Investment Dictionary

Investment and financial terms explained

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

TERM	EXPLANATION
ABS	Often a bond, the value and cash flows of which are derived from a pool of specific assets, such as loans, mortgages and credit cards.
Absolute (returns)	A measure of the gain or loss on an investment portfolio or security expressed as a percentage of invested capital. Absolute return differs from relative return because it looks at the return of a particular asset in isolation and does not measure it against a benchmark.
Absolute return strategy	Aim to achieve positive returns across all stock market conditions, regardless of whether prices are rising or falling. In managing such a strategy, investment managers employ a range of techniques including the short-selling of securities and the use of derivatives.
Accommodative (monetary policy)	A government policy of increasing the money supply in an economy in order to lower interest rates so that they reach a level which stimulates borrowing and economic growth.
Accountability (company)	Companies are accountable to their shareholders. In addition, certain companies (e.g. banks, investment firms and utilities) are responsible to their regulators in respect of their financial health and the levels of services to customers.
Accrued interest (bonds)	Interest that has accumulated, and is recognised from an accounting perspective, since the last coupon payment of a bond.
Accumulation Fund	Another term for defined contribution fund.
Accumulation shares	Units or shares where the net income from dividend payments is re-invested rather than distributed to unitholders / shareholders.
Active investment management (funds)	Where a fund manager seeks to enhance returns through effective stock selection, asset allocation and currency selection decisions.
Added value (funds)	The additional return over a benchmark that is delivered by a fund manager's skill, knowledge and expertise. Also see 'alpha'.
ADR	American Depository Receipts are a way for American investors to hold foreign stocks. They are issued certificates representing shares of non-US companies held on deposit and in trust. They are listed on US stock exchanges, or can be traded over the counter, and priced in US dollars.
Adviser	A person or authorised representative of an organisation licensed by ASIC to provide advice on some or all of these areas: investing, superannuation, retirement planning, estate planning, risk management, insurance and taxation.
AGM	Public companies are required by law to hold an Annual General Meeting which all shareholders are entitled to attend. The business of AGMs, at which all shareholders may vote, includes the approval of the company's financial statements and the election/re-election of directors. AGMs also provide an opportunity for shareholders to question the directors on the company's performance and other issues.
AI	Interest that has accumulated, and is recognised from an accounting perspective, since the last coupon payment of a bond.
All Ordinaries Index	An index measuring movements in the price (capital) of the major shares listed on the Australian Stock Exchange.
Allocated pension	A type of retirement income arrangement under which an individual invests a lump sum and then draws down an annual pension to a value that takes account of expected cash flow needs and life expectancy. If the drawdown is greater than investment earnings, then part of the initial lump sum is used to make up the difference. Unlike a traditional pension or annuity, an allocated pension can therefore provide the retiree with continual access to the capital sum invested. It also allows any balance to be passed on to beneficiaries upon the death of the individual concerned.
Alpha	The excess return of a fund relative to the return on its benchmark.
Alternative investments	Investments which do not fall into the traditional categories of bonds, cash and bank deposits, and equities. Examples include commodities, hedge funds and private equity.
American Depository Receipts	American Depository Receipts are a way for American investors to hold foreign stocks. They are issued certificates representing shares of non-US companies held on deposit and in trust. They are listed on US stock exchanges, or can be traded over the counter, and priced in US dollars.
Amortisation	An accounting term which permits a company to reduce the value of an intangible asset over its expected life.
Annual General Meeting	Public companies are required by law to hold an Annual General Meeting which all shareholders are entitled to attend. The business of AGMs, at which all shareholders may vote, includes the approval of the company's financial statements and the election/re-election of directors. AGMs also provide an opportunity for shareholders to question the directors on the company's performance and other issues.
Annual Management Charge (funds)	The annual fee levied on fund holders to cover the costs of managing the fund. It is calculated as a percentage of the value of the fund.
Annualised	A term applying to the conversion of a rate given over a specified period of time to an annual basis, i.e. an investment producing an actual return of 15% over five years would have produced an annualised return of 2.8%.
Annuity	An arrangement under which periodic payments are made to a person in return for the investment of a lump sum, usually for the purpose of providing retirement income. Each periodic payment received by the annuitant is a portion of the original lump sum, plus interest.
Appreciation	Generally, an increase in the value of an asset; (b) in terms of foreign exchange transactions, the rise in the value of a currency in relation to another currency or currencies.
ASEAN	The Association of South East Asian Nations. Established in 1967 with the objectives of improving economic co-operation between members. It comprises 10 countries of this rapidly growing region: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
Ask price	The price at which a security or asset is offered for sale to a buyer.
Asset	Any owned item of value.
Asset allocation (funds)	The apportionment of an investment portfolio between different asset classes/geographical markets. The proportion in each asset class will be determined by a fund's benchmark, its objectives and its risk profile.
Asset class	Broad groups of investments with similar characteristics. Examples include bonds, equities, property, cash and alternatives.
Asset consultant	A professional person engaged by investors, such as superannuation fund trustees, to advise on appropriate investment strategies, asset allocation, and selection of investment managers.
Asset price bubbles	The term 'bubble' refers to an episode where the price of a financial asset rises significantly, often in response to speculation, which results in the asset trading at a substantial premium to its intrinsic value. When the bubble bursts, the price of the financial asset falls sharply leaving investors with reduced wealth. This may impact discretionary spending and hinder economic growth. Central banks attempt to keep an eye on asset price appreciation and take measures to curb high levels of speculative activity which may make prices vulnerable to a sudden correction. The term 'bubble' was first used in 1720 in reference to the South Sea Bubble Crisis and more recently has been applied to Japan in the 1980s and even 'dot-com' companies in the late 1990s.
Asset value	The value of the assets underpinning a security. These may not be fully reflected in the price of a security. See also net asset value.
Asset-backed security	Often a bond, the value and cash flows of which are derived from a pool of specific assets, such as loans, mortgages and credit cards.
At the money (option)	An option is said to be 'at the money' if its exercise price equals the market price of the underlying asset.
Attribution analysis	The process by which the return on an investment portfolio is attributed to its manager's investment decisions. Typically performance is attributed to decisions regarding stock selection, asset allocation, and active market timing. An attribution analysis will show whether the managed decisions have added or detracted value in the portfolio.
Australian Prudential Regulation Authority	The Australian Prudential Regulation Authority (APRA) oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998.
Australian Securities & Investments Commission	Australian Securities & Investments Commission
Australian Securities Exchange	The principal exchange for trading in shares, bonds, and certain other securities in Australia. The Australian Securities Exchange Limited commenced operations in 1987, replacing the previous state-based exchanges. The ASX was initially established as a mutual organisation owned by individual stockbrokers and stockbroking firms, but in October 1996 its members elected to demutualise the Exchange and convert it into a listed company. The demutualisation took effect in October 1998. Web site: www.asx.com.au

B

TERM	EXPLANATION
B2C	Where businesses, for example internet retailers, deal directly with end-customers.
Back office	In relation to financial institutions this could be defined as the engine room where a host of administrative and support operations take place. These include processing of transactions, investment technology and legal/regulatory functions.
Bad debt	Amounts owed by a debtor which cannot or are unlikely to be repaid since the debtor has fallen into bankruptcy, or the cost of retrieving the debt would exceed its value.
Balance of payments	An accounting record of all international transactions made by a country over a certain period, comparing the value of goods and services exported with the value of those imported from overseas.
Balance of trade	A country's exports minus its imports — the largest component of its balance of payments.
Balance sheet	In financial accounting, this is a summary of a company's assets (what it owns), liabilities (what it owes) and shareholders' equity at a given date. It forms an essential part of a company's statutory accounts. It is often said to provide a snapshot of a company's financial position.
Balance sheet repair	The process by which a company strengthens its financial position, by reducing excessive levels of debt via the sale of superfluous assets and/or raising new capital via the issue of new shares to shareholders.
Balance sheet shrinkage	Similar to balance sheet repair, this involves a company downsizing its business, often due to the disposal of assets in order to reduce debt levels.
Balanced fund	An investment portfolio that spreads its holdings over a range of asset classes, which typically include shares, fixed interest, property, overseas securities, and cash. As opposed to sector specialist funds, which invest solely in one asset class.
Baltic Dry index	This index tracks rates for shipping bulk dry cargoes (e.g. grain and iron ore) for international routes. It is calculated daily and is influenced by the strength of world trade and the availability of shipping capacity.
Bank Bill	A bill of exchange of which the acceptor or endorser is a bank. If the bank is the acceptor, the bill is known as a 'bank accepted bill' and the bank effectively guarantees the lender repayment of the face value. If the bank is the endorser, the bill is known as a 'bank endorsed bill'.
Basel III	The Basel Committee on Banking Supervision is the international regulator for the banking sector. Its Basel III directive, published in February 2011, is designed to prevent a recurrence of the 2008-09 banking crisis by requiring banks to hold higher minimum levels of capital and to accept more stringent regulation.
Basis point	A term which is commonly-used within financial markets to describe small percentage changes. 1 basis point equals 0.01%.
Bear	An investor who believes that an individual asset price or market is about to fall.
Bear Market	A market whose overall level has fallen for an extended period. Traditionally, a 20% fall in a market index constitutes a Bear Market.
Bear squeeze	In a rising market, a trader who has gone short of a stock may be forced to buy it back in order to prevent further losses.
Bear trap	False signs that a rising trend in a stock price or stock market index has been reversed when it has not.
Beige book	The report produced ahead of each interest rate setting meeting of the US central bank (the Federal Reserve). Comprising contributions from each of the regions within the US, it provides an insight into a wide range of economic activities. It is recognised as an authoritative guide to the state of the US economy.
Benchmark	The standard against which a fund's performance is measured. A benchmark can be an index which matches the fund's strategic objective.
Beta	A measure of the volatility of a security or a fund relative to the market as a whole. A beta of greater than 1 implies that the security or fund will be more volatile than the market.
Bid price	The price at which a buyer is willing to buy a security. Varies with time, asset liquidity and levels of demand.
Bid/offer spread	The difference between the buying and selling prices of securities.
Black swan event	An unpredictable event which has a great impact on society or financial markets. Such events include natural disasters (like the ash cloud grounding all flights in Northern Europe in 2010) and man-made occurrences, such as 9/11. The term derives from European explorers' first sightings of black swans in Australia. Prior to this, only white swans were thought to exist.
Blue chip company	A long-established, stable and typically large cap company.
Bond	Bonds are a type of loan made by a lender to a borrower. They are issued by governments, supranational organisations and companies for a predetermined period of time (the 'term') after which the loan should be repaid (or 'redeemed') in full. Interest is usually paid twice yearly to bondholders at a fixed rate (known as the 'coupon'). Unlike bank loans, bonds are traded on recognised exchanges.
Bond vigilantes	Investors in bonds who pay particular attention to policies that could be deemed to be inflationary or increase default risk. Inflation erodes the value of capital and interest payments on bonds, since these tend to be fixed. Therefore, higher inflation will tend to push bond prices lower.
Bottom-up	An approach to investment which concentrates on using detailed analysis of companies to identify attractive stocks with less regard to the economies and industries in which they operate. The opposite of top-down.
Bps	A term which is commonly-used within financial markets to describe small percentage changes. 1 basis point equals 0.01%.
BRIC	An acronym based on the initial letters of the names of the four largest emerging markets: Brazil, Russia, India, China. The term was first coined in 2002 by Jim O'Neill, chief economist at Goldman Sachs. Since then it has become synonymous with the growth potential offered by emerging markets.
Bricks and mortar	A modern term for a business located in or serving consumers from a physical facility as opposed to those providing remote or online services.
Broad-capitalisation	A spread of large and small company investments, as measured by market capitalisation. Can refer to an index or a fund containing usually a large number of holdings. Such diversification is a key method of risk limitation.
Budget deficit	The shortfall in the amount of a government's income compared with the amount it spends in a fiscal year. The shortfall, which must be funded by borrowing, can be expressed as a percentage of a country's GDP.
Budget surplus	The amount by which a government's annual income (from taxes and asset sales) exceeds the amount it spends in a fiscal year.
Bull	An investor who believes that the price of an individual asset or market level is set to rise.
Bull Market	A market whose level has risen for an extended period. Traditionally, a market which has risen by 20% can be described as a Bull Market.
Business-to-business	Defined as transactions between companies conducted on a wholesale basis.
Business-to-consumer	Where businesses, for example internet retailers, deal directly with end-customers.
Buy Order (application)	To apply for new units in an mFund product from the mFund issuer via the unit registry.

