Fast Facts - E - H

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EAFE Index - Abbreviation for Europe, Australasia, and Far East Index. A world stock market index, often used as an ex-US world equity benchmark by US investors.

Earnings Multiple - Another term for price-earnings ratio; a ratio that measures the value of a company’s shares by dividing the current share price by the current or estimated future earnings per share. A fundamental yardstick used by investors to determine the attractiveness of a security.

Earnings Per Share (EPS) - A measure of a company’s performance, calculated by dividing the company’s net operating profit after tax by the number of shares on issue. What the investor actually receives in the hand is known as dividends per share, which is the proportion of earnings actually paid to shareholders. See payout ratio.

Earnings Rate - The rate of return on funds invested, usually expressed in terms of a percentage per annum.

Earnings Yield - A ratio calculated by dividing a company’s earnings per share by its current share price. The reciprocal of the price-earnings ratio. The earnings yield shows the relations of earnings per share to the current share price.

Ease - A minor or slow decline in the prices of a market.

EBIT - Abbreviation for earnings before interest and tax; a measure of a company’s total annual earnings before deduction of provisions. EBIT is one of the key measures used by investment analysis to assess corporate performance.

ECD (electronic certificate of deposit) - A certificate of deposit whereby the written certificate is replaced by the electronic storage of the details of the deposit.

Econometrics - A specialist branch of economics involving the statistical estimation of economic relationships using empirical data. These relationships are often extrapolated to forecast economic variables.

Economic Clock - A model for depicting the normal sequence of events for share and property market cycles. After interest rates fall, the share market rises, followed by commodities, inflation, and then property. Interest rates then rise to curb inflation and the cycle goes into decline.

Economic Society of Australia - A professional association for economists, established in 1925. The Society aims to promote discussion of economic issues and provide information and education to members. Web site: www.ecosoc.org.au

Efficient Frontier - A line plotted on a risk/return chart that shows the highest investment return that can be expected for any given level of risk.

Efficient Market Hypothesis - The theory that all available public information on a company is reflected in its share price and therefore that ‘information’ cannot be used to generate superior performance since all information is already factored in to the share price. In such a market, an investor can attain no more, no less, than a fair return for the risks undertaken. Prices will automatically move as soon as new information becomes available.

Efficient Portfolio - A portfolio that is fully diversified and lies on the efficient frontier; in other words, for any given return, no other portfolio has less risk, and for a given level of risk, no other portfolio provides superior returns.

Eligible Service Period (ESP) - The period of time spent in the employment of a certain employer, or in membership of a certain superannuation fund, for the purposes of calculating an eligible termination payment.

Eligible Termination Payment (ETP) - A payment made to an employee upon retirement, resignation, retrenchment, or disablement, and capable of being ‘rolled-over’ into appropriate superannuation investment products in order to defer and minimise taxation liability. Examples of ETPs include superannuation lump sum payments and redundancy payments. See also deferred annuity.

Emerging Markets - Financial markets in countries with developing economies, where industrialisation has begun and the economy has links with the global economy. The financial markets in these countries are immature compared to those of the world’s major financial centres, but are becoming increasingly sophisticated and integrated into the international markets. These markets provide potentially high returns but are subject to high risk and volatility. Current examples include Thailand and Mexico. See also tiger economies.

Employee Share Acquisition Company (ESAC) - A company established to operate and administer an employee share ownership plan, typically on the basis of subscriptions related to employees’ salary bonuses or profits of the sponsoring employer.

Employee Share Ownership Plan (ESOP) - A scheme established by an employer to provide share ownership for its employees as part of their remuneration packages.

Employer-Sponsored Fund - A superannuation fund established by an employer for its employees.

EMS - Abbreviation for European Monetary System.

EMU - Abbreviation for European Monetary Union. See also European Monetary System.

Enhanced Cash - A portfolio management technique that aims to attain returns consistently above the prevailing cash rate by taking advantage of the higher yields available from securities with lower liquidity and credit ratings than conventional liquid assets.

Enronomics - A term used to describe the activities of corporations, or indeed individuals within a corporation, who act dubiously, unethically, or even illegally in the interests of supporting or inflating the value of that corporation and/or its issued stocks. Name inspired by the ‘Enron scandal’ in the USA in 2001. Enron, a large US energy company, and its auditors were found to have illegally disclosed misleading accounting information relating to Enron that misrepresented the company’s financial state.

EPS - Abbreviation for earnings per share.

Equitisation - The use of futures contracts to convert cash investments into effective exposure to equity markets.

