Beginners Education Glossary: A-H
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Australian Clearing House – ACH – The Australian Clearing House Pty Ltd, the subsidiary of ASX which clears options and futures traded on the ASX.
Australian Financial Services Licence – A licence granted by ASIC that authorises a person who carries on a financial services business to provide financial services.
Accumulation fund – A superannuation fund where benefits received by members include investment earning plus employer contributions. (As opposed to a defined contribution or defined benefit fund).
Accumulation index – Index measuring movements in the markets value. It takes account of both price movement and income (dividend) growth & assumes income is reinvested.
Accrual accounting – Revenues and expenses are recorded as they are earned, regardless of whether cash has been paid or received.
ADR – American Depository Receipt – Certificates that represent a non-U.S. company’s publicly traded equity or debt. They trade in USD on an American exchange or over-the-counter market.
AGM – Annual General Meeting – Annual meeting between company directors and shareholders. The meeting covers company performance and outlook, and shareholders vote on key issues relating to the company.
All Ordinaries Index (XAO) – The predominant measure of overall Australian sharemarket performance. Made up of weighted average share prices Australia’s 500 largest listed companies, approximately. Established at 500 points at January 1980. More recently called the S&P/All Ordinaries.
All Ordinaries Accumulation Index (XAOAI) – Takes into account both capital appreciation and dividends as a return on the companies in the All Ordinaries index.
Annual report – Company document issued after the end of a company’s financial year, describing company’s annual activities and performance. It includes a profit and loss statement, balance sheet and a statement of cash flows.
Annual Yield – Annual yield represents the dividend return from an investment. It is calculated by dividing the dividend per share by the current market share price, converted to a percentage.
ASIC – Australian Securities and Investments Commission – The Federal Government authority responsible for administering companies and securities law.
Asset allocation – The process of choosing between assets classes or individual company assets when constructing a portfolio.
Asset backing – The value of a company’s assets divided by the number of shares on issue. Can be related to a firm’s earnings capacity.
ASX – Australian Stock Exchange– Australia’s national stock exchange for trading equities, government bonds and other fixed interest securities.
ASX 200 (AXJO) – Similar to the All Ordinaries Index but made up on only the 200 largest listed companies.
At the market – A term used to describe an order to buy or sell a stock at the best price obtainable at the time.
At the money – Term used to describe an option or a warrant with an exercise price equal to the current market price of the underlying asset.
Alpha – The expected return of a stock or a portfolio if the market rate of return is zero.
American option – An option that can be exercised before and up to its expiration date.
Amortisation – The accounting process where an interest bearing liability such as a mortgage is paid off over time through regular installments that comprise both principal and interest.
Annualise – The process of converting the rate of return on an investment for periods other than a full year to annual terms.
Annuity – A financial arrangement in which periodic payments are made to the annuity holder in exchange for the investment of a lump sum amount.
Appreciation – Refers to an increase in the value of an asset.
Arbitrage – The process of buying an asset at a price in one market, and sell it at a higher price in another market, taking advantage of current prices in different markets.
Ask price – The price at which a holder of an asset is willing to sell that asset (opposite of bid).
Authorised Capital – The amount of share capital which a company is permitted to issue. Also called nominal capital.
Balance sheet – A financial statement that reveals a company’s assets, liabilities and shareholders’ equity at a point in time.
Balanced fund – A superannuation fund that diversifies its holdings over a range of asset classes such as shares, bonds, property and cash.
Basis – The price difference between the spot price of an asset and the price for the derivatives relating to that asset.
Basis point – One percent of one percent (0.01%)
Basis risk – The risk linked to uncertain movements in the spread between a futures price and a spot price. The amount the value of a derivative differs from the value of the asset underlying it.
Bearish – A view that markets will fall.
Bear market – A pessimistic market characterised by falling prices (opposite of bullish market).
Below par – A price below the face/par value of a security.
Benchmark – A yardstick used to compare performance of securities.
