Glossary of Key Terms

We understand there are a lot of terms listed below. If you are looking for a particular definition we’d suggest using the find function with your browser (Control+F for PC or Command+F for Mac)

AGM – Stands for Annual General Meeting. It is a legal requirement in Australia that all public companies must hold an AGM every year. It is an opportunity for shareholders to ask the company’s Board of Directors questions and to vote on different resolutions.

Asset Class – Refers to the different types of investment options. The major asset classes are stocks, bonds, cash and property

ASX – The acronym for the Australian Stock Exchange. It is the largest stock exchange in Australia and where most large Australian companies are listed

Bear Market – A market where share prices are low or declining. It is generally said that the market moves in two phases – a bull phase and a bear phase.

Blue Chip – A term used to describe companies that are large and long-established on the stock market. Generally considered safer investments with less growth potential. Examples in Australia include – Commonwealth Bank, BHP Billiton and Telstra

Bond – A way for a company, organisation or government to raise money. Essentially is an IOU where investors buy the bond, giving the company money, and over a pre-determined period of time the company then pays the investor back with interest.

Bull Market – A market where share prices are high or rising.

Buy Back – Occurs when a company buys it’s shares back from the market. Usually occurs when the company deems its shares to be undervalued (or it wants the market to believe it sees itself as undervalued).

Capital Gain – An increase in the value of an asset, the difference between the purchase price and the sale price is referred to as the capital gain (or if the investor loses money – capital loss)

Capital Gains Tax – Capital gains tax is paid on the capital gain made on an investment. In Australia there is a 50% Capital Gains Tax Discount if an investor holds the asset for at least a year before selling the asset

CEO – Chief Executive Officer. The highest ranking person in a company. Ultimately responsible for decision-making

CHESS – The ASX’s Clearing House Electronic Sub-Register System. It is the ASX’s settlement system. You do not need to know a lot about it, however if you are buying and selling shares you will receive ‘CHESS Holding Statements’ that confirm your purchase or sale

Compounding – The effect of reinvested earnings, and one of the joys of investing. Occurs when you receive interest not just on your initial investment, but on all previous interest as well. Best explained using an example. Imagine you had $10 of stock in Company A and it announced a 10% dividend. If that $1 dividend was reinvested in the company you would then have $11 of Company A stock and the next year when it also announces a 10% dividend you’ll receive $1.10.

Debt – Debt is an amount of money owed. For company’s, the most common form of debt is business loans from a bank however debt can come in hundreds of different shapes or sizes.

Debt to Equity Ratio – A ratio calculated by dividing a company’s long term debt by shareholder’s equity. Some investors use this ratio as an indicator of risk – a higher ratio means high risk and vice versa.

Derivative – A financial instrument (investment option) that derives its value from some other financial instrument.

Diversification – A commonly suggested investment strategy where an investor buys a number of different asset classes (e.g. stocks, bonds, property) and companies in a variety of economic sectors  (e.g. healthcare, financial, construction, agriculture). The idea is that by diversifying your portfolio you minimise your risk.

Dividend – Distribution of a company’s earnings to shareholders. In Australia dividends are generally paid twice a year. To understand dividends understand that when you buy shares you are becoming a part owner in the company. For any company when it makes a profit the owner receives that profit, and dividends are the mechanism through which publicly traded companies distribute their profits to their owners.

Earnings – A company’s revenue minus all costs of production. Importantly, shouldn’t be confused with ‘profit’. Profit refers to revenue minus all expenses. The difference can best be illustrated by an example. If a car company makes $100,000 selling cars and it cost them $60,000 to produce and sell those cars then their earnings are $40,000. If the company then has to pay an additional $20,000 to settle a legal case then their profit is $20,000.

Earnings per share – A company’s earnings divided by it’s number of shares. So in the above example of the car company, if the company had 80,000 shares issued then its EPS would be $0.50 a share.

EBIDTA – Earnings before interest, depreciation, tax and amortisation. EBIDTA is a good way to analyse and compare the profitability of different companies and industries because it eliminates the effect of different accounting and financing decisions.

EGM – Extraordinary General Meeting. A meeting other than the AGM that involves a company’s shareholders and executives. It is usually called on short notice and deals with an urgent matter.

ETF – Exchange Traded Fund. Is a fund that could either follow a marketable security or basket of securities. Generally follows an index (e.g. ASX 200 or S&P 500) or an asset class (e.g. US Treasury 30 Year Bonds). Is publicly traded on the share market and shares in the ETF can be bought and sold as shares in a company are.

Float – A colloquial term for an Initial Public Offering. See ‘IPO’.

