Investment Glossary

All Ordinaries Index. Also referred to as the ‘All Ords’, the All Ordinaries Share Price Index is the predominate measure of the overall performance of the Australian sharemarket at any point in time. It is made up of share prices of over 300 of the largest Australian companies on ASX, weighted according to each company’s size in terms of market capitalisation (total value of a company’s shares). Stock exchanges in other countries have similar indices as Dow Jones Index ( New York ), FTSE ( London ) and Nikkei Dow ( Tokyo ).

Annuities. An investment that you buy that returns you a guaranteed income for a set number of years or for life. There are tax advantages to purchasing annuities.

Arbitrage. Buying securities in one country, currency or market and selling in another to take advantage of price differentials.

Articles of Association. Documents required by Corporations Law detailing the rules for the internal management of the company.

Assessable Income. Your gross income before allowable deductions.

Asset Backing. A useful check for investors. Net assets of a company (in $) are divided by the number of issued shares.

Assets. What you own. I like Robert Kiyosaki’s definition of an asset as something that feeds me.

Balance Sheet. A company’s bill of health showing the nature and amount of assets and liabilities.

Bank Bills. Short term investments for terms up to six months. Usually purchased with amounts of $100,000 plus. Considered to be very secure as they are guaranteed by a bank. Usually purchased at a discount. Bankruptcy. A situation where liabilities exceed realisable assets. Bankruptcy usually results from legal proceedings to recover a debt.

Bear Market. A term used to describe a falling share market.

Bearer Share Certificate. A negotiable share certificate made out in the name of the bearer and not in the name of a particular person or organisation.

Bearer Stocks/Shares. Securities for which no register of ownership is kept by the company. Dividends are not received automatically from the company and must be claimed.

Beneficial Owner. The actual or economic owner of an offshore company as distinct to the registered or nominal owner.

Blue Chip Shares. Quality shares in companies known for their ability to make a profit in good times or bad. The yield from blue chip shares is often proportionately low.

Board of Directors. An elected body of persons formed to control the planning and implementation of corporate objectives.

Bond. Document recording a loan made to a government or semi-government body for a fixed period of time at a fixed rate of interest.

Bonus Issue. The issue of bonus or free shares to existing shareholders, usually in a predetermined ratio to the number of shares already held.

Broker. A financial intermediary who acts as an agent in the buying and selling of securities or commodities for which he receives a buying or selling commission. Stockbrokers, wool brokers, insurance brokers all act in a similar capacity.

Brokerage. Fee paid to a broker for their services in buying and selling.

Budget. Estimates of revenues and expenditures (incomings and outgoings).

Bull Market. A term used to describe a rising sharemarket.

Capital Gains Tax. Tax that is paid on the growth component of an asset. The profit is calculated after allowing for inflation (indexed) and relevant expenses.

Capital Growth. The increase in the value of your investment.

Commission. The fee that a broker charges clients for dealing on their behalf.

Compound Interest. Interest paid on capital plus accumulated interest, ie. interest on interest.

Consideration. The money value of a transaction (eg. number of shares multiplied by the price), before adding commission, stamp duty, etc.

Consumer Price Index. Commonly known as CPI, this is the measure of inflation. A basket of goods and services is used as a measure.

Contract Note. Document sent to a buyer or seller confirming the transaction and showing details as to price, brokerage and any other charges involved.

Convertible Note. A loan made to a company at a fixed rate of interest with the right to be either redeemed for cash or converted into ordinary shares at a predetermined date or within a certain period.

Cover. The total net profit a company has available for distribution as a dividend, divided by the amount paid, gives the number of times that the dividend is covered.

Credit Risk. The risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss.

Currency Swap. A transaction involving the exchange of cash flows and principal in one currency for those in another with an agreement to reverse the principal swap at a future date.

Debenture. A certificate of indebtedness, an instrument in which a corporation or a company acknowledges indebtedness for a specified sum on which interest is due until the principal is paid back.

Depreciation. The decrease in the value of an asset.

Discount. When purchasing investments at a discount you actually take your interest in advance. For example if you purchased an investment for $100,000 and the interest was going to be $5,000 you would pay $95,000 and on maturity you would receive back $100,000. If you invest the interest that you receive in advance, this increases your yield.

Discretionary Trust. The form of trust usually established offshore. The discretions are vested in the trustee who can usually decide which of the beneficiaries is to benefit, when and to what extent. Discretions are exercised under advice of, or suggestions from the settlor or protector.

Dividend Yield. The dividend per share shown as a percentage of the last sale price for the shares. In analysing shares as investments, dividend yield is calculated to show annual dividend income from shares as a return on investment based on the current market price of the shares.

Dividend. Distribution of part of a company’s net profit to share holders as a reward for investing in the company. Usually expressed as a percentage of par value or as cents per share.

Domicile. The place of a person’s permanent home and the means by which the person is connected with a certain system of law related to issues such as marriage, divorce, succession of estate and taxation.

Draft. A signed, written order by which one party (the drawer) instructs another party (the drawee) to pay a specified sum to a third party (the payee), at sight or at a specific date.

