Investment Jargon Explained

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A
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 capital and the returns if markets move down. Absolute return funds
Accurals regime is 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. Taxation

After-tax return The return from an investment after all income taxes have been deducted. By comparing after-tax returns an investor can determine which investment makes the most sense based on his or her tax bracket.

Aggressive A bold investment approach that takes higher risks in return for potentially higher rewards.

Alpha

A measure of expected return based on an investments inherent value and assuming a flat market. It is useful in evaluating investments risk exclusive of market risk.


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.

Annualised rate of return

The average return over a period of years, taking into account the effect of compounding. Also called the compound growth rate. For example, a 100% return over five years is equivalent to an annualised rate of return of 20.2% per year.


Annuity 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.

Appreciation The increase in the value of an asset.

Arbitrage An attempt to profit from differences in security prices, such as disparities between the value of a stock index future and the value of the stocks that make up the index, by buying the undervalued security and selling the overvalued security.



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. Diversification

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

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

Average effective maturity A measure of a bond's maturity that takes into account the possibility that it may be called by the issuer before its stated maturity date. In this case, the bond trades as through it had a shorter maturity than its stated maturity.

Average maturityFor a bond fund, the average of the stated maturity dates of the debt securities in the portfolio. In general, the longer the average maturity, the greater the fund's sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive - and consequently, less volatile - portfolio.

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B
Baby Boomers 
This is an often quoted expression, it refers to a population bubble with people born between 1946 and 1964. 

Balanced fund A fund that seeks both growth and income, with stability of principal, through a portfolio that includes stocks, bonds as well as property listed and unlisted and cash.

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

Basis point One, one-hundredth of one percentage point, or 0.01%.

Bear market

A prolonged period of declining share prices, the bottom of which may offer courageous investors (and investors using dollar cost averaging) attractive values.  Bear Market

Bellwether

An established share market leader. IBM and General Motors are two shares commonly referred to as bellwethers.

Benchmark A standard, usually an unmanaged index, used for comparative purposes in assessing fund performance.

Beneficiary(ies)  Person(s) for whose benefit a family trust is established.

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

Beta

A measure of the price movement in relation to the the market, for example the Standard & Poor's 500 Index. Securities with beta's higher than 1.0 have outperformed the market; securities with beta's lower than 1.0 have underperformed the market.


Bid price  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.

Bollinger graph  Bands showing the highest price of a security and the lowest price in a trading period, usually one day.  Used by day traders to predict price movements.

Bond  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.

Book value The net worth, or liquidating value, of a business. Calculated by subtracting from total assets all liabilities, including debt and preferred stocks, and dividing by the number of shares of common stock outstanding.

Bottom fisherAn investor who searches for value among shares that have fallen from grace and now sell at bargain-basement prices.

Bottom-up approachAn investment strategy that emphasises finding outstanding individual companies before considering broad economic trends.

Broker/dealer

Technically, a firm that brings buyers and sellers together in its function as broker and that also buys securities to sell while fulfilling its role as dealer. The terms broker, broker/dealer, and dealer are sometimes used interchangeably.


Brokerage  Charges commission) 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.

Business cycle The rise and fall of a country's economic fortune over time, characterised by fluctuating employment levels, industrial productivity, and interest rates.  Economic cycle

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

Buy-Sell Agreement
A Buy-Sell agreement is a contract in which the owners of a business agree that if one of them dies, or leaves the business for any reason, the other(s) will purchase his or her interest in the business. Buy-sell agreements

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C
Call protection A provision in a bond's indenture setting a certain period during which the bond cannot be called away by the issuer.

Capital appreciation An increase in the value of an asset, such as shares. Capital appreciation is the investment objective of shares that purchase securities whose value is expected to rise.

Capital gain (loss) A profit (selling price minus cost basis) or loss on the sale of a security or other asset. Short-term capital gain refers to a gain on assets owned for one year or less. Long-term capital gain refers to a gain on assets owned for more than one year. Capital gains generated by a fund from the sale of securities in its portfolio are distributed to its shareholders.

Capital gain distribution A payment to fund profits (long-term gains) realised on the sale of the fund's securities. The net asset value of the fund is reduced by the amount of the distribution. For equity funds, these amounts are usually paid out once a year, in December. Fixed-income funds may include capital gains in their monthly distributions.

