Beginners Education Glossary: I-Z
I
Imputation credit - Tax credits passed on to a shareholder who receives a franked dividend. Imputation credits entitle investors to a rebate for tax already paid by an Australian company
Indicators - Analytical tools used by technical analysts to help them select shares.
Inflation - The increase in the prices paid for goods and services, measured by the Consumer Price Index.
Institutional Investor - An organisation with large investable funds whose primary purpose is to invest its own assets or those held in trust for others.
Interbank overnight rate - See ‘Cash rate’
Intrinsic value - The underlying worth of a business, calculated by analysing a company’s fundamentals.
IMF - International monetary fund - An organisation of 185 member countries. Among other aims it was established to promote international monetary co-operation, and provide temporary financial assistance to countries.
Implied volatility - The standard deviation of stock returns that is consistent with an option's market value.
Index - Is a means of measuring returns from and performance of a portfolio of selected investments. The S&P/ASX200 Index acts as a proxy for the overall performance of the larger vehicles in the market or sector.
Indexing - A passive portfolio management strategy that seeks to match the composition, and therefore the performance, of a selected market index.
In the money - This describes an option that would generate profits if exercised now - when the exercise price of a call (put) option or warrant is below (above) the current market price of the underlying asset.
Income statement - A financial statement that exhibits a company's revenues and expenses (or profit/loss position) over a specified period.
Index fund - A fund that holds shares in proportion to their representation in a broad market index such as the S&P/All Ordinaries index.
Inflation - A measure of the change in the general level of prices. A proxy is generally taken to be the change in the consumer price index.
Inflation target - The preferred range for the rate of inflation used a guidance tool for monetary policy. Australia’s inflation target is between 2%-3%.
Insider trading - An illegal activity that involves trading based on information that is not yet publicly available to the markets.
Interest coverage ratio - A measure of a company's leverage. It equals EBIT divided by interest expense and provides an indication of a company's ability to meet interest payments. The higher the interest cover, the greater the company's ability to meet interest payments.
Interest rate swaps - Where two parties trade the cashflows corresponding to different securities without actually exchanging ownership on those securities.
Institutional Placement – When a company raises capital through placing stock with institutional investors who are willing to take the price on offer.
IPO - Initial Public Offering - Initial capital raising by public subscription to securities, such as shares offered on the share market for the first time. Also known as a Float.
IRR - Internal Rate of Return - The discount rate at which the net present value of an investment is equal to zero. The total rate of return generated by an investment over its life or a given timescale, taking into account sale and purchase prices and all cash flows associated with the holding.
Issued capital - The value of securities allotted in a company to its shareholders and debt holders.
L
Leverage - See gearing.
Leverage ratio - A ratio of a company's debt to that same company's shareholders' equity.
Limited liability company - A company where shareholders have no personal liability to the creditors of that company should it go bankrupt.
Liquidity - This term relates to the speed at which an asset can be converted to cash.
LIBOR - London Interbank Offered Rate - The rate at which creditworthy banks charge each other for large loans of Eurodollars in the London market.
LME – London Metals Exchange – The primary exchange for the global trade of base metals and other related commodities.
Long position - Where an investor has an excess of purchases over sales of a particular asset at a point in time.
Long term - An investment period that usually refers to a time period of several years or longer.
M
Macroeconomics - That area of economics that focuses on analysis of broad trends in a country's economy. Key components of macroeconomics are monetary policy and fiscal policy.
Market capitalization - See capitalization.
Maintenance margin - A value below which a trader's margin must not fall. If the margin falls below the maintenance margin, a margin call occurs.
Managed fund - A trust where you pool your resources with other investors, and which is run by a professional fund manager.
Margin - A deposit lodged with an exchange or clearing house to cover the risk of financial loss due to adverse movements in market prices. May also describe financial assets, like stocks, that are purchased through money borrowed by a broker.
Margin call - A requirement by a clearinghouse that a clearing member increases margin deposits to cover for an adverse shift in prices on futures contracts held on its books.
Margin lending - A type of borrowing to buy shares which requires you to maintain the lender’s proportion of your portfolio value above an agreed level. If the portfolio value falls, the lender will issue you with a margin call, which requires you to provide securities or cash to maintain the lender’s proportion.
