Top Finance Terms

4 September 2012

Top Finance Terms You Should Know

 

Asset: Things you own that have value. This could be cash, property, equipment, etc. 

All Ordinaries Index: It’s talked about every day on the news, but do you actually know what it is? Basically, it’s the overall measure of the daily performance of the Australian share market based on the weighted share prices of around 500 of the nation’s biggest companies.

Bear market: It sounds cute, but it’s actually not great. It’s a share market in which prices are going down.

Blue chip: The basis of a great, long-term share portfolio. Blue chip is a term for the shares of leading companies, where management is excellent and the foundations are strong.

Bull market: Nothing to do with running with bulls in Spain … rather, it’s a share market in which prices are on the rise.

Capital growth: The difference between what you paid for an investment (such as a house) and what you can sell it for, if it’s increased in value.

Compound interest: Arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest.

Dividend: The amount a shareholder receives out of a company’s after-tax earnings. You can either take the money and run or reinvest your dividends back into the company in the form of more shares.

Equity: There’s been a lot of talk about this in recent years as people realise how much money they have tied up in their homes. Basically, it’s the value an owner has in an asset (in this case, a house) over and above the debt against it. Take the amount your house is worth, subtract the amount you still owe the bank and what’s left over is the equity.

Gearing: A measure of just how in debt you are. How much you’ve borrowed compared with the assets you hold.

Share (stock): Buy a share and you own part of the company — albeit a very small part. A share is essentially a contract between the company of issue and the owner, giving the latter an interest in how the company is managed, the right to share in profits and, if it all goes pear-shaped and the company is dissolved, a claim upon assets remaining once the debts have been paid. Stock is a generic term for shares and, less frequently, bonds.

TFN: Otherwise known as tax file number. Every taxpayer in Australia is allocated one by the Australian Tax Office, who then use it to match income and taxation details.  

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.

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.

Active investment management (funds): Where a fund manager seeks to enhance returns through effective stock selection, asset allocation and currency selection decisions.

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 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.

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: 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.

 

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