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 guaranteed funds

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.  Capital Notes

Capital spending Money spent by businesses to purchase or upgrade equipment or facilities. It's one of the major components of economic growth, the other being consumer spending.

Capitalisation
The market value of a company's outstanding securities, excluding current liabilities. On the US market under $250 million is generally considered small cap; $250 million to $1 billion is mid cap; and over $1 billion is large cap.

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

Cash equivalent A short-term money-market instrument, such as a bank bill, of such high liquidity and safety that it is virtually as good as cash.

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. Early withdrawal results in a penalty.

Certified Financial Planner (CFP)  Certified Financial Planner are marks of the Certified Financial Board of Standards Inc (CFP Board) and are issued by the Institute of Financial Advisers under license.  The CFP Board is an independent professional self regulatory body acting to benefit and protect the public in its dealings with persons engaged in providing financial advice by establishing educational, ethical and disciplinary standards, developing and administering examinations within the field of financial planning and authorising individuals who meet its criteria to use the CFP Board's Marks.

Chartered Life Underwriter ( CLU ) is the highest insurance and personal risk management qualification available to insurance professionals in New Zealand.  It is specifically suited to those who specialise in the areas of personal and business insurance.  The CLU qualification demonstrates that the holder has a high standard of competence in their chosen profession and it can be expected that the holder will maintain the highest standard of professionalism and ethics when giving advice.

Closed-end fund A regulated investment company that offers a fixed number of shares, which are traded on a stock exchange just like stocks.

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.

Collatarised Debt Obligation (CDO) A CDO is a financial instrument credited for the collapse of many financial institutions in the US in 2007/2008 credit crisis. CDO were a package of mortgages of various credit ratings from AA to D (sub prime) to give an overall credit rating of BBB- investment grade. When the US property market collapsed in 2007 sub prime mortgages started defaulting which caused credit downgrades and CDO investments rapidly lost value as credit markets went into freefall.

Commercial paper Corporate promissory notes issued to provide short-term financing, sold at a discount and redeemed at face value. A principal component of money market fund portfolios because of its high yield.

Common stock A security that represents ownership in a public corporation. This is the first security a corporation issues to raise capital.

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

Compounding
Interest paid on interest, resulting in a geometric rate of increase on the initial principal. For example, a $100 investment that earns 5% generates $5 per year. With compounding, it would generate $5 the first year, making a new basis of $105; then $5.25 the next year, for a basis of $110.25; $5.51 the next year; and so on. Reinvesting dividends and capital gains takes advantage of the power of compounding.  Savings Calculator

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.

Confirmation A printed record of recent transactions sent to you when distributions are paid or other business is transacted.

Conservative A cautious approach to investing that takes only prudent risks to seek a reasonable return.

Consumer Price Index The change in consumer prices determined monthly by the Statistics Department, often cited as a general measure of inflation.

Codicil  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.

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.

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

Cost basis The cost of an investment, used as the basis for calculating and reporting capital gains or losses. It is adjusted for stock splits, distributions, and return of capital.

Coupon  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.
Normal practice is to pay half the annual rate semiannually.

Credit rating An evaluation of the creditworthiness of a debt security by an independent rating service such as Rapid Ratings.

Credit risk The potential for default by an issuer on its obligation to pay interest or principal on debt securities. Most government securities are considered to have very little credit risk.

Critical Care Insurance  (Trauma insurance) Health insurance, that covers the medical and other costs involved of certain medical conditions, operations, etc. Is paid as a lump sum. Critical care insurance

Current distribution rate The rate of payment for a fund that distributes short-term capital gains or option premiums in addition to dividend and interest income, expressed as a percentage.

Current dividend yield The rate of payment for a fund that distributes short-term capital gains or option premiums in addition to dividend and interest income, expressed as a percentage.

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

Custodian The bank or trust that holds assets (shares, bonds, cash, and other securities) and handles payments and receipts for the fund's securities transactions.

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

Debenture  A bond instrument. Debentures  Refer to "first ranking debenture", "secured debenture".

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. Family Trusts

Debt securities General term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, notes, bills, and money market instruments are all debt securities.

Deflation The opposite of inflation, thus a decline in the prices of goods and services.

Derivatives  Securities that derive their value from another physical asset, also known as synthetics. Examples of derivates include futures and options. Hedge Options & Future Funds

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

Disclosure statement Details about a financial planner as defined in the Securities Markets Act 1998 and the Securities Markets (Investment Advisers and Brokers) Regulations 2007.   Disclosure Statement

Discount rate
The interest rate charged by the Federal Reserve to member banks. Basically, the floor rate for interest rates in the economy.

