glosary of financial terms

Glossary Investment Terms

Accumulation fund. A superannuation fund where benefits received by members are determined by adding investment earnings to the contributions made by them on their behalf by employers. (As opposed to a defined contribution or defined benefit fund).

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 an asset 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-up approach to portfolio management. The opposite of passive management.

AGM. Abbreviation for Annual General Meeting.

Allocated pension. A retirement income arranged through a funds manager where an individual draws a pension from a lump sum investment that is earning a return, and therefore growing.

All Ordinaries Price 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 Australian Stock Exchange (ASX).

Alpha. The expected return of a stock or a portfolio if the market rate of return is zero.

American option. An option that can be exercised before and up to its expiration date. (A European option, on the other hand, can only be exercised on its expiration date.)

Amortisation. The accounting process where an interest bearing liability such as a mortgage is paid off over time through regular instalments that comprise both principal and interest.

Annual accounts. Also called annual report, this is a financial summary of the state of affairs of a company over the course of a year. It includes a profit and loss account, a balance sheet and a statement of cash flows.

Annual General Meeting. Often shortened to AGM, this is 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).

Annualise. A mathematical process where the rate of return on an investment for periods other than a full year (e.g., for six months) are converted to annual terms.

Annuity. A financial arrangement, where periodic payments are made to the holder of the annuity in exchange for the investment of a lump sum amount. They are often used in the provision of retirement incomes.

Appreciation. In its simplest form, appreciation refers to an increase in the value of an asset. In foreign exchange markets, it refers to an increase in the value of one currency relative to that of another.

Arbitrage. A zero-risk, zero net investment strategy that still provides profit. This is facilitated by taking advantages of current prices in different markets, which allows the investor to buy an asset at a price in one market, and sell it at a higher price in another market.

ASIC. Short for the Australian Securities and Investments Commission. This is the Federal Government authority responsible for the administration and enforcement of corporations and consumer protection law for investments, life and general insurance, superannuation and banking (except lending) throughout Australia.

Ask price. The price at which a holder of an asset is willing to sell that asset (opposite of bid).

Asset allocation. The process of choosing between assets classes (e.g. shares, bonds, property and commodities) or individual company assets (e.g., BHP, CBA, ANZ and Telstra) when constructing a portfolio.

Asset backing. The value of a company's assets divided by the number of shares on issue.

ASX. Abbreviation for the Australian Stock Exchange. It is through this exchange that secondary market trading of Australian equities, bonds and certain other securities takes place.

At the market. A term used to describe an order where the broker is told by a client to buy or sell a stock at the best price obtainable at the time.

At the money. This describes an option whose exercise price is equal to the current price of the asset underlying the option.

Authorised capital. The maximum number of shares that a company is permitted to issue under its Constitution.

B

Balance sheet. A financial statement that reveals the composition (both type and volumes) of a company's assets, liabilities and shareholders' equity at a point in time.

Balanced fund. A superannuation fund that diversifies its holdings over a range of asset classes such as shares, bonds, property and cash.

Basis. The price difference between the spot price of an asset and the price for the derivatives (e.g., futures and options) relating to that asset.

Basis point. A movement in the rate of return on an investment, equal to 1/100 of a percentage point.

Basis risk. The risk linked to uncertain movements in the spread between a futures price and a spot price. Numerically, it is the amount by which the value of a derivative differs from the value for the asset underlying that derivative.

Bear. Someone who believes that markets will fall.

Bear market. A pessimistic market characterised by falling prices (opposite of bullish market).

Below par. A price below the face value (or par value) of a security.

Benchmark. An index or bellwether measure used by market players as a yardstick to compare performance of securities.

Beta. A statistical measure of the systemic risk of a particular share (e.g. CBA). It reflects the historical movement in the stock's share price viz a viz that of a broad market indicator, such as the S&P/All Ordinaries index. For example, a smaller company with a beta of 1.3 indicates that it is expected to perform 30% better than the market when it rises, and 30% worse when it falls.