Market timing - Asset allocation where investments in particular markets are increased when the investor expects that market to outperform other markets or the overall market.
Market-book ratio - The market price of a share divided by the book value per share.
Market value - The current value of a security.
Marking to market - Pricing an asset at today's market value, and not at the book value of that asset. Can also describe the daily settlement of obligations on futures positions.
Market portfolio - The portfolio for which each security is held in proportion to its market value.
Market risk - Sometimes called systemic risk. The risk of a general decline in the market, attributable to macroeconomic factors.
Market timer - An investor who speculates on broad market moves, rather than on individual securities.
Merger - A form of corporate restructure in which two companies merge their businesses. Unlike takeovers, mergers are usually a result of a mutually beneficial negotiation process.
Mean Reversion - The notion that asset values revert to an average value or to an equilibrium value.
MER - Management Expense Ratio - The amount of fees charged by the Manager divided by the total assets of the trust. This generally includes all ongoing fees. Such as fund management fees, trustee fees and custody fees.
MACD - Moving Average Convergence Divergence - An indicator that follows the difference between a series of moving averages. Buy and sell signals are generated when the MACD line rises above or below the signal line. It has the ability capture wide swinging moves in markets.
Microeconomics – The branch of economics that studies the decision making and interactions of individuals and firms.
N
NAB - Net Asset Backing - Net assets divided by the number of securities on issue.
Nasdaq – An American stock exchange and the second largest exchange in the world (by market cap).
Nasdaq Composite Index - An index of all stocks traded on the electronic Nasdaq exchange. Typically
NAV -Net Asset Value - Total assets minus total liabilities.
Negative gearing - Borrowing money to acquire assets where the interest payments exceed income from the assets, which generates a tax deduction.
Net assets - Total assets less total liabilities for a company at a point in time.
Nikkei Index - A bellwether Japanese share price index that covers the top 225 shares listed on the Tokyo Stock Exchange.
Nominal interest rate - The interest rate in terms of nominal dollars.
Non-Renounceable rights - The holder of the rights does not have the ability to sell on the ASX.
Nonsystematic risk - Firm-specific risk factors.
NPAT- Net Profit after Tax – The profit a company is left with from operating its business.
NTA - Total assets minus intangible assets such as goodwill.
O
Official List - The list of companies that trade on the ASX, as maintained by the exchange itself.
OECD - Organisation for Economic Co-operation and Development
Represents 30 countries with a commitment to a market economy. Among other aims, it seeks to encourage economic growth and financial stability among member countries.
Offer - The price at which a holder is prepared to sell an asset (similar to ask).
Open interest - The number of futures contracts outstanding.
Option - A contract between two parties, which gives the holder, the right, but not the obligation, to buy or sell the asset underlying the option at a pre-determined price (the exercise price) on or prior to a particular time in the future (the expiration date).
Ordinary shares - Holders of ordinary shares are part-owners of a company and may receive payments in cash, called dividends, if the company trades profitably. A class of shares which have no preferential rights as to either dividends out of profits or capital on a winding up.
Out of the money - Describes an option that would not be profitable if exercised now (the opposite of in the money)
Over-the-counter market - In informal group of dealers and/or brokers who trade in a market. However, there is not a formal exchange.
P
Passive management - The creation of a well-diversified portfolio that replicates a broad-based market index such as the S&P/All Ordinaries share price index.
Pcp - Previous corresponding period.
PER or P/E - Price-earnings ratio - Measures the current price of a share divided by its annual current or forecast earnings of that same share. Commonly used to measure the attractiveness of particular shares compared to other companies or to the industry. Growth stocks tend to have a high P/E ratios compared to income stocks.
Placement - An off-market issue of units to sophisticated investors generally institutions.
Portfolio - A collection of different investments held by an investor.
Preference share - Shares that take priority over a company’s ordinary shares for dividends and any distribution in the event of liquidation. Dividends are usually referenced to a fixed or floating interest rate and can be franked or unfranked.
Privatisation - The alteration of the legal and managerial structure of a government body to permit private equity holdings or outright ownership. This occurred when companies Telstra, Qantas and Commonwealth Bank were listed.
