To find a financial term, click on the first letter of the word or phrase then scroll down the alphabetic list of definitions. If you need to return to this alphabet list quickly for another selection then click on the top button to the right of each page.

Definitions reproduced with the kind permission of Macquarie Investment Limited.

Accrued interest
Interest which has been earned but is not yet due to be paid.

Account Based Pension
A superannuation investment that provides regular, flexible and tax-effective income when you retire.

All Ordinaries (All Ords) 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. For example, 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.

Annuity
Is an income stream purchased with a lump sum, generally from a life insurance company. Annuities can be payable for life (life annuities) or fixed period (term annuities).

Appreciation
The increase in the value of an asset

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.

Assets and income test
An individual's entitlement to the Government's age pension is based on two tests. The Assets Test is a test on the assets of the individual or couple. If their assets are over a certain level they will not be entitled to a full or reduced age pension. Similarly, an Income Test is also applicable. If their income exceeds a certain level the pension entitlement will cease. If income is below this level they may receive a full or reduced age pension. Both the income test and assets test are applied to an individual or a couple. Their age pension is based on the lowest pension entitlement calculated after the two tests have been applied.

Australian Securities & Investment Commission (ASIC)
The Commonwealth Government body responsible for regulation of companies and the securities and futures industries under the Corporations Law.

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.

Beneficiary
A beneficiary is someone who has an entitlement to an asset, either immediately or in the future, such as under the terms of a will or a trust.

Blue Chip
The shares of a leading company which is known for excellent management and a strong financial structure. The term has become a generic one for quality securities.

Bond
A debt security issued by such entities as corporations, governments or their agencies (eg statutory authorities). A bond holder is a creditor of the issuer and not a shareholder.

Bonus Shares
Shares issued free by a corporation to its existing shareholders on a pro rata entitlement basis.

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.

Bridging finance/loan
A temporary loan while long term finance is arranged.

Broker
A person licensed to buy and sell shares on behalf of clients. Brokerage is the charge made by a broker for a transaction.

Capital
The accumulation of wealth used to produce extra income to increase wealth or to gather further assets.

Capital gain (or loss)
Increased (or decreased) value of an asset.

Capital Gains Tax (CGT)
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.

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 share and ordinary shares.

Cash Dividend
A dividend paid on a security in cash or by cheque.

Cash Flow
Reported net income of a corporation plus amounts charged off for depreciation, amortisation, and extraordinary charges to reserves, which are book-keeping deductions and not paid out in actual dollars and cents.

Child Allocated Pension
A special form of allocated pension. It provides parents with an extremely tax-effective way of leaving money to meet their children's financial needs (especially education expenses) in the event of their death, while controlling the children's access to capital.

Collateral
Additional assets that are used as security in order to secure a loan.

Commensurate
Having the same extent or duration, corresponding in degree, amount or size.

Commute
To commute a pension means to convert it to a lump sum.

Complying pension or annuity
This pension/annuity receives favorable social security assets test treatment. To comply with Government regulations, the pension or annuity has the following features:
- it must not be commutable (except in limited circumstances);
- it must either run for life or have a term equal to the person's life expectancy (or a minimum of 15 years, if life expectancy is greater than 15 years);
- there must be no residual capital left at the expiry of income payments;
- the size of payment in a year is fixed.

Compound interest
Interest paid on the sum of an initial investment and the accumulated interest earned by that investment.

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.

Contract note
A written confirmation of a transaction which includes details of the type of security, the price, brokerage and other charges.

Corporations Law
A series of Acts of the Commonwealth Parliament regulating companies and the securities and futures industries in Australia. The Corporations Law is administered by the Australian Securities & Investment Commission (ASIC).

Correction
A movement in prices which reverses a previous trend. The term is normally used to refer to a lowering of share prices after a sustained period of increase.

Credit
An account balance in the customer's favor and/or an increase in equity.

Credit Reference Report
Lending institutions usually obtain a credit reference report and borrowers (from authorised credit reporting organisations) prior to approving loans or guarantees. The reports may include the borrowers lending and repayment history.

Cum Dividend
A share which is trading so that buyers rather than sellers qualify to receive the next dividend payment, which amount is usually reflected in the price of the share. Opposite of ex-dividend.