Bid price. The price that a prospective buyer is willing to pay for an asset (opposite of ask).

Bid-ask spread. The difference between the bid and ask price for a security. Here the bid is the highest price prospective buyers are willing to pay, and the ask is the lowest price prospective sellers are willing to accept.

Block. A large holding or transaction of shares.

Blue chip. A term used to refer to shares in leading companies that have a reputation for excellent quality and sound financial management. Good examples in the Australian market are National Australia Bank, Telstra and the Commonwealth Bank.

Bond. A security, such as a Treasury bond issued by the Australian Government, that obligates the borrower to made specified payments (coupons) to the bondholder over the life of the bond, and repays the face value at maturity.

Bonus shares. Shares issued free by a company to its existing shareholders on a pro-rata entitlement basis.

Books closing date. The date at which a company's share register is closed off to identify the shareholders and to calculate any entitlement to new issues and dividends.

Book value. This is an accounting measure that gives the net worth of an asset according to its carrying value on the company's balance sheet.

Bottom-up analysis. Security analysis that begins with forecasting returns for individual companies, then industries, and, finally, for the economy as a whole.

Breakout. This term describes a market, which has been trading within consolidation and then moves outside this range. The movement outside the range is referred to as a breakout with the price then expected to continue moving in the direction of the break. Breakouts are usually powerful and occur on high volume.

Brokerage. A fee or commission paid to a stock-broking firm to act on your behalf in the buying and/or selling of shares.

Budget deficit. The amount by which government spending exceeds government revenues.

Bull. Someone who believes that prices in markets are going to rise.

Bullish market. An optimistic market characterised by rising prices (opposite of bearish market).

Business cycle. Also called the economic cycle, it refers to recurring cycle of expansion, boom, bust, recession and trough. The vagaries of economics mean that the causes or length of business cycles over time are rarely alike.

C

Call option. An option that gives the holder the right but not the obligation to purchase an asset for a pre-determined price (the exercise price) at or before the expiration date of the option.

Capital gains. The amount by which the sale price of an asset exceeds its purchase price.

Capital growth. The appreciation of the market value of an asset.

Capitalisation. Also called market capitalisation, this term refers the product of a company's share price multiplied by the total number of shares issued by that company.

CAPM. Abbreviation for capital asset pricing model. This model is used to set discount rates. It takes the risk-free rate plus an equity risk premium (with the latter adjusted for the stock or sector beta).

CGT. Abbreviation for capital gains tax, which is a tax imposed on the profit arising from the sale of a capital asset such shares or property.

Charting. Another term for technical analysis, this refers to the graphing of market variables in order to identify trends and, flowing from this, future buy and sell opportunities.

CHESS. Abbreviation for Clearing House Electronic Sub register System. This system, which computerizes all ASX transactions and settlements, replaced the old share certificates system of years gone by.

Churning. The process of acquiring a share holding in a company, and then placing buy and sell orders for shares of that company in order to build up turnover.

Clearing house. That part of an exchange where trades are confirmed, matched and settled.

Closed end fund. A fund whose shares are traded through a stock exchange. The fund will not redeem shares at their net asset value, only at their market value, which is determined by the market.

Close Out. Where the holder of a bought position in a derivative (e.g., a sold or short futures position in 10 December 2000 bank bill futures contract) exits his obligation by undertaking an opposite trade for that same contract (in this case, 10 bought December 2000 bank bill futures contracts).

Commodity. This generic term covers a wide range of items that can be traded, including metals (such as gold, and silver) and agricultural goods (such as wool and wheat).

Common stock. Equities issued as ownership shares in a publicly listed company. They entitle the holder to voting rights and a share of the dividend payments periodically announced by the company.

Company. A legal entity regulated by the Australian Securities and Investments Commission (ASIC) under the Corporations Law.

Compound interest. A form of interest calculation, where in each period interest is calculated on both the principal and the interest previously accrued.

