The Future of Investing

Glossary

What follows is a comprehensive list of investment related terms that you may come across when reading about investing in the share market. We hope that by including them here we will help demystify the jargon used by the investing community.

Amortisation - The deduction of capital expenses over a specific period of time.

Appreciation - The increase in value of an asset.

Analyst - Also known as a Financial Analyst. Analysts have expertise in evaluating investments, and typically are employed by stockbrokers, investment advisers or mutual funds. They make buy, sell and hold recommendations on securities, and many specialise in particular industries or sectors.

Annual Report - A corporation’s annual statement of financial operations, typically a glossy, colourful publication. Annual reports include a balance sheet, income statement, auditor’s report and a description of a company's operations. The Australian Securities and Investment Commission require that all publicly traded companies file a detailed annual report.

Arbitrage - is the simultaneous purchase and sale of a security in order to profit from a differential in the price, usually on different exchanges or marketplaces.

Asset - Assets are cash, accounts receivable, inventory, real estate, and securities - anything of value that a corporation owns.

Asset Allocation - The division of an investment portfolio among major asset categories, such as bonds, shares, property or cash, usually to balance risk and reward appropriate for an investor's age.

Australian Securities and Investment Commission a government body responsible for the regulation of the Australian financial sector.

Balance Sheet - A company's financial statement that reports its assets, liabilities, and net worth at a specific time. Liabilities and net worth always equal assets, hence the name "balance sheet".

Bear - An investor who believes that a stock or the market in general will decline. A bear market is an extended period of falling prices in the overall market.

Beta - is a mathematical measure of a stock's risk in relation to the overall market usually as measured against an index. A beta of less than 1.0 means that the stock's price is likely to move less than the market in general; a beta greater than 1.0 means the stock is likely to move more than the market. High-beta stocks are great to own in a bull market, but not so fun to hold in a bear market.

Bid - The price a buyer is willing to pay for a particular stock.

Breakout - A technical analysis term, used to indicate a rise in a stock's price above its resistance level (such as its previous high price) or drop below its support level commonly the last lowest price). The assumption is that the stock will continue to move in the same direction following the breakout, which generates a buy or sell signal.

Blue Chip Shares - Stock in a well-established, financially sound and stable company that has a very good record of paying dividends.

Board of Directors - A company’s Board is elected by shareholders to oversee the management of the company.

Bonds - a fixed term investment option offered by a government or semi-government organisation with an undertaking made to repay the funds loaned by investors at a specific rate by a specific date.

Book Value - Usually Book Value Per Share. Calculated by dividing the Net Worth of a Company (common stock plus retained earnings) by the number of shares outstanding. This is the accounting value of a share of stock, the value of the company's assets a shareholder would theoretically receive if a company were liquidated.

Bonus issue a free issue of new shares to existing shareholders.

Broker -An individual or company that charges a fee or commission for buying and selling securities.

Brokerage the fee charged by a stockbroker for purchasing or selling shares for an investor.

Bull - An investor who thinks the market or a specific security or industry will rise. A bull market is an extended period in which the market consistently rises.

Business Cycle - The cycle of economic growth and decline. There are four stages in the business cycle: expansion, growth, contraction and recession.

Buy And Hold - A long-term investing strategy in which an investor's stock portfolio is fully invested in the market all the time.

Buyout - The purchase of a company or a controlling interest of a corporation's shares. A leveraged buyout is accomplished with borrowed money.

Capital - Cash or goods accumulated and available for use in producing more cash or goods.

Capital Appreciation - A rise in the market value of an asset.

Capital Asset - All of a company's tangible property, including securities, real estate and other property.

Capital Expenditures - Funds used by a company to acquire or upgrade physical assets such as property, plant or equipment.

Capital Gain -The profit made when a share (or anything for that matter) is sold for greater than its original cost basis.

Capital Gains Tax the tax payable on profits made from selling shares

Capital Loss - A capital loss occurs when the share is sold for less than its cost basis.

Capitalisation -The sum of a corporation's stock, long-term debt and retained earnings.

Cash Dividend - A dividend paid in cash to a corporation's shareholders. The amount is normally paid from a company's profits. The company has usually paid tax on these profits and the shareholder gets a credit for this by way of dividend imputation.

