Fast Facts - A - D

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A/P - Abbreviation for accounts payable.

A/R - Abbreviation for accounts receivable.

AARF - Acronym of Australian Accounting Research Foundation. Web site: www.aarf.asn.au

AAS - Abbreviation for Australian Accounting Standards. See accounting standards.

AAS25 - Abbreviation for Australian Accounting Standard No. 25 entitled Financial Reporting by Superannuation Plans. Under this standard, accounts for certain super­annuation funds are required to include valuations of assets at net market value rather than cost.

AASB - Abbreviation for Australian Accounting Standards Board. Web site: www.aarf.asn.au

Abnormal Items - Items of revenue and expense incurred during the ordinary business operations of a company, but that are considered abnormal by reason of their size and effect on the company’s results during a particular accounting period. Some examples include major bad debt write-offs, acquisition expenses, and differences arising from movements in currency exchange rates.

ABS - Abbreviation for Australian Bureau of Statistics.

ACCC - Abbreviation for Australian Competition and Consumer Commission.

Acceptor - The party to whom a bill of exchange is addressed, and who accepts primary liability to pay, on maturity, the face value of the bill to its holder. See also bank bill.

Accounting Standards - Practice notes and policies issued by the Australian Accounting Research Foundation that set out acceptable practices and procedures for use by accountants and auditors. Australian accounting standards are usually abbreviated to AAS and numbered, for example, AAS25. The standards are adhered to by professional accounting associations.

Accounts Payable (A/P) - A record of a company’s current monies owed, typically as the result of a purchase of goods or services.

Accounts Receivable (A/R) - A record of a company’s entitlement to the proceeds of the sale of goods or services, for which payment has not yet been received.

Accrual Accounting - An accounting methodology that takes account of accrued as well as actual expenses and revenue during the relevant accounting period. For example, if interest payments on a bond owned by an investor are building up but have not yet been paid, the amount notionally built up at the time of accounting is included in accruals, even though it has not actually been received.

Accrued Benefits - In relation to superannuation, the benefits that have already accumulated at a given point in time, as distinct from those that might or will build up in the future.

Accrued Interest - Interest earned on a security or bank deposit but not yet paid.

Accumulated Interest - Periodic interest payments that are past due and unpaid.

Accumulation Fund - Another term for defined contribution fund.

Accumulation Index - A numerical index of movement in a financial market that takes account of both price movement (capital) and income (dividends). Investment performance should generally be measured against an accumulation index rather than a price index, which measures movements in price only, excluding income. See also All Ordinaries Accumulation Index.

Active Management - A style of investment management that seeks to attain returns above a set benchmark by asset allocation and stock selection. Opposite of passive (indexed) management.

Active Market - A market in which the volume of securities traded is heavy or above normal.

Active Position - The difference between the actual level of investment made in a particular asset class and the benchmark level of investment in that asset class.

ACTU - Abbreviation for Australian Council of Trade Unions.

Actual Price - The price at which a deal for the transfer of ownership of an asset is formally completed, for example in a share transaction. Not to be confused with closing price.

Actuarial Value - The present value of a defined benefit superannuation fund as determined by an actuary, taking account of current assets and expected future contributions, together with expected future benefits payments, discounted by appropriate interest factors.

Actuary - A professional person qualified to make calculations and valuations in relation to superannuation funds, insurance funds, or other forms of investment. Actuaries apply mathematical, statistical, economic, and financial analysis to a wide range of practical business problems, with particular emphasis on longer-term financial contracts requiring the assessment of risk or uncertain financial outcomes. Actuaries operating in Australia are normally qualified as fellows of the Institute of Actuaries of Australia.

ADF - Abbreviation for approved deposit fund.

Administrator - (a) A person appointed by a court to admin­ister the estate of a person who has died without leaving a will, or where the appointed executor is unable or unwilling to perform the task; (b) a person appointed by a regulatory authority in certain circumstances to take charge of the affairs of a company or financial institution in place of the board of directors. See also liquidator, receiver; (c) an individual or company responsible for the day-to-day operation of a superannuation fund

AFMA - Acronym of Australian Financial Markets Association. Web site: www.afma.com.au

Age Dependency Ratio - A statistical measure of the ratio of persons above retirement age to those below retirement age. The ratio is commonly used as an indicator of the ageing rate of the general population.

Agent - A person employed to act on behalf of another (a principal).

Aggressive Portfolio - A portfolio that is significantly different from the index (or its benchmark) and that is designed to provide above-average returns by taking above-average risk. Aggressive portfolios typically have a relatively high exposure to equity investments (shares).

AGM - Abbreviation for Annual General Meeting.

AICD - Abbreviation for Australian Institute of Company Directors. Web site: www.companydirectors.com.au

AIMA - Abbreviation for Australian Investment Managers Association.