Disinflation A slowing of the rate at which prices are increasing. Not the same as deflation, when prices actually drop.

Discount  Selling below par, e.g., a $1,000 bond selling for $900. 2. (v.) Anticipating the effects of news on a security's value; for example, "The market had already discounted the effect of the labour strike by bidding the company's share price down".

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. Family Trusts

Distributions  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.

Diversification  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".

Dividend  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 An investment strategy based on making investments of equal amounts at regular intervals in the same fund or security. Because the shareholder buys more shares at lower prices and fewer shares at higher prices, the average cost of the shares purchased will generally be lower than the average price over the investment period. However, dollar-cost averaging does not ensure a profit or protect against a loss in a declining market. Regular saving

Dow Jones Industrial Average ("the Dow") The most commonly used indicator of stock market performance, based on the prices of 30 major industrial companies. Often simply called "the Dow".  Dow Jones Index

Duration A mathematical measure of a bond's sensitivity to changes in interest rates. Duration is stated in years; the shorter the duration, the less volatility you can expect from the bond.

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E
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. Economic cycle

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  There are two distinct types, "Personal Care and Welfare" and "Property" 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. Enduring powers of Attorney do not apply in the case of acting on behalf of a Trustee in a Family Trust.

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.

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

Equity release Release of capital tied up in your home, used by someone in retirement who may not have saved funds outside the value locked up in their homes.  There are 3 distinct types:

  • Reverse mortgages - The consumer borrows money against the equity in his or her home, and the principal and interest is not repaid until the home is sold, (usually when the consumer dies or voluntarily vacates the home);

  • Home reversion schemes - the consumer sells all or part of his or her house to a home reversion company. The home is sold for less than its market price (typically between 35% and 60%), but the consumer can remain in the property until they die or voluntarily vacate the home. There are at least two types of home reversion schemes - a sale and lease model, and a sale and mortgage model; and,

  • Shared appreciation model - the consumer gives up the right to some of the capital gain on the property in return for paying reduced or no interest on that part of his or her borrowings.


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.

Estate  Total amount of assets owned by a person.

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

Eurodollar CD
Short-term deposits issued by European banks, often used by money market funds.

Ex-dividend Means "without the dividend". Used to refer to a security that no longer carries the right to the next dividend. An "x" will appear next to the name of the share or fund to indicate that the share price has dropped by the amount of that dividend and thus purchasers will not receive the dividend.

Ex-dividend date When used in reference to funds, the date the share price drops by the amount of the dividend. (The fund's assets are reduced by the amount of the distribution before the NAV is calculated).

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

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F
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.
Most bonds have a face value, or par, of $1,000.

Fair Dividend Rate   New tax rules introduced in New Zealand effective 1st April 2007.  Investors holding more than $50,000 in equity investments outside New Zealand and Australia will be taxed each year at a maximum of 5% of the opening value of the investment at 1st April each year at their marginal tax rate. The 5% return includes income and capital growth.  Australian unit trusts are deemed to be international investments. For New Zealand managed funds investing internationally generally these funds will adopt the PIE (portfolio Investment entity) rules, will pay tax under FDR rules at the investors marginal tax rate on 5% growth and income even if the investment earns less than 5%.

Federal Reserve System The central bank of the United States, which has regulated credit in the economy since its inception in 1913. Includes the Federal Reserve Bank, 14 district banks, and the member banks of the Federal Reserve.

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

First Ranking Debenture There is no other charge (security) over the assets of the company that would rank above debenture stock charge if the company became insolvent (unable to pay it bills).  Refer also to "secured debenture".

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

Fiscal year An accounting period of 365 days (366 in leap years) for which a fund prepares financial statements and performance data. Not necessarily the same as the calendar year (January 1 through December 31).

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.

Forward commitment A purchase or sale of a security at a specified price with delivery and cash settlement at a specified future date.

FPIA Financial Planners & Insurance Advisers Association.  New Zealand organisation representing financial advisers.  name changed in May 2006 to the  "Institute of Financial Advisers, IFA".

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

Fundamental analysis The study of a company's business and financial status to help forecast future movements in its share price. Analysts consider the company's past record of earnings and sales as well as company's assets, management, and markets to predict trends that could affect a company's share price.

