Investment Jargon Explained

Absolute Return Funds
Absolute return funds are managed funds where the fund manager is able to take call and put option contracts and/or move to cash to protect the fund and returns if markets move down.

Accurals regime
A tax on a financial arrangement which aims to ensure that income on a debt instrument is accounted for and tax is paid on it over the life of the debt instrument.

Allocated pension or annuity
A retirement income investment where an individual invests their super money and receives an income periodically. The value of the account depends on the investment earnings and the amount of income taken. The capital is accessible and the income is flexible. There is no guarantee that the income will be paid for life.

All ordinaries accumulation index
A measurement of the average movements in share price of a selection of major Australian companies listed on the Australian Stock Exchange. It is an accumulation index, which means that it assumes that dividends have been reinvested.

Annual renewal term
Each year the insurance policy is renewable by the client - insurance company guarantees to accept renewal provided premiums are paid. The client decides to continue by simply keeping up with the premiums.

A regular income stream paid to an individual from a lump sum investment.

Application price
The price per unit or share of an investment in which applications are made.

The increase in the value of an asset.

Assessable income
Any income not exempted from income tax by the income tax act.

Asset allocation
A representation of how a portfolio is invested among the various available asset classes. eg a balanced fund may have an asset allocation of 25% NZ shares, 30% international shares, 10% property, 20% fixed interest, 10% international fixed interest, 5% cash.

Asset classes
The range of financial securities, such as shares, bonds, property, cash and specialities.

The practice of buying more or selling off some stock because the price has changed, thereby influencing the average cost of a holding.

Balanced fund
A type of managed fund whose investment strategy is to have, at all times, some proportion of its investments in all asset classes creating a risk/return balance between the types of investments.

Balance sheet
A written statement of an individual's assets and liabilities, the difference being an individuals net worth.

Bear market
A market that is decreasing over time. The opposite to a bull market.

The method by which the investment portfolio is to be measured.

Person(s) for whose benefit the trust is established.

In relation to superannuation, the entitlement to a lump sum, pension or annuity.

Price at which someone is prepared to buy shares or other quoted securities.

Blue chip shares
Shares in well established companies that have shown ability to pay dividends in uncertain markets.

A generic term for a long term debt instrument. Commonly a bond had a fixed and finite maturity date and carries an interest coupon for the periodic payment of interest. Normally the bond has a fixed coupon but variable coupon bonds are not uncommon. Other names for bond type instruments include: notes, debentures or stock. Bonds are generally issued by governments, banks or companies to finance investment projects.

Bonus issue
A free issue of shares to existing shareholders, usually in a predetermined ratio, eg 1 for 4, made from reserves or a revaluation of assets.

Bonus units
The issue of extra units in a trust following a revaluation of assets. It is in lieu of increasing the unit price.

Charges made by a broker for acting as an agent in the buying of securities.

Bull market
A market that is increasing over time. The opposite to a bear market.

Buy-back price
This price (also referred to as the asset backing), is sometime known as the exit price.

Capital gain
Profit from the sale of capital assets such as shares. Investors may buy securities for an expected increase in value as well as for dividend or income prospects. The amount by which the sale price of a security exceeds the purchase price.

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

Capital guaranteed
A feature of life insurance contracts where the sum insured as a minimum is contractually meet by the Insurance Company, and usually paid from the Companies main fund.

Capital needs
The amount of money that needs to be provided for on the death of a policyholder to cover expenses on death.

Capital Note
Higher interest rate reflects the risk.  Offered by companies to raise capital.  These are not secured.  Interest is not compounded.

One of the asset classes. Coin and note currency in circulation and in deposit accounts and money market securities.

Cash issue
An offer of new shares, usually at below market price, made to the company's existing shareholders in a predetermined ration.

Cash management
The process of organising finances in order to achieve spending goals.

Cash management trust (CMT)
A form of managed investment in which the primary investment is cash securities. While offering security, they can also offer the potential for a higher return than an ordinary bank savings account.

Certificate of deposit
A certificate is usually issued in a registered form and specifies the terms of a deposit with an institution. The term "certificate of deposit" is commonly used for debt instruments issued by registered banks. These instruments are normally issued at a discount for terms of less than one year.

Closed trust
Some trusts are only permitted to receive a certain value in funds from investors at which point they are no longer available (closed) to the public.

A document executed and witnessed in the same manner as a will, which adds to, alters, explains or confirms a former will made by the testator.

A fee paid to a financial adviser or stockbroker for a financial transaction or advice. Sometimes also referred to as brokerage.

Compound growth
Rate of growth of savings over a time. The compounding effect of interest on interest.

Compound return
Where interest is earned on interest that is credited back to the initial investment.