AIMR - Abbreviation for Association for Investment Management and Research.

AIST - Abbreviation for Australian Institute of Superannuation Trustees. Web site: www.aist.asn.au

All Ordinaries Accumulation Index - An accumulation index measuring movements in both the price (capital) and dividends (income) of the major shares listed on the Australian Stock Exchange. See also All Ordinaries Index.

All Ordinaries Index - Share price index measuring the market prices of the major stocks listed on the Australian Stock Exchange. It is the predominant measure of the overall performance of the Australian sharemarket. The index is made up of the weighted share prices of approximately 500 of the largest Australian companies. The companies are weighted according to their size in terms of market capital­isation (total market value of a company’s shares). The index is broken into a series of sub-indices including the All Resources, All Industrials, the 50 Leaders, and a series of sector indices such as mining, media, and transport.

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. Also called cash-back pension.

Alpha - The return a security or a portfolio earns above or below the market benchmark rate of return (ROR). A positive alpha indicates that an investment has earned a premium above the benchmark (market) ROR for the overall market. A negative alpha would indicate that the investment earned lower than the (benchmark) market return.

ALRC - Abbreviation for Australian Law Reform Commission. Web site: www.alrc.gov.au

Alternative Investment Management Association (AIMA), Australia - An industry association seeking to promote the use of hedge funds as an investment sector in Australia.

American Option - An option that may be exercised any time between its initiation and expiration dates, inclusive. See also European option.

Amortisation - (a) A method of paying off an interest-bearing liability whereby the amount is gradually reduced through a series of instalments comprising both principal and interest components, as opposed to paying it off in a single lump-sum payment; (b) a technique for gradually extinguishing a liability or capital expenditure over a period of time, for example, as in a typical home mortgage. See also credit foncier loan.

Analyst - A trained person who investigates the facts concerning a given security or industry and reaches a dependable conclusion about its advantages and disadvantages that may help an investor to decide what action he or she should take.

Annual Accounts - A yearly summary of the financial position of a company or superannuation fund, typically including a balance sheet and profit and loss account.

Annual Benefit Statement - A report from the manager or trustees of a superannuation fund, advising members of details of their accrued and future benefits in a fund.

Annual General Meeting (AGM) - The yearly meeting between the directors and shareholders of a company at which shareholders are asked to elect the directors, discuss any shareholder resolutions, and approve the operating and financial results of the past year.

Annual Report - A yearly record of a company’s financial condition including a description of the firm’s operations, its profit and loss accounts, balance sheet, and statements of cash flow.

Annual Returns - Conversion of the rate of return over periods other than a year, into annual terms; for example, if an investment earned minus 2% in year one and 23.5% in year two, the compound return over two years would be 21% and would convert into an annualised return of 10% per annum, even though the annual return in either year looked nothing like 10%. See also compounding.

Annualising - Conversion of the rate of return over periods other than a year, into annual terms; for example, if an investment earned minus 2% in year one and 23.5% in year two, the compound return over two years would be 21% and would convert into an annualised return of 10% per annum, even though the annual return in either year looked nothing like 10%. See also compounding.

Annuity - An arrangement under which periodic payments are made to a person in return for the investment of a lump sum, usually for the purpose of providing retirement income. Each periodic payment received by the annuitant is a portion of the original lump sum, plus interest. See also allocated pension, deferred annuity.

Anticipatory Hedging - The taking of a futures position to hedge an anticipated position in the market for the underlying physical security.

APEC - Abbreviation for Asia-Pacific Economic Cooperation group.

Application Price - The price at which a unit in a unit trust is issued. Also known as issue price or purchase price. Opposite of redemption price.

Appreciation - (a) Generally, an increase in the value of an asset; (b) in terms of foreign exchange transactions, the rise in the value of a currency in relation to another currency or currencies.

Approved Deposit Fund (ADF) - A type of fund into which eligible termination payments can be rolled over by an individual and continue to receive concessional taxation treatment until the investor reaches 65 years of age. ADFs are regulated under the SIS legislation and can only be offered by approved trustees.

Approved Trustee - An organisation eligible to be the trustee of a public offer fund under the Superannuation Industry (Supervision) (SIS) legislation. An approved trustee must be a corporation, and must fulfil certain capital, net asset, or custodial requirements, and have been approved by the Australian Prudential Regulation Authority as being capable of properly performing the trustee’s duties. Approved trustee status only applies to trusteeships of public offer funds. It should be distinguished from the requirements of a corporate trustee for a regular employer-sponsored superannuation fund.

APRA - Abbreviation for Australian Prudential Regulation Authority.

Arbitrage - Taking advantage of different prices in different markets, for example by purchasing an asset for a low price in one market and then selling the asset for a higher price in another market.