Consolidation. A period where the market trades in a broad sideways pattern within a trend. Consolidations usually follow a strong market gain or fall and occur as buyers and sellers begin digesting the recent price move. A consolidation will end with the market resuming its trend. If the consolidation ends with the market heading in the opposite direction to that before the consolidation it is has formed a top or bottom instead.

Constitution. The document that lists the rules set by the company for its operation. It covers a variety of issues as ownership limits and the size of the company's authorised capital.

Contingent liability. A liability that may materialise in the event of a particular happening (e.g., the loss of a court case being brought against a company by another party).

Convertible notes. Securities that, at the discretion of the holder, are convertible into the ordinary shares of a company at a set price/ratio at specified time in the future.

Corporate bonds. Longer-term debt issued by private companies (e.g., BHP). Like bonds, they usually pay coupons, and repay face value at maturity.

Coupon payments. These represent an obligation of the issuer of a bond to pay interest on the bond at regular periods (usually every six months).

Coupon rate. A bond's interest payments per dollar of par value.

Credit risk. The risk that counterparty to a financial obligation such as a loan will default on repayments linked to the obligation.

Cross holdings. Where one company holds shares in another company.

Cum dividend. A share (or bond) where buyers of the share (bond) rather than sellers qualify to receive the next dividend (coupon) payment.

Currency risk. The risk that an investor will incur losses on an overseas investment as a result of adverse shifts in exchange rates.

Current ratio. The ratio of a company's current assets to current liabilities. It is a measure of the ability of a firm to pay off its current liabilities by liquidating its current assets.

D

Debt-to-equity ratio. A measure of a company's indebtedness, which is simply borrowings divided by shareholders' equity.

Defined benefit fund. A fund that provides retirement benefits that is set according to a fixed formula. That is, the benefits to be paid to members of the fund are defined in advance of the member's retirement.

Defined contribution fund. A fund where the employer is committed to making contributions accordingly to a fixed formula.

Delivery. The actual transfer of possession of securities from one counterparty to another.

Delta. The ratio of the change in the price of an option to the change in the price of the asset underlying the option.

Demutualisation. The process of changing from a company owned by members to a (not necessarily publicly owned) company owned by shareholders.

Depreciation. The gradual writing down of the cost of an asset over the useful life of that asset.

Derivatives. These are a class of securities, including futures and options, which derive their value from underlying physical securities.

Discount. The amount by which the current value of a share is below its asset backing.

Discounted cash flow (DCF). Or DCF for short, this is the present value of a company's free cash flow, taking into account the time value of money as calculated by the CAPM methodology.

Discounting. The term used to describe the procedure of calculating the present value of a stream of future cash flows.

Discretionary account. The account of a customer who gives the broker the authority to make buy and sell decisions on the customer's behalf.

Divergence. Term given to when the RSI or MACD indicators broadly move in the opposite direction to that of the actual market price. Divergence can be either positive or negative. Positive divergence is when the market price moves to a new high within its current trend, while at the same time the indicator fails to register a new high. This suggests that the market, whilst moving to a new high lacks the same strength and conviction of previous rises and that these gains are likely to falter. Negative divergence applies when a market is registering new lows within a trend, which is not matched by the indicator. The indicator instead has begun to register higher lows. Once again this suggests the strength of the decline is dissipating and a reversal can be expected. This is a useful indicator near key turning points.

Diversifiable risk. Non market risk, or risk linked to firm specific risk (the opposite of systemic risk or market risk).

Diversification. The act of spreading a portfolio over a number of investments in order to limit exposure to any one form of risk.

Dividend. The amount of a company's after tax earnings that are paid out to shareholders of that company.

Dividend imputation. An Australian tax rule where the amount of corporate tax paid by a company is credited to shareholders of that company. The shareholder is assessed on the sum of the total amount of dividend and the imputation credit, but is allowed to claim the imputation credit as a tax rebate.

Dividend payout ratio. The percentage of earnings paid out as dividends.

Dividend yield. A rate of return measure, calculated by dividing the dividend per share by the current market price of the share.

