Home / Glossary of Financial Terms

The following terms and definitions represent some of the more commonly used phrases and abbreviations in the financial services industry.

The definitions marked with an asterisk (*) are taken directly from the Investment and Financial Services Association Standards (IFSA Guidance Note no.500) and are reproduced with IFSA's kind permission.

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

Active management (investment management style)*
A style of investment management that seeks to attain returns above a set benchmark by constantly monitoring and, if necessary, changing asset allocation and security selection.

Allocated pension or annuity*
An account established to provide a flexible, regular income stream (mainly retirees). It has special tax and social security features. The investment risk remains with the investor and an allocated pension may be exhausted prior to death. In that respect, this product is different from a lifetime annuity, which is paid for the life of the investor.

Annual report
A yearly report or statement of a company's financial health. It generally includes a balance sheet and profit and loss statement. Trustees of funds must also issue annual reports.

Annuity*
A regular periodic payment to a person usually made in exchange for an initial lump sum payment.

Approved Deposit Fund*
A superannuation entity (fund) that can accept Eligible Termination Payments.

Asset allocation*
The percentage of assets held in each asset class (shares, fixed interest, etc.) in an investment portfolio.

Asset class*
A category of financial assets. The major asset classes are shares, property, fixed interest and cash, which in turn can be broken down further to include domestic or international shares, domestic or international fixed interest, direct or indirect property etc.

Assets
Everything that a person or company owns or has a right to, from which a benefit can be derived.

Association of Superannuation Funds of Australia (ASFA)
The peak industry body responsible for protecting, promoting and advancing the interests of Australia's superannuation funds, their trustees and members.

ASX 300 Index (S&P/ASX 300 Index)
The top 300 companies, by market capitalisation, listed on the Australian Stock Exchange. The index is commonly used as a benchmark for the performance of Australian shares overall.

ASX 300 Accumulation Index (S&P/ASX 300 Accumulation Index)
An index of the top 300 companies, by market capitalisation, listed on the Australian Stock Exchange. This index takes into account share price movements and dividends. Many Australian share fund managers use this index as their benchmark.

Australian Financial Services Licence (AFSL)
A licence allowing an organisation to provide financial services in Australia. Licensees' activities and service standards are managed by the Australian Securities and Investments Commission (ASIC).

Australian Prudential Regulation Authority (APRA)
A Government agency responsible for prudential regulation of banks, insurance companies, superannuation funds, credit unions, building societies and friendly societies.

Australian Securities and Investments Commission (ASIC)
An independent Government body that enforces and regulates company and financial services laws to protect consumers, investors and creditors.

Australian Stock Exchange (ASX)
The main Australian market place for trading equities (shares) and related securities.

Authorised Representative
A person authorised by an Australian Financial Services licensee to provide financial products and/or financial advice, eg. a financial adviser.

B

Bear market*
A declining financial market. The opposite of a bull market.

Benchmark*
A measure used for comparison of investment returns over a period of time.

Beneficiary
Either:

• an individual or company who, on the death of another individual, receives financial benefit; or
• a person entitled (as the real owner) to enjoy the benefit of property or goods of which the legal title may be vested in a trustee, eg. a superannuation trustee holds legal title to the assets of a fund but the fund members are the beneficiaries.

Binding nomination
The documentation of an individual's wishes regarding which of their dependants and/or other beneficiaries will receive their personal superannuation benefits in the event of their death.

Blue chip
Stock/shares of leading, quality companies (usually highly valued) that are well known for their strong financial position and ability to make profits.

Bond
Similar to an IOU, bonds are generally a medium to long-term fixed interest debt security commonly issued by Commonwealth and State Governments and corporations to raise funds. They are issued by the borrower at a specified interest rate and repaid after a set period.

'Bottom-up' style (funds management style)
A method of analysing companies whereby an investor starts by looking at stock-specific fundamentals and then incorporates industry trends and macro-economic analysis. This style is the opposite of 'top down'.

Broker*
Refers to an agent who handles the orders of investors to purchase and sell securities, commodities, insurance policies or other property. The provision of this service attracts a brokerage (see below).

Brokerage*
A fee charged by a broker for the purchase or sale of a security. Also see 'commission'.

Bull market*
An advancing financial market. The opposite of a bear market.

Buy/sell spread*
The difference between the entry and exit prices (fees) of a fund.