Contributing shares
A share that is partly paid, ie the par value is not fully paid. This occurs frequently with shares in mining and no liability companies. Cannot be held by minors.

Convertible note
A debt instrument (bond) which carries with it the right and/or obligation to subscribe for equity in the issuing company.

Convertible security
A fixed interest or dividend security, which converts to an ordinary share on a specified date, under, specified conditions.

The degree to which two variables (securities or asset classes) move in relation to each other.

The periodic cash flow due on a bond instrument. It is normal to express the coupon in annual terms, irrespective of the number of payment per year eg. quarterly. In some instruments the coupon is detachable and can be traded separately to the underlying bond.

Currency gains
The contribution to a security's capital gain attributed to movements in the currency in which the asset was denominated.

A bond instrument.

Debt forgiveness
When a settlor transfers assets to a Trust the Trust owes the settlor the value. The settlor can forgive the debt through gifting.

Decreasing term
Sum insured decreases by specified amount each year until the policy expires.

Securities that derive their value from another physical asset, also known as synthetics. Examples of derivates include futures and options.

Disability or income replacement insurance
Insurance that provides an income for the policyholder during a prolonged disability following sickness or accident.

Disclosure Statement
In accordance with the provisions of the Securities Markets Act 1988 and the Securities Markets (Investment Advisers and Brokers) Regulations 2007 our Disclosure Statement sets out the disclosure required to be made in relation to your financial adviser.

The amount by which a security is issued or sold below its par or face value.

Discretionary trust
A legal device by which one person (the settlor) transfers assets owned by him/her to a second party (the trustee) who holds the assets for the benefit of a 3rd party (the beneficiary). Leaves the distribution of wealth from a trust up to the trustee.

Income payments from managed investments. Such payments comprise a share of any net income and realised capital gains earned by an investment over a financial year. The components which generally make up a distribution are profits from the sale of assets, income and currency gains.

Spreading an investment over a range of asset classes, sectors and regions with the aim of reducing risk. As the old saying goes "don't put all your eggs in one basket".

Payment to shareholders from a company's after-tax earnings.

Dividend imputation
Tax already paid by a company is credited to individual shareholders when a dividend is paid.

Dividend yield
The return that an investor will obtain based on a specific market price. The yield is calculated as a percentage of the last sale price.

Dollar cost averaging
One of the benefits of investing a set amount of money, at regular intervals, over a long period of time. This means an investor could gain an advantage from rises and falls in the investment price, buying more when the price is low and less when the price is high.

Earnings per share (EPS)
Net profit divided by the total number of shares in the company expressed as cents per share.

Economic indicators
Housing status, employment figures - signals as to the likely growth in the economy and inflation.

Effective rate of return
The actual return on the amount invested.

Emergency fund
An amount that is set aside (usually 3 months expenditure), in highly liquid investments to meet emergencies, should they arise. The idea is that the client will not have to liquidate other investments and risk financial loss.

Enduring power of attorney
The legal document that enables you to appoint a person or organization to look after you and your affairs for the rest of your life regardless of the state of your physical or mental health.

Entry fee
Paid by the investor when purchasing units in a trust. This can range from 0.5% for income trusts to 5% for some property or equity trusts. The fee is included in the price that new investors pay. Most of the entry fee is paid as a commission to investment advisers and brokers.

A share investment, or the part of an asset owned by an individual over and above any debt against the asset.

Equity trust
A unit trust which invests mainly in shares with a component of cash or fixed interest investments. The pooling of funds allows for a wide spread of shares to be purchased and professionally managed.

Total amount of assets owned by a person.

Exchange rate
The price of the NZ dollar in terms of other currencies.

Person named in the will charged with the duty of carrying its provisions.

Future value
The future value as a present amount compounding over a certain time at a certain rate.

Face value
The amount for which a bond or money market instrument will be redeemed on maturity by the issuer. The term in synonymous with nominal value or par value.

Fiduciary duty
To act with absolute trust. It is the role of the financial adviser to put the interests of their clients ahead of their own at all times.

Fiscal policy
Deals with government spending and revenue raising ie taxation and capital expenditure.

Fixed interest security
Investments that offer the investor a specified return if held to maturity. The owner of the maturity is promised pre-determined payments at regular intervals throughout the life of the security.

Fund manager
Person who invests money on behalf of unit holders.

A derivative investment, an obligation to buy or sell a specified quantity of an underlying asset at some time in the future, at a price which is agreed when the contract is executed.

A measure of the debt ratio, which is the amount of borrowing compared with the equity in an asset. Borrowing to invest, such as when purchasing a house using a mortgage or purchasing a share portfolio using a margin loan.

Group investment fund
Fund established by the public trustee or trustee company administered by the Trustee Companies Act.