(The) Dow Jones. The Dow Jones Industrial Average is the average of 30 large blue chip US corporations. It has been computed since 1896, a history that has aided its broad recognition across the world.

Due date. The date when any form of debt instrument becomes payable or matures.

Due diligence. The process of checking the accuracy of information contained in a company public statement, such as a prospectus, before recommending that company to others. Is also the act of one company investigating another company before buying its shares.

Duration. A measure of the average life of a bond. It is the weighted average of the times until each payment is made, with the weights proportional to the present value of the payment.

E

Earnings per share (EPS). A commonly reported performance measure, calculated by dividing a company's net profit after tax by the number of shares on issue.

Earnings retention ratio. The percentage of earnings retained by a company (i.e., that portion of earnings not paid out in dividends).

Earnings yield. The ratio of earnings per share to the price of that share (i.e., it is the reciprocal of the price-earnings ratio).

EBIT. The abbreviation for earnings before interest and tax. A key earnings measure that shows earnings by a company before various provisions are taken away.

Effective annual yield. The annualised interest rate on a security (e.g., a bond) computed via compound interest techniques).

Equity. Another word for a share investment. It can also mean the value an owner has in an investment after debt on that investment is deducted.

Eurodollars. US dollar denominated deposits at non-US banks or foreign branches of US banks.

Euromarkets. A generic term referring to international markets for currencies outside of each currency's home market place.

European option. An option that can only be exercised on its expiration date.

Exchange rate. The price of one unit of a particular country's currency in terms of another country's currency.

Exchange risk. Another term for currency risk.

Ex-dividend. Shares sold ex-dividend entitle the seller to retain the current dividend. Shares are usually quoted ex-dividend five business days before the company's books close.

Exercise price. The price set for buying (calling) or selling (putting) the asset underlying an option. This is the same as the strike price.

Expiration date. The date when an options or futures contract lapses.

F

Face value. The price at maturity of a bond. It is not normally an indication of current market value.

False Break. Occurs when a market fails to carry on with the breakout, instead quickly reversing and returning to trade within the limits of the previous consolidation. False breaks are typically difficult to read, but low volume on the initial breakout is one indication that can be quite reliable.

Fed. Short for the US Federal Reserve, the US central bank.

Fibonacci Retracements. These are based on the number sequence developed by an Italian mathematician named Fibonacci. In theory markets after moving substantially in one direction �back pedal� or �correct� a portion of the initial move. Using the Fibonacci number sequence, markets typically retrace 31.2% or 61.8% of the prior market move. 50% is commonly used as well. These retracement levels are usually used to derive targets for market moves as well as potential support and resistance levels.

Fifty Leaders Index. A subset of the S&P/All Ordinaries share index that measures price movements in the 50 leading stocks as listed on the ASX.

Financial intermediary. An institution such as a bank, building society, credit union, insurance company or superannuation fund, that acts as a middleman between borrowers and lenders.

Firm specific risk. Risk that is linked to investment in a particular firm that is independent of market risk.

Fixed interest asset. A security such as a Treasury bond that pays a specified cashflow (e.g. six monthly coupon payments) over a specified period, and pays back the face value of the security at maturity.

Flight to quality. The process where investors seek out less risky investments in times of economic uncertainty.

Float. This is term given to the process where a company offers its shares to the public and lists on a stock exchange.

Floating rate bond. A bond whose interest rate is reset periodically relative to a specified market rate.

FOMC. Abbreviation for the Federal Open Market Committee, which is part of the Fed, and determines interest policy in the US.

Foreign exchange swap. An agreement to exchange stipulated amounts of one currency for another at one or more future dates.

Forward contract. An agreement that calls for the future delivery of an asset at a price agreed to by the two parties involved in the contract.

Franked dividends. Dividends on shares with dividend imputation credits attached.

FTSE. The abbreviation for the Financial Times Stock Exchange index. The UK equivalent of Australia's S&P/All Ordinaries share price index, it is a value-weighted index of 100 of the largest companies listed on the London Stock Exchange. It is often called the "Footsie".