Cash Flow - The amount of cash a company generates during a period, calculated by adding non-cash charges (such as depreciation) to net income after taxes.

CHESS (Clearing House Electronic Sub-Register System) - the Australian Stock Exchange’s computer system that records share ownership.

Closely Held Shares - Shares held by individuals closely related to a company.

Closing price - the price of a share at the end of a day’s trading.

Commission - The fee paid to a broker to buy or sell securities. A commission increases the tax basis of the purchased security (thereby reducing the eventual capital gain or loss). Commissions vary widely from broker to broker.

Common Stock - A class of stock in a company, normally with voting rights. Corporations may have several classes of common stock, as well as preferred stock, or they may have a single class of common stock. Common stockholders are on the bottom of the ladder in a corporation's ownership structure, and have rights to a company's assets only after bondholders, preferred shareholders and other debt holders have been satisfied.

Confirmation - The written acknowledgment provided by a broker that a trade has been completed. It includes details such as the date, price, commission, fees, and settlement terms.

Contributing shares - shares that have not been fully paid for and require further payment in the future.

Corner A Market - To acquire enough of a particular security in order to manipulate its price.

Corporation - A form of business organisation in which ownership is established through the issue of shares. A corporation is ongoing and the owners face only limited liability.

Current Assets - Appears on a company's balance sheet, representing cash, accounts receivable, inventory, marketable securities, prepaid expenses and other assets that can be converted to cash within one year.

Cyclical Industry - An industry, such as manufacturers of durable goods, whose performance is closely tied to the business cycle of the general economy.

Current Liabilities - Appears on a company's balance sheet, representing amounts owed for interest, accounts payable, short-term loans, expenses incurred but unpaid and other debts due within one year.

Current Yield - The average annual rate of return received from an investment, based on income received during a year divided by the security's market price.

Day Order - An order to buy or sell a security that automatically expires if not executed on the day the order is placed.

Debt Financing - A company can raise working capital by issuing bonds or notes to individuals or institutions, along with a promise to pay interest as well as to repay the principal. The other major way of raising capital is to issue shares of stock in a public offering.

Debt Service - The repayment of interest and principal of a debt.

Debt/Equity Ratio - A measure of a company's financial leverage, calculated by dividing long term debt by shareholders' equity. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt, which can result in volatile earnings as a result of the additional interest expense.

Depreciation - An expense recorded regularly on a company's books to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company's reported earnings.

Derivative - A security, like an option or future, whose value is derived from another underlying security.

Devaluation - A significant fall in the value of a currency, as compared to gold or another country's currency.

Dilution - Dilution is the effect on a company's earnings per share caused by the conversion of convertible securities or the issuance of additional shares. Dilution reduces earnings per share by increasing the number of shares potentially outstanding.

Diversification - The process of mixing a variety of different investments, types of industries, categories of risk or companies in order to reduce the risk in a portfolio.

Dividend the share of a company's earnings that are authorised by a company's Board and paid (generally in cash) to a class of shareholders, usually half yearly. Payment made to shareholders by a company, based on the company’s annual profit result.

Dividend reinvestment plan - Plans offered by some companies for reinvestment of cash dividends by purchasing additional shares, on the dividend payment date, occasionally at a discount from market price.

Dividend Yield - The annual dividends paid by a company divided by its current stock price.

Dollar Cost Averaging - A technique of buying a fixed dollar amount of a particular investment, regardless of the share price; thus purchasing more shares when prices are low, and fewer shares when prices are high. Over time, the average cost per share of the security will become smaller. This method attempts to lessen the risk of investing a large amount in a single investment at the wrong time.

Dow Jones Industrial Average- a major index of the American stockmarket, an equivalent of the S&P/ASX 200 Composite Index.

Due Diligence - The process of disclosure to investors of all material information pertinent to an issue.

Earnings - Net income for a company during a specific period, generally (but not always) referring to after-tax income.

Earnings per share (EPS) a company’s net profit figure divided by the total number of shares outstanding.

Equity - On the balance sheet, the value of the funds contributed by the owners (the shareholders) plus the retained earnings (or losses). The balance sheet may list Shareholders' Equity.

Equity Financing - The process of selling common or preferred stock to raise working capital.