Futures  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. Hedge, options & future funds

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

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G
Gearing  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. Leveraged investments

Gifting  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.

Government security Any debt obligation issued by the government or its agencies.

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

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.

Growth investing Focuses on stocks of companies whose earnings are growing rapidly and are likely to continue growing.

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H
Hedge A strategy used to offset investment risk. In investing, hedging involves the purchase of an offsetting position, such as a put option or futures contract, to guard against the risk of a market decline. Often used as a defensive strategy in portfolios investing in securities to reduce the negative effects of unfavourable moves in currency exchange rates.   Hedge Funds.

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

Historical yield The actual yield of an investment over a given period, measured from the beginning of the period.

Holding period The length of time an investment must be in an account before it can be exchanged.

Home reversion schemes The consumer sells all or part of his or her house to a home reversion company. The home is sold for less than its market price (typically between 35% and 60%), but the consumer can remain in the property until they die or voluntarily vacate the home. There are at least two types of home reversion schemes - a sale and lease model, and a sale and mortgage model.

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I
IFA
Institute of Financial Advisers.  New Zealand organisation representing financial advisers prior to May 2006 known as FPIA - Financial Planners & Insurance Advisers Association

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.  Taxation

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

Income protection insurance  Indemnity income protection insurance is based on 75% of earned income, premiums are tax deductible, benefit is taxable. Loss of earnings is based on last 3 years income, other income including investment income is offset.  Agreed value income protection insurance the insurance company agrees on the cover amount at time of taking the insurance.  Insurance

Indemnity  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.

Index A benchmark against which to measure performance, such as Standard & Poor's 500 Index, NZSE40, MSCI.

Inflation  The situation of excess money in circulation relative to the goods and services available for purchase. Reflected in increasing prices.
Often equated with loss of purchasing power.  Inflation calculator

Initial public offering (IPO) A private company's first public offering of common shares.

Instrument A legal document, such as a security.

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.

Interest  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.

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

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

Investment company A "company" that invests in other "companies". Actually, a separate investment company owned by its shareholders. An investment company combines the money from a number of investors and then invests the money in a large, diversified portfolio.

Investment-grade Bonds suitable for purchase by prudent investors. Standard & Poor's and Moody's Investors Service designate bonds in their top four categories (AAA/Aaa, AA/Aa, A, and BBB/Baa) as investment grade.  Rapid ratings a rating of B3 and above is investment grade.

Investment objective The goal an investor or a fund seeks to accomplish. Investment objectives include current income, capital appreciation, or a combination of the two.

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.

Issue A share or bond offering sold by a corporate or government entity at a particular time.

 

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J
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.

Junk Bond Lower-rated higher-yielding bonds with a credit rating of BB or lower.

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L
Large cap A company that has a total market capitalisation of $1 billion or more.

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

Leverage The use of borrowed money to increase the funds available for investment, used in order to achieve a greater rate of return.

Leveraged buyout (LBO) The purchase of a controlling interest in a company using borrowed money.

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.

Liquidity The ability to easily turn assets into cash. An investor should be able to sell a liquid asset quickly with little effect on the price. Liquidity is a central objective of money market funds.

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

Long-term investment strategy A strategy that looks past the day-to day fluctuations of the stock and bond markets and responds to fundamental changes in the financial markets or the economy.

Loss  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.

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M
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.

Market timing A strategy of buying or selling securities in anticipation of changes in market or economic conditions.

Maturity date The date on which the principal of a bond must be repaid.

Money market fund A fund designed to provide safety of principal and current income by investing in securities that mature in one year or less, such as bank certificates of deposit, commercial paper, and Government stock. The price per share is fixed at $1.00. Money market funds have the lowest risk of any type.

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.

Mutual fund  In New Zealand these investments are more commonly referred to as Unit Trusts.  A diversified, professionally managed portfolio of securities that pools the assets of individuals and organisations to invest toward a common objective such as current income or long-term growth. A mutual fund is a regular investment company registered under a prospectus.

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N
NASDAQ A nationwide electronic system established by the National Association of Securities Dealers for up-to-the-minute price quotations and trading on over 5,000 over the counter shares.

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.

Nest egg
Money put aside for future needs such as retirement or a college education. An investment in a retirement plan would be part of your nest egg.