C

Capital
The value of your investment, represented by total assets (what you own) less total liabilities (debts or monies owed). Also refers to the initial amount you invested (eg. a capital guaranteed fund).

Capital Gains Tax
A tax applied on the increase in the capital value of an investment that is payable when the investment is sold.

Capital growth
The increase in the market value of an asset.

Capital guaranteed fund
An investment fund designed for a conservative investor where a guarantee applies to the return of the sum originally invested.

Capital stable fund
A term used to describe investments that have a high fixed interest or cash component.

Cash management trust
A pooled investment vehicle that invests in high-yielding money market investments normally only available to professional investors.

Commission*
A fee charged by a broker or financial planner for the execution of a purchase or sale of a managed investment. Alternatively, it can be a fixed amount per transaction or a percentage of the total value of the transaction. Also referred to as 'brokerage' and is normally deducted from the gross amount contributed to the investment product prior to investment.

Commutation*
The process of converting a pension or annuity into a lump sum.

Complying pension or annuity*
A series of payments received over the remaining lifetime of a pensioner. The pension may be paid by a superannuation fund or life insurance company. The pension must meet a number of legislated requirements.

Complying superannuation fund*
A regulated superannuation fund that has not been given a notice from Australian Prudential Regulation Authority (APRA) that it is non- complying.

Compound interest
Interest that is paid on accumulated interest, as well as on the capital invested, i.e. if you reinvest the interest you earn on an investment, you earn interest on your interest as well as the capital amount over time.

Consumer Price Index (CPI)*
Measures the price of a basket of items typifying goods and services purchased by Australian households across eight capital cities. CPI allows comparisons of the relative cost of living over time and is used as a measure of inflation. CPI is also used to determine the inflation adjustment, if any, that investors may be entitled to under the Capital Gains Tax sections of the Income Tax Assessment Acts.

D

Death benefits
Benefits paid by a superannuation fund to a dependant or estate, following the death of a member.

Debt security*
Borrowed funds that must be repaid by the entity issuing the debt security.

Deductible amount
The tax-free component of an annuity or pension.

Deferred annuity
A type of annuity (retirement income product) that starts payment of income at a later date, such as when an investors turns 65. Deferred annuities can only accept Eligible Termination Payments such as lump sums from superannuation funds.

Defined benefit fund*
A fund where the member receives a benefit that is defined by the trust deed of the superannuation fund.

Dependant
The spouse or children of an individual or any other person who is financially dependent on that individual.

Derivatives*
A financial instrument that derives (hence its name) its value from the price of a physical security or an index.

Distribution
An income payment made to unit trust investors. Under a trust deed, any income earned by the investments held in the trust may have to be distributed to the investors. The term may also be used to describe a return of capital.

Diversification
The process of distributing funds across a number of asset classes to reduce the impact that volatility in one asset class, sector or market will have on the performance of your overall portfolio of assets.

Diversified fund
An investment fund that invests in a broad range of asset classes (eg. fixed interest, shares, property). The fund manager can alter the composition of the funds in light of changing economic and investment conditions, in order to achieve the best results.

Dividend*
The payout from a company of a portion of its earnings to its shareholders, in proportion to the number of shares the shareholder owns.

Dividend imputation
In order that company earnings are not taxed twice, investors who receive dividend payments may also receive a tax or imputation credit for the tax already paid by the company.

Dividend reinvestment plan
A scheme that enables shareholders in a company to acquire shares instead of taking their dividends in cash.

Dollar-cost averaging*
The practice of investing amounts of money at regular intervals, regardless of whether the securities markets are declining or rising.

Dow Jones Industrial Average
A price-weighted average of 30 blue-chip stocks (shares) that are generally leaders in their industry. The Dow Jones Average has been a widely used indicator of the U.S. stock market since 1928.

E

Eligible Termination Payment (ETP)
A lump sum payment made to an individual by an employer (or from a superannuation fund/approved deposit fund) as a result of retrenchment, retirement, resignation, death or disablement. ETPs are subject to concessional tax rates.

Entry fee
A fee payable by investors on entry to certain investment options.

Equity
A term for shares. Also a general word used to describe a shareholding or ownership in a company. Can also refer to the value of your capital invested in an asset.

Ex dividend
A share where the seller, not the buyer, is entitled to receive the dividend.

Exit fee
A fee payable by investors when withdrawing all monies from or closing certain investment options.