Exchange - An exchange is a market where securities, commodities, options and futures are traded, such as the Australian Stock Exchange and the New York Stock Exchange.

Execution - The completion of a buy or sell order.

Fixed term interest an investment locked in for a set period, which is guaranteed a certain rate of interest for the duration.

Float - The initial public listing of a company that has previously been privately owned, or owned by the government.

Franked dividends - dividends paid to shareholders that have already had the tax on them paid for by the company.

Futures - a form of investment whereby commodities are traded for a specified price on a specified future date. This occurs at the Sydney Futures Exchange and not the Stock Exchange.

Fundamental Analysis - A method of evaluating stocks based on fundamental factors, such as earnings, future growth, return on equity, profit margins, and so on, to determine a company's underlying value and potential for future growth.

Going Public - The process of selling shares that were formerly privately held to new investors for the first time.

Good 'Til Cancelled -This is an order to buy or sell a security that is good until the investor cancels it.

Growth Rates -The compounded annualised rate of growth of a company's revenues, earnings, dividends or another figure.

Growth stocks - stocks in companies that are expected to return consistent capital growth to investors.

Head & Shoulders - A technical analysis term to describe a chart formation in which a stock price rises to a peak and then declines, and then rises above the former peak and again declines, and then rises again but not to the second peak and again declines. The first and third peaks are shoulders, and the second peak is the formation's head. This pattern is considered a very bearish indicator.

Income Statement - A company's financial statement summarising revenues and expenses in a specific period, also known as a profit and loss statement.

Industry - One of any number of categories used to describe a company's primary business activity, usually determined by largest source of a company's revenues.

Industrial stocks - stocks in companies involved in the manufacturing and services sectors.

Insider Information - Information about a company's activities that has not been disclosed to the general public. It is illegal for anyone with access to such information to make trades based on it.

Insider Trading - Illegal trading by anyone considered an insider who has access to non-public information, and who attempts to profit from that knowledge.

Inventory - Included on a company's balance sheet. Inventory is often referred to as stock and can represent raw materials or items already available for sale or in the process of being manufactured.

Inventory Turnover - The ratio of annual sales to inventory. Low turnover may indicate excess stock or poor sales -- not a good sign.

Leverage - The use of borrowed capital to increase the return of an investment.

Liability - The legal obligation to pay a debt. Current liabilities are debts payable within twelve months; long-term liabilities are debts payable over a period of more than twelve months.

Liquidity - The ease and certainty with which an asset can be converted into cash.

Listed company - a company whose shares are traded on the stock exchange

Long - Or Long Position. Describes the owning of a security. An owner of shares of Telstra is said to be "long Telstra" or "has a long position in Telstra".

Long Term Assets - On the balance sheet, the value of a company's property, equipment and other capital assets, less depreciation. These are usually recorded "at cost" and so do not necessarily reflect the market value of the assets.

Long Term Debt - Loans with obligations of over one year on which interest is paid.

Long Term Liabilities - A company's liabilities for leases, bond repayments and other items due in more than one year.

Margin - Using borrowed money to purchase securities ("buying on margin").

Margin Account - A brokerage account in which the broker lends the customer cash to purchase shares. The loan in the account is secured by the value of these shares, and if the value of the stock drops sufficiently the account holder will be required to deposit more cash, or sell a portion of the stock.

Margin Call -The demand that a customer deposit cash in a margin account.

Market Capitalisation -The total dollar value of all outstanding shares, calculated by multiplying the number of shares times the current market price.

Market Timing - An attempt to sell a stock or portfolio when a market is at a high and buying at a low.

Market Value - The price at which investors buy or sell a security at any time.

Merger -The combination of two or more companies, generally by offering the shareholders of one company shares in the acquiring company in exchange for the surrender of their stock.

Moving Average - A technical analysis term. The average prices of a security for a particular period are charted in an attempt to determine recent trends.

Negative gearing -when borrowed funds are used to purchase an investment and the interest on these borrowings is higher than the profit realised resulting in a negative cashflow. This loss may be able to be offset against other income.

Net Asset Value - usually expressed as a per share amount. The value of a company or fund’s investments.

Net Income -The company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses.

Odd Lot - A buy or sell transaction involving less than 100 shares of stock.

Operating Expenses - The day-to-day costs of running a business.

