Glossary

A

Active management A style of investment management which aims to provide returns above a set benchmark, through asset allocation and stock selection. The opposite of passive management.

Asset allocation The apportionment of an investment portfolio among the relevant asset classes or sector.

Asset classes The different categories of financial assets, such as shares, bonds (or fixed interest), property and cash.

Average annual return A calculation that converts a cumulative total return into an annualised figure, expressed as a percentage.

B

Bear market A market that is declining over time (a bear is seen as clawing the market down). The opposite to a bull market.

Broker An independent person who buys and sells a range of financial and/or insurance products on behalf of investors and receives a commission called brokerage.

Brokerage A fee charged by a financial adviser or stockbroker for a transaction. Sometimes referred to as commission.

Bull market A market in which prices are moving upward over time (a bull tosses the market up). The opposite to a bear market.

C

Capital gain/loss The difference between an asset's purchase price and selling price.

Capital gains tax A tax on the gains of an investment, payable only when the capital gain is realised after selling the investment.

Consumer Price Index (CPI) An index that measures the change in the cost of a 'basket' of basic goods and services, showing how the cost of living changes over time. The most widely accepted indicator of inflation.

D

Depreciation A decrease in the value of an asset.

Derivative A financial contract that derives its value from another physical asset. Examples of derivatives include futures and options.

Distribution A in a managed fund, a distribution is the amount paid out to investors on a regular basis. Such payments comprise a share of any net income and realised capital gains earned by an investment over the period.

Diversification The process by which investors hold a variety of different asset classes, in an effort to reduce the overall volatility of their portfolio.

Dividend An amount paid to shareholders from a company’s after-tax earnings.

E

Equity (a) a share investment or (b) the value of an asset owned by an individual over and above the debt against the investment.

G

Gearing (a) borrowing specifically to fund an investment, e.g. to buy shares or purchase a house using a mortgage, or (b) a measure of the debt ratio, which is the amount of borrowing compared with the equity in an asset.

Growth assets Assets, such as shares and property, that are expected to provide strong investment returns over time.

H

Hedging The practice of undertaking one investment activity in order to protect against the possible loss in another. Options and futures are often used to hedge an investment.

I

Imputation credit Taxation credits are passed on to shareholders who have received dividends from holding shares or managed share investments.

Inflation The effect on the economy of increases in prices without corresponding increases in productivity. Inflation is typically measured by reviewing the cost of a 'basket' of selected goods and services. Refer the Consumer Price Index.

Interest The return earned on money that has been invested or loaned.

Investment An asset purchased with the intention of producing a capital gain or income, or both, for the owner.

N

Net Asset Value (NAV) The total assets of a company, or managed fund, less total libilities. A more pure measure is Net Tangible Assets (NTA), which do not include intangible items, such as goodwill.

P

Passive management A style of investment management that aims to achieve performance equal to the market or index returns. The opposite of active management.

Portfolio A range of investments held by an investor, or a managed fund’s investment holdings.

Property securities An investment term for property trusts listed on the stock exchange.

Property trust A managed fund that invests in a portfolio of 'real' property (i.e. buildings).

R

Rally A rapid rise, usually following a decline, in the general price level of a market or asset class.

Real return Return net of inflation, or net of tax and inflation.

Realise To sell an investment.

Realised gain When an investment that has increased in value is sold and a capital gain is realised. An investment that has increased in value, but has not yet been sold, has an 'unrealised' gain.

Reinvest Where income earned from an investment is added to the original investment, increasing the potential for higher capital growth and distributions in the future.

Return The profit earned on an investment, usually expressed a percentage.

Risk The variability of returns, referring to the possibility that an asset may not achieve its expected rate of return. Generally, the higher the return, the higher the potential risk.

S

Sector A group of industries that share common characteristics, such as the telecommunications sector, financial sector, or technology sector.

Stock exchange A market with a trading floor where securities are bought and sold.

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

T

Trust Deed A document setting out the methods of application, investment and withdrawal of funds in a managed investment, unit trust or superannuation fund.

U

Unit price The price for each unit in a unit trust. This is calculated by dividing the value of the total assets by the number of units held by investors.

Unit trust An investment where a number of individuals place their money with a professional manager who manages the fund on their behalf. Also known as a managed investment.

Units A share of a unit trust or managed fund, reflecting an investor's entitlement to the assets of the fund.

Unrealised capital gain Occurs when an investment increases in value, but is not yet sold or realised.

Y

Yield The interest rate earned on a bond, or the dividend paid on an investment, expressed as a percentage.