Net asset value per share (NAV) The market value of one share of a unit trust. The fund's NAV is calculated daily by taking the fund's total assets (securities, cash, and accrued earnings), subtracting the fund's liabilities, and dividing by the number of shares outstanding. The NAV does not include the sales charge. The process of calculating the NAV is called pricing.

Niche A small, focused market in which a company specialises. Niche companies are often favoured investments because they can be well-insulated from competition.

Nominal return  The actual return on an investment.   Refer to Real Rate of Return.

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O
Offer   The price at which someone is prepared to sell securities.

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

OneAnswer  Portfolio wrap platform based on OneAnswer administration platform used by Lyford Portfolio Management Service

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.

Options  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.
The right to buy is a call; the right to sell is a put. Unlike a futures contract, an option does not obligate the investor to perform the transaction; the obligation is only on the part of the seller.

Ordinary shares  Ordinary unit of capital.

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P
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.
Bonds generally have a par value of $1,000.

Pension This could refer to the regular income received from your employer or the New Zealand superannuation when your age 65.  It is also a term that can refer to superannuation.  Refer also "allocated pension or annuity".

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.

Ponzi Scheme  In a Ponzi scheme, the scammer uses fresh money from unsuspecting investors to make payments to more mature investors, creating the false appearance of legitimate returns. The largest Ponzi scheme in recent years is Bernard Madoff's, estimated to be around $30 billion USD.  He was sentenced to 120 year prison term on 30 June 2009.  He was 73 at time of sentencing.  He operated his scheme for 20 years before finally giving himself in following the share market down turn in 2008.

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.

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

Portfolio Investment Entity (PIE) New tax rules effective 1st October, managed funds can elect to be PIE's.  In which case investments outside New Zealand and Australia will be taxed at the investors marginal tax rate on 5% of the opening value (income and capital).  The fund manager will pay the tax directly.  From 1st April 2008 the maximum tax deducted will be 30% even if the investor is on a marginal tax rate of 39%.

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.

Premium  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.

Price to earnings ratio (P/E ratio) A method of valuing shares, calculated by dividing the closing price of a company's shares by its annual earnings per share. Growth shares tend to have a high P/E ratios compared to income shares.

Prime rate The interest rate a bank charges on loans to its most creditworthy customers. Frequently cited as a standard for general interest-rate levels in the economy.

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

Prime Bank Instruments  This is an investment scam and definitely do not get taken for the exorbitant claims which are made, refer to  Scams under Useful Resources

Private placement The sale of securities to a limited number of investors at the initial stages of a company's operations, a private placement allows investors to invest in attractive companies before the company sells shares to the public.

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

Profit margin The amount by which a company's sales and other earnings exceed its expenses, expressed as a percentage.

Profit-taking Selling securities after they have risen in value to realise a gain.

Profit  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.

Prospectus  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.

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R
Rally A substantial rise in the price of a security or an entire market.

Real rate of return The return on an investment net of tax, inflation and management fees.

Realise  To sell an investment.

Recession Officially defined as three negative GDP returns.  Can lead to negative inflation.

Redemption/redeem  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.

Registry An institution used by the issuer of shares to maintain its shareholder records and perform all account transactions.

Reinvest  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.

Reinvestment privilege
The right of shareholders to use income and/or capital gain distributions to purchase additional shares of their fund without paying a sales charge.

Return of capital A fund distribution that exceeds earned income - that is, a distribution that includes a portion of the investor's original principal. Return of capital is sometimes distributed to maintain the level of the distribution when income is not adequate to do so.

Reverse mortgages The consumer borrows money against the equity in his or her home, and the principal and interest is not repaid until the home is sold, (usually when the consumer dies or voluntarily vacates the home

Return  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. Refer also to real rate of return.

Risk  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' in terms that there is a very low default probability..

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. Risk/Return profiler

Roll-Over This term means to re-invest.  For example if a fixed interest investment matures it may be automatically rolled over into another investment with the same term.

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S
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  Salary Sacrifice

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

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

Secured Debenture Secured means the deposit is secured by the company granting a charge (giving security) over all of its assets.  This charge is given to a independent Trustee company.  A charge is only as good as the assets it covers.  If a company's assets comprise loans to borrowers the security taken by the charge is only as good as the realisable value of the loans.  Refer also to "first ranking debenture".

Security  (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.

Security transfer A form that transfers ownership of a registered security from the owner to another party.

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

Shares  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 index future A futures contract linked to the cash value of a share index such as Standard & Poor's 500 Index. Allows an investor to invest in the market, rather than individual stocks, to hedge against market declines or to speculate on a market rally.