Operating Income - The profit realised from a business's operations.

Ordinary Shares - the most common type of share, which gives holders direct equity in the company and the right to a share of the profits.

Public Companies - companies listed on the stock exchange, thereby enabling them to be publicly owned.

Position - An investor's ownership of a security, either long or short.

Portfolio - A person’s investment holdings, representing several different investment options.

Preference Shares - A class of ownership in a corporation with a stated dividend that must be paid before dividends to common shareholders. These shares return a fixed dividend to the investor who does not usually have voting rights.

Price to Earnings Ratio (PER) - the number of times the price of a share covers its earnings. Sometimes referred to as the "multiple". Calculated by dividing the stock's current price by the company's current annual earnings per share. In and of itself, the P/E Ratio tells very little, but can be usefully compared to the P/E Ratios of other companies in the same industry, or to the market in general, or to the company's own historical P/E Ratios, in order to determine how much the market is currently willing to pay for a share of the company's earnings.

Profit Margin - Calculated by dividing annual net earnings after taxes by revenues, displayed as a percentage. Useful to compare stocks within industries - a higher profit margin indicates a more profitable company. Can also be calculated by dividing a company's pre-tax earnings by its revenues, known as the Pre-Tax Profit Margin. Since taxes can vary from year to year and from company to company, this may give a truer picture of a company's underlying profitability.

Program Trading - Computerised trading used primarily by institutional investors, typically for large volume trades, where orders from the trader's computer are entered directly into the market's computer system and executed automatically.

Prospectus - A formal written statement that discloses the terms of a public offering of a share or a managed fund. The prospectus is required to divulge particular essential information to investors about the proposed offering and the company’s financial situation.

Proxy - A formal document signed by a shareholder to authorise another shareholder, or commonly the company's management, to vote the holder's shares at the annual meeting.

Quotation - Or Quote. The current price being offered for a particular stock.

Range -The difference between the high and low price of a security during a particular period.

Recession -A period of general economic decline, part of the usual business cycle.

Relative Strength - Calculated by dividing the performance of a stock's price over a period by a market index. Used to determine a stock's performance relative to the market and other stocks.

Retained Earnings- The percentage of earnings not paid out in dividends but retained by the company to be reinvested in its core business or to pay debt.

Return - The percentage gain or loss for a share in a particular period. The Real Rate of Return is the annual return realised on that investment, adjusted for changes in the price due to inflation.

Return On Assets - Calculated by dividing a company's annual earnings by its total assets, displayed as a percentage. Useful to indicate how profitable a company is relative to its total assets.

Return On Equity -Calculated by dividing a company's annual income by its Book Value (or its earnings per share by book value per share), displayed as a percentage. It is a measure of a company's profitability.

Resource Stocks - Stocks in the mining and energy sectors.

Rights issue - An issue of new shares to existing shareholders who have the right, but not the obligation, to purchase new shares issued by the corporation at a preset price, usually below the market price.

SEATS (Stock Exchange Automated Trading System) the Australian Stock Exchange’s computer system that enables transactions to take place.

Selling Short - Selling a stock that you do not own. This is done in the hope that it will fall in price and eventually you can buy it back cheaper.

Settlement Date - For stocks, payment must be made by the fifth business day after the purchase. This is the Settlement Date.

Share - Equity in a company.

Spread -The difference between the ask and bid prices of a stock.

Stamp duty - a government tax on financial transactions.

Stock Split - A proportional increase in a company's outstanding shares. After the split, the market value of the shares remains the same, though the number of shares held by each shareholder is proportionately increased.

Stock Symbol - A unique symbol assigned to a security.

Stockbroker - A registered dealer who buys and sells shares on behalf of investors.

Stop Loss - An order to sell a stock when its price falls to a particular point to limit an investor's losses.

Takeover - When one company takes over the ownership of another.

Technical Analysis - A method of evaluating securities by analysing data of a stock's market activity, generally price and volume. Technical analysts use charts to identify patterns that can suggest future activity.

Trade -A transaction involving the sale and purchase of a security.

Trading Range -The spread between the high and low prices traded during a period of time.

Warrant - A warrant is a security entitling the holder to buy a specific amount of stock at some specific future date at a specific price.

Yield -The percentage rate of return of the annual dividends paid on a stock.