Current Yield
Annual interest, coupon or dividend divided by market price per bond or share to determine the income return expressed as a yield based on the current market price.

Death or disability pension
This is a pension paid in the event of the death or permanent incapacity of the pensioner or teh death of another person.

Debenture
A loan made to a company for a fixed period of time at a fixed rate of interest usually secured by the company's assets and a trust deed.

Debt Security
A security representing borrowed funds that must be repaid by the issuer (eg. bonds, certificates of Deposit, debentures). If the government issues bonds, it is borrowing funds. Purchasers of the bonds are thus lenders to the government.

Deductible Amount
The deductible amount of a pension is an annual tax-free amount included in the total pension payments. It represents the return of any contributions you've made for which you've not received a tax deduction, plus any CGT-exempt proceeds from the sale of a business, spread out over your expected lifetime.

Delisting
The removal of a company's shares from listing on the Stock Exchange. This may occur because the company has failed to comply with the Exchange's rules, or no longer meets listing requirements (eg has been taken over).

Dependants
Your dependants for tax purposes are your spouse, your de facto, your children under 18 and anyone else who is financially dependant on you at the relevant date. Your dependants for other superannuation purposes are your spouse, your de facto, children of any age (whether an adopted, step-child or ex-nuptial child or not) and anyone else who is financially dependent on you at the time.

Depreciation
The writing-down of the cost of an asset systematically over the life of that asset.

Derivatives
Securities that derive their value from another security, eg future and options. Also known as Synthetics.

Diversification
The spreading of investment funds among classes of securities and localities in order to distribute and control risk. This is a fundamental law of investment, meaning simply "don't put all your eggs in one basket".

Dividend
The amount of a company's earnings which it pays to shareholders.

Dividend Imputation
The tax rule under which tax paid at the company level is credited to individual shareholders. Dividend imputation works by assessing shareholders on the total amount of the dividend and the imputation credit, and then allowing them to claim a tax rebate equal to the imputation credit. See also Franked Dividend. Dividend imputation affects the valuation of the sharemarket for taxable investors.

Dividend Yield
The return on share investment, calculated by dividing the dividend rate (in cents per
share ) by the market price of the share.

Dow Jones Index
A share price index measuring the market prices of 30 representative industrial companies on the New York Stock Exchange. The United States equivalent of the Australian 50 Leaders Index. There are broader measures of the United States sharemarket, notably the S&P500, which more closely corresponds to Australia's All Ordinaries Index.

Employment Termination Payment (ETP)
A lump sum payment made in consequence of the termination of employment.

Equity
a) A synonym for a share (as distinct from fixed-interest) investment.
b) The interest of value which an owner has in an asset over and above the debt against it. The difference between the market value of an asset and any debts or claims made against it.

Estate
When you die, most of the things you own become part of your estate. The exceptions are superannuation benefits payable to dependants, assets held as a joint tenant, assets held in trust, and life insurance policies owned by others, which are subject to special treatments.

Ex Dividend
A term meaning "without dividend". Denotes a share price which is quoted on the basis that the seller, not the buyer, is entitled to the current dividend on the share. Opposite of Cum Dividend.

Executor
This is the person you appoint in your will to distribute your estate to your beneficiaries. To do so, they have to apply to a court for a grant of probate. Your will gives them the instructions they need to make the distribution in accordance with your wishes.
If you die without making a will, or if the will you leave is invalid, you are said to have died intestate. In that case someone, usually a person with some interest in the estate, will apply to the court for letters of administration. That gives the official approval to act as administrator and to deal with the assets of the estate as set out in legislation.

Fixed Interest
Income which remains constant and does not fluctuate, such as income derived from bonds, annuities and preference shares. Any debt security which has a fixed flow of income is known as a fixed-interest security.

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: or
b) In relation to companies, the decision to put a company's shares on offer to the public.

Franked Dividend
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.

Gearing
a) A measure of indebtedness; ie the extent of borrowings as against the equity held by a person or company in an asset.
b) The ability to increase exposure by investing in futures without making the underlying cash available. See also Leverage.

Imputation Credit
Taxation credits which are passed on to shareholders who have received franked dividends in relation to their shareholdings. See also Dividend Imputation - Franked Dividend.