C

TERM	EXPLANATION
Call option	An option giving the holder the right to buy an agreed amount of an asset on a future date at a pre-determined price.
Callable bond	A bond where the issuer has the option to redeem the bond prior to the date of maturity.
Cap	An upper price limit. A restrictive measure putting an upper price limit on an investment.
CAPEX	A model that describes the relationship between risk and expected return. The model recognises that investors need to receive a sufficient level of return to be compensated for both the time value of money and for the risk of investing in that asset within the context of the wider market.
Capital Asset Pricing Model	A model that describes the relationship between risk and expected return. The model recognises that investors need to receive a sufficient level of return to be compensated for both the time value of money and for the risk of investing in that asset within the context of the wider market.
Capital buffers	Amount of capital that a bank is required to hold by the regulator in order to limit risk.
Capital expenditure	Defined as investment by companies and other bodies on long-term physical assets, like buildings, plant and machinery, which are to be used for productive purposes. Companies look to finance such spending from internal resources or from the issuance of equity or long-term debt in the form of corporate bonds.
Capital gain/loss	The difference between the purchase price of an asset and the price at which it is sold.
Capital markets	A generic term for equity and bond markets and markets for other financial securities. The capital markets undertake two functions: a primary one - raising long-term capital - and a secondary one - a trading forum for the buying and selling of existing securities.
Capital ratio	A measure of the financial strength of a bank, expressed as a ratio of its capital to its assets. A high capital ratio indicates that the bank is in a relatively strong position to withstand the effects of bad debts and financial strain.
Capital value	The total worth of an investment or asset.
Capitalisation (cap)	The total value of a company on the stock market. It is calculated by multiplying the share price by the number of shares in issue.
Cash	Generally, a country's coin and note currency in circulation; (b) one of the investment asset classes that is available on short notice or 'at call'.
Cash flow	This measures the movement of cash inflows into and cash outflows out of a company. Inflows comprise income (from operating profits and asset sales), amounts raised for investment. Outflows comprise expenses (taxes etc) and expenditures. Cash flow statements are closely monitored by analysts for the information they provide on company performance.
Cash flow return on investment	A widely used valuation measure, it reflects the importance that investors attach to a company's cash flow and is regarded as a more accurate measure of its performance than profits.
Cash management trust	A pooled investment vehicle for investors who would not individually have access to the professional money market. By pooling funds from various sources, larger volumes of higher yielding short-dated securities can be purchased, thereby decreasing the cost of transactions, and thus resulting in higher returns to the trust members. CMTs generally restrict themselves to negotiable instruments of a duration of no longer than 12 months. As these securities are highly liquid, a CMT can accommodate cash flows, both in and out, on a daily basis, thereby offering small investors a flexibility not present in a traditional fixed rate term deposit.
CD	A note of receipt issued by a commercial bank for funds deposited. A CD pays a fixed amount of interest and has a set date of maturity, usually of one year or less.
CDO	A security where a pool of fixed income assets of different credit quality are packaged together and new securities are created using the interest and capital repayments from the underlying bonds. These new securities are sliced into different levels of risk, or tranches. The highest quality tranche takes priority in terms of interest and capital repayments and hence carries the lowest interest. As the risk on each tranche of the CDO increases, so do the potential interest payments.
CDS	A type of derivative that insures against the possibility of default on a bond. Credit default swaps are a good proxy for the market's perception of the default risk associated with an individual issuer. An increase in the value of a CDS reflects a higher chance of expected default.
Ceiling	A restrictive measure putting an upper price limit on an investment. Also known as a cap.
Central banks	Banks that provide banking services to the government of a country and its commercial banking system. Their responsibilities can vary from country to country but typically include control of inflation, maintaining the security of the banking system and the regulation of financial markets. Leading central banks include the Bank of England, the European Central Bank and the US Federal Reserve.
Certificate of deposit	A note of receipt issued by a commercial bank for funds deposited. A CD pays a fixed amount of interest and has a set date of maturity, usually of one year or less.
CHESS	The ASX Clearing House Electronic Subregister System. ASX’s settlement system for the cash equity, related markets and mFund transactions. It is also a subregister of all CHESS holdings maintained on CHESS HINs.
Chinese A-shares	Chinese shares, quoted in Renminbi on the Shanghai or Shenzin stock exchanges, which are usually only available to be bought and sold by Chinese investors. Overseas fund managers are limited to Chinese H-shares and Red Chips.
Chinese H-shares	Shares of Chinese companies which are listed on the Hong Kong stock exchange where they can be bought and sold by international investors.
Clean price	The price of a bond excluding accrued interest.
Closed-ended fund	A managed fund with a fixed number of shares, which provides shareholders with a professionally managed portfolio of investments.They do not allow investors access to withdrawals until a pre-determined period is passed and all assets are sold and proceeds distributed.
Closing price	The share price at the time of market closure each day.
Collateral	This is a specific asset which is pledged to a lender by a borrower as security for a loan. Such loans are described as 'secured.' In the event of a borrower falling into default the lender may assume ownership of the asset. A residential mortgage is typically secured on the house being purchased.
Collateralised debt obligation	A security where a pool of fixed income assets of different credit quality are packaged together and new securities are created using the interest and capital repayments from the underlying bonds. These new securities are sliced into different levels of risk, or tranches. The highest quality tranche takes priority in terms of interest and capital repayments and hence carries the lowest interest. As the risk on each tranche of the CDO increases, so do the potential interest payments.
Collateralised loan	Similar to collateralised debt obligations, but based on loans rather than bonds and not ordinarily transferable.
Collective investment scheme	A generic term for open-ended funds and closed ended funds. By pooling the money of a large number of investors, collective investment schemes enable small savers to access the services of professional investment managers.
Commercial mortgage	A mortgage used to finance the purchase of a property intended for business purposes.
Commercial mortgage backed securities	Usually bonds that are backed by mortgages on commercial property.
Commercial paper	An unsecured short-term debt instrument with a maturity of anything up to 270 days.
Commercial property	Non-residential property such as offices, shops, shopping centres, warehouses, farms and industrial units, which would be ordinarily used for business activities.
Commodities	Primary products or raw materials used for consumption purposes by a range of end users. The main categories are: oil and gas, base metals, precious metals and agricultural products (including food and raw materials, such as cotton). Prices of commodities are determined by supply and demand, with trading taking place on regulated markets such as the Chicago Mercantile Exchange.
Compounding (of income)	Term for income generated by an asset (dividends for equities and coupons for bonds) which, when reinvested, generates its own return.
Consumer discretionary (stock)	Stocks in sectors such as carmakers, leisure, retail and restaurants which are affected by variations in the levels of discretionary consumer spending. They are relatively exposed to downturns when consumers can delay purchases, particularly of big ticket items.
Consumer price index	Often abbreviated to CPI, this is an index composed of a wide range of everyday goods and services, which is used to determine the rate of inflation. CPI data is generally published on a monthly basis. In the UK and elsewhere it is used to determine increases in state pensions and other payments.
Consumer staples (stock)	Stocks in sectors such as beverages, food, household goods and tobacco where demand is fairly steady and relatively little affected by economic downturns. These sectors can be dominated by large multinational groups. They are regarded as defensive stocks.
Convertible (bond)	A bond which offers the holder the right to convert into the underlying shares of a company at a pre-determined price and date. Due to this option, the price of a convertible bond is subject to movements in both the bond and equity markets.
Core inflation	A measure of inflation which excludes categories, such as food and energy, which are subject to fluctuations. Compared to headline inflation data, such as CPI and RPI, core inflation is said to provide a more reliable guide to the underlying inflation rate.
Corporate bond	A bond issued by a company, rather than a government. The price of the bond is influenced by the company's financial health as well as the outlook for interest rates and inflation. Corporate bonds are seen as higher risk than government bonds because of the greater risk that companies will default on their obligations to pay interest or repay the bond's principal amount on maturity.
Corporate governance	A set of customs, policies and laws affecting the way in which companies are directed and controlled. It encompasses the relationship between the company and its shareholders, directors, employees and other stakeholders. Following a number of company failures, institutional investors have stepped up their oversight of the way that companies are directed and controlled, focusing particularly on accountability, fair treatment of all shareholders and the remuneration of directors.
Corporate health	An expression that indicates a company's level of profitability as well as the strength of its finances.
Corporate responsibility	Also known as corporate social responsibility (CSR), this embraces responsibility for a company's actions. Whilst a company's prime responsibility is to its shareholders, it is widely recognised that it also has a broad responsibility to other stakeholders. These may include employees, customers, suppliers and the communities in which the company's operations are located. CSR also encourages a company to undertake activities that will have a positive impact on the environment.
Coupon rate	The amount of interest payable on a bond. It is fixed at the date of issue and usually remains the same throughout the life of the bond. The term 'coupon' derives from the original bond certificate where coupons, one for each scheduled interest payment covering a number of years, were printed on the certificate. At the due date the bondholder would physically detach the coupon and present it for payment of the interest.
Covenant	A covenant is a formal agreement or restriction which prevents a bond's issuer from taking action that could unexpectedly increase the bond's risk prior to its maturity. It may forbid the issuer from undertaking certain actions, such as the sale of an asset on which the bond is secured, or force the early repayment of a bond in the event of a takeover or merger.
CPI	An index composed of a wide range of everyday goods and services, which is used to determine the rate of inflation. CPI data is generally published on a monthly basis. In many countries, it is used to determine increases in state pensions and other payments.
Credit crunch	A situation which occurs when there is a lack of liquidity in the financial system which results in banks becoming unwilling or less able to lend money.
Credit default swap (CDS)	A type of derivative that insures against the possibility of default on a bond. Credit default swaps are a good proxy for the market's perception of the default risk associated with an individual issuer. An increase in the value of a CDS reflects a higher chance of expected default.
Credit quality	An estimate of a bond's default risk, usually based on its credit rating.
Credit rating	Credit ratings are an evaluation of the ability of a bond's issuer to meet their financial obligations. Credit ratings are formally awarded by agencies, such as Standard & Poor's (S&P), Moody's and Fitch, who closely monitor the circumstances of bond issuers, making changes where appropriate. Credit ratings range from the highest rating of AAA with S&P, which implies there is minimal risk of default, to D, where issuer is in default. Not all bonds have a credit rating - such bonds are called 'non-rated.'
Credit rating agency	The three main credit rating agencies are Standard & Poor's (S&P), Moody's and Fitch. Each of these agencies monitors a bond issuer's financial circumstances to ascertain its ability to meet its debt obligations.
Credit spread	The difference in yield between a corporate bond and a government bond with the same characteristics, such as maturity and coupon. The credit spread measures the perceived difference in default risk between the two bonds.
Cross holdings	When listed companies hold stakes in other listed companies.
Crossover bond/credit	A bond that is on the cusp between investment grade and sub-investment grade status.
CSR	Also known as corporate social responsibility (CSR), this embraces responsibility for a company's actions. Whilst a company's prime responsibility is to its shareholders, it is widely recognised that it also has a broad responsibility to other stakeholders. These may include employees, customers, suppliers and the communities in which the company's operations are located. CSR also encourages a company to undertake activities that will have a positive impact on the environment.
Cumulative (return)	The change in value of an asset over a specific period, assuming all income is re-invested. For example, if a fund produced a total return of 6% in year one, 8% in year two and 10% in year three, the cumulative return over the three years would be 25.9%.
Current yield	The annual gross income on a bond or share expressed as a percentage of the bond or share's current market price.
Cycle	A recurring pattern of behaviour or events, typically from individuals, markets and economies.
Cyclical stock	Shares in companies engaged in activities which are sensitive to fluctuations in the economic cycle. Sectors such as construction and retail fall into this category.

