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Glossary
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A
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B
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C
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D
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E
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F
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G
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H
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I
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J
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K
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L
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M
N
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O
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P
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Q
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R
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S
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T
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U
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V
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W
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X
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Y
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Z
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A
Accumulation index
An index that measures movement in the value of a market. It takes account of both price movement and income growth. Income growth in the case of shares relates to dividends.
Active management
Attempts by a fund manager to achieve returns over and above those normally associated with a given level of risk. This can be done via a bottom-down or top-down approach to portfolio management. The opposite of passive management.
AGM
The yearly meeting between directors and shareholders of a company. At the meeting management details company performance and outlook, and shareholders vote on key issues relating to the company (e.g., election of Board members, changes to Constitution etc).
All Ordinaries Index
More recently called the S&P/All Ordinaries share price index, it is a share price index that measures the market prices of the major stocks listed on the ASX.
Annual report
The document, issued after the end of a company’s financial year, which describes the affairs of the company over that period. Amongst other things, it includes a profit and loss statement, and balance sheet and a statement of cash flows.
ASIC
The national authority responsible for administering companies and securities law. It acts as the industry’s policing body by prosecuting individuals and companies that contravene the Corporations Act.
Asset Plays
Companies that are sitting on valuable assets that investors have overlooked. These assets might include something as simple as cash, or land that has unrecognised value. One of Peter Lynch's six categories of stocks.
ASX
Australia’s national stock exchange. It started operating in its current form in 1987.
Avoid
Usually invoked where we have not covered a stock before, or after a string of negative recommendations. It means do not buy this stock, or sell it if you have not acted on previous Sell recommendations.
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B
BBSW
The Bank Bill SWap rate is the rate at which banks lend to each other and a reference rate for most floating rate securities.
Better Value Elsewhere
Stocks with this recommendation are trading above our estimate of fair value, but not ludicrously so. Over time the stock will most likely be worth more in the future, although better opportunities exist at the time of the recommendation.
Blue Chip
A large company with a market capitalisation of more than $1 billion. Note that blue chip does not necessarily mean safe, it is a reference to size only.
Bond
Type of fixed interest investment, often issued by governments for their funding requirements.
Broker
The intermediary who acts as the go-between in security transactions. See our section on choosing a broker.
Brokerage
The fee charged by a broker for processing a securities transaction.
Buy
Undervalued and suitable for purchase now. A stronger recommendation than 'Long Term Buy'.
Buy for Yield
Where a stock offers an attractive, stable income in relation to its current price.
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C
Capital gain
The taxable profit an investor makes on a securities or property transaction. Capital gains tax is the name given to the tax an investor must pay on capital gains.
Capital loss
The loss, which may be offset against current or future capital gains, that an investor makes on a securities or property transaction.
Charting
A branch of the method of selecting shares known as technical analysis which uses share price charts to make buy and sell decisions.
CHESS
The system that allows the automatic transfer and settlement of ASX transactions via computer processing.
Client adviser
The individual who provides you with advice at a full service broker.
Commission
See brokerage.
Concise report
A summarised version of the annual report.
Contract note
The document a broker must issue you which describes a securities transaction. You must keep this as a record of your transaction for tax purposes.
Cumulative
Payments on an income security are cumulative if any missed payments need to be made up in future.
Cyclicals
Companies where sales and profits rise and fall in a regular although not necessarily a predictable fashion. These companies are typically hostage to the economic cycle. One of Peter Lynch's six categories of stocks.
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D
Debt to equity ratio
The debt-to-equity ratio measures the extent of a company’s debt exposure. This is a useful ratio because it indicates where a company stands in relation to its creditors. Generally speaking the higher the figure the greater the risk the company faces in repaying its debtors. Although there is no hard-and-fast rule about the safest level of debt a company should have in order to stay out of trouble, we believe that 80% gearing or below (depending on the sector) is a useful guide to judge whether a company is being financially responsible or not.
There are a few ways of calculating this ratio but this simple calculation is a good indicator of a company’s debt position. We prefer to use only interest-bearing liabilities such as bank loans and other borrowings, minus the company’s cash because these are the most important liabilities. Now here’s a formula:
Debt-to-equity ratio = (borrowings - cash/shareholders’ equity) x 100
One thing to keep in mind is that this figure doesn’t tell you the full story. A company with a steady income stream and continued profits coupled with high gearing such as Hills Motorway is often safer than a company with less debt but more volatile earnings such as NRMA.
Delisting
Is when a company’s shares are removed from the official list. Reasons for removal include a company failing to comply with the exchange’s rules or no longer meeting listing requirements.
Demutualisation
A case where a company established for the benefit of its customers, who are often called 'members', becomes publicly listed. This normally entitles the customer to receive shares in the company.
Direct ownership
Holding an asset in your own name rather than through a managed fund.
Director
A member of a company’s board who is charged with overseeing the affairs of the company, and ensuring that senior management acts in shareholders’ interests.
Diversification
The process of spreading your investments across different classes or assets.