Arbitrageur - A person who engages in arbitrage.

Arithmetic Average (Mean) - In the context of investment performance surveys, the arithmetic average is a simple average of the sum of all values measured, divided by the number of those values. As opposed to the asset-weighted average.

Arm’S Length - A description of a transaction conducted on a strictly commercial basis. The term is used particularly in cases where the parties to the transaction are associated with each other but the transaction occurs as if the parties were completely independent of each other. Such a transaction would be conducted at arm’s length.

Arrears - (a) In the case of superannuation, contributions that are overdue; (b) more generally, the term refers to money that is now due but has not yet been paid.

Articles Of Association - A document that spells out the internal rules of operation of a company. See also memorandum of association.

ASA - Abbreviation for Australian Shareholders' Association.

ASC - Abbreviation for Australian Securities Commission, a former regulator of Australian corporations and securities markets before implementation of the Financial System Inquiry reforms in July 1998. The regulatory functions of the ASC have now been transferred to the Australian Securities and Investments Commission (ASIC).

ASCT - Abbreviation for Australian Society of Corporate Treasurers.

ASFA - Acronym of Association of Superannuation Funds of Australia. A national industry association established in 1961 to promote the interests of superannuation funds and their trustees and members. Web site: www.asfa.asn.au

Asian Securities Analysts Federation (ASAF) - An inter­national co-operative organisation for securities analysts in the Asian and Oceania regions. The purpose of ASAF is to promote the interchange of securities analysis and fund management expertise on matters of common interest to member associations (including the Securities Institute of Australia). Web site: www.asaf.org.au

Asia–Pacific Economic Cooperation group (APEC) - An international grouping of nations in the Pacific, East Asia, and North America established to advance regional interests and promote free trade policies around the world. APEC commenced as the Asia Pacific Economic Forum in 1989, but rose to greater prominence in November 1993 when leaders of most member nations met in Seattle, USA, to formalise their combined regional policies and trade principles. The founding membership of APEC comprises Australia, Brunei, Canada, China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Thailand, and the USA; a grouping of nations representing approximately 40% of the world’s population, 40% of the world’s trade, and 50% of global gross domestic product.

ASIC - Acronym of Australian Securities and Investments Commission. See ASC. Web site: www.asic.gov.au

Ask Price - The price at which the holder of a security is prepared to sell that security. See also offer.

Asset - Property or items controlled by an economic entity as a result of past transactions or events. Assets are the opposite of liabilities. Items such as cash, investments, accounts receivable, and materials and inventories that in the ordinary course of operation are likely to be consumed or converted into cash within twelve months of the last financial year are called current assets. All assets other than current assets are called non-current assets. These include items such as buildings and machinery, which are known as fixed assets, as well as patents and goodwill, which are referred to as intangible assets.

Asset Allocation - The weighting of assets in an investment portfolio among different asset classes (shares, bonds, property, cash, and overseas investments). Also known as investment mix. See also growth fund, strategic asset allocation, and tactical asset allocation.

Asset Allocation Model - A computer model that, when given information and forecasts for the various asset classes (return, risk, covariances), will give asset allocations that will be most efficient in terms of the trade-off between risk and return. See also optimisation.

Asset Backing - The value of a company’s assets under­pinning its issued shares. Some companies may have a strong asset backing even if the dividends they pay on shares are relatively low. See also net asset backing.

Asset Class - A broadly defined category of financial assets, for example, domestic shares, overseas bonds, cash, and so on.

Asset Consultant - A professional person engaged by investors, such as superannuation fund trustees, to advise on appropriate investment strategies, asset allocation, and selection of investment managers.

Asset Value - The value of the assets underpinning a security. These may not be fully reflected in the price of a security.

Assets - Resources owned by a company, fund, or individual. Cash, investments, money due, materials, and inventories are called current assets; buildings and machinery are known as fixed assets; and patents and goodwill are known as intangible assets. Opposite of liabilities.

Asset-Weighted Average (Mean) - In the context of investment performance surveys, the asset-weighted average is an average derived by comparing returns earned by fund managers where those returns are weighted according to each manager’s respective size by assets under management. An alternative to the use of arithmetic averages.

Assignment - The legal transfer of assets from one party to another; for example, the transfer of interest under a will; the transfer of rights in a patent; the transfer of a lease or mortgage. An assignment of contract is an act by which one person substitutes another as a party to a contract, either for some or all of the purposes of the contract. The assignment of rights and liabilities under contracts is limited by law.

Associate Company - Refers to a company that is 20% to 50% owned by another company

Association for Investment Management and Research (AIMR) - A global non-profit organisation of more than 36,000 investment professionals from more than eighty countries worldwide. Headquartered in the USA and with eighty-seven affiliated societies and chapters throughout the world, AIMR provides educational services to investment professionals while seeking to promote high standards of ethics and professionalism within the investment industry. Web site: www.aimr.com

Assurance - Traditionally used to describe insurance based on human life; hence ‘life assurance’.