Portfolio Turnover (Velocity) - A measure of the trading activity in a fund’s portfolio of investments -- that is, how often securities are bought and sold by the fund. Also known as velocity.
Premium - The purchase price of an option.
Present value - The present day value of a future amount, determined by discounting this future amount by an appropriate discount rate.
Price / Operating Cash Flow ratio - This ratio compares a company's share price with the cash flow per share. We use two Price/OCF ratios, one including Capital Expenditure, and one before (or excluding) Capital Expenditure.
Primary market - The market into which shares are sold when they are first issued.
Product Disclosure Statement - A PDS is the offer document that contains information inviting investment in the securities of an ASIC-registered investment scheme. A PDS generally contains financial and other information about the company and its operations as well as risk and risk mitigating strategies.
Profit and Loss Account (P&L Account) - A major financial statement showing a company's earnings and expenses over a given period of time.
Prospectus - A statement approved by ASIC that provides details of an upcoming securities issue to the public.
Private placement - An issue of bonds or stocks that are sold directly to a select group of (often institutional) investors.
Proxy - This allows an agent to vote on an issue relating to a company in the name of a shareholder in that company.
Public offering - An issue of bonds or stocks to the entire market.
Pullback - After a strong trend the market retraces a small portion of that move before resuming its trend. This differs from a consolidation, which trades sideways. Pullbacks are usually short and small in magnitude (typically less than 30% of the rise).
Put option - The right but not the obligation to sell an asset at a specified exercise price on or before a specified expiration date.
R
RBA - Reserve Bank of Australia - Australia's central bank. The controller of monetary policy in Australia.
Redeemable preference share - Preference shares that can be redeemed for a fixed amount of cash or shares.
Recession - A decline in GDP for two or more consecutive quarters.
Record Date - Date used in determining who is entitled to a dividend. Those on the register at the record are eligible for the entitlement.
Return - The percentage an investment has earned or might earn.
Real interest rate - The excess of the nominal interest rate less the inflation rate.
REIT - Real Estate Investment Trust - A global term for a corporation or trust that pools the capital of investors to purchase and manage income generating property (equity REIT) and/or mortgage loans (mortgage REIT). REITs are traded on major exchanges just like stocks. They are also granted special tax considerations.
Relative Strength Indicator (RSI) - An indicator used to measure the underlying strength of a market move. It attempts to anticipate a change in trend when it crosses above or below upper and lower limits which suggests that a stock has become overbought or oversold.
Renounceable rights - The holder of the rights has the ability to sell on the ASX.
Responsible Entity – RE - A public company holding an Australian Financial Services Licence who has been authorised by the Australian Securities & Investments Commission to operate a registered managed investments scheme.
Resistance level - This is a term often used in technical analysis. It describes a price level above which it is supposedly difficult for a stock to rise above.
ROA - Return on assets - An earnings measure that is earnings after tax divided by total assets.
ROE - Return on equity - An earnings measure that is earnings after tax divided by shareholders' equity.
Rights issue - An offer made to existing shareholders in a company to buy new shares to be issued by that company at a discount to the prevailing market price.
Risk - The recognition that outcomes are uncertain. For more detail see credit risk, currency risk, interest rate risk and systematic risk.
Risk-free asset - In theory such an asset does not exist, although the market use gilt edged government debt such as Australian Treasury notes as a proxy for a risk-free asset.
Risk-free rate - An interest rate that can be earned with certainty.
Risk premium - The expected return in excess of that on risk-free asset. The premium compensates the investor for taking on the riskier investment.
S
S&P 500 – An index made up of the 500 largest companies listed on American stock exchanges.
Security - General term for the instruments that signify ownership of an asset class. Units, shares or bonds are all types of ‘security’.
Settlement date - The date, three days after the transaction, by which you must supply cash or documentation for a securities purchase or sale.
Shares or stocks - Shares represent part-ownership in a company. They can be ordinary shares, preference shares or partly-paid (contributing) shares.
Share registry - An organisation which, on behalf of a company, records changes in share ownership, issues share holding statements, and makes adjustments for dividend payments, bonus and rights issues.
Short term - An investment period that usually refers to days or months rather than years.