Earnings Per Share. Company’s net profit divided by the total number of shares in the company. Expressed as cents per share.

Equity Options. A class of options giving the purchaser the right but not the obligation to buy or sell an individual share, a basket of shares or an equity index at a predetermined price, on or before a fixed date.

Equity Swaps . A transaction that allows an investor to exchange the rate of return (or component thereof) on an equity investment (an individual share, a basket or index) for the rate of return on another non-equity or equity investment.

Equity. The amount of the asset that you own.

Exercise Price. The fixed price at which an option holder has the right to buy, in the case of a call option, or to sell, in the case of a put option, the financial instrument covered by the option.

FED (Federal Reserve). The US Central Banking system, established in 1913 and responsible for managing the US dollar, both within and outside the US.

Fiduciary Account. An amount typically deposited with a Swiss Bank which will redeposit the sum with a third party bank outside Switzerland in its own name (to eliminate Swiss withholding tax on interest).

Final Dividend. The dividend paid by a company at the end of its financial year.

Fixed Interest. A security where the return when held to maturity is fixed. Fixed interest securities normally receive periodic interest payments and repayment of principle at maturity. The term also embraces discount securities which may not attract interest payments.

Float. The initial raising of capital by public subscription to securities.

Floor. A contract whereby the seller agrees to pay to the purchaser in return for the payment of a premium, the difference between current interest rates and an agreed (strike) rate times the notional amount, should interest rates fall below the agreed rate. A floor contract is effectively a string of interest rate guarantees.

Franked Dividend. A dividend paid by a company out of profits on which the company has already paid tax. The investor is entitled to an imputation credit, or reduction in the amount of income tax that must be paid, up to the amount of tax already paid by the company.

Freehold. Usually refers to properties that have no debt or obligations attached to them.

Fully Paid. Applied to new issues when the total amount payable in relation to the new shares has been paid to the company.

Futures. Securities or goods bought or sold for future delivery. There may be no intention to take them up but to rely upon price changes in order to sell at a profit before delivery.

Gearing. When you borrow to invest.

Gross Income. The amount of income before tax or deductions.

Growth Stock. Stock with good prospects for future expansion, so promising capital gain. Immediate income prospects may be modest.

Hard Currency. The term "hard currency" is a carry-over from the days when sound currency was freely convertible into "hard" metal, ie. Gold. It is used today to describe a currency which sufficiently sound so that it is generally accepted internationally at face value.

Hedge Funds. Speculative funds managing investments for private investors (in the US , such funds are unregulated if the number of investors does not exceed one hundred).

IBC (International Business Corporation) . A term used to define a variety of offshore corporate structures. Common to all IBC’s are the dedication to business use outside the incorporating jurisdiction, rapid formation, secrecy, broad powers, low cost, low to zero taxation and minimal filing and reporting requirements. An increasing number of offshore jurisdictions are permitting the use of nominee shareholders, directors and officers.

Imputation. The system embodied within a series of provisions of the Australian Income Tax Assessment Act whereby the tax paid by a dividend paying company is imputed to the shareholders receiving distributions by way of dividend.

Income Insurance. Insures your income in the event of you being unable to work due to sickness or accident. It does not cover you if you are unemployed.

Inflation. A measure of the rising cost of goods and services.

Insider Trading. A criminal offence involving the purchase or sale of shares by someone who possesses inside information about a company’s performance and prospects which in not yet available to the market as a whole, and which, if available might affect the share price.

Interest Rate Swap. A transaction in which two counter parties exchange interest payment streams of differing character based on an underlying notional principal amount. The three main types are coupon swaps (fixed rate to floating rate in the same currency), basis swaps (one floating rate index to another floating rate index in the same currency) and cross-currency interest rate swaps (fixed rate in one currency to floating rate in another).

Interim Dividend. A dividend paid during the year and not at the end. Most profitable companies pay dividends every half year.

Investment Trust. A company whose sole business consists of buying, selling and holding shares.

Joint Tenants. Usually refers to investments that are owned by one or more people. Any investment owned by joint tenants automatically reverts to the surviving tenant/s upon death.

Laundering. Laundering is the process of cleaning illicitly gained money so that it appears to others to have come from, or to be going to, a legitimate source.

Leasehold. A land interest which is acquired under a lease. For example, if you are the owner of a leasehold hotel, you have the right to occupy and operate the hotel for a period of time, but you don’t own the premises.

Letter of Intent. A document by which the investor states that he intends to enter into a High-Yield transaction.

Leverage. An investment is leveraged when you use a small amount of money and borrow the remainder to hold a much larger investment.

Liabilities. What you owe.

Liquidity. Assets that can easily be converted to cash. A liquid market is a market with enough activity and participants to make buying and selling easy.

Listed Company. A company which is listed on a public stock exchange and whose shares are traded through the stock exchange.

Market Value. The current price that the market will pay for an asset.

Mortgage. A charge over land given by the owner (borrower/mortgage) to a lender (mortgagee) to secure repayment of a loan or to ensure satisfaction of a debt.

