Account-Based Pension (Allocated Pension) - Now referred to as an "Account Based Pension" or simply as a "Pension", is a type of retirement income arrangement under which an individual invests a lump sum and then draws down a regular annual payment. The minimum annual pension payment is currently between 4%–10% per annum depending on the age of the recipient, and the maximum is 100% of the account balance.

 

Accumulation Fund - A superannuation fund which generally accepts both employer and personal contributions. These might be regular or lump sum which is then invested into the various asset classes to generate earnings subject to that particular asset class (in contrast to a "Defined Benefit Fund").

 

Active - A style of investment management that seeks to attain returns above a set benchmark through the continual adjustment of asset allocation and stock selection. The weightings of the individual stocks reflect the convictions of the Manager rather than just replicating the relevant index.

 

All Ordinaries Index - A share price index measuring the market price of the major stocks listed on the Australian Stock Exchange. It is made up of share prices of approximately 500 of the largest Australian companies on the ASX (the number of companies varies depending upon compliance with the criteria for inclusion). Stock exchanges in other countries have similar indices such as the Dow Jones Index (New York) and FTSE.

 

Annuity - An arrangement under which periodic payments are made to a person in return for the investment in a lump sum, usually for the purpose of providing retirement income.

 

APRA - Australian Prudential Regulation Authority

 

Australian Securities and Investment Commission (ASIC) - ASIC is a government body responsible under the Corporations Law for regulating companies, the issue and sale of shares, trust units, company borrowings, investment advisers and dealers.

 

Australian Securities Exchange (ASX) - Australian Stock Market

 

Australian Taxation Office (ATO) – Australian Taxation Office

 

AWOTE - Average Weekly Ordinary Time Earnings

 

Bear Market - A bear market is a falling market. A "bear" is a person that is generally pessimistic about the market outlook, anticipates further losses and is motivated to sell.

Blue Chip Stocks - The shares of a leading company which is known for its excellent management and strong financial structure. The term has become a generic one for quality securities.

 

Bonus Dividend - An abnormal dividend declared out of profits. If paid in cash, it is regarded as an increment to the normal dividend and is unlikely to be repeated in future periods.

 

Bonus Shares Issue - A bonus issue is a free issue of shares to shareholders as an additional reward for investing in the company. Generally, a bonus issue will cause the existing share price to fall as the value of the company's assets is now spread over a larger number of shares.

 

Bull Market - A bull market is a rising market. A "bull" is a person who buys securities in the expectation that prices will rise and so give him/her an opportunity to resell at a profit.

 

Business Cycle - Investment decisions are based on the identification and analysis of economic trends and the impact of those trends on the value of investments. The weighting of different types of investments within a portfolio and the nature of specific holdings within an asset class depend upon the current position of the economy within its business cycle.

 

Capital Gains Tax - Capital gains tax is the tax payable on the profit from the sale of capital assets such as shares.

 

CHESS - CHESS is the Clearing House Electronic Subregister System. It is the System established and operated by the Settlement and Transfer Corporation for the following purposes: the clearing and settlement of transactions in CHESS-approved securities; the transfer of securities; the registration of transfers; and the establishment and administration of CHESS subregisters.

 

Complying Funds - A superannuation fund which complies with the operating standards specified in the SIS Legislation and is thereby eligible to receive concessional taxation treatment.

 

Concessional Contribution - Contributions made by or for an individual that receive concessional tax treatment (previously referred to as taxable/deductible contributions).

 

Contrarian - A style where the manager believes that they can add value by taking a different view to the market consensus.

 

Contributions Tax - A tax levied on certain contributions to superannuation funds, currently 15%.

 

Cum Dividend - Cum means 'with'. Shares quoted cum dividend entitle the buyer to the current dividend. The price of the shares will usually reflect the amount of the dividend. Similarly, shares 'cum rights' entitle the buyer to participate in the new issue of shares.

 

Debt/Equity Ratio - Shows the relationship between funds provided by borrowing and funds provided by shareholders. The debt/equity ratio shows to what extent a company is financed by debt (also called the gearing or leverage ratio). Debt/Equity ratio = (total debt / shareholder equity) x 100

 

Defined Benefit Fund - A superannuation fund that uses a formula to calculate the retirement benefit based on average salary and years of service or membership in the fund (in contrast to an "Accumulation Fund").

 

Derivatives - A derivative is an instrument that derives its value from an underlying instrument (such as shares, share price indices, fixed interest securities, commodities, currencies etc). Warrants and exchange traded options are types of derivatives.

 

Diversification - The spreading of investment funds among classes of securities, localities, investment styles and among different fund managers, in order to distribute and control risk. Simply "Don't put all your eggs in one basket".

 

Dividend - A distribution of profits to the shareholders of a company, usually paid in cash and normally expressed as cents per share. When a dividend is paid more than once a year, dividends other than the final dividend are called interim dividends. Typically, dividends are paid twice a year, one interim and one final dividend.

 

Dividend Cents Per Share - Dividend in cents per share, paid by the company to the shareholders. It is paid from company profits and can vary from year to year.

 

Dividend Imputation - The Australian tax rule that enables shareholders to claim a tax credit for the tax that a company has already paid on its profit. Dividends that include the right to a tax credit are called 'franked'.

 

Dividend Yield - The dividend return on the investment calculated by dividing the dividend rate by the market price of the share and converted to a percentage.

 

Earnings Before Interest and Tax (EBIT) - A key measure of the financial performance of a company. It is similar to net profit, except that the effects of tax and interest are factored out, providing a better measure of a company's underlying performance.