D

TERM	EXPLANATION
De-listing	The removal of a company's shares from listing on the stock exchange. This may occur because the company has failed to comply with the exchange's rules, or no longer meets listing requirements, for example because it has been taken over.
Dealer	An individual who places orders to buy or sell securities.
Debenture	A type of debt security backed by the general credit of the issuer and not by a specific security.
Default	To be unable to meet outstanding obligations, such as the interest payments or capital repayments on a loan.
Default rate	The percentage of borrowers who default on the interest or capital payments on their debt.
Default risk	The risk that a bond's issuer will be unable to make its interest or principal repayments.
Defensive asset	Typically cash or fixed interest investments that are generally low risk and less volatile than growth investments.
Defensive stock	Shares in companies engaged in activities where demand remains relatively stable throughout all phases of the economic/business cycle. Sectors in this category include healthcare and utilities.
Defined Benefit Fund	A superannuation fund in which the benefits to be paid to the member are defined before the member's retirement. The benefit is usually expressed as a proportion of the member's salary on retirement. In these funds it is generally the company or sponsor of the fund, rather than the member, that carries the risk as to the ability of the fund to meet its liabilities. See also defined contribution fund, accumulation fund.
Deflation	A fall in the general level of prices for goods and services over an extended period.
Deleverage	The process of reducing debt by governments, businesses or individuals.
Demographics	The study of human populations, particularly their size, structure and distribution. The importance of these trends is widely recognised by investors. A growing population, especially if increasing numbers are becoming more prosperous, is recognised as a key source of rapid economic growth. This is a particular feature of emerging countries. By contrast, most developed countries have an ageing population profile which creates problems of dependency.
Depression	A period of severe and prolonged recession (as in the early 1930s), characterised by reduced economic activity, high unemployment and falling prices.
Deregulation	The end or reduction of government control over a particular area of activity with the objective of promoting competition and efficiency.
Derivative	A tradable security, the value of which is derived from the actual or expected price of an underlying asset. Futures, options and swaps are all types of derivatives. Underlying assets can include bonds, commodities, currencies, equities, market indices and interest rates.
Devaluation	A substantial and often extended decline in the value of a currency relative to another currency or groups of currencies. Devaluations can be deliberately engineered - planned by governments for policy reasons - or can occur for economic reasons.
Developed markets	Financial markets of advanced industrial countries which typically offer investors relative economic stability, effective regulation and high standards of corporate governance.
Developing economies	Economies such as Brazil, China and India which are characterised by rapid growth but low GDP per capita relative to levels prevailing in the US and other developed economies.
Dirty price	The price of a bond including accrued interest.
Discount (NAV)	Shares in property companies and investment trusts are valued in relation to their underlying net asset values (the total value of all assets less liabilities). When the net asset value per share is below its market price it is said to stand at a discount.
Discount (price)	The difference between the market price of a bond and its principal or par value when its market price is below its principal value.
Discounting	A mathematical process that calculates the present value of an investment from a stream of expected future payments.
Disposable income	The level of household income available for spending on a discretionary basis once taxes and all other prior calls on gross income have been met. 'Real' disposable income also takes into account the rate of inflation.
Distribution units/fund	Holders of this class of securities receive net income declared by the funds in the form of cash.
Distribution yield (bond funds)	The distribution yield estimates the cash distribution to the shareholders: in addition to expected cash income, it includes the amortised annual value of unrealised capital gains/losses of current bond holdings, calculated with reference to their historic purchase price and expected redemption value (known as 'effective yield from purchase price' method).
Diversification	Well diversified portfolios contain a range of securities spread across a number of different asset classes, geographical regions, countries, sectors and stocks.
Dividend	The payment to shareholders from company profits usually after all other calls (e.g. interest charges and tax) have been met. Dividends, which are declared on a quarterly, six-monthly or annual basis, can be paid in cash or in the form of new shares. Dividends form an important part of returns to shareholders.
Dividend cover	A measure of the sustainability of a company's dividend payment. It is calculated by dividing earnings per share by the dividends per share.
Dividend imputation	A tax rule under which tax paid at the company level is credited to individual shareholders. Dividend imputation affects the valuation of the sharemarket for taxable investors.
Dividend yield	This is the calculated by dividing the dividend per share by the share price.
Dodd-Frank legislation	Named after the two Congressmen who piloted the act through Congress, this legislation, passed in July 2010, represents a broad based attempt to prevent a repetition of the 2007-09 US banking crisis. Principal measures, including improvements on transparency and accountability, strengthened market oversight, as well as limits on bank holdings of hedge equity funds and on proprietary trading, are aimed to ensure financial stability. In addition, a new agency was established to ensure better protection for consumers.
Domestic demand	Demand for goods or services generated in a company's home market.
Double-dip recession	A return to negative economic growth following a period of apparent recovery from an earlier recession.
Dove	An individual, particularly a member of a central bank committee responsible for determining monetary policy, who favours a less rigorous approach to inflation using monetary policy.
Dow Jones Industrial Average	A widely used US stock market indicator. It is a price-weighted average of 30 actively traded blue chip companies listed on the New York Stock Exchange (NYSE).
Downgrade	When a bond's credit rating is lowered to reflect a more risky outlook for the issuer, implying a higher risk of default.
Duration	A widely used measure of the riskiness of a bond or a portfolio of bonds, duration is a measure of the sensitivity to changes in interest rates. The higher the duration of a bond, the greater the expected price movement following a change in the prevailing level of interest rates.

E

TERM	EXPLANATION
Earnings per share	This is a measure of a company's profitability. It is calculated by dividing a company's net earnings by the total number of shares in issue.
Earnings yield	A measure of the value of a company's earnings that can easily be compared with the yield on government bonds. It is calculated by dividing the earnings per share after tax and interest payments by the market price and multiplying by 100. The resulting percentage figure is the earnings yield.
Economic and Monetary Union	The process by which prospective members of the Euro area sought to harmonise their economies in preparation for the euro's launch in 1999.
Economic cycle	A recurring pattern of economic behaviour.
ECU	The European Currency Unit was an artificial unit of currency used for accounting purposes derived from a basket of the currencies of the European Community member states. It was used as the unit of account of the European Community before being replaced by the Euro on January 1 1999.
Efficient frontier	A line created from the risk-reward graph comprised of optimal portfolios. The optimal portfolios plotted along the curve have the highest return possible for the given amount of risk.
EMEA	An acronym for Europe, the Middle East and Africa.
Emerging markets	Financial markets (bonds and equities) based in emerging economies such as Brazil, China and India which, although not having reached the levels of developed markets, feature improving liquidity, market efficiency, accounting standards and securities regulation.
Equity	The ownership of a company is vested in its equity or issued share capital, with each shareholder, however small, owning part of the company and entitled to a share of its profits, normally distributed through dividend payments declared by the company. They are also entitled to receive its annual report and accounts and to attend and vote at AGMs. The terms 'equities' and 'shares' are interchangeable.
ESM	A permanent rescue funding programme which is due to succeed the temporary European Financial Stability Facility (EFSF) in mid-2013. It is intended that the ESM will complement a new framework of reinforced economic governance, aiming at an effective and rigorous economic surveillance, which will focus on prevention and will substantially reduce the probability of a crisis arising in the future.
Establishment fee	A one-off fee which may apply to set up a personal or other loan.
Ethical investment	Managers of ethical funds focus on companies pursuing sustainable objectives concerning social, environmental and ethical issues and avoid those involved in areas, such as gambling and tobacco, which may be considered to be harmful.
European Central Bank	European Central Bank; The central bank for Europe's single currency, the euro, which was established in 1999. Its main task is to maintain the euro's purchasing power and ensure price stability. Its monetary committee, consisting of members from all member states, meets on a monthly basis to determine the level of interest rates required to control inflation.
European Currency Unit	The European Currency Unit was an artificial unit of currency used for accounting purposes derived from a basket of the currencies of the European Community member states. It was used as the unit of account of the European Community before being replaced by the euro on January 1 1999.
European Financial Stability Facility	A Luxembourg-registered company created by euro area member states. In conjunction with the IMF, this fund provides emergency assistance to Eurozone members which would otherwise be unable to meet their financial commitments. So far, Greece, Ireland and Portugal have sought bail-outs. Funding is mainly provided by Germany and other financially-robust Eurozone countries.
European Stability Mechanism	A permanent rescue funding programme which is due to succeed the temporary European Financial Stability Facility (EFSF) in mid-2013. It is intended that the ESM will complement a new framework of reinforced economic governance, aiming at an effective and rigorous economic surveillance, which will focus on prevention and will substantially reduce the probability of a crisis arising in the future.
Ex-date	The date from which the buyer of a security forgoes the next dividend or coupon payment. Instead, this is received by the seller of the security.
Ex-dividend	If a share or bond is purchased ex-dividend, then the seller is entitled to the next dividend or coupon payment.
Ex-dividend date	The date from which the buyer of a security forgoes the next dividend or coupon payment. Instead, this is received by the seller of the security.
Exchange Traded Funds	These are investment funds, shares of which trade on stock exchanges. Usually based on an index or basket of securities, they cover an expanding range of asset classes (including bonds, equities and alternative assets), together with a number of investment themes. ETFs are a relatively new category of securities. Key attractions include low dealing and management charges.
Exercise price	The price at which an option can be exercised. For put options this is the price at which an investor can sell the underlying asset, while for call options the exercise price is the price at which an option holder can buy the underlying asset.
Extraordinary General Meeting	These are required when an extraordinary resolution is to be voted on by shareholders. Such resolutions may refer to important issues such as a change in the company's objectives or the issue of a large number of additional shares to finance a large acquisition.