Beta – A measure of how historical changes in a share price have correlated to overall movements in the share market as a whole. Market beta is 1.0. Shares with beta > 1 are more reactive, those with <1 are less reactive to market movements.
Bid price – The price that a prospective buyer is willing to pay for an asset (opposite of ask).
Bid-ask spread – The difference between the bid and ask price for a security.
Block trade – Off-market trading mechanism enabling market users to transact orders of significant size in specified contracts.
Blue chip – Refers to shares in leading companies that have a reputation for excellent quality and sound financial management.
Bond – A security that obligates the borrower to make specified payments (coupons) to the bondholder over the life of the bond, and repays the face value at maturity.
Books close date – The date at which a company’s share register is closed off to identify the shareholders and to calculate any entitlement to new issues and dividends.
Book value – An accounting measure that gives the net worth of an asset according to its carrying value on the company’s balance sheet.
Breakout – When a market has been trading within consolidation then moves outside this range. The price is then expected to continue moving in the direction of the break.
Brent crude – A major benchmark of oil worldwide.
Broker – The intermediary who acts as the go-between in security transactions.
Brokerage – The fee charged by a broker for processing a securities transaction.
Bullish – Belief that prices in markets are going to rise.
Bull Market – A prolonged period of rising security prices.
Call option – An option that gives the holder the right but not the obligation to purchase an asset for a pre-determined price (the exercise price) at or before its expiration date.
Capital gain – The amount by which the sale price of an asset exceeds its purchase price.
Capital loss – The loss, which may be offset against current or future capital gains, that an investor makes on a transaction.
Capital growth – The appreciation of the market value of an asset.
Capitalisation or Market Capitalisation – A company’s share price multiplied by the total number of shares issued by that company.
Cash rate – Interbank overnight rate – The interest rate which banks charge to lend funds to other banks on an overnight unsecured basis. The RBA calculates and publishes this cash rate each day on the basis of data collected directly from banks.
Cash rate target – A target for the cash rate or overnight interest rate. A tool in monetary policy specified by the Reserve Bank of Australia.
CGT – Capital gains tax – Tax imposed on the profit arising from the sale of a capital asset such shares or property.
Charting – An aspect of technical analysis using share price charts to make buy and sell decisions.
CHESS – Clearing House Electronic Subregister System – The system that allows the automatic transfer and settlement of ASX transactions via computer processing. Replaces old share certificates system.
Churning – The process of acquiring a share holding in a company, and then placing buy and sell orders for shares of that company in order to build up turnover.
Client adviser – The individual who provides you with advice at a full-service broker.
Closed end fund – A fund whose shares are traded through a stock exchange. Shares can only be redeemed at their market value, not at their net asset value.
Commission – See brokerage.
Concise financial report – A summarised version of the annual report provided to shareholders if a full annual report is not requested.
Contract note – A written document confirming a transaction between a broker and a client which describes the costs, type and quantity of shares traded. Also known as a ‘Confirmation.’
Cumulative – The right of some preference shares to receive a dividend even though none has been declared. Payments become an arrear.
Commodity – The term covers a wide range of items that can be traded, including metals and agricultural goods.
Common stock – Equities issued as ownership shares in a publicly listed company. They entitle the holder to voting rights and a share of the dividend payments periodically announced by the company.
Compound interest – A form of interest calculation, where in each period interest is calculated on both the principal and the interest previously accrued.
Consolidation – A period where the market trades in a broad sideways pattern within a trend. Consolidations usually follow a strong market gain or fall. It will end with the market resuming its trend or if the market heads in the opposite direction having formed a top or bottom.
Credit risk – The risk that counterparty to a financial obligation such as a loan will default on repayments linked to the obligation.
Cum dividend – Shares quoted cum dividend entitle the buyer to the current dividend. The price of the shares will usually reflect the amount of the dividend.
Currency risk – The risk that an investor will incur losses on an overseas investment as a result of adverse shifts in exchange rates.
Current ratio – The ratio of a company’s current assets to current liabilities A measure of liquidity that shows a company’s ability to pay off its current liabilities by liquidating its current assets.