ASX - Abbreviation for Australian Stock Exchange.

ASX code - The code, usually three letters, used by the Australian Stock Exchange to identify individual com­panies, for example, AMC for Amcor Ltd, BHP for BHP Billiton Ltd, and so on.

At a Discount - Below face value. A security is said to be selling at a discount when the market value is below the face (par) value of the security. Shares can also be said to be trading at a discount (or premium) to net tangible assets.

At a Premium - Above face value. A security is said to be selling at a premium when its market price is above its face (par) value.

At Par - The price that equals the face value (par value) of a security.

At the Close - A way of describing an order that is executed at the price obtainable ‘at the close’ of the market on the day it is entered. See also execute an order.

At the Market - Describes an order that the broker will execute at the best price obtainable at the time he or she receives it on the trading floor. Synonymous with market order. See also limit order.

At the Money - Refers to a call option or a put option whose exercise price is equal, or virtually equal, to the current price of the commodity or asset on which the option is written.

At the Opening - Describes an order to be executed at the best price obtainable as soon as the market opens; no actual price limit is set.

ATO - Abbreviation for Australian Taxation Office.

Attribution Analysis - The process by which the return on an investment portfolio is attributed to its manager’s investment decisions. Typically performance is attributed to decisions regarding stock selection, asset allocation, and market timing. An attribution analysis will show whether the managed decisions have added or detracted value in the portfolio.

Audit - An independent examination of the records and operations of a company, superannuation fund, or other legal entity, in order to ensure that the entity complies with accounting requirements and/or regulatory standards. A conventional financial audit is conducted to examine the annual accounts of an organisation to determine whether (in the opinion of the auditor) they represent a true and fair view of the organisation’s financial status. Other types of audits might be initiated by management or regulatory authorities; for example, audits of an organisation’s information technology systems. Under the Superannuation Industry (Supervision) (SIS) legislation, audit requirements include examination of a fund’s compliance with prescribed operating standards, such as the requirement that funds do not lend money to their members. See also external audit and internal audit.

AUSSIE MAC - A mortgage-backed certificate issued by the National Mortgage Market Corporation, first issued in 1985. See also securitisation.

Austraclear - A computerised settlement and safe custody system for bills of exchange and, more recently, cash transactions. Austraclear records trades and changes of ownership and removes the need for bills of exchange or cash to physically change hands.

Australian Accounting Research Foundation (AARF) - The organisation that researches and issues accounting standards for Australian practitioners. The Foundation was established jointly by the Australian Society of Certified Practising Accountants (ASCPA; now known as CPA Australia) and the Institute of Chartered Accountants in Australia (ICAA). Web site: www.aarf.asn.au

Australian Accounting Standards Board (AASB) - A board established under the Corporations Law to develop a conceptual framework for evaluating proposed accounting standards and to review, sponsor, consult upon, or change proposed standards. Web site: www.aasb.com.au

Australian Banking Industry Ombudsman Ltd - An independent office established in 1990 to assist individual bank customers in settling unresolved complaints with their banks. The Ombudsman is not employed by the banks, but by a council that has equal numbers of consumer and bank representatives. Web site: www.abio.org.au

Australian Bureau of Statistics (ABS) - The Common-wealth Government body responsible for the collection and publication of statistical data on a wide range of matters, including economics, demographic trends, and census figures. Web site: www.abs.gov.au

Australian Competition and Consumer Commission (ACCC) - The Commonwealth Government agency responsible for administering legislation concerning fair trade practices, prices surveillance, competition, and consumer protection. It was formed in 1995 by merging of the former Trade Practices Commission and Prices Surveillance Authority. Web site: www.accc.gov.au

Australian Council of Trade Unions (ACTU) - The national organisation for Australia’s trade union movement. The ACTU was established in 1927 and has its headquarters in Melbourne. Web site: www.actu.asn.au

Australian Financial Markets Association (AFMA) - The national industry body representing the nearly 200 organisations that participate in the Australian over-the-counter (OTC) wholesale financial markets. OTC markets include all wholesale financial markets trans­actions not traded on an authorised exchange. They include interest rates, foreign exchange, commodities, equities, and their derivatives. It was formed in 1986 to streamline market practices and establish trading standards in OTC markets. Web site: www.afma.com.au

Australian Institute of Company Directors (AICD) - A representative body for directors and senior officers of Australian companies, comprising a membership of more than 13,000 from industry, commerce, the professions, government, and non-profit organisations. Among the activities of the AICD are professional training and development courses, director-specific information services, and representation of directors’ interests to government and the regulators. Web site: www.companydirectors.com.au

