Glossary of Terms


Alpha – Is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers’ performances. Often, the return of a benchmark is subtracted in order to consider relative performance and determine Alpha.

Annuity – A payment at regular intervals of a certain sum of money for a term of years or during the life of an individual.

Assets – Everything that a person or company owns or has a right to, from which a benefit can derive. Net assets are assets in excess of liabilities. Liquid assets are assets either in the form of cash or readily convertible into cash.

At call – Funds which can be withdrawn on demand or without notice.

Balanced Trust –  Balanced Trusts invest in a broad spectrum of investment markets, including shares, listed property trusts and government securities. The main advantage in  this type of investment is in the flexibility afforded to  fund managers in being able to alter the investment composition of the trust in the light of changing economic and investment conditions.

Beta – is a measure of systemic risk the beta of a portfolio is its covariance in relation to the market.  The market has a covariance of 1.  A higher (or lower) beta would imply more (or less) volatility than the market.

Blue Chip Stock – Stock of a large, national company with a solid record of stable earnings and/or dividend growth and a reputation for high quality management and/or products.

Book to Market (BtM) Ratio – The BtM is the ratio of a firm’s book value of equity. Book value of equity is determined by using historic cost information.  Market value of equity is determined by buyers and sellers of the stock using current indices.

Capital Growth – The increase in value of an asset or investment i.e. the difference between the current values and the original purchase price. (Provided the result is positive, not negative)

Capital Guaranteed – An investment where your money (capital) is guaranteed ; usually by a bank, government body, or life insurance company.

Cash Management Trust – A unit trust where investors (unit holders) pool their money into money market instruments. Cash management trusts operate with a trust deed, a trustee overseeing activities, and a management company responsible for the investment strategy.

Compound Interest – Interest which is paid on accumulated interest as well as the original principal invested, referred to by Nelson Rockerfeller as: “The eighth wonder of the world!”. 

Consumer Price Index (C.P.I.) – Measures the national inflation rate. The index is measured quarterly (December, March, June and September quarters) and reflects changes in prices (up or down) of a fixed “basket” or list of goods and services.

Correlation – A parameter, related to covariance, that indicates the tendency for two random variables to “move together” or “co-vary”

Debenture – A type of fixed interest security, issued by companies (as borrowers) in return for medium and long term investment of funds. A debenture is a debt instrument, it does not grant equity to the investor. Debentures are issued to the general public through a prospectus and are secured by a trust deed which sets out the terms and conditions of the fund-raising and the rights of debenture holders.

Deferred Annuity – An annuity where income payments do not commence i.e. are deferred until a specified date in the future.

Dividend – The share of profits distributed to shareholders of a publicly listed company.

Dividend Imputation – A tax system, where dividends paid to a shareholder by a taxpaying Australian company to its shareholders, carry a credit for the tax the company has already paid on its profits. This results in the shareholder shareholders receiving a reduction to their tax liability to the extent of the tax already paid by the taxpaying Australian company.

Eligible Termination Payment (ETP) – The term used to describe lump sum funds received when retiring or changing employment that can be rolled over into an Approved Deposit Fund or Deferred Annuity. ETPs can include payments from a superannuation fund, approved deposit fund, deferred annuity, commutation of an annuity / pension , unused sick leave and ‘golden handshakes.’

Earnings per share (EPS)  An indicator of a company’s performance.  it is calculated by dividing the company’s after-tax earnings by the number of shares on issue to highlight the profit earned in terms of each share.

Franked Dividend – A dividend distributed by an Australian company out of profits on which company tax has been paid.

Investment Bonds – A lump sum investment product. Technically, an investment or insurance bond is a single premium, lump sum investment life insurance contract.

Maturity – The date on which a debt or other borrowing is due to be repaid.

MSCI Indices – Varying indices compiled by Morgan Stanley Capital International (e.g. World, Asia, Healthcare etc.) that are designed to measure equity market performance across different regions and industries.

Negative Gearing – A way of obtaining tax advantages through an investment where the deductible expenses (typically including interest) exceed the income derived from the investment.

Non GAAP – An alternative earnings measure of the performance of a company.  Many companies report non-GAAP (Generally Accepted Accounting Principle) earnings in addition to the required GAAP earnings, stating that the alternative figure more accurately reflect their company’s performance.  Some common examples of non-GAAP earnings measures are: cash earnings, operating earnings, EBITDA, and pro-forma income.

Pension – A regular payment made to a person from a superannuation fund or from the Department of Social Security or Department of Veterans Affairs.

Price to Book Ratio (P/B) – The ratio of a company’s current share price to its current book value.  Book value is the sum of a company;share price’s total assets minus its total liabilities and intangible assets.  The P/B is used as an indicator of the value of a company by comparing its share price to the amount of the company’s assets that each share is entitled to.

Price to earnings Ratio (P/E) – The ratio of a company’s current share price to its per share earnings.  The P/E is used as an indicator of the value of a company by comparing a share price to the amount of per-share earnings the company generates expressed as a multiple.

Risk – Comprises two components: uncertainty and exposure.

Short Selling or Shorting – A transaction by which an investor is able to generate profit from a fall in the price of a particular company or market index.  To generate such a profit an investor borrows securities and then sells them, then when the price has fallen, the investor repurchases the securities at a lower price and returns them to the lender retaining as a profit the difference between the sale price and the reduced purchase price.

Style Drift – When a fund moves away from its stated investment objective over time.

Quantitative Easing (QE) – A monetary policy used by Central Banks to increase the supply of money by increasing the excess reserves of the banking system.  QE3 refers to the recently announced proposals for an additional round of Quantitative Easing following QE2.

Rollover – The renewal of a loan facility or continuation of a deposit at each maturity date, usually including a revision of the interest rates. (The term is also used to describe the transfer of Eligible Termination Payments to an acceptable superannuation or rollover fund.)

Shareholder – A person who buys a portion of a public or private company’s capital. By doing so that person becomes a shareholder in that company’s assets and receives a share of the company’s profit in the form of dividends.

Superannuation – An investment vehicle which operates primarily to provide benefits for retirement. Superannuation savings are usually made through trust funds and if these funds meet prescribed government standards they are eligible for tax concessions.

Term Deposit – Money invested for a fixed term at a fixed rate of interest which applies for the duration of the deposit.

Unit Trust – An investment which operates under the unit principle enabling investors to share in a pool of  managed investments. The success of a unit trust depends on the expertise and experience of the funds management company responsible for the trust’s investment strategy. Common types of investment undertaken by unit trusts are property, shares, mortgages, and the fixed interest market.

Value at Risk (VaR) – A widely used measure of the risk of loss on a specific portfolio of financial assets.

Volatility – A metric of variability in a given investment.  Sometimes viewed in the framework of a stochastic process (which means a process governed by the laws of probability).