Daily settlement price – The official daily quotation for each Contract available on a Market of the Exchange for each delivery or cash settlement month as determined by the Exchange for the purpose of margining by the Clearing House.
Day orders – Orders which automatically expire at the close of the day’s trading if not filled during the day they are received.
DCF – Discounted Cash-Flow – A valuation method that accounts for differences in the timing of cash flows, by discounting these cash flows to their present values.
Debt to equity ratio – Shows the relationship between funds provided by borrowing and funds provided by shareholders. The debt/equity ratio shows to what extent a company is financed by debt (also called the gearing or leverage ratio)
Delisting – Is when a company’s shares are removed from the Official list. Reasons for removal include a company failing to comply with the exchange’s rules or no longer meeting listing requirements.
Delivery – The actual transfer of possession of securities from one counterparty to another.
Demutualisation – The process of changing from a company owned by members to a (not necessarily publicly owned) company owned by shareholders.
Depreciation – The gradual writing down of the cost of an asset over the useful life of that asset.
Depression – A period during which business activity drops significantly. High unemployment rates and deflation often accompany a depression.
Derivatives – These are a class of securities, including futures and options, which derive their value from underlying physical securities.
Director – A member of a company’s board who is charged with overseeing the affairs of the company, and ensuring that senior management acts in shareholders’ interests.
Discount – The amount by which the current value of a share is below its asset backing.
Discounting – The term used to describe the procedure of calculating the present value of a stream of future cash flows.
Discretionary account – The account of a customer who gives the broker the authority to make buy and sell decisions on the customer’s behalf.
Distribution – Income emanating from a trust, similar to a dividend from a company.
Divergence – When the RSI or MACD indicators broadly move in the opposite direction to that of the actual market price. Divergence can be positive or negative.
Diversification – Spreading a portfolio over a number of investments in order to limit exposure to any one form of risk.
Dividend – Distribution of part of the company’s net profit paid out to shareholders, expressed as a number of cents per share. To receive a declared dividend the shares must be purchased before the ex-dividend date.
Dividend imputation – An Australian tax rule where the amount of corporate tax paid by a company is credited to shareholders of that company. The shareholder is assessed on the sum of the total amount of dividend and the imputation credit, but is allowed to claim the imputation credit as a tax rebate.
Dividend payout ratio – The percentage of earnings paid out as dividends.
Dividend type – Dividends will be classified as either interim, final or special. The last dividend in the financial year is final, other regular dividends are interim, and special dividends are those not paid regularly each year.
Dividend yield – A rate of return measure, calculated by dividing the annual dividend per share by the current market price of the share.
Dow Jones – The Dow Jones Industrial Average is the average of 30 large blue chip US corporations. It has been computed since 1896, a history that has aided its broad recognition across the world.
DPS – Dividends per share – The amount of earnings paid out to shareholders on a per share basis adjusted by a dilution factor to take account of issues and reconstructions.
DRP – Distribution Reinvestment Plan – An alternative to cash dividends, allowing shareholders to receive new shares instead of cash. These shares are often issued at a discount and no brokerage is paid.
Due diligence – The process of checking the accuracy of information contained in a company public statement, such as a prospectus, before recommending that company to others. Is also the act of one company investigating another company before buying its shares.
Earnings retention ratio – The percentage of earnings retained by a company (i.e., that portion of earnings not paid out in dividends).
Earnings yield – The ratio of earnings per share to the price of that share (the reciprocal of the price-earnings ratio).
EBIT – Earnings before interest & taxes – A key earnings measure. Similar to net profit, except that the effects of tax benefits, deductions and loans are factored out, providing a better measure of company’s underlying performance.
EBITDA – Earnings before interest, taxes, depreciation and amortization.
Electronic holding statement – Evidence of your securities ownership in the form of a holding statement. All security holdings on ASX are registered electronically.
EPS – earnings per share – Measures the earnings that are attributed to each equivalent ordinary share over a twelve-month period. It is calculated by dividing the company’s earnings by the number of shares on issue
Equities – Synonym for shares and represents part-ownership of a company, as distinct from debt securities such as bonds and debentures.