F

TERM	EXPLANATION
Face value	The amount stated on the face of a bond certificate. This is the sum the holder will receive when the bond matures. It is also known as 'nominal value' or 'principal value'.
Fair value	The price at which an investment is deemed to be neither over-priced nor undervalued, taking into account objective and subjective factors.
Fallen angel	Bonds issued by companies whose credit rating has been downgraded from investment grade to sub-investment or 'junk' status. Investors whose mandate limits them to holding only investment grade securities are likely to be forced sellers.
Fannie Mae	The nickname of the Federal National Mortgage Association, Fannie Mae was established in 1938 as part of Franklin Roosevelt's New Deal. A government-sponsored enterprise, Fannie Mae's role was to create a secondary market in mortgages, guaranteeing them and providing stability and liquidity for home loan firms.
Fed	US Federal Reserve System. The central bank of the United States. Established in 1913, its objectives are to maintain a stable monetary and financial system, low inflation and to promote healthy levels of employment.
Fed funds rate	The rate of interest set by the US Federal Reserve which banks may charge on their reserves held by the Fed when using them as short-term loans to other authorised depository institutions.
Fiduciary	A person or organisation entrusted with the responsibility of managing, holding, or investing assets in the best interests of the owner of the assets. Trustees of superannuation funds are fiduciaries for members of their funds.
Financial market	A generic term for the markets in which financial securities are traded; for example, stock exchanges, futures exchanges, currency markets.
Financial Services Guide	A guide that contains information about the entity providing you with financial advice. It should explain the financial service offered, the fees charged and how the person or company providing the service will deal with complaints.
Fiscal drag	Periods of rising prosperity and increasing incomes result in higher tax revenues for the government, even if tax rates remain unchanged. This is termed fiscal drag and is said to serve as a restraining influence to prevent the economy overheating.
Fiscal policy	Government spending and taxation policy.
Fiscal stimulus	Governments have the power to stimulate growth during times of recession by a combination of tax cuts and increasing public spending, funded by higher borrowings.
Fiscal surplus	The amount by which the government's revenues from taxes and asset sales exceeds its spending in any given year.
Fitch	One of the main three credit rating agencies.The other two being Moody's and Standard & Poor's.
Fixed income	Refers to a style of investing where securities, such as most bonds, pay predetermined and fixed rates of interest (coupon) at regular intervals.
Fixed interest security	Refers to securities, typically bonds, which pay a predetermined and fixed rate of interest (coupon) over a defined period and returns the nominal amount of capital lent to the company or entity at the end of the life of the security.
Fixed investment	Investment in physical assets, such as building, plant and machinery, which provide the means for a company to increase production or improve productivity.
Fixed rate	A rate of interest that is predetermined and does not change.
Flat rate	A pricing structure that charges a single fixed rate fee for services, regardless of frequency of usage. Often associated with tax, where one rate is applicable to everyone in an economy.
Floating rate	A rate of interest that varies according to movements in another factor, such as interest rates.
Floating Rate Note	A debt instrument or bond with a variable interest rate. Most floating rate notes have a rate of interest that is linked to the prevailing level of interest rates plus an additional spread, e.g. LIBOR + 0.25%. This is the reference rate. The size of the spread will depend on the credit quality of the issuer. Floating rate notes tend to pay coupons on a quarterly basis. The size of the coupon is determined at the start of each coupon period using the reference rate. The coupon is reset to a new level for each new coupon period.
Floor	A lower price limit.
Flotation	Another term for new issuance of securities on the stock exchange.
FOMC	Federal Open Market Committee. The group which sets US interest rate policy.
Forex	An abbreviation for the Foreign Exchange Market, where currencies are traded on an international basis. Trading in leading currencies, the US dollar, the euro, sterling and the Japanese yen, is conducted on a huge scale.
Forward contract	A contract between two parties to buy/sell an asset on a specific future date at a price agreed today.
Franked dividend	Dividends on shares with imputation credits attached. A company is able to declare that a percentage (up to 100%) of a dividend is franked, depending on the amount of tax the company has already paid. If a company pays the full company tax rate, the dividends are fully franked.
Freddie Mac	Freddie Mac is the colloquial name for the Federal Home Loan Mortgage Corporation. Set up in 1970, Freddie Mac is a government-sponsored enterprise the purpose which, like Fannie Mae, is to expand the secondary market for mortgages in the US.
Front office	This is the customer-facing part of an organisation associated with marketing and sales functions which require direct contact with customers. Fund managers and analysts will make up a significant part of the front office in an investment management organisation.
Frontier markets	The financial markets of the poorest and least developed emerging countries. Frontier markets have lower capitalisation and liquidity than the more developed emerging markets and are typically pursued by investors seeking high returns and low correlations with other markets. The implication of a country being labelled as frontier is that, over time, its market will become more liquid and exhibit similar risk and return characteristics to the larger, more mature emerging markets.
FTSE	A company, jointly owned by the Financial Times and the London Stock Exchange, which is a leading provider of stock market indices. The FTSE 100 Index, which comprises the hundred largest companies quoted on the London Stock Exchange, is the most widely recognised UK stock market index.
Fund manager	An organisation that specialises in the investment of a portfolio of securities on behalf of individuals and organisations, subject to the guidelines and directions of the investor. Fund managers offer pooled investment products and individual portfolios to a range of investors including superannuation funds, institutions, and individuals.
Fund of funds	A fund which invests in a range of other funds. Funds of funds enable investors to gain access to a wide range of investments at once.
Fundamental analysis	Analysis of the performance of a company, focusing on a wide-ranging number of aspects relating to its record and potential, including sales, profits and its financial health. This exercise is carried out by investment analysts who then relate the potential of the company to its valuation.
Fundamentals	The basic facts based on statistical data, reports and other sources of information which may be used to evaluate the performance of economies and companies.
Futures	Futures are contracts between two parties to buy/sell a specific amount of an asset at a specific future date at a price agreed today. Futures may be traded on regulated exchanges.

G

TERM	EXPLANATION
G20	G8 countries plus leading emerging economies such as Brazil, China, India, Indonesia, Korea and Mexico. G20 meetings now form a more important policy-making forum than those of the G7 and G8.
G7	The Group of Seven Leading Industrial Countries. These are Canada, France, Germany, Italy, Japan, the UK and the US. Together they account for around half of total world GDP.
G8	The G7 countries plus Russia.
Gearing	A general term for a technique to multiply gains and losses or, more strictly, the ratio for a company's debt compared to its total assets.
Generally Accepted Accounting Principles	A set of accounting rules established and recognised by international accounting authorities.
Geopolitical	The combination of geographic and political factors influencing a country or region.
German bunds	Bonds issued by the German government.
Gilt/gilt-edged security	Bonds issued by the UK government. The term 'gilts' derives from the original certificate which was gilt-edged. Gilts are usually issued with fixed coupons, or interest payments, although some may have these payments linked to the level of inflation - these are known as 'index-linked gilts'.
Glass-Steagall Act	Taking its name from two members of the US Congress, this Act of 1933 sought to set in place a tough regulatory structure to prevent a recurrence of the banking crisis which followed the 1929 Wall Street Crash. One of its key proposals was the separation of deposit-taking banks from those involved in investment banking. This separation was maintained until the Act was repealed in 1999.
Global Industry Classification Standards	GICS is an enhanced industry classification system jointly developed by Standard and Poor's and MSCI. It classifies companies around the world according to the main business operation. The GICS system consists of four levels of classification: ten sectors, twenty-three industry groupings, fifty-nine industries, and 122 sub-industries.
Globalisation	The integration of national economies into the international economy through trade, capital flows, investment, deregulation and labour movement. The process is being facilitated by infrastructure development, technology and faster communication.
Goldilocks economy	A term which implies that a country's economic growth is steady and consistent and that there is no immediate danger of it becoming overheated and inflationary or sluggish and deflationary. The term has its roots in the well known children's story where Goldilocks chooses the porridge which is just right, neither too hot nor too cold.
Goods & Services Tax	A tax on individual goods or services that is added on to the price of those goods or services. Goods and services taxes are often advocated as a means of increasing savings in the economy as an alternative to income taxes, which are perceived to penalise savings and to reward spending. Also known as consumption tax or, in some countries, value added tax.
Government bond	A bond that is issued by a government.
Great Depression	This term is generally used to describe the period in the early 1930s when much of the world endured an extended period of economic contraction, high unemployment and falling prices.
Gross	Value before the deduction of tax or fees, etc.
Gross Domestic Product	A commonly-used indicator of the strength of a country's economic activity. GDP stands for Gross Domestic Product, and measures the value of all final goods and services produced within that country. Usually calculated on a quarterly basis, it indicates the size of an economy and the extent to which a country's economic activity is expanding or contracting.
Gross Redemption Yield (bond funds)	The most widely used measure to compare the value offered by different bonds. Gross Redemption Yield is a measure of a bond's future return if it is held until maturity. It is expressed as a percentage and takes into account the time value of money, accrued interest and any capital gain or loss on redemption.
Growth stock	A share in a company with a record of consistent above-average growth in sales and profits which the market believes is set to continue.
Guidance	Publicly traded companies report their results at least every six months for large companies. These announcements are usually accompanied by a meeting at which analysts can discuss the company's trading prospects. In addition, the company's chief executive often gives a broad indication of the outlook for the company's prospects over the near future. This is termed 'guidance'.

H

TERM	EXPLANATION
Hang Seng index	The Hang Seng Index is the main index used to track the Hong Kong stock market. It gauges the changes in the share prices of 46 companies, accounting for some 60% of the total capitalisation of that market.
Hard currency	The currency of a country with a robust economy and a credible record of controlling inflation and limiting the level of public sector debt, which is accepted worldwide as a form of payment for goods and services. The Swiss franc is a good example.
Hawk	A member of the policy making body of a central bank who favours a strict approach to keeping inflation under control.
Headline inflation	The rate of inflation based on a wide-ranging basket of goods and services. It is distinct from 'core' inflation which excludes cyclical elements such as energy and food.
Hedge funds	A generic term for funds pursuing a range of strategies involving a wide variety of assets and the use of debt and derivatives to enhance returns. Hedge funds originated in the US in the 1940s and have become very popular since the 1990s.
Hedging	Techniques used by investors to limit risk due to adverse price movements in assets. More specifically the use of derivatives to protect or minimise a potential loss from an existing position. Hedging is widely used to protect the value of overseas investments from fluctuations in currencies.
High alpha	A term used to describe an investment strategy that aims to deliver performance that is significantly above that of a targeted benchmark.
High yield (bond)	A bond with a credit rating below BBB with Standard and Poor's.
Hot money	In a world where there are few restrictions on the flow of enormous volumes of capital from one country to another, the term 'hot money' applies to capital flows from investors in a country where investment prospects are unexciting to another where the prospects are better or where interest rates are higher. For the recipient country, this can lead to issues such as a rapid escalation in asset prices.
Housing starts	The number of new residential construction projects begun during a specific period of time. Together with the level of mortgage approvals and house price trends, housing starts are used as an indicator of economic health.
Hybrid bond	A security, typically a convertible bond, that combines characteristics of both bonds and equities. Hybrid bonds pay a known (fixed or floating) coupon until a certain date, at which point the bondholder may have a number of options including converting the securities into the underlying share.

I

TERM	EXPLANATION
Illiquid	Markets or securities where trading volumes are low or where trading is impossible due to a total loss of confidence by market participants.
IMF	International Monetary Fund. An international agency, established in 1947. Its primary functions are to promote international monetary cooperation, exchange-rate stability, to foster economic growth and employment, reduce poverty and to provide temporary financial assistance to countries in order for them to make balance of payments adjustments. 187 countries currently belong to the IMF, with the majority of funds used to provide emergency assistance being subscribed by the US and other wealthy nations. The IMF also produces well-researched reports on the outlook for the world economy and on the outlook for individual countries.
Imputation credit	Taxation credits that are passed on to shareholders who have received franked dividends in relation to their shareholdings. See also dividend imputation.
Indemnity	A legal agreement under which one party agrees to pay for losses incurred by another.
Index	A statistical measure of change calculated by various providers such as FTSE and MSCI, an index consists of a number of securities in a specific asset class (e.g. equities, bonds, commodities etc). It serves as a benchmark for funds investing in those areas. Indices can be broad, like the FTSE All-Share Index (UK equities) or more narrowly focused on specific sectors.
Index-linked bonds	Bonds which offer a degree of inflation protection since its coupon and principal are linked to the level of inflation rather than being fixed in value.
Indirect Cost Ratio (ICR)	ICRs measure the total indirect costs of managing a fund and includes management costs. Indirect costs can include performance fees, investment-related legal, accounting, auditing and other operational and compliance costs. The aggregation of these indirect costs are divided by the average net asset (this being the size) of the fund and presented as a percentage.
Individually managed portfolio	Investment portfolio managed according to a separate investment mandate.
Inflation	An increase in the general level of prices of goods and services in the economy. A core function of central banks is to pursue policies which ensure that inflation remains low.
Inflection point	A significant change to the fortunes of a market or company, based on a key change in fundamentals, which results in a significant upgrade or downgrade in outlook. In graphical form, an inflection point can be seen as a sudden change in the trend of a graph.
Information ratio	The information ratio (IR) tells an investor how much excess return is generated from the amount of excess risk taken relative to the benchmark. It is frequently used by investors to set portfolio constraints or objectives for their managers, such as tracking error limits or attaining a minimum information ratio. The IR is calculated by dividing the portfolio’s mean excess return relative to its benchmark by the variability of that excess return. The difference between the Sharpe ratio and the IR is that the IR aims to measure the risk-adjusted return in relation to a benchmark. The Sharpe ratio by contrast is a forward-looking ratio to determine what reward an investor could expect for investing in a risky asset versus a risk-free asset
Infrastructure	Long-term assets the purpose of which is to provide key services (e.g. transport facilities, utilities) for the efficient working of a country's economy and the wellbeing of its citizens.
Initial Public Offering	IPOs usually represent the initial flotation on the stock market of shares in a company which had hitherto been unlisted.
Interbank lending	A wholesale market by which banks lend money on a short-term basis (often overnight) at the prevailing market rate (the interbank rate) to other banks. In Australia, the rate is known as the Interbank Overnight Cash Rate.
Interest	The additional amount charged by a lender to a borrower.
Interest cover	A measure of a company's ability to pay the interest on its debt. It is calculated by dividing a company's earnings before interest and tax by its interest charge.
Interest rate risk	The risk that a movement in interest rates will affect the value of a financial instrument, especially a bond. Duration is one way of measuring this risk.
International Monetary Fund	International Monetary Fund. An international agency, established in 1947. Its primary functions are to promote international monetary cooperation, exchange-rate stability, to foster economic growth and employment, reduce poverty and to provide temporary financial assistance to countries in order for them to make balance of payments adjustments. 187 countries currently belong to the IMF, with the majority of funds used to provide emergency assistance being subscribed by the US and other wealthy nations. The IMF also produces well-researched reports on the outlook for the world economy and on the outlook for individual countries.
Inverted yield curve	If longer dated bond yields are lower than short-term bond yields then the yield curve is said to be 'inverted', negatively or downward sloping. This implies that investors expect interest rates to fall
Investment grade (bond)	A bond with a credit rating provided by rating agency Standard & Poor's that is BBB or higher.
Investment Manager	The entity that manages the investment aspects of the portfolio including investment strategy. The entity can be the same or separate from fund issuer (RE).
Investment trust	An investment company with a fixed share capital, which provides shareholders with a professionally managed portfolio of investments. Their shares are traded on the stock market.
IPO	IPOs usually represent the initial flotation on the stock market of shares in a company which had hitherto been unlisted.
Irredeemable stock	A bond with no set redemption date.