F

Financial adviser*
A person who advises individuals on suitable forms of investment for their assets, considering their tax position, liabilities, personal circumstances, etc. May also be referred to as a financial planner. Financial advisers must have certain training and skills under Australian law.

Fiscal policy
The Government's policy relating to its receipts and expenditure. Its potency as an economic tool stems from the fact that by spending more or less than it receives, the Government can affect the overall level of demand in the economy.

Fixed interest
Interest paid at a predetermined and unchanging rate for a specified period of time on investments such as bonds.

Float
In relation to companies, it refers to the decision to list on a stock exchange and offer shares to the public. For currencies, it is the decision to let market forces set the exchange rates.

Franked dividends
Company/share dividends paid out of profits on which the company has already paid tax. The investor is then entitled to a reduction in income tax for that amount (imputation credit).

FTSE 100 Index (Financial Times Stock Exchange 100 Index)
The main index of the London Stock Exchange (LSE). An index of the 100 largest companies, by capitalisation, traded on the LSE. Commonly referred to as the 'Footsie'.

Fund manager
An organisation that invests or manages money on behalf of individuals or other organisations.

Futures
A contract that obligates the owner to buy or sell a certain quantity and quality of an underlying asset at a predetermined price at a future date.

G

Gearing
Describes the practice of borrowing to invest. Gearing is usually expressed as a ratio of the borrowed amount divided by the total amount invested.

Gross Domestic Product (GDP)
A commonly used measure of the total market value of goods and services produced by an economy.

'Growth At a Reasonable Price' (GARP) style (funds management style)
A growth manager (see below) that tends to employ elements of 'value style'investing in its investment decision-making.

Growth fund
A fund that has a higher proportion of assets in investments such as shares and property that are expected to deliver most of their returns through capital appreciation.

'Growth' style (funds management style)
A growth style manager seeks companies whose earnings are projected to be superior to the market average.

H

Hang Seng Composite Index
The main index for the Hong Kong Stock Exchange.

Hedging
An investment position taken to counteract the potential risk from another investment.

I

Immediate annuity
An annuity which is purchased with a single payment and begins to pay out an income to the investor straight away, either for an agreed fixed period or for the life of the investor.

Imputation
The process through which a shareholder obtains a tax credit on the dividends received on Australian share investments that can be used to offset other taxable income. This credit serves as an individual rebate on any tax already paid on the dividends of an Australian company.

Imputation credit*
Tax credits available to an investor who receives franked dividends or distributions. These credits are available to offset the investor's tax liability. Should the tax liability be zero, then for certain investors the credits are refundable.

Index
A numerical measure of price movement in financial markets, e.g. the S&P/ASX 300 Index.

'Index' manager (funds management style)
An index manager endeavours to replicate or copy the performance (returns) of a specific market index, such as the S&P/ASX300 Index.

Industrial shares
Shares in companies that are involved in the production of goods and services as distinct from those involved with raw commodities.

Inflation
An overall increase in the prices of goods and services in an economy. The most common measure of prices in Australia is the consumer price index.

Insurance bond*
A single premium investment product, issued by life insurance companies or friendly societies, which operates in the same manner as a unit trust except that the return is provided to the investor net of tax.

Investment and Financial Services Association (IFSA)*
An industry association established in late 1997 which acts as the collective voice of its member companies when dealing with governments and the general public. (Mostly represents life offices and fund managers.)

Investment manager*
An entity that specialises in the investment of money on behalf of investors.

J

No listings

K

No listings

L

Liquidity
The ease with which an investment can be converted into cash with minimum loss.

Listed company
A company whose shares can be bought and sold on a stock exchange.

Lump sum
A single payment for a total amount due, as opposed to a series of periodic payments, eg. you may be entitled to receive a lump sum benefit from a superannuation fund instead of as a pension or annuity.

M

Managed fund*
Any form of investment in which a number of investors place their money with a manager to invest on their behalf.

Management Expense Ratio (MER) (Now referred to as Total Expense Ratio or TER)*
Provides a measure of the total annual cost of investing in a fund and is a useful guide when comparing annual costs of different investment funds. It refers to a calculation of the total amount of fees deducted from an unlisted managed fund, and all expenses incurred by the fund, expressed as a percentage of the average fund size for the period under review.

