip.
Shareholder
The owner of one or more issued shares of a company who is normally
entitled to: a) a proportionate share of the issuing company's undivided
assets; b) dividends when declared by the directors; and c) the
right of proportionate voting power.
Share Price Index
An index measuring movements in the prices of shares, but not of
their dividends (as opposed to an Accumulation Index, which measures
movements in both price and dividend income).
Share Ratio
A derivative contract developed by the Australian Stock Exchange
in 1994 that allows investors to gain exposure to an equity, not
on the basis of whether it goes up or down in price, but on the
basis of its performance relative to index. Share ratios allow investors
to hedge company specific risk during periods of potential volatility,
because they do not pick the direction of the overall market, rather
how a share will perform relative to it.
Spread
a) In relation to share, bond and currency markets, the difference
between the bid price and the ask (offering) price, incorporating
both an estimate of demand and potential profit for the seller;
b) In relation to unit trusts, the difference between the allocation
and redemption price of units, as a result of transaction costs
incurred in buying and selling the underlying securities which make
up the value of the trust; c) In relation to options markets, the
holding of a long position and an offsetting short position, usually
in contracts with the same underlying security or asset.
Standard & Poors (S&P)
A United States credit rating agency. S&P also maintains a range
of United States sharemarket indices; the most widely quoted is
the S&P 500. (See also Australian Ratings, Moody's).
Standard Variable Rate
The rate which lenders apply to their 'premium' home loan product.
Carries features such as a redraw facility, portability, salary
account and mortgage offset.
Statutory Authority
A public (or semi-government) authority established by legislation,
and having the power to make legally enforceable decisions and regulations.
Examples include bodies responsible for electricity generation,
gas, water supply, etc.
Superannuation
A means of setting aside funds during working life for use as retirement
income, under a regulatory system which provides certain taxation
incentives and prudential controls for the benefit of contributors.
Superannuation Complaints Tribunal
A tribunal established under the SIS Legislation to conciliate and,
if necessary, review complaints brought before it by individuals
who are affected by decisions of trustees of superannuation or approved
deposit funds.
Superannuation Guarantee Charge (SGC)
A policy introduced in 1991/92 Federal Budget, providing that, as
from 1 July 1992, all employers who fail to contribute a prescribed
level and standard of contributions to complying superannuation
funds on behalf of their employees are required to pay a charge
to make up those contributions. The SGC is scheduled to increase
to 9% by 1999, and to be complemented by a compulsory additional
3% employee contribution, to be phased in from the 1997/98 financial
year.
Superannuation Industry Supervision (SIS) Act/Legislation
Legislation enacted by the Commonwealth Government in 1993, and
commencing on 1 July 1994 for the regulation, responsibilities and
activities of superannuation funds. The SIS Legislation replaces
the previous Occupational Superannuation Standards Act and Regulations
and brings the industry under the sole supervisory authority of
the Insurance and Superannuation Commission. (See also Complying
Fund, Public Offer Fund, Regulated Superannuation Fund).
Surplus
An excess of revenue or income over expenditure. (Opposite of Deficit).
Surrender Value
The amount due to the policy holder if a life insurance policy is
cancelled and cashed in, prior to the maturity date.
Syndication
An arrangement between a number of different parties or financial
institutions to jointly devote resources to a particular undertaking.
(See also Joint Venture).
Systematic Risk
One of the components into which the risk of an asset, as defined
by its price volatility, is usually divided, the other is specific
risk. The systematic risk is the portion of the risk that relates
to movements in the underlying market of which this asset forms
part. Systematic risk is normally measured in terms of beta. It
should not be confused with systemic.
T
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).
Tariff
A charge levied on imports with the aim of protecting local industries.
Tax Exempt
a) Referring to income which is not liable for tax in the hands
of the recipient; b) Referring to a fund which does not incur tax
on its income, by virtue of its beneficiaries being a specialised
class of persons, eg. a superannuation annuity fund, or a charitable
organisation.
Tax File Number (TFN)
A number allocated to taxpayers by the Australian Taxation Office.
The TFN is used by the Taxation Office to match income and taxation
details.
Tax Loss
A situation where total deductions exceed total income, based on
the Taxation Office's definitions.
Term Deposit
A deposit with a financial institution for a fixed period and a
rate of interest which applies for the duration of the deposit.
Term to Maturity
The amount of time to elapse before the capital of a fixed interest
security becomes due for repayment.
TFN
Abbreviation for Tax File Number.
Time Horizon
The period of time over which an investment objective is to be realised.
Time horizon is a critical factor for all investors in determining
the types of investments they should make or, at least, the amount
of risk they are prepared to carry. The investments made to provide
for future retirement income, for instance, would almost always
be different from those for short-term purposes.
Time Spread
In options markets, a spread consisting of one long and one short
option of the same type and with the same exercise price, but which
expire in different months. All options must have the same underlying
stock or commodity.
Time Value
The balance of an option premium not represented by the option's
intrinsic value.
