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Understanding financial Jargon A - E

 

Understanding the lingo can be overwhelming, here are some basic terminologies to help you get an edge on your friends, family and colleagues.

 

Approved Deposit Fund (ADF)
A type of fund into which eligible termination payments (ETPs) can be “rolled over” upon a person’s retirement, resignation or retrenchment. ADFs were introduced in the second half of 1984 in response to changes in the way that lump-sum superannuation payments are treated in terms of taxation. Funds placed in ADFs benefit from favourable tax treatment.

 

Accumulation fund
A type of superannuation fund in which the benefit a member receives reflects total contributions plus whatever they have earned, less expenses and tax, so the benefit reflects the performance of the fund’s investments.

 

All Ordinaries Index
An Australian Stock Exchange measure of the share price movements of the 250 Australian companies identified in the index.

 

All Ordinaries Accumulation Index
An index which measures movements in the value of the major shares listed on the Australian Stock Exchange. It takes into account the capital appreciation and dividends of the 500 largest listed companies.

 

Annuity
A form of life insurance which operates to provide retirement income. The person who takes out the annuity pays the life office a lump sum and in return receives a series of payments.

 

Asset allocation
The process of allocating the total investment between the different asset sectors such as shares, bonds (also known as fixed interest investments), property, cash (also known as short dated fixed interest) and overseas investments. Asset allocation can also be referred to as the split between growth and interest bearing investments.

 

Asset class/sector
Refers to a grouping of securities with broad characteristics in common. These sectors include Australian shares, international shares, property, cash, Australian fixed interest, international fixed interest and private capital (ie. private equity and infrastructure).

 

Asset mix
The percentage of an investment held in each asset sector. Investment analysis is the outworking of asset allocation. Investment analysis shows the asset mix is a major factor in investment performance.

 

AWE
Average weekly earnings.

 

AWOTE
Average weekly ordinary time earnings – a measure of average wages.

 

Balanced fund
A fund or portfolio which invests in all major asset classes. ie. cash, fixed interest, property and shares, domestically and internationally. It provides long term capital growth and a reasonable level of income.

 

Basis point
One hundredth of 1 per cent: 100 basis points equals 1 per cent.

 

Bear market
A market which is likely to fall; a situation where a dealer is more likely to sell an asset, even to the extent of selling assets which the dealer does not have. The bear hopes to close his short position by buying at a lower price than the assets he has contracted to deliver. The difference between the purchase price and the original sale price represents the successful bear's profit. Assets can be in the form of stock, currency or commodities.

 

Benchmark
The long-term “neutral” asset mix within the limits (maximum and minimum) of the strategy range of a particular asset class. A benchmark provides a standard for measuring the individual fund manager’s investment performance. It is used by trustees to determine the investment option best suited to their profile. The benchmark index is the generally accepted market index, which is used to assess performance (eg. the All Ordinaries Accumulation Index.)

 

 

Book value
The value of an asset as recorded in the books of account of an organisation.

 

Bull market
A market which is likely to rise; a situation where a dealer is more likely to buy than sell stock/currency/commodities and therefore establish a bull position. A bull with a long position hopes to sell his purchases at a higher price after the market has risen.

 

Call
When a company makes a call on shares it asks the holders of partly paid shares to contribute more money. A call in futures trading refers to a ‘margin call’. Funds can be placed on the money market ‘at call’ which means they have not been lodged for a fixed term.

 

Call Option
The right, but not the obligation, to buy a financial instrument, such as a share or a commodity during a given period.

 

 

Capital
The value of an investment in a house or business, represented by total assets less total liabilities.

 

 

Capital growth fund
An investment fund which invests principally in assets most likely to increase in value, such as shares and property.

 

Capital guaranteed fund
A Fund in which the original capital and the declared investment returns are guaranteed.

 

Capital stable option
A Fund in which security is normally provided by a conservative investment policy concentrating on fixed interest or short term investments, which may be held to maturity or on which no capital losses are realised.

 

Capital Structure
The debt and equity portfolio of a company balance sheet. Privately held companies can contain several levels (or tranches) of debt and equity in their capital structures.

 

 

 

Complying fund
Fund which satisfies the conditions of the Superannuation Industry (Supervision) Act (SIS) and Regulations and therefore may be taxed concessionally.

 

 

Corporate bonds
Security issued by a company in which the company acknowledges that a stated sum is owed and will be repaid at a certain date. A corporate bond, like a government-issued bond, usually pays a stipulated amount of interest throughout its life to the holder.

 

Cost Basis
The value of an investment, not taking into account unrealised gains associated with market valuations. It consists of the amount of the original investment, any additional incremental investments, capitalised fees, retained earnings from the investment etc.

 

CPI
Consumer Price Index. A measurement taken quarterly of movements in the prices of a fixed list of goods and services. The CPI is used as a guide in adjusting award wages and other costs, which are linked to the inflation rate.

 

 

Credit downgrade or upgrade
A change to a company’s credit rating. An upgrade reflects a perceived heightened ability to meet debt obligations. A downgrade reflects a deterioration in the company’s perceived ability to repay debt.

 

Credit rating
Rating applied to a company’s debt or debt security that indicates the company’s relative creditworthiness. The most well-known ratings are issued by US ratings companies Moody’s Investors Services or Standard & Poor’s. Debt issuers pay these companies to rate their debt to make it easier to attract investors.

 

 

 

Deferred annuity
A type of annuity that pays an income starting from a future age or date. Deferred annuities can only accept eligible termination payment (ETPs) such as lump sums from superannuation funds.

 

Derivative
Financial tool which enables investors to obtain returns from an investment in a market or a particular security without physically purchasing that security. They generally require a small deposit, can usually be bought or sold more quickly than physical securities and are generally much cheaper to transact. Derivatives can be used as a risk management tool or to speculate. They can provide key benefits in that they can improve liquidity and reduce transaction costs.

 

 

Direct investment
Taking a stake in a company or joint venture which brings a say in how the operation is run, although it does not necessarily give a controlling interest.

 

 

Diversification
The process whereby funds are spread among classes of securities and geographical localities in order to distribute and control risk. As a result, the return on the portfolio as a whole varies less than the return on smaller lots of individual stocks.

 

 

Dividend
The distribution of part of the earnings of a company to its shareholders.

 

Due Diligence
Detailed research of a business, its management team and other factors to ensure the accuracy, soundness and completeness of its operations. A critical step in the investment selection process.

Duration
In fixed interest investments this is a measure of the portfolio’s sensitivity to interest rate changes. It takes into account the maturity date of a debt plus its coupon payments. As an indicator of risk, duration is useful for two reasons. First it provides a means of assessing the degree of mismatch between the assets and the benchmark or liabilities of a portfolio. Second, it provides an indication of portfolio volatility or risk.

 

 

Earning rate
Interest or growth rate earned on amounts held in the superannuation plan (usually expressed as a percentage of each year).

 

EBITDA
This is Earnings Before Interest, Taxes, Depreciation and Amortisation. This is an accounting measure of operational earnings that provides a more accurate view of the performance of a company’s core business versus the net earnings of a company. It is often used to compare firms with different levels of indebtedness.

 

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 minimise taxation liability.

 

Emerging Markets
A term used to define less developed economies, such as Russia, Brazil, Turkey and Egypt. Characteristics which define emerging markets include, GNP (gross national product) per capita is substantially below the average for developed economies (as benchmarked by the World Bank), markets are highly regulated, there are restrictions on foreign investments and investment risk is perceived to be higher than for developed markets. Emerging markets are attractive due to the potentially high growth rates resulting from economic reform.

 

Equities
Also referred to as shares.