J

TERM	EXPLANATION
J-curve	A type of diagram where the curve falls at the outset and eventually rises to a point higher than the starting point, suggesting the letter J. While a J-curve can apply to data in a variety of fields, the J-curve effect is most notable in both economics and private equity funds. A demonstration of this would be the trend in a country's balance of trade following a currency devaluation. Initially, this leads to a deterioration in the trade balance due to the impact of higher import prices and lower prices for exports. However, after a while, a lower exchange rate will tend to make exports more competitive and, with imports more expensive, will result in an improvement in the balance of trade.
Junk bond	A bond with a credit rating provided by rating agency Standard & Poor's that is below BBB.

TERM

EXPLANATION

J-curve

A type of diagram where the curve falls at the outset and eventually rises to a point higher than the starting point, suggesting the letter J. While a J-curve can apply to data in a variety of fields, the J-curve effect is most notable in both economics and private equity funds. A demonstration of this would be the trend in a country's balance of trade following a currency devaluation. Initially, this leads to a deterioration in the trade balance due to the impact of higher import prices and lower prices for exports. However, after a while, a lower exchange rate will tend to make exports more competitive and, with imports more expensive, will result in an improvement in the balance of trade.

Junk bond

A bond with a credit rating provided by rating agency Standard & Poor's that is below BBB.

K

TERM	EXPLANATION
Keynes (John Maynard) (1883-1946)	One of the most influential economists of the 20th century. The founder of Keynesian economics, which advocates that governments should influence economic behaviour through intervention in order to achieve full employment and price stability.

L

TERM	EXPLANATION
Lagging indicator	Economic variables that tend to follow movements in the economy as a whole; for example, trade figures. Publication of lagging indicators confirms things that have already happened rather than pointing to emerging trends.
Large cap	Companies of large size as defined by their capitalisation (number of shares in issue X share price), listed on a stock exchange.
LBO	The purchase by private equity interests of a company using both equity and debt.
Leading indicators	Data which provides an indication of how an economy is likely to develop in the future.
Leverage	A general term for any technique to multiply gains and losses. A common way to attain leverage is to borrow.
Leveraged buy-out	The purchase by private equity interests of a company using both equity and debt.
Leveraged loans	Securities which can be bought and sold like a bond, these are loans where the borrower already has above-normal amounts of debt. As such, they carry a higher risk of default and, therefore, pay a higher rate of interest. Leveraged loans are often used to fund a management buy-out.
Liabilities (current)	Debts and other obligations owed to another party.
Liabilities (future)	A payment which must be made in the future. For example, pension funds have liabilities for the payment of pensions when their members retire.
LIBID	London Interbank Bid Rate.
LIBOR	London Interbank Offered Rate. The interest rate used when one bank borrows from another. LIBOR is often used as a reference point for the pricing of other financial products.
Liquidation	The process by which a company is brought to an end (or wound up) and its assets distributed to those with a claim on it. Liquidation can be either voluntary or compulsory when it is imposed by creditors as a means of securing monies owed.
Liquidity (cash)	Another term for cash. Often used to describe the amount of cash held within a fund.
Liquidity (in dealing)	A word describing the degree with which transactions in a particular security can be undertaken without the action affecting the security's market price.
Liquidity crisis	A state of affairs in which access to liquidity becomes constrained or non-existent, resulting in financial institutions being unable to meet their commitments. This occurred during the banking crisis of 2008-09.
Listed	Listed securities are those that have been accepted to be traded on a regulated stock exchange after having satisfied the authorities of their financial strength and credibility.
Local currency	The currency of the country in which the investor or fund is domiciled.
Long position	An excess of purchases over sales of the relevant commodity, currency, or investment instrument. For example, if a trader is said to be long on yen, then he or she has bought Japanese yen. Opposite of short position.
Long-dated bond	A bond with a final maturity date of 15 years or more.
Long-only fund	A fund which cannot 'go short' stocks.
Long/short funds	Funds which can both hold stocks that the manager believes will increase in value and go short of (sell without owning) others considered overvalued and likely to fall in price.
Loosening (fiscal)	A government policy aimed at stimulating recovery during times of recession. This can include increases in public spending and cutting taxes.
Loosening (monetary)	The action of central banks in cutting interest rates or resorting to quantitative easing (printing money to buy assets) in order to stimulate an economy.

M

TERM	EXPLANATION
M&A	The term used to describe the acquisition of one company by another or the merger of two companies. An acquisition involves the acquirer buying all the shares in the target company at an agreed price, with payment in the form of cash or new shares in the acquiring company.
M1	Also termed 'narrow money', a measure of money supply which takes into account coins and notes in circulation, together with short-term deposits.
M4	Also termed 'broad money', a measure of money supply which takes into account M1 assets plus longer term time deposits and money market funds.
Macaulay duration	The weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price, and is a measure of bond price volatility with respect to interest rates, the metric is named after its creator, Frederick Macaulay. Together with modified duration, Macaulay duration is frequently used by portfolio managers to estimate the sensitivity of thier investments to movements in interest rates.
Macroeconomics	A branch of economics concerned with 'big picture' aspects; for example, national or global trends in economic growth or inflation.
Managed Fund	An investment fund where your money and that of other investors is pooled and used to buy assets such as cash, shares, bonds and listed property trusts. The fund is managed by a fund manager.
Managed Investment Scheme	A type of investment vehicle that pools the assets of multiple investors into a single vehicle with a common investment objective and strategy. The investor's interests in the managed investment scheme are recognised as a security and are regulated in Australia under the Corporations Law, administered by the Australian Securities and Investments Commission. The definition of managed investment scheme encompasses a variety of investment products including property trusts, equity trusts, cash management trusts, and certain agricultural investment schemes. Sometimes also called collective investment schemes.
Management buy-out	The acquisition of a company or subsidiary of another company by its existing managers, usually in conjunction with external funding from a private equity fund.
Management Fee	An amount payable for administering the fund. Typically the cost is deducted from returns before allocation to the fund.
Marginal tax rate	Describes the burden ratio (usually expressed as a percentage) at which a business or person is taxed.
Market capitalisation	The total value of a company on the stock market. It is calculated by multiplying the share price by the number of shares in issue.
Market cycle	A business cycle concerned specifically with rises and falls in market activity. Market cycles generally correspond to the economic clock, with periods of heavy purchasing indicating growth and periods of heavy selling indicating recession.
Market maker	Dealers are said to be making a market in a given security when they quote a buy price and a sell price at the same time.
Market risk	Risk that relates to the market as a whole and therefore cannot be diversified away simply by holding a greater variety of securities within that market. See also systematic risk.
Market value	The current value of an item or security, as opposed to its book value.
Mature markets	Long established financial markets of advanced industrial countries (e.g. the UK) with steady, rather than dynamic, rates of economic growth.
Maturity (date)	The date on which a loan, bond, mortgage or other debt/security is due to be repaid.
MBO	The acquisition of a company or subsidiary of another company by its existing managers, usually in conjunction with external funding from a private equity fund.
Medium-dated bond	A bond with a final maturity date of between five and 15 years.
Mega cap	The very largest companies listed on a stock exchange.
MENA	An acronym for the Middle East and North Africa.
Mergers and Acquisitions	The term used to describe the acquisition of one company by another or the merger of two companies. An acquisition involves the acquirer buying all the shares in the target company at an agreed price, with payment in the form of cash or new shares in the acquiring company.
mFund CHESS holding	An investor’s electronic fund units sponsored by an ASX Participant and maintained by the mFund issuer through its unit registrar.
mFund issuer	A product manufacturer of funds that has been admitted by ASX under the ASX Operating Rules to settle funds through the mFund Settlement Service.
mFund product	An unlisted managed fund admitted under the ASX Operating Rules that investors can invest in through the mFund Settlement Service via their stockbroker or adviser.
mFund Profile	An information sheet providing key features and important information about an mFund. This document does not replace the full PDS.
mFund Settlement Service	The core service that enables the automation of settlement of purchases (applications) and sales (redemptions) for unlisted managed funds on ASX, using CHESS.
Microeconomics	Economic analysis dealing with individual companies or markets and their impact on the economy, as opposed to macroeconomics, which focuses on broader influences and trends.
Mid cap	Companies with a stock market value which is below the level which would qualify them for inclusion in the leading stock market index. In Australia, the top 50-100 stocks are considered to be mid-caps
Mid price	The price that is equidistant between the bid price and the offer price of a quoted security. It is the price which appears on the table of stock market prices in the financial pages of newspapers such as the Daily Telegraph.
Modern portfolio theory	A well regarded theory on how risk-averse investors can construct portfolios in such a way as to produce optimum returns for a given level of market risk. It emphasises that risk is an inherent part of investment returns. According to the theory, it is possible to construct an 'efficient frontier' of optimal portfolios offering the maximum possible expected return for a given level of risk.
Modified duration	Measured in years, modified duration is a measurement of a bond's sensitivity to movements in interest rates. For example, a bond with a modified duration of 5.2 years can be expected to undergo a 5.2% movement in price for each 1% movement in interest rates. The longer the modified duration (in years), the more sensitive a bond's price to changes in interest rates.
Momentum	An indication of the strength of a trend, momentum signals the likelihood of a continuation in an existing price movement. For example, the tendency for rising asset prices to rise further, and falling prices to keep falling. There are various ways to measure momentum, but most involve volume in some way.
Monetary policy	A way of influencing the pace of economic activity by controlling the availability and cost of money. Generally the responsibility of central banks, this is carried out mainly through varying the level of interest rates.
Monetary Policy Committee	The committee of the Bank of England responsible for setting the level of base rates in order to meet a specific inflation objective. Established in 1997, the committee consists of nine members and meets monthly.
Money market funds	Funds that invest in cash deposits or short-dated securities, such as commercial paper and floating rate notes. By pooling the cash of many savers, they enable investors to typically earn a higher return than would be offered on short-term deposits by a bank.
Money supply	The total amount of money circulating in the economy, defined by M1 and M4 measures. Central banks are charged with control of money supply, an excess of which is said to lead to higher inflation.
Moody's	One of the main three credit rating agencies. The others being Standard & Poor's and Fitch.
MPC	The committee of the Bank of England responsible for setting the level of base rates in order to meet a specific inflation objective. Established in 1997, the committee consists of nine members and meets monthly.
Multi-manager funds	Funds which invest in a range of other funds, managed by different specialist managers. They enable investors to gain access to a wide range of investments.
Municipal bond	A US bond issued by a city, local government or their agencies.