Time Weighted Rate of Return
A method of determining rates of return
on the basis of measuring only the investment performance of assets
held for the entire time period measured. This rate provides an
effective standard for comparing the performance of different funds,
in which cash flow could vary considerably. The investment manager
usually cannot control the timing or the amount of contributions
to the fund. Because the time weighted rate eliminates the impact
of money flows into or out of the fund, it is a useful means of
appraising the fund manager's ability to make the fund's assets
perform. (See also Money Weighted Rate of Return).
Timing
The art of deciding upon the exact moment to buy or to sell.
Total Return
The aggregate increase or decrease in the value of a portfolio resulting
from the net appreciation (or depreciation) of the principal of
the fund, plus or minus the net income (or loss) experienced by
that fund during the period.
TPC
Abbreviation for Trade Practices Commission.
Tracking Error
The degree of proximity with which an actual portfolio follows a
representative market index. Technically the tracking error is represented
by the standard deviation of the differences in return between the
portfolio and the index. Tracking error measures the likelihood
(based on historical data) of actual returns differing from index
returns.
Trade Practices Commission (TPC)
The former Commonwealth Government agency responsible for administering
legislation concerning fair trade practices, and merged in 1995
with the Prices Surveillance Authority to form the Australian Competition
and Consumer Commission.
Trader
A person who actively buys and sells securities for his or her own
account, usually with relatively short time horizons.
Trade-Weighted Index (TWI)
An index measuring the value of Australia's currency in relation
to those of its major trading partners. The index is weighted to
take account of the volume of trade conducted between Australia
and the countries concerned.
Treasury Note (TN)
A short-term debt instrument issued by the Commonwealth Government,
issued on a tender basis each week for terms of either 13 or 26
weeks. The Reserve Bank conducts the tenders, which are pitched
in line with liquidity expectations over the period in which the
notes have to be paid for, as well as providing liquidity for periods
when it is most needed (eg. tax run-down periods).
Trend
A persistent and pervasive direction, upwards or downwards, of commodities,
prices, earnings, etc. over a period of time.
Trough
A charting term, also known as a bottom (eg. in charting prices,
a trough is the point where the price bottoms before the pressure
to buy pushes it back up). (See also Peak).
Trust Deed
An agreement spelling out the methods of receipt, investment and
disbursement of funds under a superannuation plan, unit trust, charitable
trust, etc. A superannuation trust deed will typically contain provisions
for: investment powers of trustees, irrevocability and non-diversion
of trust assets, payment of legal, trustee and other fees, liability
of trustees, periodic reports by the trustees, records and accounts
to be maintained, conditions for removal, resignation, or replacement
of trustees, benefit payments under the plan, and the rights and
duties of the trustees in case of amendment or termination of the
plan.
Trustee
a) A person or company that has legal responsibility for financial
aspects (receipts, disbursements and investment) of funds; b) A
trust company which acts in a capacity of trust as a fiduciary and
to whom assets have been conveyed for the benefit of another party.
The Trustee in this case oversees the behaviour of the manager in
relation to the operation of a unit trust.
Trustee Companies Association of Australia (TCA)
An industry association representing private state and public trustees
since 1945. The main aim of the association is to represent the
views of the industry to State and Federal government and regulators,
mainly regarding legislation, and provide education to the industry
and associated professions.
Trustee Director
A director of a corporate trustee.
Trustee Investment Status
A status conferred on selected investments by State Government
Trustee legislation. Rules or trust deeds governing certain types
of funds might require a portion of investments to be made in authorised
trustee investments.
Trust Fund
A fund whose assets are managed by a trustee or a board of trustees
for the benefit of another party or parties. Restrictions as to
the type of investments in which the trustee may invest the assets
of the trust fund are usually found in the trust deed and in applicable
legislation.
Turnover
a) In relation to investment portfolios, the rate at which securities
within a portfolio are exchanged for other securities of the same
class; b) In relation to investment markets, the level of trading
that occurs.
TWI
Abbreviation for Trade Weighted Index.
U
Unbundled
Referring to the structuring of a product or service where the individual
components involved in the management of that product are split
out with separate fees usually applying. For example, an unbundled
superannuation arrangement might involve separation of investment
management, trusteeship and insurance arrangements among different
parties. (Opposite of Bundled).
Uncalled Capital
That part of the company's issued capital which has not
been paid for by the shareholders. (See also Authorised Capital
and Issued Capital).
Undeducted Contribution
A component of an eligible termination payment comprising
superannuation contributions (usually by employees) after 30 June
1983 for which no tax deduction was claimed.
Underlying
Referring to the stock, commodity futures contract, or cash index
to be delivered in the event an option is exercised. The term underlying
is often used as a noun in its own right, as well as an adjective.
Underlying Inflation
A calculated measure that takes the headline inflation rate and
excludes certain volatile items or series that are affected by factors
other than general economic conditions (eg. government taxes, or
the effect of weather on fruit and vegetable prices). The resulting
rate is based on only those items directly related to the economy.
Underlying Security
The shares, stock or commodity upon which a synthetic security is
based. Also called Physical Security.