Mutual Fund. A mutual fund is an investment vehicle which is used to pool investors funds and invest them on their behalf. Most common in the USA , in Australia they are often called Managed Funds, Investment Funds or Trusts.

Negative Gearing. When the tax deductible cost of servicing a loan exceeds the income earned from an asset, it is considered negatively geared.

Net Asset Value. The value of a company after all debts have been paid, expressed as an amount per share.

Net Income. The amount of income you receive after tax has been deducted.

Net Worth. The amount that your assets are worth after subtracting all liabilities.

Nominee Company. A company formed for the express purpose of holding securities and other assets in its name or to provide nominee directors and/or officers on behalf of clients of its parent bank or trust company.

Nominee Director. A director whose function is passive in nature, The director receives a fee for lending his or her name to the organisation. Nominee directors are subject to director responsibilities.

Nominee Name. The name in which a security is registered and held in trust on behalf of the beneficial owner.

Offshore Banking. By popular usage, the establishment and operation of US or foreign banks in such offshore tax havens as the Bahamas and the Cayman Islands .

Offshore Financial Centres. An offshore financial center which is used by international banks as a location for "shell branches" to book certain deposits and loans. Such offshore bookings are often utilised to avoid regulatory restrictions and taxes.

Offshore Trust. The quality that differentiates an offshore trust from an onshore trust is portability. The offshore trust can be transferred to additional jurisdictions to maintain confidentiality and to advantage desirable facets of the new jurisdictions laws.

Option. A contract giving the taker (buyer) the right, but not the obligation, to buy or sell certain shares at a specified price on or before a specified date. To acquire this right the taker pays a premium to the writer (seller) of the contract. Options are frequently transferable and are themselves bought and sold.

Ordinary Shares. The most common form of shares. Holders receive dividends which vary in accordance with the profitability of the company and the recommendations of the directors. The holders of the ordinary shares are the owners of the company.

Par. The nominal - or face value of a security. A bond selling at par is worth the same dollar amount as when issued or when redeemed at maturity.

Portfolio. An investor’s holding of securities of various types. The wise investment policy is to build up a balanced portfolio according to personal requirements.

Preference Shares. These rank above ordinary shares for claims on assets, earnings and dividends but rank below creditors and debenture holders. These shares usually have a fixed dividend rate.

Principal. (1) The party that controls the funds and seeks a secure high-yield investment. (2) The capital sum as distinguished from interest or profits. Private

Placement. An issue that is offered to a single or a few investors as opposed to being publicly offered.

Privatisation. Conversion of a state run company into a public company, often accompanied by a sale of its shares to the general public.

Prospectus. A document issued by a company setting out the terms of its public equity issue or debt raising. Subject to the rules of the Stock Exchange and the Corporations Law.

Retail Buyer. The buyer of a security when it arrives on the secondary (retail) market.

Rights Issue. An invitation to existing shareholders to acquire additional shares in the company in proportion to the number of shares they already own – usually at a preferential price.

Securities. General name for shares and bonds of all types. Shares produce a variable dividend and bonds a fixed interest.

Settlement. Exchanging money or securities for securities.

Shares. Shares (known as stocks in North America ) are the financial instruments issued by a company to show the entitlement of an owner to a portion of the capital base of that company. They signify that as a shareholder, you are a part owner of that company. When that company becomes a public company, its shares can be traded publicly on the sharemarket (or stockmarket).

Stag. A person who applies for a new issue of securities with the intention of selling immediately for a profit, as opposed to one who invests for long term holding.

Stocks. A term commonly used in the USA to describe what are known in Australia as shares. Refer to Shares above.

Tax Rebate. An amount which is subtracted from tax payable.

Taxable Income. The income that you pay tax on after all deductions have been allowed for.

Telegraphic transfer. Often abbreviated to 'TT', is most often used in UK Banking to refer to a CHAPS transfer; that is a payment made via the Clearing House Automated Payments System.

The term is also used to describe other electronic funds transfer methods and, incorrectly, BACS (Bankers Automated Clearing Services) and ATFS (Automated Funds Transfer System) payments.

Tenants-In-Common. Where two or more people own an investment. In the event of death, the share of their investment passes to the beneficiaries nominated in the owner’s will.

Title. The document by which ownership is recorded.

Trusts. Investments which involve pooling investors’ money with experts managing the investment for the individuals. Trusts usually concentrate on one area of investment. The three most common are Equity, Property and Cash Management.

Underwriter. One who arranges a new issue of securities and agrees to purchase any unsold securities thereby guaranteeing full subscription.

Unsecured Notes. A loan made to a company for a fixed period of time at a fixed rate of interest. It is not secured by a charge over the company’s assets.

Warrant. Long-dated Options contracts issued by a third party and traded on the Stock exchange in the same manner as ordinary shares are traded.

White Knight. A company which rescues another which is in financial difficulty, especially one which saves a company from an unwelcome takeover.

Yield. The effective rate of return obtained from an investment, expressed as a percentage of the current market price.