Indexed
Something is said to be indexed when its value is increased each year in line with the Consumer Price Index (CPI) or another measurement (for example, age pension payments are indexed twice yearly in line with the CPI).

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.

Initial Public Offering (IPO)
The process by which a company raises its initial capital from the public and obtains a listing on the stock exchange. This is done by the company issuing a prospectus inviting the public to subscribe to shares. To do this the company must by a public company. Investors who subscribe become shareholders.

Institutional Investor
An organisation whose primary purpose in investment markets is to invest its own assets or those held in trust by it for others. Includes superannuation funds, life companies, universities, banks, etc. Institutional investing has an ever increasing impact on securities trading.

Interest
The return earned on funds which have been loaned or invested ie the amount a borrower pays to a lender for the use of his/her money.

Investment Adviser
A professionally qualified individual or company whose principal livelihood is obtained from giving objective, impartial investment advice to individuals for a stated fee.

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.

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. See also Gearing.

Liabilities
Debts (plus, in the case of companies, dividends due to shareholders). Opposite of Assets.

Life annuity
A product which provides a set regular income stream guaranteed for life (see also Annuities).

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.

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, unit-holders or clients. See also Liquid Assets.

Listed company
A company whose shares are traded on the Stock Exchange and are able to be bought and sold by members of the general public.

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.

Market Price
With reference to a security, the last reported price at which the security sold. Alternatively, the highest price which a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept. These two terms are not synonymous. For example, some securities are valued against last sale when the current bid price is significantly different.

Market Timing
The purchase or sale of securities on the basis of shorter-term price patterns and temporary market opportunities as well as judgments of underlying value. An extremely difficult thing to get right consistently.

Maturity dates
a) A fixed date when an investment can be cashed without penalty, or reinvested.
b) The end date of the term of a fixed interest investment.

Merger
A form of corporate restructuring in which two companies combine into one. Unlike takeover, mergers are usually negotiated by the management of the two companies concerned.

Mortgage
The legal security placed over property to secure a loan.

Mortgage Trusts
Money is pooled for lending to individuals and companies who buy or develop residential or commercial properties. These loans are secured by first mortgages over the properties. The trust collects the interest paid on these loans thendistributes the interest as income to investors.

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 Asset Backing (NAB)
Total shareholders' funds in a company (i.e. total assets less total liabilities) divided by the number of shares on issue.

Net Asset Value (NAV)
Total assets of a company less total liabilities. A more refined measure is Net Tangible Assets, which do not include intangible items like goodwill.

Offer
The price at which a person is willing to sell or buy.

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. A "put" sells an option or an asset, and a "call" buys an option.

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.

Par Value
The face value of a security. In relation to shares, the par value is set by the company at the time of issue and does not necessarily reflect the share's market value.

Prospectus
A legal document lodged and/or registered with the Australian Securities Commission setting forth the complete history and current status of a security issue or fund, and which must be made available to all interested purchasers in advance of their investment when an offer is made to the public.

Rate of Return
The sum of the increase/decrease in market value of the asset plus interest and realised net capital gains.

Resource Sector
That proportion of the All Ordinaries Index which is represented by mining, energy and commodity related shares.

Recession
A downturn in the economy less serious than a depression. Measuring the growth of a national output identifies a recession. Six months of negative growth qualifies as a recession.

Residual capital value
The amount of the original purchase price of an annuity that is returned to the purchaser at the end of the term in the case of a term annuity, or on death in the case of a life annuity.

Reversionary Pension
This pension starts after you die. The reversionary pensioner is usually your spouse or some other person you nominate at the time your pension commences.

Rights Issue
A privilege accorded a holder of an existing security to purchase new securities issued by the same company at a discount to the existing market, and able to be exercised within a relatively short (30 to 60 days) time span.

Risk
In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must promise higher expected yields if investors are to
be attracted to them. Risk can take many forms, but a major one is valuation risk - paying too much for an asset.

Risk-Free Asset
An investment with no chance of default, and a known or certain rate of return. Typically in Australia the 90 day Treasury Note is used as a risk-free proxy.

Rollover
The process of transferring an eligible termination payment (ETP) to a superannuation fund or rollover fund. Generally lump sum tax is not paid until an amount is subsequently withdrawn.