N

TERM	EXPLANATION
Nasdaq	Now a proper noun in its own right, NASDAQ stood for 'National Association of Securities Dealers Automated Quotations'. It is an electronically based US stock market and it also lends its name to a series of indices which are heavily biased towards companies in the information technology and biotech areas.
National Guarantee Fund	This Fund covers investors in certain cases of broker misconduct, where those investors have traded shares and some other investment products on the stock exchange.
Negative gearing	The purchase of an investment using borrowed funds, where the interest on the borrowing is greater than the income derived from the investment. For tax purposes, this negative net income can be offset against income gained from other sources. Negative gearing is most often associated with purchases of investment real estate, but can also apply in the case of shares or managed investments.
Negatively-sloped (yield curve)	If longer dated bond yields are lower than short-term bond yields, then the yield curve is said to be 'inverted', negatively or downward sloping. This implies that investors expect interest rates to fall.
Net	Value after all deductions.
Net Asset Value	Often abbreviated to NAV, it is calculated by subtracting the total value of a company's balance sheet liabilities (amounts it owes) from its assets. The NAV per share, which is calculated by dividing the NAV by the total number of shares in issue, is a key valuation measure used by analysts particularly in evaluating shares in property companies and investment trusts.
Net profit	The profit earned by a company less expenses. See also earnings before interest and tax.
New issue	Any type of security issued to raise additional money.
Nikkei 225	The Nikkei 225 Index is the most commonly used index for the Tokyo stock exchange.
Nominal (value)	In the case of bonds, the principal or face value of which will be repaid at maturity.
Nominal return	The rate of return in simple monetary terms, unadjusted for any change in inflation. A nominal interest rate of 10% is a real rate of only 6% if inflation at the time of measurement is 4%.
Non-cyclical/defensive stock	Shares in companies engaged in activities which are relatively insensitive to changes in the fortunes of the economy. Sectors such as healthcare and utilities come into this category.
Non-government bond	A bond issued by a non-government issuer. Usually this is a company or a supranational organisation, like the World Bank. The price of the bond is influenced by the issuer's financial health as well as the outlook for interest rates and inflation. Non-government bonds are normally seen as higher risk than government bonds because of the greater risk that issuer will default on their obligations to pay interest or repay the bond's principal amount on maturity.
Non-rated	Bonds that do not have a formal credit rating. That is not to say that they are of lower credit quality, rather that the bond's issuer has decided not to pay for a credit rating agency to assign a rating to its bonds.
Normal yield curve	If longer dated bond yields are at a higher level than short-term bond yields then the yield curve is said to be of a normal shape, or positively-sloped. In a normal economic environment, uncertainty about the future direction of interest rates and inflation will mean that it is natural for investors to demand an additional return to invest their money for longer periods of time. This results in a gentle increase in yields as the maturity date of the bond lengthens.
NYSE	New York Stock Exchange. The oldest US stock exchange, founded in 1817, merged with Euronext NV in 2007 to become NYSE Euronext.

O

TERM	EXPLANATION
Offer price	The price at which an investor is able to buy a security.
OPEC	The Organisation of Petroleum Exporting Countries was founded in 1960 by leading oil producers. Its objectives are to co-ordinate policies in order to maintain prices, revenues and the supply of oil to consumers.
Open market operations	Direct intervention by central banks to ensure financial stability by buying or selling government bonds in secondary markets.
Open-ended fund	A type of managed fund that has no limit to the number of shares in issue. If demand is high, new shares are created. When selling occurs the manager buys back units.
Optimal portfolio	The portfolio that best meets an investor's needs and risk and return expectations among the range of all feasible portfolios.
Options	An option gives the holder the right, but not the obligation, to buy (termed a 'call option') or sell (termed a 'put option') an asset at fixed price in the future.
Ordinary shares	Securities that represent an ownership interest in a company. If the company has also issued preference shares, both have ownership rights. The preference shareholder normally is limited to a fixed dividend, but has prior claim on dividends and, in the event of liquidation, assets. Ordinary shareholders assume the greater risk, but generally exercise the greater control and may gain the greater reward in the form of dividends and capital appreciation. If the company is wound up, the ordinary shareholders rank behind secured creditors, including debenture holders, in the liquidation process.
Organisation for Economic Co-operation and Development (OECD)	This organisation was established in 1961 and currently consists of 34 member countries with relatively well developed economies. Its main purpose is to assist member states in the development of policies to promote sustainable development. The OECD also produces regular reports on the state of the world economy.
OTC	Direct trades between a buyer and a seller rather than via the stock market.
Outperformance	Achievement of a higher investment return than a benchmark or other measure (for example, competitor portfolios) against which that return is being compared. Opposite of underperformance.
Output gap	The difference between the productive capacity available for a country's economy and the amount being used. The gap typically widens during recessions.
Over the counter	Direct trades between a buyer and a seller rather than via the stock market.
Overweight	Having a greater exposure to a particular sector or stock in an investment portfolio, compared with a neutral or benchmark position. Opposite of underweight.

P

TERM	EXPLANATION
P/E ratio	Perhaps the key measure used by analysts of a company's value relating to its share price and profitability. It is calculated by dividing the share price by the earnings per share, trailing or forecast.
Par	Par value is the amount to be returned to a bond holder on the redemption date. It is also known as 'face value'. When the price of a bond equals its face value, it is said to be trading at 'par'.
Partly paid shares	Shares that contain uncalled capital, being additional funds (equity) that the issuing company can require to be paid from time to time as per the terms of the issue.
Passive investment management	Passive funds seek to track the returns from a given market index. Passive fund managers use various methods, such as sampling, to replicate the returns on the index and do not seek to generate outperformance through active stock or asset allocation decisions. As such, investment management costs are lower than for actively managed funds.
Payroll tax	A state government tax on businesses, levied on the basis of the size of the payroll of the business.
PDS	A PDS or Product Disclosure Statement is a document that financial service providers must provide to investors when they recommend or offer a financial product. It must include information about the product's key features, fees, commissions, benefits, risks and the complaints handling procedure.
Pension fund	A superannuation fund in which benefits are payable as an income stream during retirement rather than (or as well as) by way of a lump sum payment; (b) the term used in the UK and USA for retirement savings plans generally; in other words, the US equivalent of superannuation funds.
Percentile	A statistical measure representing the ranking of a particular figure or outcome on a scale comprising 100 equal groups. See also quartile.
Peripheral Eurozone economies	Eurozone countries towards the edge of the Eurozone, including Greece, Spain, Portugal, Italy and Ireland. Many of these countries are characterised by their relatively large budget deficits and high levels of government borrowing in relation to their levels of GDP. While they benefitted from above-average rates of growth in the decade following the introduction of the euro, many of these countries are now experiencing below-par growth following the imposition of austerity measures to reduce their levels of borrowing.
PIIGS	An acronym for Portugal, Ireland, Italy, Greece and Spain.
Placing	The sale of shares by a company on a stock exchange made to selected individuals or institutions for the purpose of raising money. Unlike an issue that is open to all investors, they do not require prior approval from shareholders.
PMI	Purchasing Managers' Indices measure changes in key areas such as employment, output, prices charged and the level of new orders. They provide a good indicator of the level of manufacturing and service sector activity. The indices are produced monthly for all leading economies by specialist providers such as Markit Economics in the UK and the Institute of Supply Management in the US.
Pooled Superannuation Trust (PST)	A unit trust in which the assets of superannuation funds, approved deposit funds and other PSTs are grouped together and invested by an investment manager.
Portfolio	An investor's collection of investment holdings, usually with reference to its composition. That is, the mix of different classes of securities, such as bonds, property, shares, and cash; or if in a single asset class, the mix of different sectors and stocks.
Portfolio construction	The process of identifying which asset classes to invest in, and in what proportions.
Positively-sloped (yield curve)	If longer dated bond yields are at a higher level than short-term bond yields then the yield curve is said to be of a normal shape, or positively sloped. In a normal economic environment, uncertainty about the future direction of interest rates and inflation will mean that it is natural for investors to demand an additional return to invest their money for longer periods of time. This results in a gentle increase in yields as the maturity date of the bond lengthens.
PPP	Purchasing power parity (PPP) is the theory that exchange rates between countries are determined by the amount of currency used to buy a specific good or service, or a defined range of goods or services, in those countries.
Preference share	A security issued by a company which carries no vote but which entitles the holder to receive a fixed rate of dividend payments. The shares rank after creditors but ahead of ordinary equity for payout in the event of liquidation.
Premium	When the market price of a share, particularly of an investment trust or property company, is above its underlying net asset value, it is said to be trading at a premium.
Present value	The current value of estimated future cash payments. It is calculated by discounting the future value at a specific interest rate.
Price earnings ratio	Perhaps the key measure used by analysts of a company's value relating to its share price and profitability. It is calculated by dividing the share price by the earnings per share, trailing or forecast.
Primary market	The stock exchange has two main functions. The primary one is the raising of long-term capital for companies by the issuance of shares to investors, with the stock exchange serving as a market for both sides. The secondary function is trading in existing securities.
Principal	The original amount lent to the issuer of a bond. Also known as the 'face value' of a bond.
Private equity	Equity capital made available by investors to companies not quoted on the stock exchange. The term encompasses venture capital (the supply of long-term capital for a company at an early stage in its life) and management buy-outs which target much larger and more mature companies.
Proper Authority	An instrument appointing an agent as an authorised representative that signifies the responsibility of a securities dealer or investment adviser for acts of that agent.
Prospectus	A document detailing the investment objectives of a fund or group of funds including information on how the funds are managed and by whom, past performance, financial information and charges.
Protectionism	Policies which place restrictions on trade, or the flow of capital between countries or which limit changes in the value of currencies.
Public debt	Public debt is debt issued by governments and their agencies to cover shortfalls in revenue relative to public spending. In the UK, most public sector debt is funded by the issue of gilts.
Purchasing Managers' Index	Purchasing Managers' Indices measure changes in key areas such as employment, output, prices charged and the level of new orders. They provide a good indicator of the level of manufacturing and service sector activity. The indices are produced monthly for all leading economies by specialist providers such as Markit Economics in the UK and the Institute of Supply Management in the US.
Purchasing power parity	Purchasing power parity (PPP) is the theory that exchange rates between countries are determined by the amount of currency used to buy a specific good or service, or a defined range of goods or services, in those countries.
Put option	An option giving the holder the right to sell an asset on a future date, at a price agreed today.

Q

TERM	EXPLANATION
QE2	Quantitative Easing 2. The nickname given to the second tranche of quantitative easing announced in the autumn of 2010 by the US Federal Reserve.
Quant funds	Funds that select securities by quantitative analysis. Quant fund managers build computer based models which they use to determine the attractiveness of an investment.
Quantitative analysis	Research on economies and companies which focuses mainly on actual data and statistics.
Quantitative easing (QE)	A policy used by central banks to stimulate economic growth, especially when interest rates are already at very low levels. Quantitative easing involves increasing the amount of money in the economy and using it to purchase financial assets, in particular bonds.
Quartile	A statistical measure dividing a sample into four numerically equal groups. Thus, 'top quartile' means the top 25% of a given sample. See also decile, percentile.
Quoted	These are securities which are listed and priced on a stock exchange and which are available to be bought and sold by investors.