Market-linked fund
A pooled investment fund (also see 'pooled fund') that is valued according to movements in the market to which it is linked.

Master trust or master fund*
Both names are used interchangeably for schemes that allow individual investors or smaller superannuation funds to channel money into one or more underlying funds. A master fund may include one or more legal entities that cover superannuation and non-superannuation investments. Where a master fund is a complying superannuation fund, it may offer several products including accumulation options, allocated and superannuation pensions.

Monetary policy
Economic policy, usually handled by the Reserve Bank, concerned with the management of money supply, interest rates and financial conditions.

Money market
A market for trading short-term securities.

'Multi-manager' style (funds management style)
A funds management style where the investment management is conducted by more than one fund manager. It can be used for diversified or single asset class funds.

N

NASDAQ (National Association of Securities Dealers Automated Quotations)
A computerised system that provides brokers with the price of shares and securities traded on the New York Stock Exchange (NYSE) and over the counter. Unlike the NYSE, the NASDAQ has no physical trading floor.

Negative gearing
An investment strategy where related costs (eg. interest payments on funds borrowed to buy an income-producing asset) exceed the income from the asset.

NIKKEI-225 Stock Average
The main Japanese stock market benchmark that measures the top-rated 225 companies listed on the first section of the Tokyo Stock Exchange.

Non-preserved benefits
That portion of superannuation benefits that can be accessed/withdrawn at any time.

O

Option
An investment contract that gives the owner the right but not the obligation to buy or sell an asset at a predetermined price within a stated period of time.

Ordinary shares
Securities or fully paid shares that represent an ownership interest in a company. They carry voting rights (for the shareowner) and entitle the shareholder to receive dividends if the company makes a profit and decides to pay dividends.

Overweight
Taking a greater exposure to one investment market or security compared with a benchmark or neutral position. The opposite of underweight.

P

Passive management (investment management style)*
A style of investment management that aims to achieve investment returns in line with those of a specified market or index. May also refer to a style of investment management that focuses on holding investments for an extended period rather than trading to maximise gains.

PAYE Tax
An abbreviation for 'Pay As You Earn' tax, where employees have income tax deducted from their wages or salary by their employer.

Pension
A regular, periodic payment to an individual, made by either the Government or a superannuation fund.

Personal contributions
In relation to superannuation, personal contributions are payments made to a fund from an individual's after-tax salary or other financial source, e.g. investment dividends, inheritance. Also referred to as 'after-tax contributions' or 'undeducted contributions'.

Pooled fund
A number of individuals place their funds into one investment product fund (fund) that is then managed by an investment manager on behalf of all the investors.

Pooled superannuation trust (PST)*
A PST is a scheme with a trustee approved by APRA, which is used only for the investing the pooled assets of regulated superannuation funds, approved deposit funds, life offices and registered organisations. PSTs are taxed under special provisions of the Tax Acts. When holders of units in PSTs dispose of their holdings, they do not need to pay any additional amounts in tax.

Portability
The ability to transfer benefits from one investment or superannuation fund to another.

Portfolio
A collection of investments that are all owned by the same individual or organisation.

Preservation
A regulatory requirement that certain superannuation benefits cannot be accessed until a condition of release has been satisfied or the member has reached retirement age.

Preserved benefits
Benefits within a superannuation fund that cannot be accessed until the fund member turns 55 and/or retires, or a 'special circumstance' has been met (e.g. severe financial difficulties or permanent incapacity).

Privatisation
The sale of Government-owned services which permits the public to gain direct ownership via an allocation of shares.

Product Disclosure Statement
A document required by law that provides specific details about the financial product being offered.

Property trust
A unit trust that pools investors' funds into property investments.

Q

Quartile
A statistical measure dividing a sample into four numerically equal groups. Thus top quartile in a funds management context means the top 25% of the fund managers in a particular category or asset class.

R

Rally
A rise in the sharemarket or a particular share price after a period of falling prices.

Reasonable Benefit Limit (RBL)
A Government-imposed maximum on the benefits that a person can receive into their superannuation fund at a concessional tax rate.

Recession
A significant slowdown or minor contraction in the economy (as opposed to a depression which is a major contraction in economic output). A recession is sometimes defined as a period where a nation's Gross Domestic Product (GDP) declines over two consecutive quarters.

Regular savings plan*
An agreement in which an investor pays a regular amount at a nominated frequency into an existing scheme (investment fund).