Fully diluted earnings per share. Earnings per share of a stock after converting all options, warrants and convertible securities into equivalent common stock.

Fundamental analysis. Analysis of markets that predicts stock values on the basis of prospective earnings and dividends, interest rate expectations and risk considerations.

Future value. What an amount invested today at a particular interest rate will be worth in the future.

Futures contract. A contract that commits the holder to the purchase or sale of an asset at an agreed price at a particular date in the future. A person has a long position if she agrees to purchase the asset in the future, and a short position if she agrees to sell the asset in the future. A futures contract differs from a forward contract in that the former is more standardised, traded through an exchange, and has maintenance margin plus mark-to-market requirements.

Futures option. The right to enter into a specified futures contract at a futures price equal to a stipulated exercise price.

Futures price. The price at which a futures trader commits to make or take delivery of the asset underlying the futures contract.

G

Gearing. A measure of the indebtedness or leverage of a company (or an individual for that matter). The degree of gearing is often measured by use of the debt-to equity ratio.

Gilt-edged. An investment is said to be gilt-edged if it has low risk/high security characteristics.

Growth fund. A fund that aims to achieve above average rates of growth over the longer term, although risk is higher than that for a balanced fund.

H

Hang Seng index. The main Hong Kong share price index, similar to Australia's S&P/All Ordinaries index.

Hedge fund. A type of investment vehicle where investors in the fund allow its managers to use higher risk investment techniques to leverage up return potential.

Hedge ratio (for an option). The number of stocks required to hedge against the price risk of holding one option. (See also delta.)

Hedging. Investing in an asset to reduce the overall risk of a portfolio.

Holding period return. The rate of return over a given period.

I

Implied volatility. The standard deviation of stock returns that is consistent with an option's market value.

In the money. This describes an option that would generate profits if exercised now (the opposite of out of the money)

Income statement. A financial statement that exhibits a company's revenues and expenses (or profit/loss position) over a specified period.

Index arbitrage. An investment strategy that exploits divergences between actual futures prices and their theoretically correct prices in order to make a profit.

Index fund. A fund that holds shares in proportion to their representation in a broad market index such as the S&P/All Ordinaries index.

Initial public offering. Stock issued to the public for the first time by a privately owned company or a privatised government enterprise.

Insider trading. An illegal activity that involves trading by management, major shareholders or employees of a firm using information that is not yet publicly available to the markets.

Interest coverage ratio. A measure of a company's leverage. It equals earnings before interest and tax (EBIT) divided by interest expense, and provides an indication of a company's ability to meet interest payments.

Interest rate risk. The risk associated with holding a debt security such as a bond when interest rates are volatile.

Interest rate swaps. Where two parties trade the cashflows corresponding to different securities without actually exchanging ownership on those securities.

Investment portfolio. A set of financial assets chosen by an investor.

Issued capital. That part of a company's authorized capital that has already been issued to shareholders.

J

K

L

Leverage. Another word for gearing.

Leverage ratio. A ratio of a company's debt to that same company's shareholders' equity.

Limited liability company. A company where shareholders have no personal liability to the creditors of that company should it go bankrupt.

Liquidity. This term relates to the speed at which an asset can be converted to cash.

London Interbank Offered Rate (LIBOR). The rate at which creditworthy banks charge each other for large loans of Eurodollars in the London market.

Long position. Where an investor has an excess of purchases over sales of a particular asset at a point in time.

M

Macroeconomics. That area of economics that focuses on analysis of broad trends in a country's economy. Key components of macroeconomics are monetary policy and fiscal policy.

Maintenance margin. A value below which a trader's margin must not fall. If the margin falls below the maintenance margin, a margin call occurs.

Margin. A deposit lodged with an exchange or clearing house to cover adverse movements in market prices. May also describe financial assets, like stocks, that are purchased through money borrowed by a broker.

Margin call. A requirement by a clearinghouse that a clearing member increases margin deposits to cover for an adverse shift in prices on futures contracts held on its books.

Market capitalisation. Also called capitalisation, this term refers the product of a company's share price multiplied by the total number of shares issued by that company.