Most common means of transferring assets to a trust. The settlor then forgives the debt at the rate of $27,000pa to avoid gift duty.

Growth assets
A term given to assets such as shares and property which are expected to provide strong investment returns over the long term, usually in the form of capital gains rather than income.

Growth fund
An investment fund which is predominantly invested in growth assets.

Hedge funds
An investment fund where the fund manager is authorised to use derivatives and borrowing to provide a higher return.

Also referred to as insurance. It is undertaking one investment to protect against the potential loss in another investment. Options and futures are often used to hedge an investment.

Imputation credits
New Zealand fund managers are taxed on capital gains and dividends at 33%. The tax on dividends paid out or re-invested is called 'imputation credit'. Imputation credits can only be off-set against other tax, such as PAYE or resident withholding tax. If you do not have any other income then the imputation credits cannot be used, but can be carried forward to the next tax year.

Regular payments from an investment derived from interest on cash or bonds, dividends on shares, or rent from properties.

Replacement value - with an asset that is damaged, stolen or lost the insurance company will pay a sum of money that will ensure the same financial position as before the loss - no better, no worse.

The situation of excess money in circulation relative to the goods and services available for purchase. Reflected in increasing prices.

Insurance bond
Lump sum investment into an investment fund, operated as a Life Insurance Policy with a Life Insurance Company administered under the Life Insurance Act 1908.

The return earned on money which has been invested or loaned, the price paid for its use.

Interim dividend
Dividend declared before the close of the financial year, usually at the end of the first half year.

Arises where a deceased person has made no will that disposes of all or some of their assets on death.

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

Investment statement
The plain English explanation required by the Securities Act for all investments and term deposits.

Investment term
That period during which the portfolio's assets remains intact without the need for withdrawals.

Joint tenancy
If two people own property as joint tenants and one party dies, the property passes in total to the surviving tenant - cannot be gifted under a will - supersedes provisions of a will.

Level term
Refers to Life Insurance products. Period is fixed. Either the premiums remain constant, or sum insured remains constant.

Life insurance
The contractual obligation to make a payment in the event of certain contingencies - either death of the life insured, or maturity of a policy.

Lifetime pension or annuity
A retirement income investment where an individual invests their superannuation or other money and receives an income periodically. The capital is not accessible, and there is little income flexibility. The payments are guaranteed to be made for the person's lifetime.

To sell an investment or to convert an investment into cash.
Listed security : a security which is bought and sold via an exchange, such as shares on the stock exchange.

Listed trust
Unit trusts listed on the Stock Exchange in order that purchases and sale of units can take place on the Exchange.

Occurs where the sale price of an asset is less than the initial cost.

Lump sum
A superannuation benefit taken in cash rather than being rolled over to a pension or annuity.

Managed investments or funds
A unit trust which allows investors to pool their money with that of other investors so that the fund can buy a wide range of investments. These investments are managed by a professional fund manager who makes the investment decisions.

Management expense ratio (MER)
A ratio expressing the management, trustee and certain other expenses of a managed fund as a proportion of the net asset value of the fund.

Margin loan
A line of credit established for the purpose of investing in shares or unit trusts, often to make use of negative gearing.

Money market
A market where short-term securities, such as promissory notes and bills of exchange, are traded. Securities in the money market all have terms of 1 year or less.

Monetary policy
The practice of using financial policy instruments to influence monetary conditions in NZ, ie how easy or difficult it is to obtain money and credit.

Negative gearing
Purchasing an investment with borrowed funds where the interest on the borrowing exceeds the income from the investment. Often used in the property investment market.

Net asset value
The value of a company, or managed fund, which is the assets less liabilities.

Nominal return
The actual return on an investment.

The price at which someone is prepared to sell securities.

Official Cash Rate - the base overnight interest rate at which the Reserve Bank of NZ lends to, or borrows from Registered Banks.

Open ended unit trust
A trust for which the Manager can receive unlimited funds. Most unlisted trusts are in this category.

OEIC (Open Ended Investment Company)
UK based unit trusts which have a tax advantage in that capital gains are tax free to New Zealand investors.

A derivative investment, giving the holder an option to buy or sell a specified quantity of an underlying asset at some time in the future, at a price which is agreed when the contract is executed.

Ordinary shares
Ordinary unit of capital.

Par value
The nominal or face value of a security as determined by the issuers. It bears no relation to the market price of the share or security.

Permanent insurance
Insurance cover for the entire life of the policyholder, usually in the form of a whole of life contract.

Personal accident & sickness insurance
This contract insures against accident or sickness. The policy usually pays out in the form of a lump sum or an income for a specified loss.