Dividend
The income paid by a company, usually every six months, to shareholders.
Dividend
A dividend represents the distribution of part of a company's net profit to shareholders. To receive a declared dividend the shares must be purchased before the ex-dividend date. You will receive the declared amount for each share held.
Dividend yield
The percentage of the dividend, in cents per share, divided by the share price in cents.
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N
Non-cumulative
Non-cumulative distributions imply that a missed distribution isn’t temporary like a stay in a private hospital, but rather permanent and financially painful like the bill
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D
DPS
Dividend Per Share, the amount of earnings paid out to shareholders on a per share basis.
DRP
Allows the shareholder to choose to receive dividends in the form of shares in the company instead of a dividend cheque. The new shares are usually offered without brokerage costs and often at a small discount to the market price.
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E
EPS
Earnings Per Share, calculated by dividing the NPAT by Number of shares on issue.
Equity
Your ownership interest in any asset. Alternatively, ‘equities’ are a more formal name for the asset class of ‘shares’.
Execution only broker
A broker who just processes the transaction and who is not permitted to provide you with advice on securities transactions. Sometimes known as a ‘discount’ broker.
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F
Face value
The amount repaid on a bond or income security at maturity and the amount on which distributions are calculated.
Fast Growers
Small and aggressive young companies that grow at 20 to 25 per cent a year. These companies have often established a good niche within their particular industry, but risk is higher than with slow growers or stalwarts. One of Peter Lynch's six categories of stocks.
Financial year
The period over which a company measures its performance. The most common financial year ends on 30 June every year.
Fixed interest
A type of debt that pays a fixed annual rate of interest.
Float
A new issue of shares in a company before it lists on the stock exchange.
Franked Dividend
A dividend that carries tax advantages for shareholders. A percentage of the dividend paid by a company can be franked, up to 100%. The idea behind imputation credits (which lead to franking) is that companies have already been taxed on the money they earn. When they go to pass on dividends to shareholder, therefore, they should not be taxed again. On the franked portion of a dividend, shareholders pay the difference between their own marginal rate of income tax and the rate of corporate tax that the company has paid.
Franking
The percentage of the dividend on which the company has already paid tax.
Full service broker
A broker who provides you with advice on securities transactions, and other services such as research and access to floats.
Fund manager
A professional who buys and sells investments for a managed fund.
Fundamental Risk
This rating has two components. The first is a stock's underlying business strength. Here, we look at a company's competitive position and management expertise, its products and the general industry dynamics. Secondly we look at financial strength, which refers to our assessment of the company's debt and other obligations, like operating leverage, which may lead it to financial distress.
We then combine these factors into a single rating-fundamental risk. Market-dominant, well-managed companies with low debt enjoy a low risk rating and poorly managed, highly geared companies in competitive markets suffer a high risk rating.
Fundamentals
A company’s financial and operational details. Fundamental analysts assess these factors in an attempt to determine the long-term performance of the business, and ultimately, the company’s share price performance.
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H
Hedge fund
A type of higher risk managed fund that uses more aggressive or specialised investment strategies to boost overall returns.
High Stakes
Risky, speculative investments for those who like to play a high risk;high reward game with a percentage of their portfolio.
Hold
The share price is trading around what we believe the company to be worth. It's fair value and existing holdings can be maintained.
Hold for Asset Value
Where the underlying assets owned by a company are of greater value than that indicated by the current price, but not of a magnitude to warrant a more favourable recommendation.
Hold for Yield
Used where we expect income, rather than capital gains, to be the main reward for holding stock over time.
Hold while Unstable
Reflects a situation where we believe a company is trading around fair value, but there is uncertainty surrounding it and the share price is fluctuating as a result.
Holding statement
The document which notifies you of your shareholding in a particular company.
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I
Imputation credit
The credit shareholders are entitled to for the tax already paid by the company they own shares in.
Indicators
The analytical tools used by technical analysts to help them select shares.
Inflation
The ongoing upward creep in the prices paid for goods and services.
Institutional Investor
An organisation whose primary purpose is to invest its own assets or those held in trust for others. Such companies include superannuation funds, retail and wholesale fund managers and insurance companies.
Intrinsic value
The underlying worth of a business, calculated by analysing a company’s fundamentals.
Investing
Buying financial or other types of assets in an attempt to obtain a higher return than is possible from cash.
Investor's College
An educational feature in each edition of The Intelligent Investor. Covering a range of topics;from accounting to assessing management, Investor's College provides the tools for subscribers to do their own research.
IPO
Initial Public Offering, the first sale of shares in a company to the public. Also known as a Float.
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L
Long term
An investment period that usually refers to a time period of several years or longer.
Long Term Buy
This recommendation is applied to above average companies that may never trade at bargain prices but should deliver good results to genuine long-term investors over time. It can also be applied to average companies that are mildly underpriced.
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M
Managed fund
A trust where you pool your resources with other investors, and which is run by a professional fund manager.