Market portfolio. The portfolio for which each security is held in proportion to its market value.

Market price of risk. This relates to the extra return, or risk premium that investors demand if they are to purchase a risky asset.

Market risk. Sometimes called systemic risk, this is risk attributable to macroeconomic factors.

Market timer. An investor who speculates on broad market moves, rather than on individual securities.

Market timing. Asset allocation where investments in particular markets are increased when the investor expects that market to outperform other markets or the overall market.

Market-book ratio. The market price of a share of a share divided by the book value per share.

Market value. The current value of a security.

Marking to market. Pricing an asset at today's market value, and not at the book value of that asset. Can also describe the daily settlement of obligations on futures positions.

Master fund. A fund that allows investors to direst their funds into a number of different wholesale or retail pooled funds operated by a variety of funds managers. Master funds have three broad categories: discretionary funds; fund of funds; and, feeder funds.

Mortgage backed bond. An obligation that is secured by a pool of mortgages. In Australia these are issued by banks, and other non-bank concerns like PUMA.

Moving Average Convergence Divergence(MACD). An indicator that follows the difference between a series of moving averages. The indicator has two lines, the MACD line and a signal. A buy signal is generated when the MACD line rises above the signal line. A sell is generated when the MACD line fall below the signal. Because the MACD is generated from moving averages it is has a unique ability capture wide swinging moves in markets. Divergence, trendlines and support lines can also be applied to the MACD to generate additional signals.

MSCI Index. Abbreviation for Morgan Stanley Capital International Index. The MSCI consists of a number of country indexes focusing on equity markets. It is one of the bellwether measures of share market performance at the international level.

N

Negative gearing. Borrowing money to acquire assets where the interest payments exceed income from the assets, which generates a tax deduction.

Net asset backing. Total shareholders' funds in a company divided by the number of shares on issue.

Net assets. Total assets less total liabilities for a company at a point in time.

Net tangible assets. Net assets less intangible assets such as goodwill.

Nikkei Index. A bellwether Japanese share price index that covers the top 225 shares listed on the Tokyo Stock Exchange.

Nominal interest rate. The interest rate in terms of nominal dollars.

Nonsystematic risk. These are firm-specific risk factors that can be eliminated by diversification.

O

Offer. The price at which a holder is prepared to sell an asset (similar to ask).

Open interest. The number of futures contracts outstanding.

Option. A contract between two parties, which gives the holder, the right, but not the obligation, to buy or sell the asset underlying the option at a pre-determined price (the exercise price) on or prior to a particular time in the future (the expiration date). See call option and put option for further explanation.

Ordinary shares. Securities that represent a stake or share in the ownership of a company. If a company is wound up, the ordinary shareholder generally rank behind secured creditors in the wind-up process.

Out of the money. This describes an option that would not be profitable if exercised now (the opposite of in the money)

Over-the-counter market. In informal group of dealers and/or brokers who trade in a market. However, there is not a formal exchange.

P

Par value. The face value of a security.

Part A Statement. In the event of a takeover, the bidder must provide this statement to the shareholders of the takeover target. Its aim is to help these shareholders decide whether or not to accept the takeover offer.

Part B Statement. In the event of a takeover, the Board of the takeover target must provide this statement to the shareholders of the takeover target. Its aim is to help these shareholders decide whether or not to accept the takeover offer.

Passive management. The creation of a well-diversified portfolio that replicates a broad-based market index such as the S&P/All Ordinaries share price index.

Portability. The ability to switch one's superannuation from one fund to another or into a rollover fund.

Portfolio management. Where assets are combined into a portfolio that fits the investor's preferences (e.g., level of risk) and needs (e.g., regular dividends and coupon payments).

Premium. The purchase price of an option.

Present value. The present day value of a future amount, determined by discounting this future amount by an appropriate discount rate.

Price-earnings ratio (P/E ratio). A common share market indicator, that measures the price of a share divided by the earnings of that same share.

