Glossary terms

Investment market terms explained

All Ordinaries Index

Also referred to as the 'All Ords', the All Ordinaries Share Price Index is a measure of the overall performance of the Australian share market at any point in time. It is made up of share prices of approximately 500 of the largest Australian companies on the ASX (the number of companies varies depending upon compliance with the criteria for inclusion). Stock exchanges in other countries have similar indices such as the Dow Jones Index (New York) and FTSE.

Alpha (a)

The alpha coefficient measures the portion of an investment's return arising from specific (non-market) risk. It can be a positive or a negative number. Often referred to as a manager's "value added" (or "value subtracted"), alpha measures the difference between actual returns and expected performance resulting from exposure to specific risk factors.

Australian Stock Exchange

The main Australian market place for trading equities, derivatives, government bonds and other fixed interest securities.

Australian Securities and Investment Commission (ASIC)

ASIC is a government body responsible under the Corporations Law for regulating companies, the issue and sale of shares, trust units, company borrowings, investment advisers and dealers.

Bear Market

When share prices are falling, the market is said to be in a bear market phase. A bear is said to 'claw' the prices down. 

Beta (β)

The beta coefficient measures an investment's relative volatility or impact of a per-unit change in the independent variable (market) on the dependent variable (portfolio), holding all else constant. The beta of a portfolio is its covariance in relation to the market. The market portfolio has a beta coefficient of 1. A higher (lower) beta would imply more (less) volatility.

Blue Chip Stocks

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

Bonus Dividend

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

Bonus Shares/Issue

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

Book to Market Ratio (BtM)

The "BtM" is the ratio of a firm's book value of equity to its market value of equity. Book value of equity is determined by the firm's accountants using historic cost information. Market value of equity is determined by buyers and sellers of the share using current information. A high (low) BtM ratio indicates that the book value per share is high (low) relative to the share price.

Bull Market

Describes a consistent strong buying of shares and rising share prices. The term originates from a bull which is said to 'toss' the prices up.

Capital Gains Tax

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

CHESS

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

Cum Dividend

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

Debt/Equity Ratio

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

Derivative

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

Dividend

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

Dividend Cents Per Share

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

Dividend Yield

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

Dividend Imputation

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

Earnings Before Interest and Tax (EBIT)

A key measure of the financial performance of a company. It is similar to net profit, except that the effects of tax and interest are factored out, providing a better measure of a company's underlying performance.

Earnings Per Share

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

Efficient Market Theory

"EMT" is the theory postulating that market prices reflect the knowledge and expectations of all investors. It asserts that any new development is instantaneously priced into a security, thus making it impossible to beat the market consistently.

Ex Dividend

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

Franked Dividend

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

Futures

Futures are contracts to buy or sell a particular asset (or cash equivalent) on a specified future date.
 

Gearing

Process of increasing funds available for investment through borrowing. The ratio of debt finance to equity finance or, as the use of long-term debt in financing an entity. Gearing may be measured as EBIT/EBIT - Interest.

Hedge

Transaction which reduces or offsets the risk of a current holding.
 

Independent Variable

An independent variable is a factor whose effects are to be studied and manipulated in an experiment (i.e., exposure to market, size, and/or value risk).
 

Last Sale

The last price at which the stock recorded a sale in the market before close of trading.

Liquidity

Being able to convert assets into cash easily, quickly and with little impact on price. A liquid market is a market with enough participants to make buying and selling easy.

Market Capitalisation

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

Net Tangible Assets (NTA)

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

Nominal Yield

Nominal yield is calculated as the annual dollar amount of income received from a fixed interest security divided by the issue's par value (usually $1000). This yield is also called the coupon rate.

Option

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

Ordinary Shares

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

Paid Up Capital

The amount paid by shareholders or recorded as paid on issued shares.

Price to Earnings (PtE) Ratio

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

Return on Assets (ROA)

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

Return on Equity (ROE)

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

Rights Issue

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

Shareholder Register Number

SRN stands for Security holder Reference Number, which is allocated by an Issuer to identify a Holder on an Issuer Sponsored or Certificated Subregister.

Warrants

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