 

Earnings Per Share - Earnings per share is the net profit after tax divided by the number of shares on issue. It does not necessarily represent the amount distributed to shareholders.

 

Equities - Another term for shares.

 

Equity - The interest or value which an owner has in an asset over and above the debt against it. For example, a homeowner has equity in that part of the value of his or her house above the amount borrowed from a lender.

 

Ex Dividend - Securities are quoted 'Ex-Dividend' four business days before a Company's Record Date to determine shareholders entitled to the dividend. Shares sold 'Ex-Dividend’ entitles the seller to retain the dividend then current.

 

Franked Dividend - A franked dividend is paid by a company out of profits on which the company has already paid tax. The investor is entitled to an imputation credit, or reduction in the amount of income tax that must be paid, up to the amount of tax already paid by the company.

 

Fundamental Analysis - Analysis of individual shares based on factors, which are essential to the performance of the company in question. The company's financial statements are examined, and economic, political and industrial factors are also taken into account in an attempt to predict earnings and risk. This is then considered in light of current share prices to ascertain a mispricing.

 

Growth Portfolio - An investment portfolio which aims to achieve an above average rate of after–tax income and capital growth over the medium to long term, while adopting a medium risk profile.

 

Income Portfolio - A portfolio consisting of securities whose principal attractiveness lies in the steady income they provide.

 

Index - Structuring a portfolio so that it closely replicates a nominated market index e.g. the All Ordinaries Index.

 

Market Capitalisation - The market value of a company, calculated by multiplying the number of shares on issue by the market price of these shares at a given point in time.

 

Net Tangible Assets (NTA) - This refers to the net physical assets owned by a company at balance date. It is used to calculate the asset value per share, by indicating what would happen if all net assets were liquidated, debts repaid and then the remainder divided up amongst shareholders on a cents per share basis.

 

Non-Concessional Contribution - Personal contributions to a superannuation fund for which a tax deduction has not been claimed. Formerly known as Undeducted Contributions.

 

Option - An option is a contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell an underlying asset at a particular price on or before a particular date.

 

Ordinary Shares - The most commonly traded security in Australia. Holders of ordinary shares are part-owners of a company and may receive payments called dividends, if the company trades profitably. Ordinary shares have no preferential rights to either dividends out of profits or capital, on the winding up of a company.

 

Passive - A style of investment management that can also be described as "buy and hold", that is the manager tends to maintain a portfolio's composition and not make judgements concerning ongoing asset allocation and stock selection. This style of management is often associated with an "index" manager, where the portfolio is only changed when the composition of the index changes.

 

PE Ratio - The number of times the earnings per share is covered by the share price. It is commonly used to measure how attractive a share is to investors, and to compare shares in one company with another. The lower the ratio relative to the average of the sharemarket, the lower the (market's) profit growth expectations. Calculated by: Market price of shares / Earnings per Share = P/E Ratio.

 

Preservation - The maintenance of superannuation benefits or eligible termination payments in superannuation or rollover funds until a condition of release is met.

 

Return - The amount of money received annually from an investment usually expressed as a percentage.

 

Return on Assets (ROA) - In analysing shares as investments, return on assets is calculated to show how much profit a company is making on the assets used in its business. Return on assets = (Earnings before interest & tax / Total assets) ×100.

 

Return on Equity (ROE) - In analysing shares as investments, return on equity is calculated to show the return the company has made for shareholders on their investment. Shareholders' equity normally excludes intangible assets such as goodwill, and is calculated by deducting total liabilities and intangibles from total assets. Return on equity = (After-tax profits / Shareholders' equity) ×100.

 

Rights Issue - An offer of additional shares to existing shareholders, in proportion to their holding, to raise money for the company. Shares are often offered below the current market price. The shareholder does not have to take up the offer. If not taken up the offer will lapse, unless it is renounceable. In that case, the shareholder can sell or transfer his or her right to the shares.

 

Risk - In its simplest sense, "the variability of returns". Investment with greater inherent risk must promise higher expected yields if investors are to be attracted to them.

 

Rollover - The transfer of an eligible termination payment into an approved deposit fund, deferred annuity or superannuation fund prior to retirement in order to defer or, if the rollover remains in place until at least minimum retirement age, avoid the requirement to pay lump sum tax.

 

Salary Sacrifice - The portion of the pre–tax salary of an employee that is given up in exchange for additional contributions by the employer to the employee's superannuation.

 

Spouse Contribution - A contribution made on behalf of the spouse. The contributions will be treated as a non–concessional contribution and will be part of the persons preserved benefit.

 

Superannuation Guarantee (SG) - A compulsory minimum contribution for most employees. Serves as a means of setting aside funds during ones working life to provide a retirement income, under a regulatory system which provides certain taxation incentives and prudential controls for the benefit of contributors.

 

Superannuation Guarantee Charge (SGC) - A charge payable to the government by employers who fail to make their required Superannuation Guarantee contributions to employees. 9% since the 2002 – 2003 Financial Year.

 

Transition to Retirement Income Stream - This condition of release allows members who have reached their preservation age, but who do not wish to retire permanently from the workforce to access their superannuation in the form of a non commutable pension.

 

Value - A management style that utilises different measures, e.g. price/earnings ratio and dividend yield to determine a "fair value" for an individual stock. The manager then buys and sells appropriately as the market value moves below or above that "fair value".

 

Warrants - A warrant is a financial instrument issued by banks and other institutions and is traded on the Australian Stock Exchange's equity market. Warrants may be issued over securities such as shares in a company, a currency, an index or a commodity.