Underperformance
Achievement of a lower investment return than a benchmark or other
measure (eg. competitor portfolios) against which that return is
being compared. (Opposite of Outperformance).
Undervalued
Referring to a security or currency which trades below what is perceived
to be its proper market value, taking account of statistical or
fundamental research or other relevant information.
Underweight
Having a lesser exposure to a particular sector in an investment
portfolio, compared with a neutral or benchmark position. (Opposite
of Overweight).
Underwriter
A broker or bank which arranges the sale of an issue of securities
on behalf of a client and, if it does not sell all stock to other
institutions or investors, itself undertakes to purchase the unsold
securities. By using an underwriter, the client is therefore assured
of raising the full amount of money it is seeking.
Unfranked Dividends
Share dividends paid by companies which are not subject
to Australian tax (or paid by Australian companies, but before the
introduction of dividend imputation in 1986). Recipients of unfranked
dividends are subject to tax at their normal marginal rate.
Unfunded
In relation to superannuation, describing a scheme in which the
accrued benefits payable to members (i.e. the liabilities of the
fund) are not matched by the fund's current assets. Some Government
superannuation funds have unfunded liabilities. (See also Fully
Funded).
Unfunded Liabilities
The actuarial calculation of the value of future benefits payable
(eg. to members of a defined benefit superannuation fund) less the
net assets of the fund at a given balance date.
Unit Trust
A pooled investment fund or collective investment, established under
a trust deed, that continually offers new units and stands ready
to redeem existing ones from the owners.
Unlisted
Referring to a company and/or shares that are not available for
purchase or sale through the sharemarket.
Unlisted Securities
Securities which are not listed on an organised stock exchange.
Unrealised Profits
Profits which have not yet been received because, while the price
of the asset has risen, the owner has not yet sold; i.e. paper profits.
Unsecured Creditor
A person or organisation who has lent money to another without taking
security over specific assets of the borrower, so that repayment
is dependent solely on the borrower's ability and willingness to
repay. The lender is legally entitled to repayment but ranks after
secured creditors, debenture holders, etc in the event that the
borrower is wound up.
V
Value Added Tax
A term used in some countries for a Goods and Services Tax.
Value Date
The trading date of the instrument being used to hedge an underlying
exposure. This date is always before/the same as the underlying
exposure's maturity.
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.
Variance
A measure of dispersion of returns on investments based on deviations
from the average or mean value.
Vendor
A seller of an asset. In real estate transactions the vendor is
the person disposing of the property.
Vendor Shares
Shares that are issued in payment for assets sold to a company at
the time of a float.
Venture Capital
Capital which is subject to more than a normal degree of risk, usually
associated with a new business or venture and particularly in relation
to new technology projects. Also called Risk Capital. (See also
Development Capital).
Vertical Integration
The acquisition by a company operating in one market of another
company which is complementary to its existing business (as a supplier
or user of product) but which operates in another market eg. a newspaper
publishing company acquiring a paper manufacturer. (See also Horizontal
Integration).
Vertical Spread
In options markets, a spread in which one option is bought and one
option is sold, where both options are of the same type, have the
same underlying security, and expire at the same time. The options
differ only by their exercise prices.
Vesting
In relation to superannuation, the inclusion of all or part of the
employer contribution in the benefit payable to a member who leaves
his or her employment (eg. resigns) before being eligible for retirement
benefits. (See also Full Vesting, Partial Vesting).
Volatility
The extent of fluctuation in share prices, exchange rates, interest
rates, etc. The higher the volatility, the less certain an investor
is of return, and hence volatility is one measure of risk.
Volume
The aggregate number or value of securities traded during a given
period.
W
Wall Street
The location of New York's financial district; most often used to
refer to major participants in the United States sharemarket generally.
Weighting
The relative proportion of each of a group of securities or asset
classes within a single investment portfolio. (See also Overweight,
Underweight).
Wholesale Investment Products
Investment funds that are structured and tailored for professional
investors (including most superannuation funds, institutions and
corporate investors) to invest in.
Withholding Tax
The tax payable on payments such as dividends, interest and debt
repayments, sent to foreign entities.
Write Down
To reduce the recorded value of an asset in an account, eg. owing
to depreciation.
Writer
The creator, or seller, of an option.
X
Y
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 of principal. Amortised yield
(or redemption yield) relates the sum 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).
Yield Curve
A visual representation of the term structure of interest rates.
It shows the relationship between bond yields and maturity lengths.
A normal or positive yield curve signifies higher interest rates
for long-term investment, while a negative or downward curve indicates
higher short-term rates.
Yield to Maturity
The yield provided by a bond which is held to its maturity date,
taking account of both interest payments and capital gains or losses.
Your equity equals the total value of the asset less the debt held
against that asset.
Z
Zero Coupon Bonds
Discounted bonds which are issued with no coupon,
i.e. there is no periodic income payment, and the yield to the bondholder
is derived from the capital value of the bond at its maturity.
Sources:
Country NATWEST Dictionary of Investment Terms
Master Financial Planning Guide (CCH)