Australian Institute of Superannuation Trustees (AIST) - An institute founded in June 1992 by the Conference of Major Superannuation Funds to represent the interests of superannuation fund trustees. The AIST is an independent, non-profit incorporated association, whose objectives include the promotion of ethical and effective performance standards by trustees, improvement of the knowledge and skills of trustees, representations to government and relevant authorities on matters of concern to trustees, and enhancement of sound management and security of superannuation funds by trustees on behalf of their members. The Institute’s information and educational activities include provision of a reference manual to members as well as access to an ongoing seminar series. The Institute represents the interests of trustees to appropriate bodies concerned with super­annuation policy and administers a certification process for trustees. www.aist.asn.au

Australian Law Reform Commission (ALRC) - A Commonwealth Government body responsible for reforms on legal issues referred to it by the Attorney-General. Together with the Companies and Securities Advisory Committee, the ALRC was responsible for a major review of Australia’s collective investments industry in the early 1990s, which ultimately led to the new regulatory regime incorporated in the Managed Investment Act of 1998. Web site: www.alrc.gov.au

Australian Prudential Regulation Authority (APRA) - A Commonwealth Government regulatory body established to set standards for the prudent management of banks and insurance companies, and for ensuring that trustees of superannuation funds are aware of their obligations to members. APRA was formed on 1 July 1998 as one of the measures to implement the recommendations of the Financial System Inquiry. It combines many of the former regulatory functions of the Insurance and Superannuation Commission, and the Bank Supervision Department of the Reserve Bank of Australia. See also Australian Securities and Investments Commission, Financial Sector Advisory Council. Web site: www.apra.gov.au

Australian Securities and Investments Commission (ASIC) - The Australian Government regulatory body that enforces and administers the Corporations Law and consumer protection law for investments, life and general insurance, superannuation, and banking (except lending) throughout Australia. ASIC was established in 1998 as part of the implementation of the Financial System Inquiry. It supersedes the former Australian Securities Commission (ASC) and some regulatory responsibilities formerly exercised by the Insurance and Superannuation Commission (ISC). See also Australian Prudential Regulation Authority. Web site: www.asic.gov.au

Australian Shareholders’ Association - An association representing the interests of individual shareholders in Australian listed companies. The ASA plays an active role in campaigns for improved corporate governance standards among Australian companies, both through its own advocacy activities and through its links with other industry groups representing institutional investors and other financial market participants. Web site: www.asa.asn.au

Australian Stock Exchange (ASX) - The principal exchange for trading in shares, bonds, and certain other securities in Australia. The Australian Stock Exchange Limited commenced operations in 1987, replacing the previous state-based exchanges. At December 2001, it provided the twelfth largest stock market in the world, with a market capitalisation of more than A$1 trillion. The ASX was initially established as a mutual organisation owned by individual stockbrokers and stockbroking firms, but in October 1996 its members elected to demutualise the Exchange and convert it into a listed company. The demutualisation took effect in October 1998. Web site: www.asx.com.au

Back Office - A term that refers to the operational activities of a company, as opposed to the main business, or ‘front office’ operations. The back office of an investment bank comprises the accounting, reporting, and support oper­ations while the front comprises the analysts, dealers, and traders. Clear demarcation between the front and back offices helps to ensure that appropriate Chinese walls exist within a financial services organisation and that its business activities are properly accountable and appropriately monitored and recorded.

Backspread - There are call backspreads, which are bull strategies, and put backspreads, which are bear strategies. To create a call backspread, a trader sells one call option with a strike price and an expiration date and buys more than one call option with a higher strike price but the same expiration date.

Backwardation - A situation that occurs in futures markets, whereby the contracts with earlier expiration dates have a higher price than contracts with later expiration dates. Opposite of contango.

Bad Debts - A term used to describe uncollectable accounts receivable that constitute losses that should be written off.

BAD Tax - Abbreviation for Bank Accounts Debit Tax, a Federal Government tax on all withdrawals from bank accounts that are linked to a cheque book.

Badged Product - An investment product that is administered or managed by one organisation, but labelled with the name of another organisation that typically is responsible for distribution of the product.

Balance Date - The date at the end of an accounting period—typically 30 June for the majority of Australian companies and superannuation funds—by which time all accounts must be balanced for that accounting period.

Balance Of Payments - A record of a nation’s position in relation to financial transactions with all other nations. Balance of payments figures are made up of both current account items, for example, imports and exports, and capital account items, for example borrowings and investments. In Australia, balance of payments figures are published monthly by the Australian Bureau of Statistics.

Balance Sheet - A key financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date. In one column all the company’s assets are listed with their values, and in the other all its liabilities and the equity of the shareholders. See also profit and loss account.