Share split An increase in the number of outstanding shares of a stock with a corresponding adjustment in the share price. A share split has no effect on the market value or the value of the owner's shares. For example, if a share selling for $100 per share splits two-for-one, a shareholder with 100 shares worth $10,000 before the split would have 200 shares worth $50 per share after the split, with the same $10,000 value.

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.

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

Standard & Poor's 500 Index A daily measure of share market performance, based on the performance of 500 major companies. Though it does not include transaction or management costs, the S&P500 is often used as a yardstick for equity fund performance.

Standard deviation How volatile is a fund likely to be? This measurement of historical volatility is often used to help answer that question. It shows the average difference between a portfolio's periodic returns and a benchmark index. The smaller the difference, the lower the standard deviation will be - and the greater the degree of stability you can expect from the fund.

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

Sub Prime Mortgages Mortgages given to people with poor credit records and low ability to pay interest when interest rates increased.  When the US property started dropping in 2007 some people found that their mortgage was worth more than their house and walked away from their liability.

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

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

Switching  Transferring units between two funds in a unit trust.

Systematic investment plan (SIP) A service option that allows a customer to purchase shares/units through regular deductions from a bank, cheque or savings account.

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T
Tax loss carried forward A tax benefit that allows an individual or a unit trust to offset past losses against future profits.

Technical Analysis Analysis of the supply and demand for securities using charts and graphs to identify price trends that may foretell future price movements.

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.

Testator  Person who makes a will.

top-down approach
An approach to investing in which the investor first look's at general trends in the economy and then chooses specific industries and particular companies that will benefit from these broad trends.

Total return The return on your investment which takes into account the change in price, plus dividends or interest you receive. The total return for a fund reflects changes in net asset value and reinvestment of all distributions in additional shares of the fund.

Transfer agent (also known as registrar) An institution, used by an issuer of shares to maintain its shareholder records and perform all account transactions.

Treasury bill, bond, note Negotiable debt obligations issued by the US government and backed by its full faith and credit. Treasury bills are short-term securities with maturities of one year or less. Treasury notes are intermediate-term securities with maturities of one to 10 years. Treasury bonds are long-term securities with maturities of 10 years or longer.

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

Trust A legal arrangement under which an individual (settlor/trustor) gives fiduciary control of property to a person or institution (trustee) for the benefit of a beneficiary.

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

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

Turnaround A sharp, positive reversal in the performance of a company, industry, or the entire economy. One of the tenets of value investing is the search for turnaround situations.

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U
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.

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.

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

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V
Valuation Putting a value on a security in relation to other securities.

value investing Investing in companies whose shares appear to be undervalued by the market at large.

Vesting  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.

Volatility
Changes in the price of a security. Rapid, wide price swings indicate a high degree of volatility.  Also referred to as risk or standard deviation in returns.

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W
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.

Will
  (Last will and Testament)
A statement by a person as to how their property is to be distributed or disposed of on their death.

X
x Appears next to a unit trust or share listing in the newspaper to indicate that the fund recently paid a capital gain or dividend. This amount was previously included in the fund's net asset value and is deducted from the net asset value when it is paid out. The "x" stands for "ex-dividend".

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Y
Yield The rate at which a security distributes income, expressed as a percentage of the current price. For example, if a fund distributes $1 per share over the year and at the end of the year the price is $20, its yield is $1/$20, or 5%. Yield is an important measure of performance for income funds and individual bonds.

Yield curve A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux, and one of the key activities in managing any income-orientated unit trust is to study trends reflected by comparative yield curves.

Yield spread The variation between yields on different types of debt securities; generally a function of supply and demand, credit quality, and expected interest-rate fluctuations. Treasury bonds, for example, because they are so safe, will normally yield less than corporate bonds. Yields may also differ on similar securities with different maturities. Long-term debt, for example, carries more risk of market changes and issuer defaults than shorter-term debt and thus usually yields more.

Yield to maturity The annual return on a bond, assuming the bond is held until its maturity date. Unlike current yield, this takes into consideration the purchase price, redemption value, time to maturity, coupon yield, and time between interest payments.

Z
Zero coupon bond A security that pays no interest but is instead sold at a deep discount from face value. The holder receives the rate of return through the gradual appreciation of the security, which is redeemed at maturity for the full face value.

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