Pooled investment
An investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf. Also known as a unit trust or managed investment, or in the US a mutual fund.

The full range of an investor's, or managed fund's, investment holdings.

Preferred shares
Rank ahead of ordinary shares for claims on assets and dividends but after creditors and debenture holders. These shares usually attract a fixed dividend rate.

The amount by which the issue price of a share exceeds its par value. The opposite to discount.

Present value
The value in today's dollars of a future cash flow discounted at a required rate of return.

Primary market
Where securities can be purchased directly from the issuers.

The grant to the executors by the government to administer the estate of a deceased Testator in terms of a proved will.

Occurs when an investment appreciates in value and is sold, or realised. Also known as a realised gain.

Promissory note
An instrument evidencing the obligations of the maker (issuer) to pay a certain sum of money on a certain date to the holder. They are issued without coupon for terms of less than one year.

Property funds
In a managed investment the term property generally refers to investments in property securities - property trusts listed on the stock exchange. Funds which invest in property securities allow diversification by investing across a range of different property sectors such as commercial, office, industrial, hotel and retail properties. A property securities fund generally invests in property trusts that are listed on the share market, or in property-related companies.

A legal document lodged with the Australian Securities and Investments Commission which details how the fund operates, outlining the nature of the fund(s), how to invest and what to expect from the investment.

To sell an investment.

To withdraw, or sell, an investment.

Redemption price
The price at which an investor can withdraw their units from a fund or trust.
This is suitable for investors with income less than $38,000 and will not be affected if they declare their income at a higher rate, re eligibility for community services card, income assessment.

Where income from an investment is used to make an additional investment, generally at no fee, increasing the potential to receive higher capital growth and distributions in the future.

The amount of money received from an investment each year. Can be comprised of income and/or capital growth and is expressed as a percentage.

The variability of returns. Generally, the higher the level of risk an investor is prepared to accept, the higher the potential return over time.

Risk free rate
The return on a 'riskless' asset. The 90-Day Government bond is often referred to as the 'risk free rate'.

Risk management
The level of exposure to financial loss that death or disability would bring to an individual, that can be managed by using a professional insurer.

Risk profile
A persons tolerance to risk.

Salary sacrifice
An amount of pre-tax salary that an employee decides to contribute to super or allocate to a fringe benefit instead of taking it as cash salary. Available to employees earning over $60,000. Not relevant now that the top marginal tax rate is teh same as the family Trust tax rate.

Secondary market
The market where existing securities are traded, eg NZ Stock Exchange.

A group of securities with common characteristics, such as resource sector companies or financial companies.

(1) an asset traded on a financial market, such as shares or bonds or (2) an asset pledged to ensure the repayment of a loan.

The person(s) who originally established the trust - they place assets into the trust to be held for certain purposes.

Represents ownership in part of a company. When you buy a share in a company you become a joint owner of the business and share in the future of that business. Also known as an equity.

Share split
A division of the par value of existing shares/units into smaller denominations, eg one $1.00 share may be split into two 50cent shares.

The difference between the offer and buy-back prices - this is the equivalent to the entry fee for the trust.

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

A tax effective means of putting aside money during your working life for use in retirement.

Sum assured or life assurance
Where the life insurance company 'assures' they will pay the sum insured and bonuses.

Transferring units between two funds in a unit trust.

Tenants in common
If two people own property as tenants in common - individuals may gift half of the property to a third person in their will.

Term insurance
Here the policyholder purchases risk cover only for a specified term. Term is generally cheaper than any other type of insurance cover.

Person who makes a will.

Trauma cover
Health insurance, that covers the medical and other costs involved of certain medical conditions, operations, etc. Is paid as a lump sum.

Person responsible for investing money on behalf of a trust, individual(s).

Trust deed
The legal terms (documentation) under which a trust operates. It lists assets of trusts, trustees, beneficiaries and terms of trust.

Unit price
The price for each unit of a unit trust. This is calculated by dividing the value of the assets of the trust by the number of units on issue to investors.

A share of a unit trust or managed fund which represents an entitlement to the asset within the fund.

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

Relates to superannuation, an employee's entitlement to optional employer superannuation contributions. Vesting is usually expressed on a scale, for example for each year of service employees are entitled to a further 20% of optional employer contributions. This means that after 5 years of service an employee is entitled to 100% of these contributions if they leave the employer.

The fluctuations in performance returns of a security or a portfolio.
Whole of Life Insurance : permanent insurance. The Life Insurance Company pays out to the policyholder the sum they are insured for (the basis sum assured) plus bonuses the policy has generated, when the policy holder dies.

A statement by a person as to how their property is to be distributed or disposed of on their death.

The dividend, or interest rate, on an investment expressed as a percentage of the price.