Price / Operating Cash Flow ratio. This ratio compares a company's share price with the cash flow per share. We use two Price/OCF ratios, one including Capital Expenditure, and one before (or excluding) Capital Expenditure.

Primary market. The market into which shares are sold when they are first issued.

Principal. The outstanding balance on a loan.

Profit and Loss Account (P&L Account). A major financial statement showing a company's earnings and expenses over a given period of time.

Prospectus. A statement that provides details of an upcoming securities issue to the public. In Australia, prospectuses must be approved by the Australian Securities and Investments Commission (ASIC) prior to their issue.

Private placement. An issue of bonds or stocks that are sold directly to a select group of (often institutional) investors.

Proxy. This allows an agent to vote on an issue relating to a company in the name of a shareholder in that company.

Public offering. An issue of bonds or stocks to the entire market.

Pullback. After a strong trend the market retraces a small portion of that move before resuming its trend. This differs from a consolidation, which trades sideways. When a market rises strongly, a pullback may see it decline a small portion of that gain as profit taking steps in before rallying again. In reverse when a stock is falling, bargain hunting may lift the stock and see it retrace some of its decline, before declining once again. Pullbacks are usually short and small in magnitude (typically less than 30% of the rise).

Put option. The right but not the obligation to sell an asset at a specified exercise price on or before a specified expiration date.

Q

R

Random walk. A term that describes the idea that changes in share prices are random and unpredictable.

Real interest rate. The excess of the nominal interest rate less the inflation rate.

Relative Strength Indicator (RSI). This indicator is one of the most powerful tools available in charting. The indicator is used to measure the underlying strength of a market move. Because it ranges from 0 to 100 the strength of a market during the current period can be directly can be compared to that of any other period. Due to this ability, divergence, trendlines, support and resistance levels can all be used to assess the implications of price moves on its future direction.

Repurchase agreement. The sale of Treasury bonds for a short period of time (usually less than 30 days), with an agreement these bonds at a slightly higher price.

Reserve Bank of Australia. Australia's central bank (often abbreviated to RBA). It is the controller of monetary policy in Australia.

Resistance. The opposite of support. These are price levels in a market that are expected to provide some barrier to a price rise. Resistance levels act as a ceiling to gains and are predominately derived from prior market peaks or levels where the market had been very active.

Resistance level. This is a term often used in technical analysis. It describes a price level above which it is supposedly difficult for a stock to rise above.

Return on assets (ROA). An earnings measure that, in its simplest form, is earnings after tax divided by total assets.

Return on equity (ROE). An earnings measure that, in its simplest form, is earnings after tax divided by shareholders' equity.

Riding the yield curve. Where bond market players buy longer-term bonds in anticipation of capital gains as yields fall with the declining maturity of their bond holdings.

Rights issue. An offer made to existing shareholders in a company to buy new shares to be issued by that company at a discount to the prevailing market price.

Risk. The recognition that outcomes are uncertain. For more detail see credit risk, currency risk, interest rate risk and systematic risk.

Risk-averse investor. An investor who only buys a risky asset if it provides compensation for risk via a risk premium.

Risk-neutral investor. An investor who considers the level of risk irrelevant, and considers only the level of return of risk prospects.

Risk-lover investor. Investors who will accept lower expected returns on investments with higher levels of risk.

Risk-free asset. In theory such an asset does not exist, although the market use gilt edged government debt such as Australian Treasury notes as a proxy for a risk-free asset.

Risk-free rate. An interest rate that can be earned with certainty.

Risk premium. The expected return in excess of that on risk-free asset. The premium compensates the investor for taking on the riskier investment.

Risk-return trade-off. The risk attached to an investment, and the return one can attain by holding that investment.

S

S&P/All Ordinaries share price index. A share price index that measures the market prices of the major stocks listed on the Australian Stock Exchange (ASX).

SEATS. Abbreviation for the Stock Exchange Automated Trading System. This is a computer network that allows stockbrokers to trade via computer terminals.

Secondary market. The market where securities already in existence are bought and sold (can be on an exchange or over-the-counter market).