Equity – Another word for a share investment. It can also mean the value an owner has in any asset after debt on that investment is deducted.
Eurodollars – US dollar denominated deposits at non-US banks or foreign branches of US banks.
Euromarkets – A generic term referring to international markets for currencies outside of each currency’s home marketplace.
European option – An option that can only be exercised on its expiration date.
Exchange rate – The price of one unit of a particular country’s currency in terms of another country’s currency.
Ex-date – Date on which shares change from being quoted “cum” to “ex”. It is usually the fourth business day prior to the record date.
Ex-dividend – Shares sold ex-dividend entitle the seller to retain the current dividend. Shares are usually quoted ex-dividend five business days before the company’s books close.
Ex-dividend date – Four business days before the company’s Record Date. To be entitled to a dividend a shareholder must have purchased shares before the ex-dividend date.
Execution only broker – A broker who processes the transaction but is not permitted to provide advice on securities transactions. Sometimes known as a ‘discount’ broker.
Face value – The amount repaid on a bond or income security at maturity and the amount on which distributions are calculated.
Fed – Short for the US Federal Reserve, the US central bank.
Financial year – The period over which a company measures its performance. The most common financial year ends on 30 June every year.
Fixed interest asset – A security such as a Treasury bond that pays a specified cashflow over a specified period and pays back the face value of the security at maturity.
Fixed interest – A type of debt that pays a fixed annual rate of interest.
Float – A new issue of shares in a company before it lists on the stock exchange. Also known as an IPO.
Flight to quality – The process where investors seek out less risky investments in times of economic uncertainty.
Floating rate bond – A bond whose interest rate is reset periodically relative to a specified market rate.
FOMC – Federal Open Market Committee – Part of the US Federal Reserve. Determines interest policy in the US.
Franking Credit – Used in a dividend imputation system and represent the portion of a dividend to which a company has already paid taxation. Shareholders then include the grossed-up amount of the dividend (pre-tax) and then have their income tax payable calculated using that grossed up dividend. Franking credits are then used to offset tax payable.
Franked Dividend – 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.
Franking – The percentage of the dividend on which the company has already paid tax.
FTSE – Financial Times Stock Exchange – The UK equivalent of Australia’s S&P/All Ordinaries share price index, it is a value-weighted index of 100 of the largest companies listed on the London Stock Exchange.
Full-service broker – A broker who provides you with advice on securities transactions, and other services such as research and access to floats.
Fully diluted earnings per share – Earnings per share of a stock after converting all options, warrants and convertible securities into equivalent common stock.
Fundamental Analysis – Method of analysis using ratios and percentages calculated from financial data of a company to assess the company’s quantitative and qualitative aspects.
Fundamentals – A company’s financial and operational details. Fundamental analysts assess these factors in an attempt to determine the long-term performance of the business, and ultimately, the company’s share price performance.
Fund manager – A professional who buys and sells investments for a managed fund.
Futures – Futures are contracts to buy or sell a particular asset (or cash equivalent) on a specified future date at a price agreed today.
GDP – Gross Domestic Product – The total value of all goods and services produced within a country in a given time period (usually a year or quarter).
Gearing – Process of increasing funds available for investment through borrowing. The ratio of debt finance to equity finance or, as the use of long-term debt in financing an entity. Gearing may be measured as EBIT/EBIT-Interest.
Hang Seng index – The main Hong Kong share price index, similar to Australia’s S&P/All Ordinaries index.
Hedge – Transaction which reduces or offsets the risk of a current holding, involves the purchase of an offsetting position to guard against the risk of a market decline.
Hedge fund – A higher risk managed fund. Fund managers funds have greater scope to use derivatives, short positions, and exotic securities to boost returns using aggressive and specialized strategies.
Historical Yield – The yield on an investment based on the end of period price, but using distributions or dividends previously paid over the relevant period.
Holding period return – The rate of return over a given period.
Holding statement – The document which notifies you of your shareholding in a particular company.