Balanced Fund - An investment portfolio that spreads its holdings over a range of asset classes, which typically include shares, fixed interest, property, overseas securities, and cash. As opposed to sector specialist funds, which invest solely in one asset class. See also specialist sector management.

Balanced Manager - An investment manager whose expertise includes asset allocation and the supervision of portfolios containing a variety of classes of investments (as distinct from expertise in managing a particular asset class such as shares). See also specialist manager.

Balloon Payment - The final payment terminating a debt, in which the amount paid is substantially more than previous instalments.

Bank Bill - A bill of exchange of which the acceptor or endorser is a bank. If the bank is the acceptor, the bill is known as a ‘bank accepted bill’ and the bank effectively guarantees the lender repayment of the face value. If the bank is the endorser, the bill is known as a ‘bank endorsed bill’.

Bank of England - The central bank of the UK. The bank was established privately in 1694 and was nationalised by the British Parliament in 1946. Web site: www.bankofengland.co.uk

Banker’s Acceptance - An American term for a bank accepted bill. Used in domestic or international trade or commerce to finance the shipment and storage of goods or to facilitate currency exchange transactions with foreign banks. A popular money market investment.

Bankers’ Blanket Bond Insurance - A form of insurance taken out by a fund manager against losses incurred from the negligence or fraudulent activity of an employee. Also called a blanket fidelity bond.

Bankruptcy - A declaration by the Federal Court to place all of an individual’s assets and liabilities with an official receiver to liquidate and distribute to creditors, according to prescribed legal guidelines. Bankruptcy can be declared if an individual’s liabilities exceed his or her assets or accounts cannot be paid. It should be noted that bankruptcy applies to an individual; the equivalent status for a corporation is receivership or liquidation.

BARRA - Software developed by the international investment consulting firm Barra International used to evaluate risk profiles, chiefly in equity investments.

Barrier Option - There are two categories of barrier options being knock in and knock out.

Basis Point - A measurement of fluctuation of an investment, equal to one hundredth of one per cent.

Basis Risk - The extent to which valuations for derivative securities do not accurately reflect valuations for the underlying physical securities on which they are based. Basis risk is sometimes exploited by investors engaged in index arbitrage.

Basket Option - An option constructed around a series, or ‘basket’, of different commodities, securities, or currencies. For example, a currency basket option gives its holder the right to buy (call) or sell (put) a specified basket of foreign currencies in exchange for a fixed price (denominated in the investor’s native currency) at a specified future date. Currency basket options have become prominent in modern portfolio management practices, as they allow investors to hedge all or most of their foreign currencies simultaneously, often at lower cost than would be incurred for individual option contracts on each currency.

BCA - Abbreviation for Business Council of Australia.

Bear - Someone who believes the market will decline in price. Opposite of bull.

Bear Market - A market in which prices decline.

Bear Spread - Two options positions with the same maturity date (expiration date) that will profit from the price of the underlying asset falling.

Bearer Bond - A bond made payable to its holder (bearer).

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

Benchmark - An index or other market measurement that is used by a fund manager as a yardstick to assess the risk and performance of a portfolio; for example, the All Ordinaries Accumulation Index is a commonly used benchmark for Australian share portfolios.

CAC40 - An index of 40 capitalisation-weighted companies listed on the Paris Stock Exchange.

Call - A request for funds that are owed to the calling entity. A call can be either a repayment of a loan, or a call on shares, where the owner of the shares has contracted to make further contributions of equity.

Call Option - An option that gives its holder the right but not the obligation to purchase an asset at a predetermined date (maturity date) for a predetermined price (exercise price). See also put option.

Cap - A ceiling or maximum rate of interest under a loan. A ‘capped rate loan’ means that the borrower cannot pay more, but can still pay less, than the specified maximum rate of interest. See also collar.

Capital Account - The part of Australia’s balance of payments relating to investment flows (in other words, share and bond transactions, loans and borrowings, and the level of international reserves held by the Reserve Bank of Australia), as opposed to current account items such as imports and exports.

Capital Adequacy - (a) An internationally adopted standard for the prudential supervision of banks based on the principle that capital is the foundation of a bank’s strength. Capital adequacy standards require that minimum levels of shareholders’ equity (weighted according to the risks associated with different kinds of activity) must be maintained to support the investment and lending activities of banks. See also risk weighting; (b) in relation to public offer funds, capital adequacy is a requirement under the SIS Legislation that the approved trustee maintain a prescribed level of capital in cases where the trustee intends to keep custody of the fund’s assets (or, alternatively, that the custodian is appropriately capitalised in cases where an external custodian is used).