R

TERM	EXPLANATION
Rational expectations theory	An economic theory which argues that individuals and companies make choices based on their current expectation of the outlook for the future.
Real (value)	The value of an asset or cash flow adjusted to take into account the effect of inflation.
Real estate	A legally designated term for land and the property structures that stand above it or below it.
Real estate investment trust (REIT)	Real Estate Investment Trusts (REITs) are the common international investment structure for property investment companies. REITs are closed-ended funds.
Real interest rate	Interest rates after adjusting for the prevailing level of inflation.
Real return	An inflation-adjusted return, as distinct from a nominal return, which is unadjusted for any change in inflation; for example, if the real interest rate is 6% and inflation at the time of measurement is 4% then the nominal return is 10%, and the real return is 6%.
Rebate	The return of a proportion of a payment that reduces the total outlay.
Recession	A decline in a country's economic activity. Technically, an economy is said to be in recession if it experiences two consecutive quarters of negative growth.
Recovery rate	The percentage of the principal that can be recovered in the event of default on a loan or bond.
Recovery stock	Shares in a company which has suffered a substantial share price fall but which is expected to recover due to changes in management and strategy or a more favourable economic environment.
Redemption (date)	The final maturity date of a bond. This is the date on which a bond holder will be paid the bond's principal amount.
Redemption price	The price at which an investor can withdraw his or her units in a unit trust. Opposite of application price, which is the price that a unit in a unit trust is issued.
Redemption Yield (Fund)	The redemption yield estimates the annualised total return: in addition to expected cash income, it includes the amortised annual value of unrealised capital gains/losses of current bond holdings, calculated with reference to their current market price and expected redemption value.
Reference rate	A benchmark upon which the interest rate for a floating rate note or interest rate swap is based.
Registry	An accounting firm or other organisation engaged to administer the register of shareholders or unitholders issued by a company or managed investment scheme.
Regression analysis	A technique for understanding how a change in one factor will affect another. It is widely used in forecasting.
Reinvest	The process where dividends and coupons are used to increase the amount of the original investment.
Relative (returns)	Returns from an investment compared to a relevant index or benchmark over the same period of time.
Rental income	A term used to describe the amount of rent a property generates over a given period.
Rental value	The level of rent obtainable from a tenant if they were to occupy a property.
Rental yield	This is calculated by dividing the annual rent by the acquisition cost of a property and expressing the answer as a percentage.
Repo	The sale of securities together with an agreement for the seller to buy back the securities at a later date and at a predetermined price. The entire transaction generates a return which is similar to a cash deposit.
Repurchase agreement	The sale of securities together with an agreement for the seller to buy back the securities at a later date and at a predetermined price. The entire transaction generates a return which is similar to a cash deposit.
Reserve Bank of Australia (RBA)	Reserve Bank of Australia - The Reserve Bank of Australia is Australia's central bank. The Reserve Bank's main function is monetary policy. Policy decisions are made by the Reserve Bank Board, with the objective of achieving low and stable inflation over the medium term. Other major roles are maintaining financial system stability and promoting the safety and efficiency of the payments system. The Bank is an active participant in financial markets, manages Australia's foreign reserves, issues Australian currency notes, and serves as banker to the Commonwealth Government. Web site: www.rba.gov.au
Reserve Requirement Ratio	The minimal amount of capital to be held by banks as a percentage of their assets. This is intended to increase their financial strength in order to prevent another banking crisis.
Residential mortgage backed securities	A bond that is backed by mortgages on residential property.
Responsible Entity (RE)	The legal entity responsible for the overall management of the mFund. The entity can be the same or separate from the investment manager.
Restrictive (monetary policy)	Rising or high levels of interest rates with the objective of reining in economic activity. Higher interest rates are the classic method employed by central banks to control inflation.
Restructure (debt)	A process that allows a borrower facing cash flow problems and financial distress to reduce and renegotiate its debts in order to improve its financial position so that it can continue its operations.
Retail price index	Like CPI, this index measures the rate of inflation, but, unlike the CPI, it includes housing costs.
Return on capital employed (ROCE)	A measure of a company's profitability. It is calculated by dividing the company's gross profits less expenses by its capital employed (equity plus reserves) and expressing the result as a percentage.
Return on equity (ROE)	A measure of a company's profitability that reveals how much profit after taxes the company has generated on shareholders equity. It is calculated by dividing net income by shareholders equity and expressing the result as a percentage.
Return on investment (ROI)	A measure of profits generated from a particular project or investment.
Rights issue	An issue of new shares (for the purposes of raising a substantial amount of money) by a company to its existing shareholders in proportion to the number already held.
Risk	The ultimate risk for investors is the loss of all or part of their capital. The term also applies to the impact of uncertainty leading to short-term price fluctuations and increased volatility. Investors need to understand the inherent risk of investments and the degree of risk which they can tolerate.
Risk appetite	This term refers to the degree of risk an investor will accept in return for a given expected rate of return. Investor risk appetites generally increase at times of optimism over economic and business prospects and when there is more money available to invest.
Risk aversion	Some investors are inherently cautious/risk averse and will only consider low risk assets, such as cash and government bonds, where the risk of capital loss is minimal. For most investors, attitudes to risk tend to fluctuate according the economic and market environment, as well as personal circumstances.
Risk capital	Another term for venture capital or, alternatively, capital that an investor is prepared to lose if an investment fails.
Risk management	Strategies pursued by fund managers to limit risk. These include broad portfolio diversification and careful stock selection.
Risk premium	The extra return required by investors for holding a risky investment rather than a safer one (such as government bonds which are theoretically risk-free).
Risk-free asset	An asset which has a certain future return and is not subject to any investment risk. In theory, such an asset does not exist - even cash deposits are subject to counterparty risk. In reality, very short-dated government bonds backed by AAA rated governments are considered to be risk-free assets.
Risk-free rate	The rate of return for an investment with no investment risk. In practice, the yield on very short-dated government bonds (issued by AAA rated government borrowers) is used as a proxy since these are viewed to carry the least amount of investment risk.
RMBS	A bond that is backed by mortgages on residential property.
RPI	Like CPI, this index measures the rate of inflation, but, unlike the CPI, it includes housing costs.
RRR	The minimal amount of capital to be held by banks as a percentage of their assets. This is intended to increase their financial strength in order to prevent another banking crisis.
Running Yield (bond funds)	The running yield estimates expected cash income into the fund from coupons of current bond holdings and, where applicable, dividends from current equity holdings. It is expressed as a percentage of a fund's net asset value. The running yield is net of all charges, except where the Annual Management Charge (AMC) is charged to capital, in which case, the running yield will be gross of the AMC.

S

TERM	EXPLANATION
S&P 500	The S&P 500 Index consists of 500 of the largest companies listed on the NYSE and Nasdaq and is the most commonly used benchmark for funds focusing on the US.
SAA	SAA or Strategic Asset Allocation refers to the composition of an asset mix within a portfolio, constructed with the aim of meeting the long-term objectives of a fund, rather than being based on short-term views of relative performance of the various asset classes. Usually a benchmark is derived in this fashion.
Sampling	A widely used practice in passive investment management where, rather than exact replication, a selection of representative shares is chosen to track the index. Research has indicated that this practice, if carefully carried out, enables an index fund to closely track the performance of the underlying index.
Scrip issue	When a share price becomes too high, its marketability can be impaired since investors are unable to invest small amounts of money in the company. In this instance, a company may seek permission from shareholders to reduce its share price by increasing the number of shares in issue.
Secondary market	A key function of the stock exchange is to provide an efficient and well regulated market for the buying and selling of existing shares by investors. This is termed a secondary market.
Sector	A group of securities that share common characteristics, for example resources sector, textiles sector, and so on.
Secured debt	Debt that has the backing of assets that can be used as collateral in the event of default. A good example is a mortgage which is secured on a residential property. Secured debt ranks above unsecured debt in the event of default.
Securitisation	The packaging of an income stream from selected assets and issuing of securities to investors backed by those assets. Securitisation enables relatively illiquid instruments, for example mortgages, to be converted into marketable securities with active secondary markets.
Securitised bonds	Bonds that use the revenues of specific assets or the revenues of the issuer as collateral. In the event of default, the bond holders can force the sale of the assets to meet the payments.
Security	Tradable financial instruments, such as bonds and equities.
Sell order	To request to sell some or all units in an mFund product from the mFund issuer via the unit registry.
Seller's market	A condition of the market in which there is a scarcity of goods available, and as a result, sellers can obtain better conditions for a sale or higher prices. Opposite of buyer's market.
Semi-government paper	Fixed interest securities issued by a state government. Semi-government paper is of high credit standing and carries a state government guarantee. They are often referred to as 'semis'.
Senior debt	Debt that takes priority over unsecured debt in the event of default for capital repayment, and also for interest payments over a bond's life (maturity).
Sensitivity	A measure of the likely degree of change in the price of a security in response to changes in economic or market circumstances.
Service sector	Economic activities which do not involve the production of manufactured goods, minerals or primary agricultural products. For most developed economies, service sectors (e.g. administration, retailing and business support) account for the majority of total output.
Settlement	Finalising a transaction by transferring the units to the buyer and the money to the seller.
Share	A unit of ownership of a company's equity. As owners, shareholders usually have a right to vote at AGMs and to receive dividends.
Shareholder activism/engagement	The action undertaken by one or more shareholders to influence a company's management and strategy.
Shareholder value	The prime duty of a company's management is to run the business in the best interest of its shareholders, normally expressed in terms of maximising the long-term returns, through earnings, dividends and share price, on the capital invested.
Sharpe ratio	The Sharpe ratio is similar to the information Ratio (IR) and is used to measure risk-adjusted returns. However, the Sharpe ratio measures the difference between an asset's return and the risk-free rate of return divided by the standard deviation of the asset's returns. The difference between the Sharpe ratio and the IR is that the IR aims to measure the risk-adjusted return in relation to a benchmark, such as the Standard & Poor's 500 Index (S&P 500). Additionally, the IR measures the consistency of an investment's performance, while the Sharpe ratio measures how much an investment portfolio outperformed the risk-free rate of return on a risk-adjusted basis.
Sharpe ratio	This is a ratio which is calculated by analysis of how well the rate of return on an asset compensates the investor for the risk taken in holding it. The Sharpe ratio can help in determining whether the returns on a portfolio can be attributed to a fund manager's skill or involve taking excessive risk.
Short position	An excess of sales over purchases of a relevant commodity, currency, or investment instrument; for example, if a trader is said to be short yen, then he or she has net sold Japanese yen. Opposite of long position.
Short-dated bond	A bond with a final maturity date of less than five years.
Short-dated government bond	A bond issued by a government with a final maturity date of less than five years.
Short-term interest rates	The interest rate on bonds and other financial securities with a final maturity date of less than one year.
Shorting or short selling	An action by which a trader sells a security they do not own in the hope of buying it back at a cheaper price when its prices falls.
Simplified Prospectus	A document containing key information about a fund or group of funds with an overview of how they are managed, investment objective, past performance, charges and risks associated. This document must be received by a prospective investor before they invest. The Simplified Prospectus will be replaced by the Key Investor Information document in due course.
Single currency	The European single currency, the euro, was introduced in 1999 for countries belonging to the Eurozone. It replaced currencies formerly used by member countries.
Small cap	A term for quoted companies on a stock exchange with a capitalisation which is relatively small in relation to the total size of the market. In the UK, the main index for this category is the S&P/ASX Small Ordinaries index.
SME	An initialism for small and medium sized enterprises.
Socially responsible investment	Investment in companies which follow sustainable trading policies and which take into account the need to follow high standards in relation to the environment, employees, customers and the communities in which they operate.
Sovereign debt	Bonds issued by a national government.
Sovereign default	The failure of a government to pay the interest or principal on its bonds. Historically associated with the sovereign debt of emerging markets, fears of a sovereign default have now spread to the Eurozone due to the perceived unsustainably high level of government debt in Greece, Ireland and Portugal.
Sovereign wealth funds	Funds, often valued in billions of dollars, established by countries with huge amounts of surplus wealth for the purpose of long-term investment in a range of assets. The largest funds are those of major oil producers, such as Abu Dhabi and Norway.
Special situation stock/funds	This specialist investment field seeks to generate high returns from identifying shares likely to benefit from particular developments such as a takeover bid or an upward revaluation.
Spot rate	The current exchange rate of a currency.
Spread (yield)	The difference between the yields of two bonds.
SRI	Investment in companies which follow sustainable trading policies and which take into account the need to follow high standards in relation to the environment, employees, customers and the communities in which they operate.
Stagflation	An economic environment which combines high inflation with recession/low economic growth. This situation prevailed in the UK in the 1970s.
Standard & Poor's	One of the main three credit rating agencies. The others being Fitch and Moody's.
Stapled securities	A combination of separate classes of securities that can be traded only as a single unit, not as individual components.
Stock	A generic term applying to equities.
Stock selection	Fund managers select shares in companies which they consider to be undervalued relative to their prospects. This exercise is carried out on an ongoing basis, often involving detailed research by analysts.
Stockbroker	Entities which access the ASX to enable applications to buy or sell units in an mFund product.
Strategy	A policy which aims to deliver an investor's long-term aims.
Stress tests	Tests applied to banks to assess their ability, particularly in relation to their capital strength, to withstand a range of challenges arising from a hypothetical deterioration in the economic outlook.
Sub-investment grade bond	A bond with a credit rating of less than BBB by Standard and Poor's.
Sub-prime mortgages	These are loans advanced to individuals often on low incomes with limited access to bank credit. This sector flourished in the US in 2004-07 thanks to a combination of exceptionally low interest rates and a sharp deterioration in lending standards.
Subordinated debt	Debt that ranks below all other debt but ahead of equity in the event of a company failure.
Supranational	International organisations, such as the European Union or World Bank, which transcend national boundaries for the benefit of a wider grouping.
Sustainable development	Defined as 'developments that meet the needs of today without compromising the ability of society in the future to meet its requirements'. Companies following these policies seek to avoid environmental damage, to make careful use of existing resources and to make greater use of renewable resources.
Swaps	A derivative in which two counterparties exchange certain characteristics of one financial instrument for those of another financial instrument. An example is interest rate swaps.
SWFs	Funds, often valued in billions of dollars, established by countries with huge amounts of surplus wealth for the purpose of long-term investment in a range of assets. The largest funds are those of major oil producers, such as Abu Dhabi and Norway.
Synthetic security	An intangible derivative security, the price of which tracks that of another asset, such as an equity or bond, but where the buyer of the synthetic security does not own that asset.
Systemic risk	Generally used in reference to an event that can trigger a collapse in a certain industry or economy, such as the threat to the entire banking and financial system in 2008-09, which was only averted by concerted international action by governments.