Rollover fund
A type of fund set up for the investment of eligible termination payments (ETPs), including superannuation payouts. If a superannuation payout is invested in a rollover fund, generally no lump sum tax is paid until the amount is withdrawn. Rollover funds include superannuation funds, approved deposit funds and rollover annuities (also called deferred annuities).

Scrip
Abbreviation for subscription, or a certificate denoting entitlement to a parcel of shares. Synonymous with share certificate.

Settlement
In relation to stock trading, an arrangement between brokerage houses for the payment or receipt of cash or securities. It represents the final consummation of a securities action and is handled through the stock clearing corporation.

Share
A certificate of ownership; a contract between the issuing company and the owner which gives the latter an interest in the management of the corporation, the right to participate in profits and, if the company is dissolved, a claim upon assets remaining when all debts have been paid. (See also Equity).

Shareholder
The owner of one or more issued shares of a company who is normally entitled to:
i) A proportionate share of the issuing company's undivided assets
ii) Dividends when declared by the directors; and
iii) The right of proportionate voting power.

Share Price Index (SPI)
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 income).

Speculator
One who is willing to assume a relatively large and generally undiversified risk in the hope of extraordinary gain. Speculators do, in fact, help give depth to securities markets.

SPI Futures
Abbreviation for Share Price Index Futures. One of the important futures contracts offered on the Sydney Futures Exchange, it trades around the underlying physical level of the All Ordinaries Index. The difference narrows the closer the contract gets to it expiry date at the close of each calendar quarter.

Split
A division of a company's shares into a greater number of share units by reducing the par value (where applicable) of each share. In the case of a $10 share, a four for one split would mean that four new shares would be issued for each old share at an "after-split" price of $2.50.

Statement of financial position
A statement about what you own and how much you owe.

Stamp Duty
A State Government charge levied on certain property and securities transactions.

Stock
A generic term for equities (shares) and, less frequently, bonds.

Stockbroker
A professional person who buys and sells securities on behalf of others in return for a commission (or brokerage).

Superannuation fund
A special type of investment plan set up to take advantage of tax concessions for people who are saving for their own retirement or for employers to contribute to their employees' retirement.

Superannuation lump sums
Tax-free Component:
Includes non-concessional contributions, government co-contributions and spouse contributions made after 30 June 2007
AND
The crystallised amount of the following components at 30 June 2007:
• Pre-July 1983
• Concessional
• Post June 1994 invalidity
• Undeducted contributions
• The CGT exempt component
(Not subject to tax)

Taxable Component:

Age of member at time of payment	Tax treatment (including Medicare Levy)
	Taxed Element	Untaxed Element
60 or over	• Tax-free	• 15% up to untaxed balance* • 45% on balance
Between preservation age and 60	• Tax-free to low rate cap amount** • Up to 15% on balance	• 15% up to low rate cap amount** • 30% from low rate cap amount** to untaxed plan cap amount* • 45% on balance
Under preservation age	• Up to 20%	• 30% to untaxed plan cap amount* • 45% on balance
* $1,000,000 from 1 July 2007 ** $140,000 from 1 july 2007, increasing each year with indexation in increments of $5,000 in line with AWOTE)

Takeover
The acquisition of shares by one company in another so as to gain a controlling interest. Takeovers of Australian companies are regulated by the Corporations Law.

Term annuity
A product which provides a set regular income for a fixed term after which residual capital value is paid.

Trader
A person who actively buys and sells securities for his or her own account, usually with relatively short time horizons.

Transitional Reasonable Benefit Limit (TRBL)
This is a higher RBL based on your age, salary and level of superannuation benefits. Transitional RBLs are approved by the ATO.

Trust deed
A document setting out the terms and conditions of a loan.

Trustee
All superannuation funds have a set of rules called a trust deed. All money is held in a trust by a trustee, who is usually independent of the members. It is the trustee's responsibility to invest the members' contributions in line with the rules contained in the trust deed.

Undeducted contributions
Broadly, personal and spouse contributions made to a superannuation fund since 1 july 1983, for which no tax deductions were claimed.

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 which don't, (but before the introduction of dividend imputation in 1986). Recipients of unfranked dividends are subject to tax at their normal marginal rate.

Yield
The return on an investment expressed as a percentage. Alternatively, the profit and/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.

Copyright © 2000-07 Forsyte Consulting Pty Ltd unless otherwise stated.