Franking Credit – An imputed tax credit attached to a dividend. Essentially the company paying the dividend pays tax on that dividend so the investor is given a franking credit to avoid the dividend being taxed twice. To explain with an example – If a company earns $100 and pays 30% tax, they are left with $70 profit. If there is only one investor the company pays the investor $70 as a dividend. However, that $70 has already been taxed, so to avoid double-taxation, the company also gives the investors $30 in franking credits meaning the investor has a total assessable income of $100 ($70 dividend + $30 franking credit), which when taxed at 30% leaves the investor with their full dividend allocation. It is confusing, but the important thing to remember is franking credits reduce your taxable income.

Index – A collection of stocks that provides a snapshot of the economy or a segment of the economy. This is again best explained by example – the ASX 200 index tracks the biggest 200 companies listed on the Australian stock market. In essence it averages out the performance of these 200 companies and gives you a snapshot of the performance of the Australian stock market. Other indexes that you should know are the S&P 500 (a basket of 500 of the biggest American stocks), Dow Jones Industrial Average (often shortened to ‘the Dow’ a basket of 30 of the biggest ‘blue chip’ American companies), NASDAQ Composite Index (The NASDAQ is a market that features a lot of technology stocks, and the composite index represents all stocks that trade on the market).

Index Fund – A fund that follows an index. It is generally an extremely low fee investment option. For example, two index funds that follow the ASX 200 index are iShare’s ASX200 ETF (ASX Ticker Symbol: IOZ) and SPDR ASX200 Fund (ASX: STW)

Inflation – The rise in the price of goods and services. Inflation is measured by seeing the cost change in a basket of goods (e.g. if the basket of goods cost $100 and then the next year it costs $101 – there has been 1% inflation). Inflation is the reason saving cash in the bank is not a good strategy, because as inflation rises the value of that cash is lessened

Intangible asset – Assets with no physical existence and no fixed value. Examples include intellectual property, trademarks and goodwill.

Interest Rate – The proportion of a loan that is charged as interest to a borrower, usually expressed as an annual percentage. For example if you take out a $100 loan at 5% interest, you will be required to pay $5 in interest per year.

IPO – Stands for ‘Initial Public Offering’. Occurs when a private company (so a company that isn’t listed on the share market) offers stock of the company to the public for the first time. Generally investors will have the opportunity to ‘subscribe to the IPO’ which means buy the stock before the company lists and then there will be a ‘listing date’ when the company becomes a publicly traded company and investors can buy and sell the company’s stock on the share market.

Market Capitalisation – Often referred to as just ‘market cap’ it is a measure of a company’s size. Is calculated by multiplying the number of issued shares by the company’s share price. At the time of writing, Apple is the largest company in the world by market cap with 5.247 billion issued shares and a share price of $139.14, so has a market cap of $730 billion.

Mutual Fund – A pool of investors money that is managed by a professional investor

Net Tangible Assets – Net tangible assets is calculated by taking a company’s total assets and subtracting total liabilities (e.g. debt), intangible assets (e.g. intellectual property, goodwill) and par value of preferred stock. NTA is an important metric because it tells investors what would be left for shareholders if the company immediately ceased doing business.

Operating Revenue – An accounting term that refers to all revenue a company makes from its operations. Generally is from sales, but may also be from fees, commission, brokerage etc. depending on the type of business the company is operating.

Price-to-earnings ratio – The ratio of a company’s share price to the company’s earnings per share. For example, if a company’s share price is $10 and it’s earnings per share are $1 then it has a P/E ratio of 10. Many investors use this metric to determine if a company is good value (P/E ratios of between 10 and 20 are generally average – although this may differ in different industries or countries).

Prospectus – Is a legal document that a company or investment bank will offer for any investment product. The most common form of prospectus is for IPO’s, and the prospectus will detail the company’s activities and financial history as well as making some projections for business activities over the next couple of years. It is financial statement fraud to intentionally deceive investors on a prospectus.

Stock Split – The division of a company’s shares into a greater number of shares. So, for example, in a 3-to-1 stock split a company with 1,000 shares would then have 3,000 shares. An investor that had 10 shares would now have 30 shares – so the investors proportionate ownership of the company would remain the same. The main reason companies do stock splits is because their share prices have become so high that they are prohibitively expensive for smaller investors. Netflix is a company that recently had a stock split. In 2015 their share price was over $700 per share, so they decided to do a 7-for-1 stock split to have a lower price per share.

Return on Equity – ROE is a measure of profitability that calculates how much profit a company generates for each dollar of shareholder equity. It is calculated by dividing net income by shareholders equity.

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