T

TERM	EXPLANATION
Tactical asset allocation (TAA)	A process by which the asset allocation of a fund is changed on a short-term basis to take advantage of perceived differences in relative values of the various asset classes. A variation of asset allocation around a benchmark. See also strategic asset allocation.
Tactical	Tactical positions are held as part of an active portfolio strategy in order to add value by taking advantage of opportunities that may arise.
Tankan survey	A quarterly survey of current and prospective business trends and conditions among leading Japanese companies conducted by the Bank of Japan and used to help formulate monetary policy.
Tax loss	A situation in which total deductions exceed total income, based on the Taxation Office's definitions.
Technical analysis	A method of evaluating securities by analysing patterns of market activity such as past prices and trading volumes. This is mainly carried out by the study of charts of share prices and market indices with the intention of seeking an insight into future performance. Such practitioners, known as chartists, pay little value to the intrinsic value of investments.
Telecom	Telecommunications, encompassing both fixed line and mobile communication systems.
Term to maturity	The amount of time to elapse before the capital of a fixed interest security becomes due for repayment.
Thematic investing	An investment approach which identifies themes and trends that are influencing or are likely to influence economies and financial markets. Funds have been devised to take advantage of long term themes such as the dynamic growth of China and other emerging economies.
Themes	Short or long-term economic, geographic or political trends which are likely to impact economies and financial markets. Examples could include a global shortage of water, or the ageing population within developed economies.
Tightening (fiscal)	A policy of reducing government debt through tax increases and cuts in government spending.
Tightening (monetary)	The action of central banks in raising the level of interest rates at which they lend money to commercial banks, or raising the amount they are required to keep in reserve. This, in turn, leads in an upward shift in the cost of borrowing and a knock-on slowing in the pace of economic activity.
Time horizon	The period over which an investment objective is to be realised. Time horizon is a critical factor for all investors in determining the types of investments they should make or, at least, the amount of risk they are prepared to carry. The investments made to provide for future retirement income (long time horizon) would be different from those for a person saving to buy, say, a car (short time horizon).
Time value of money	Due to its potential to earn interest, money available at the present time is generally accepted to be worth more than the same amount received at a future date. Therefore, any stated amount of money is worth more the sooner it is received.
TIPS	Bonds issued by the US government where the coupon and principal are linked to the level of inflation.
TMT	Technology, media and telecoms. During the stock market boom of 1999-2000, these sectors were viewed by investors as the heart of the 'new economy', commanding extravagant valuations.
Top-down	An investment approach which emphasises the studying of macroeconomic and industry patterns and developments on individual stock selection and analysis.
Total return	The total return on an investment consists of capital growth (or depreciation) together with any income derived from the asset.
Toxic assets	An asset that becomes illiquid and cannot be sold. The term 'toxic asset' was coined in the financial crisis of 2008-09. At that time it referred to mortgage-backed securities, collateralised debt obligations and credit default swaps.
Tracking error	A statistical measure of risk, which measures the deviations of fund returns from the return on its benchmark.
Trade and trading	Investors buying or selling shares on a stock exchange.
Trade Weighted Index	An index measuring the value of Australia's currency in relation to those of its major trading partners. The index is weighted based on the volume of trade conducted between Australia and each country in the index.
Treasury bills	Short-dated government securities. They pay no interest but are sold at a discount with a promise to pay in 91 days.
Treasury inflation protected securities	Bonds issued by the US government where the coupon and principal are linked to the level of inflation.
Triple witching hour	This occurs four times per annum when contracts for stock index futures, options and stock options all expire on the same day. This can lead to short-term volatility.

U

TERM	EXPLANATION
Underlying security	The shares, stock, or commodity on which a synthetic security 'for example, futures and options' is based. Also called physical security.
Underlying Yield (bond funds)	The underlying yield is calculated in the same way as the distribution yield, but is always net of all charges, including the Annual Management Charge.
Underperformance	Achievement of a lower investment return than a benchmark or other measure (for example, competitor portfolios) against which that return is being compared. Opposite of outperformance.
Undervalued	Referring to a security or currency that trades below what is perceived to be its fair market value, taking account of statistical or fundamental research or other relevant information.
Underweight	Having a lesser exposure to a particular sector in an investment portfolio, compared with a neutral or benchmark position. Opposite of overweight.
Unfranked dividends	Share dividends paid by companies out of profits on which Australian tax has not been paid; for example, profits made by companies with accumulated losses. Recipients of unfranked dividends are subject to tax at their normal marginal rate.
Unit	A term of measurement that represents a share in the underlying assets of a managed investment scheme.
Unit trust	A pooled investment fund or collective investment, established under a trust deed, that continually offers new units and stands ready to redeem existing ones from the owners.
Unitholder	Investor whose investment is held in the form of units in a managed investment scheme.
Universe	A term sometimes used to describe the total number of operators or competitors in a particular field, or the number of available stocks from which a portfolio is selected. Fund manager performance surveys are also referred to in this way.
Unlisted	Securities which are not quoted on the stock exchange.
Unrealised profits	Profits that have not yet been received because, although the price of the asset has risen, the owner has not yet sold.
Unsecured debt/bonds	Debt or bonds that do not have the backing of specific assets that can be used as collateral in the event of default. Personal loans are a good example. Unsecured debt ranks below secured debt in the event of default.
Upgrade	When a bond's credit rating is raised to reflect an improved financial position.
US Federal Reserve	Serves as the central bank of the United States. Established in 1913, its objectives are to maintain a stable monetary and financial system, low inflation and to promote healthy levels of employment.
US Treasuries	Bonds issued by the US government.

V

TERM	EXPLANATION
Value added	The excess return above the return from a fund's benchmark achieved by active fund management.
Value at risk (VaR)	A widely used measure of risk. Value at Risk allows fund managers to judge the extent to which their portfolios are exposed to loss by estimating the size and probability of a potential loss on a portfolio of assets. It is based on the statistical analysis of historical price trends and volatilities.
Value stocks	Shares with valuations which, on a range of measures, appear unduly modest relative to their financial strength, record and expected future growth prospects. Value investing is an approach which focuses on shares in this category which are thought to be well placed to benefit from an upward revaluation.
Volatility	A measure of the fluctuation in the price of an individual security, asset class or market. The best known measure of volatility is the US Vix Index, also known as 'the fear index'.
Volcker rule	Proposals of Paul Volcker, former chairman of the US Federal Reserve, to avert the recurrence of another banking crisis. The main proposals were restrictions of bank ownership of hedge funds and private equity funds, and on proprietary trading - the use of bank funds for speculative trading.

W

TERM	EXPLANATION
Warrant	A stock market security that gives the holder the right to purchase a specific share at a specific price within a certain time frame. The main difference between warrants and call options is that warrants are issued and guaranteed by a company and trade freely on a stock market, whereas options are not issued by a company and are not necessarily exchange-traded instruments. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months.
Weighting	The relative proportion of each of a group of securities or asset classes within a single investment portfolio.
World Bank	Established in 1944 to promote post-war reconstruction, this supranational organisation has 187 member countries. Through a number of development bodies its main objective is the promotion of economic and social development among the poorer countries of the world. It provides low interest loans, credits and other forms of support.
World Trade Organisation (WTO)	Established in 1995 and with 153 member countries, the WTO's objectives are to promote global trade by reduction of tariff barriers and other restrictions. It serves as a forum for trade negotiations and for the settlement of disputes between countries. It also publishes regular reports on world trade.
Write-down	The reduction in the value of an asset on a company's balance sheet. Often attributable to banks subject to bad debts. These amounts rise at times of recession or financial crisis.

Y

TERM	EXPLANATION
Yield (income)	A measure of return: the interest or dividend income from an asset expressed as a percentage of the assets' current market value. This is the basic calculation but there are other variations commonly used.
Yield curve	A graphical representation of the relationship between short-term and long-term yields. The shape of the yield curve is affected by expectations of the future path of interest rates and inflation, as well as by liquidity issues. A gently upward sloping yield curve, where long dated yields are modestly higher than short-term ones, is the normal shape and reflects investors' natural uncertainty - they expect to get paid a higher return for investing their money for a longer period of time. A steeply upward sloping yield curve may reflect expectations of a rise in interest rates, while, if longer dated yields are lower than short-term ones, the yield curve is said to be inverted. This shows that interest rates are expected to fall and may foretell a recession.
Yield gap	The difference between the yield on long-term (usually 10-year ) government bonds and the yield on the main equity index. When equities yield in excess of bonds this described as a 'reverse yield gap'.
Yield spread	The difference in yield between two bonds.
Yield to maturity	The most widely used measure to compare the value offered by different bonds. Also know as the Gross Redemption Yield, it is a measure of a bond's future return if it is held until maturity. It is expressed as a percentage and takes into account the time value of money, accrued interest and any capital gain or loss on redemption.

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