Capital Asset Pricing Model (CAPM) - A model for describing the way prices of individual assets are determined in an efficient market, based on their relative risk in comparison with the return on risk-free assets. According to this model, prices are determined in such a way that risk premiums are proportional to systematic risk as measured by the beta coefficient. As such, the CAPM provides an explicit expression of the expected returns for all assets. The CAPM holds that if investors are risk averse, high-risk stocks must have higher expected returns than low-risk stocks.

Capital Gain/Loss - The difference between the sale price of a capital asset and its cost.

Capital Gains Tax - A tax on the increase in the capital value of investments, payable when the capital gain is realised. Capital gains tax is indexed so that nominal increases in value owing to inflation are not taxed as well.

Capital Growth - Increase in the capital or market value of an investment, as opposed to income that may be received from the investment from time to time, as in the case of dividends from share investments.

Capital Guaranteed - Refers to an investment product, that includes some form of guaranteed return of capital. Interest earnings are not generally guaranteed in these products. See also capital protected, capital stable.

Capital Market Line - The line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (beta) for a particular portfolio.

Capital Markets - The markets for medium- to long-term investments (in other words, investment of one year and over in securities such as shares and bonds), as distinct from the money market, which is for shorter-term investments.

Capital Protected - A type of investment portfolio that is managed in such a way as to substantially reduce the risk of capital losses, usually through the use of quantitative techniques such as protection overlays. See also capital stable, capital guaranteed, and protected growth fund.

Capital Stable - A term usually describing unitised investment vehicles that have a high fixed interest and/or cash component. This creates a relatively stable unit price compared with balanced funds, which typically have a higher exposure to share markets. A capital stable fund aims to provide a moderate level of income plus some capital growth. Capital stable funds should be distinguished from capital guaranteed funds, which offer a promised return (usually retrospective) to the investor, and also from capital protected funds, which aim to produce a certain minimum return while allowing a controlled participation in the expected higher gains from growth assets.

Capital Stock - All shares representing ownership of a business, including preference and ordinary shares.

Capital-Indexed Bonds (CIBs) - A form of inflation-linked (indexed) bonds whose proceeds on maturity are linked to movements in the Consumer Price Index (and/or speci­fied indices), and that pays coupon rate that represents the real return (the return above inflation) of the investment; for example, 1% per quarter of the variable final amount. See also indexed annuity bonds.

Capitalisation - The number of the shares issued by a company multiplied by the current market price. See also market capitalisation.

CAPM - Abbreviation for capital asset pricing model.

Carded Rates - Currency exchange rates quoted by banks each day and usually listed on a daily exchange rate sheet. Carded rates usually apply to small foreign exchange transactions.

Carrying Charge - The expense, such as storage charges, insurance, interest, and other incidental costs involved in ownership of stored physical commodities (for example gold) over a period of time. The carrying charge may be reflected in futures contracts based on the physical commodities.

CASAC - Abbreviation for Companies and Securities Advisory Committee.

Cash - (a) Generally, a country’s coin and note currency in circulation; (b) one of the investment asset classes that is available on short notice.

Cash And Carry - The practice that involves the purchase of a physical commodity against the forward sale of that commodity on the futures market. For example, a trader could buy gold today at the spot, or currently available price, and sell the gold forward at a higher price through the futures market. When the gold futures expire, the trader can deliver the physical gold to satisfy the gold futures position, thereby earning a good return on the investment.

Cash Commodity - The actual physical commodity as distinguished from futures contracts based on that commodity. Also called spot commodity.

Cash Dividend - A dividend paid on a security in cash (in other words, by cheque or direct bank transfer).

Cash Equivalents - Short-term investments held in lieu of cash and readily converted into cash within a short time span, for example, Bank bills, Treasury notes etc, generally with maturities of no longer than 180 days. Often referred to, along with cash, as liquid assets.

Cash Flow - (a) Generally, the net amount of money received by an individual or company in a certain period; (b) in relation to company accounts, the cash flow is the reported net income plus amounts charged off for depreciation, amortisation, and extraordinary charges to reserves, which are book-keeping deductions and not paid out in dollars and cents.

Cash Management Trust (CMT) - A pooled investment vehicle for investors who would not individually have access to the professional money market. By pooling funds from various sources, larger volumes of higher yielding short-dated securities can be purchased, thereby decreasing the cost of transactions, and thus resulting in higher returns to the trust members. CMTs generally restrict themselves to negotiable instruments of a dur­ation of no longer than 12 months. As these securities are highly liquid, a CMT can accommodate cash flows, both in and out, on a daily basis, thereby offering small investors a flexibility not present in a traditional fixed rate term deposit.

Cash-Back Pension - Another term for 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 determined by the individual.

DAX30 - The principal German stock market index covering 30 major blue chip companies traded on the Frankfurt stock exchange.

Day Order - An order to a broker to buy or sell shares only on the day when the order is entered.

Dealer - An individual who places orders to buy or sell securities.