Securitisation. The pooling together of similar loans (e.g., home mortgages) into standardised bonds, or mortgage-backed bonds. These bonds use the interest paid on the underlying loans to pay interest to the bondholders.

Short position. Where an investor has an excess of sales over purchases of a particular asset at a point in time.

Shorting a market. A strategy where the investor sells an asset that she does not own. It entails the investor borrowing the asset from a broker, and then giving it back to the broker when the loan is repaid.

Speculation. The purchase of a risky investment in anticipation of greater returns than that on a risk-free asset.

Spot rate (or spot price). The current interest rate (or price) on offer for an asset. In currency markets it refers to the current exchange rate between two countries' currencies.

Spread. In futures, the taking of a long position in a futures contract with one maturity, and a short position of a futures contract with a different maturity. In options, a combination of two or more call options or put options for the same stock, but with differing exercise prices or expiration dates.

Squeeze. A long squeeze occurs when supplies of a commodity are not enough to allow delivery of the asset underlying the futures contract. A short squeeze is the opposite - here the physical commodity will be delivered, unless the futures contract is closed out.

Standard deviation. A statistic that measures dispersion around a particular point.

Statement of cash flows. A financial statement that shows a company's cash receipts and cash payments over a specified period, such as a year.

Stock exchange. A secondary market where already issued securities are bought and sold. The Australian Stock Exchange (ASX) fulfils this function in Australia.

Stock split. Where a company issues new shares in exchange for the shares it currently has on issue. These splits can result in fewer shares on issue (e.g., if a 1 for 5 stock split occurs), or more shares on issue (e.g., if a 4 for 1 split takes place).

Stop-loss order. A sell order to be made if the price of a stock holding falls below a pre specified level.

Support. Price levels in a market that are expected to provide some barrier to a decline in price. Support levels are usually at some previous price that the market was active around or formed a low at. These are aimed to provide a floor beneath the price.

Support level. This is a term often used in technical analysis. It describes a price level below which it is supposedly difficult for a stock to fall.

Systematic risk. Similar in meaning to market risk. It refers to risk attributable to macroeconomic factors.

T

Technical analysis. Forecasting techniques that focus on identification of trends that repeat themselves. Once identified these trends can be used to predict future buy and sell opportunities in markets.

Treasury bonds. A bond issued by the Australian Government to assist in its financing requirements. They can have maturities out to 15 years.

Treasury notes. A shorter-term security issued by the Australian Government. They can have maturities of 5, 13 or 26 weeks, and are generally used for liquidity management purposes.

Trending Indicator. Trending indicators are used to identify whether a market is in a trending phase and if so, the strength of it. The most common trending indicator referred to on this site is the Directional Movement Index. It is one of the most reliable and accurate measures. The most common interpretation is when the index is rising and above 20, the market is trending in the direction that the market is moving.

Trendlines. Are used to identify market direction and to provide a consistent moving support and resistance levels over time. Trendlines can be applied over any time frame from a few minutes to several years. In an uptrend, a supporting trendline is drawn by connecting the price lows within that uptrend. The market makes higher lows as it touches this trendline. The more times it touches it the more powerful it is. When it breaks this, in theory, is a trend reversal signal. The same theory applies in reverse for a downtrend, where a resistance line is drawn by connecting the peaks within that downtrend.

Trough. That point of time in an economic cycle when a recession bottoms.

U

Underwriter. Underwriters purchase shares or bonds from the issuing company and resell them, receiving a fee for this service.

V

Valuation. The value of a share using a weighted average of the P/E ratio, DCF, price/net tangible assets and other measures.

W

White knight. A friendly party in a takeover. He generally purchases a stake in the takeover target in an attempt to block a planned takeover.

X

Y

Yield curve. A graph that has the yield to maturity of a particular set of securities (such as bonds) on one axis, and time to maturity on the other.

Yield to maturity. A rate of return measure that shows the average rate of return earnt on a security, such as a bond, if it is held to maturity.

Z