Margin lending
A type of borrowing to buy shares which requires you to maintain the lender’s proportion of your portfolio value above an agreed level. If the portfolio value falls, the lender will issue you with a margin call, which requires you to provide securities or cash to maintain the lender’s proportion.
Margin of safety
The difference between a company’s intrinsic value per share and its share price. Value investors believe that you should only buy shares where this difference is significant.
Market Capitalisation
The amount it would cost to buy all of the outstanding shares in a company. It is calculated by multiplying the total outstanding shares by the current share price.
Merger
A form of corporate restructure in which two companies merge their businesses. Unlike takeovers, mergers are usually a result of a mutually beneficial negotiation process.
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NPAT
Net Profit After Tax
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O
Official List
The list of companies that trade on the ASX, as maintained by the exchange itself.
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P
PER
Price-to-Earnings Ratio, the stock's price divided by it's current or estimated EPS. It can be used as a measure of the attractiveness of a particular security versus other similar securities.
Portfolio
A collection of different investments held by an investor.
Preference share
Shares that take priority over a company’s ordinary shares for dividends and any distribution in the event of liquidation. Dividends are usually referenced to a fixed or floating interest rate and can be franked or unfranked.
Privatisation
The alteration of the legal and managerial structure of a government body to permit private equity holdings or outright ownership. This occurred when companies Telstra, Qantas and Commonwealth Bank were listed.
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R
Redeemable preference share
Preference shares that can be redeemed for a fixed amount of cash or shares.
Return
The percentage an investment has earned or might earn.
Risk Ratings
A rating out of five, for fundamental risk and shareprice risk, with a rating of five corresponding to the highest level of risk.
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S
SEATS
The screen-trading system adopted by the ASX.
Second Line
Smaller than blue chip companies, second line companies have a market capitalisation of less than $1billion.
Security
General term for the instruments that signify ownership of an asset class. Units, shares or bonds are all types of ‘security’.
Sell
Overpriced, with the risk of holding on to such stocks being greater than the chances of continued capital gain. There are usually better, and safer, opportunities elsewhere.
Sell and Switch
As with a sell recommendation, although in this case we suggest an alternative stock for those who want continued exposure in that particular sector.
Settlement date
The date, three days after the transaction, by which you must supply cash or documentation for a securities purchase or sale.
Share
Part ownership of a business.
Share registry
A company which maintains the list of shareholders and processes documentation such as share transfers, dividends and reports to shareholders.
Shareprice Risk
This is something altogether different, being the degree to which we think a share price corresponds to the real, or intrinsic, value of a stock, and an assessment of its volatility. So, companies that we believe are extremely overpriced and prone to volatility will have a high rating while those that are reasonable value and backed by a good dividend won't.
Such methods don't conform to conventional academic theory, which states that risk relates solely to a share price's volatility, but we make no apologies for that.
To our minds, the primary risk of a business is in it going broke. And the share price, in the short term at least, is a reflection of what a group of not necessarily informed people are prepared to pay for a stock, not a reflection of its true value. There is a relationship between the fundamentals of a business and its share price but it is only revealed over a reasonable period, sometimes many years. That is why companies in the dot.com boom could be 'worth' hundreds of millions one day and insolvent the next.
Short term
An investment period that usually refers to days or months rather than years.
Slow Growers
Large and typically mature companies that are expected to grow only slightly faster than the economy itself. These companies tend to pay generous and regular dividends. One of Peter Lynch's six categories of stocks.
Speculative
A term that denotes a higher risk type of investment.
Speculative Buy
A number of factors could earn a stock this tag but, ultimately, it refers to a more risky investment. We'd suggest that you don't put too much of your portfolio at risk following such recommendations.
Speculator
An individual who bets on price movements, usually in the short term.
Stalwarts
Large and typically long established companies that tend to grow faster than slow growers thanks to their strong market positions or brand names. These stocks often provide some protection against recession conditions. One of Peter Lynch's six categories of stocks.
Strong Buy
To warrant a strong buy a stock must be grossly undervalued and offer significant downside protection - a high dividend yield for example. But don't expect 'Strong Buy' recommendations to rise in price immediately: sometimes the opposite can occur. Eventually, though, the value is realised.
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T
Take Part Profits
Used where stocks have risen to a point where we feel they have overshot their intrinsic value by a large amount. We suggest you sell some of your shares to reduce exposure to possible falls.
Technical analysis
A means of selecting shares which focuses on using indicators, share price charts and analysis of price and volume trends to make buy and sell decisions.
Trust
A type of investment structure where investors hold their interest in units rather than shares. Commonly used by property trusts.
Turnarounds
Companies that may recover after a period of difficulty, often involving high debt levels. These companies can potentially go bankrupt before they turn around. One of Peter Lynch's six categories of stocks.
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V
Valuation
A value for a business that is derived by fundamental analysis.
Volatility
The tendency of the value of certain assets, such as shares, to move around, sometimes sharply.
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Y
Yield
The total dividends received over the previous 12-month period expressed as a percentage of the current share price.
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Thu 11 Mar 2010 1:19 