Dealer’s Licence - A licence issued by the Australian Securities and Investments Commission under the Corporations Law to a person in the business of dealing in debentures, shares, prescribed interests, and options. The licence will invariably be subject to conditions, including liquidity requirements.

Debenture - A type of debt security backed by the general credit of the issuer and not by a specific security.

Debt Ratio - The extent to which a company’s total assets are financed with borrowed funds, in other words, borrowings divided by total assets. An important financial statistic.

Debt Security - A security representing borrowed funds that must be repaid by the issuer; for example bonds, certificates of deposit, debentures. If the government issues bonds, it is borrowing funds. Purchasers of the bonds are thus lenders to the government.

Debt To Equity Ratio - The relationship between funds provided by creditors and funds provided by shareholders; in other words, borrowings divided by shareholders’ funds.

Debt–Equity Mix - In relation to investment portfolios, the proportions of cash and fixed interest assets relative to growth assets, held within the overall portfolio. For example, a growth-oriented portfolio might have a debt– equity mix of 25% debt and 75% equity, while for a more conservative capital stable portfolio the mix might be 60% debt and 40% equity.

Decile - A statistical measure dividing a sample into ten numerically equal groups. See also percentile, quartile.

Deductible - Referring to expenses that can be offset against taxable income. Certain contributions to superannuation funds, for example, are tax deductible up to prescribed limits.

Default - Failure to perform a contractual obligation; for example, if a borrower fails to pay a loan instalment at the correct time, as set out in the loan contract, then he or she has defaulted on that loan.

Default Premium - The yield spread above the risk-free rate of return for a security with the same maturity.

Defeasance - Offsetting a liability by matching it with appropriate assets.

Deferred Annuity - A type of annuity, or retirement income, that begins payment of income at a future date. Eligible termination payments can be ‘rolled-over’ into deferred annuity funds. The fund then provides a pension that is required to begin on or before the purchaser’s sixty-fifth birthday. See also allocated pension and approved deposit fund.

Deferred Delivery - The settlement of a share transaction more than three days after the trade is executed. This occurs when the seller has a confirmed holding in the security, but has not as yet received delivery. This often happens following a new share issue.

Deficit - An excess of expenditure over income or revenue. Opposite of surplus.

Defined Benefit Fund - A superannuation fund in which the benefits to be paid to the member are defined before the member’s retirement. The benefit is usually expressed as a proportion of the member’s salary on retirement. In these funds it is generally the company or sponsor of the fund, rather than the member, that carries the risk as to the ability of the fund to meet its liabilities. See also defined contribution fund, accumulation fund.

Defined Contribution Fund - A superannuation fund in which the amount of contribution payable, as distinct from the end benefit, is defined as a proportion of salary. In these funds, the benefit payable to a member on retirement is the total of all defined contributions to the fund (both from the employer and the employee) for that member, plus the investment earnings on those contributions. Unlike a defined benefit fund, the investment risk in a defined contribution fund is borne by the fund members. Also known as accumulation fund.

Deflation - A general fall in prices. It is the opposite of inflation and generally applies to more than just a temporary decline. The early 1990s saw some evidence of deflation, particularly in financial asset and property prices.

Delisting - The removal of a company’s shares from listing on the stock exchange. This may occur because the company has failed to comply with the exchange’s rules, or no longer meets listing requirements, for example because it has been taken over.

Deliverable Types - The actual types or grades of physical commodity that may be delivered under Sydney Futures Exchange rules in settlement of a futures contract.

Delivery - The transfer of possession of securities from one individual or firm to another in fulfilment of contracts made on an exchange and on terms that meet all of the requirements of that exchange.

Delivery Month - In the futures market, the calendar month during which delivery can be made or taken on a futures contract.

Delivery Points - Locations designated by futures exchanges at which the physical commodity covered by a futures contract may be delivered in fulfilment of the contract.

Delta - In the options market, delta is the measure of the change in an option premium for a one unit change in the value of the underlying security. The delta is often used as the basis to hedge the risk associated with option positions.

Delta Hedging - A method of hedging (taking steps to offset risk) exposures to option markets by purchasing or selling the underlying securities in proportion to the option’s delta.

Demutualisation - The process of conversion from a mutual to a company structure; generally to attain a broader shareholder base. In recent years, many of Australia’s largest life insurance companies and other significant organisations—for example the Australian Stock Exchange—have undergone demutualisation.

Depreciation - An accounting practice whereby the cost of an asset is systematically written-down over the life of that asset. Depreciation recognises that assets tend to lose value as they age. It is considered to be a non-cash business expense, and can normally be offset against income for taxation purposes. Opposite of appreciation.

Depression - A prolonged slump in economic activity, characterised by rising unemployment and serious falls in the production and consumption of goods. See also recession.

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