Resource shares
Shares in companies involved in commodity-related activities such as mining and energy.

Retirement income stream
An investment product that provides a regular income in retirement.

Retirement Savings Account (RSA)*
A superannuation account maintained solely for retirement income purposes. RSAs are portable, owned and controlled by the member and capital guaranteed. The balance of the account cannot be reduced by the crediting of any negative interest or earnings or by changes in the market value of assets, but may be reduced by fees and charges.

Return
The amount of income or growth received from an investment or a transaction, usually expressed as a percentage of the amount invested.

Risk
The chance of incurring a loss from an investment.

Rollover
Transfer of superannuation money from one approved superannuation fund to another.

S

Securities*
A form of contract representing ownership in shares, fixed interest and derivatives.

Self-managed superannuation fund (SMSF)
A superannuation fund managed by one person or a small team of individuals. They are regulated by the Australian Taxation Office (ATO) and have to meet numerous regulatory criteria.

Share
Part-ownership in a company. Shares include certain rights (eg. to participate in the appointment of directors, to receive dividends, to receive a share of the surplus assets in a company's dissolution). Different types of shares include ordinary shares, convertible notes and preference shares.

Spouse superannuation contributions
A situation where a higher-earning spouse makes contributions to their lower income-earning spouse's superannuation fund.

Stockbroker
A stock exchange member who is authorised to buy and sell shares on behalf of others.

Strategic asset allocation*
The composition of an asset mix within a portfolio, constructed with the objective of meeting the long-term liabilities of a fund, rather than being based on short-term views of relative performance of the various asset classes.

Superannuation (super)
A system where individuals set aside funds during their working life to fund retirement. The Government supports this system by requiring employer contributions on behalf of employees, providing tax concessions and regulatory controls for the benefit of contributors.

Superannuation Guarantee
A Government scheme whereby employers must contribute a prescribed level (currently a minimum of 9%) of an employee's annual income into a nominated superannuation fund.

Superannuation Guarantee Charge
A charge imposed on any employer that fails to contribute the prescribed level of superannuation for their employees.

T

Tactical asset allocation*
An investment approach by which the allocation of a fund to different classes of asset is changed on a short-term basis to take advantage of perceived differences in their relative values.

Term certain annuity
An annuity where income payments are guaranteed to be paid for an agreed term.

'Top down' style (funds management style)
A method of analysing companies whereby an investor starts by looking at macro-economic factors and then incorporates industry trends and stock-specific factors. This style is the opposite of 'bottom up'.

Trust deed*
A document that sets out the rules for the establishment and operation of a fund.

Trustee
The person or company that has the legal responsibility to ensure that the trust or superannuation fund is operated in accordance with the trust deed.

U

Undeducted contributions
Contributions to a superannuation fund or retirement savings account made after 30 June 1983 for which no tax deductions were allowable. The undeducted contributions component of an Eligible Termination Payment is not taxable and does not count towards a person's Reasonable Benefit Limit (see definition in this glossary).

Underlying investments or securities*
In relation to managed investments, this normally means the investments selected by the investment manager. In the case of master trusts, underlying investments are the investments offered through menu options for an investor to select. The menu may include both listed and unlisted investments and investments only available through the master trust the investor has elected to use.

Underweight
Taking on a smaller exposure to one investment market or security compared with a benchmark or neutral position. The opposite of overweight.

Unit trust
A pooled investment structure set up under a trust deed where investors buy units in a trust that is managed by the fund manager on behalf of the investors. The value of units is set either by the market (if a listed trust) or by the trustees (if unlisted), who adjust the price according to valuations.

V

'Value' style (funds management style)
A value investor seeks to invest in assets that are underpriced on the expectation prices will increase. With shares, the key ratio to judge whether stocks are underpriced or not is their relative price/earnings ratio.

Volatility
The extent to which total returns from an investment fluctuate over time.

W

Wrap account/service*
A portfolio reporting and custodian service in which investors hold assets via a custodian arrangement and receive reports on all assets within the portfolio. Assets held may include direct investments such as shares, and managed investments including master funds, etc.

X

No listings

Y

Yield
The income earned from an investment expressed as a percentage.

Z

No listings

The definitions marked with an asterisk (*) are taken directly from the Investment and Financial Services Association Standards (IFSA Guidance Note no.500) and are reproduced with IFSA's kind permission.