SEATS - Stock Exchange Automated Trading System - This is a computer network that allows stockbrokers to trade via computer terminals.
Secondary market - The market where securities already in existence are bought and sold (can be on an exchange or over-the-counter market).
Securities - A financial instrument, which is a claim over an asset or a future income stream. Examples are bonds and shares.
Securitisation - The pooling together of similar loans into standardised bonds. These bonds use the interest paid on the underlying loans to pay interest to the bondholders.
SPP - Share Purchase Plan – Typically accompanies an institutional placement and allows retail investors to take part in a company’s capital raising.
Short position - Where an investor has an excess of sales over purchases of a particular asset at a point in time.
Shorting a market - A strategy where the investor sells an asset that she does not own. It entails the investor borrowing the asset from a broker, and then giving it back to the broker when the loan is repaid.
Speculation - The purchase of a risky investment in anticipation of greater returns.
Spot rate (or spot price) - The current interest rate (or price) on offer for an asset.
Spread - The difference between the current bid and the current ask (in over-the-counter trading) or offered (in exchange trading) of a given security
Standard deviation - A statistic that measures dispersion around a particular point.
Stapled Security - When the unitholder owns a unit in the Trust and a unit in the attached Company, which cannot be separately traded.
Statement of cash flows - A financial statement that shows a company's cash receipts and cash payments over a specified period, such as a year.
Stock exchange - A secondary market where already issued securities are bought and sold such as the Australian Stock Exchange (ASX).
Stock split - Where a company issues new shares in exchange for the shares it currently has on issue. These splits can result in fewer shares on issue, or more shares on issue.
Stop-loss order - A sell order to be made if the price of a stock holding falls below a pre specified level.
Support level - This is a term often used in technical analysis. It describes a price level below which it is supposedly difficult for a stock to fall.
Systematic risk - Similar in meaning to market risk. It refers to risk attributable to macroeconomic factors.
T
Target or Price Target - Usually refers to a brokers expected share price in 12 months-time.
Technical analysis - Method used to selecting shares through the study of price action. Charts representing past price movements and volume, are the principle tools used to identify trends on which future predictions are made.
TED spread - An indicator of perceived credit risk in the general economy. The difference between the three-month T-bill interest rate and three-month LIBOR. T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks.
Tracking Error - The difference between the returns achieved on an index-based portfolio of assets and the performance achieved by the index it follows. Tracking error measures the standard deviation of the excess returns of a portfolio of securities compared to its benchmark.
Treasury bonds - A bond issued by the Australian Government to assist in its financing requirements. They can have maturities out to 15 years.
Treasury notes - A shorter-term security issued by the Australian Government. They can have maturities of 5, 13 or 26 weeks, and are generally used for liquidity management purposes.
Trust - A type of investment structure where investors hold their interest in units rather than shares.
Trustee - One who beneficially holds property on behalf of another under a trust.
Turnover (velocity) - The number of units in a particular stock traded on the ASX over a period of time.
U
Underwriter - Underwriters purchase shares or bonds from the issuing company and resell them, receiving a fee for this service. They agree to purchase any unsold shares in an issue of shares.
Unitholder - The person registered under the provisions of the Trust Deed as the holder of a unit in the Trust. Includes persons jointly registered.
Unit Trust - A collective fund which holds a portfolio of securities on behalf of the investors who hold units in the trust.
V
Valuation - A value for a business that is derived by fundamental analysis.
VIX Volatility Index - The Chicago Board of Trade’s volatility index, measures the cost of using options as insurance against declines in the S&P 500.
Volatility - Measure of the amount of fluctuation in price of the underlying asset calculated using the standard deviation of average daily price change.
VWAP – Volume weighted average price.
W
WACC – Weighted average cost of capital.
Warrants - Financial instruments issued by banks, governments and other institutions that are traded on the ASX. Broadly split into products with investment purposes and those for trading purposes; warrants may be issued over securities (such as shares), a basket of securities, a share price index, currencies or commodities.
Working Capital - Current assets less current liabilities. A measure of the long-term investment required to finance the day-to-day operations at a given.
WTI – West Texas Intermediate – The benchmark price of oil.
Y
Yield - The total dividends received over the previous 12-month period expressed as a percentage of the current share price.
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