Equity - (a) A synonym for a share (as distinct from fixed interest) investment; (b) the interest or value that an owner has in an asset over and above the debt against it. For example, a home-owner has equity in that part of the value of his or her house above the amount borrowed from a lender.

Equity Risk Premium - The difference between the rate of return available from risk-free assets (such as government bonds) and that available from assuming the risk inherent in more volatile investments such as shares.

Equity Swap - An equity exchange transaction involving two parties. Equity swaps can involve a variety of different transactions; for example, swapping the return in one market for that of another. See also swap.

Face Value - Face value is ordinarily the amount that the issuer promises to pay at maturity and is generally different from the current market value.

Factor - An aspect of the investment environment that influences returns on financial assets. See also common factor.

Fair Market Value - (a) The mathematical calculation of the correct price for a security (often different from the current price; (b) the value of an option or futures premium according to a mathematical model.

FAST - Acronym of flexible accelerated securities transfer.

FBT - Abbreviation for fringe benefits tax.

Fed Funds Rate - The overnight US cash rate set by the FOMC as part of their responsibilities in relation to monitoring the US monetary policy.

Federal Reserve - The Federal Reserve (or the Fed as it is generally known) is the central bank of the USA. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Today, the Federal Reserve’s duties fall into four general areas: (1) conducting the nation’s monetary policy (through the regular FOMC meetings); (2) supervising and regulating banking institutions and protecting the credit rights of consumers; (3) maintaining the stability of the financial system; and (4) providing certain financial services to the US Government, the public, financial institutions, and foreign official institutions.

Feeder Fund - A feeder fund is a fund that does not hold direct investments itself, but invests into (‘feeds’ into) other underlying funds in order to gain exposure to the underlying investments.

FID - Abbreviation for financial institutions duty.

Fidelity Cover - A type of insurance against loss of money held in trust for or on behalf of investors. Fidelity cover must be maintained by all stock exchanges, funded by contributions from the exchange’s members.

Fiduciary - A person or organisation entrusted with the responsibility of managing, holding, or investing assets in the best interests of the owner of the assets. Trustees of superannuation funds are fiduciaries for members of their funds.

Fifty (50) Leaders Index - A share price index measuring price movements in fifty leading stocks listed on the Australian Stock Exchange. See also All Ordinaries Index.

Financial Analyst - An individual trained to advise on the risk and return characteristics of investments and on the management of investment portfolios.

Financial Asset - Any asset that can be securitised; in other words, represented by a written certificate (for example, a share certificate or bond) that establishes a claim on the issuing person or organisation.

Financial Futures - Futures contracts concerned with trans­actions of financial instruments, as distinct from physical commodities. The essential value of financial futures is that they allow investors to hedge, or protect, against adverse movements in interest rates or share prices. Financial futures can also be used by speculators who, although having no involvement as buyers or sellers in the underlying securities, can trade in futures as a means of profiting from expected price movements. Financial futures available in Australia include bank bill futures, SPI Futures, and Commonwealth bond futures.

Financial Institutions Duty (FID) - A former state government charge on inflows into financial institutions. As part of the National Tax Reform, financial institutions duty was abolished on 1 July 2002.

Financial Market - A generic term for the markets in which financial securities are traded; for example, stock exchanges, futures exchanges, currency markets. See also capital markets, money market.

Financial Planning - The process of providing comprehensive advice and assistance to a client for the purpose of meeting a client’s financial needs and life goals. The process normally includes six steps: data gathering, goal setting, identification of financial issues, preparation of written options and recommendations, implementation of the client’s decision, and periodic review and revision of the plan.

Financial Planning Association of Australia (FPA) - The peak professional organisation for the financial planning industry in Australia. FPA provides a range of services to consumers and to member individuals and organisations. Web site: www.fpa.asn.au

Financial Sector Advisory Council (FSAC) - An advisory body established in 1998 to provide advice to the Commonwealth Government on financial sector developments and policies. The FSAC, established in response to recommendations of the Financial System Inquiry (Wallis reforms), aims to bring together a range of views from the business sector to advise government on policies to facilitate the growth of a strong and competitive financial sector for Australia.

Financial Services Review Act 2001 (FSRA) - Commonwealth legislation that aims to bring the life, superannuation, and securities industries under one licensing regime. The FSRA was introduced in March 2002 and imposes new regulations and standards of conduct for financial service providers. Simply, the FSRA changes the emphasis of looking at the industry from being product-based to looking at the industry as service-based.

Financial System Inquiry (FSI) - A comprehensive review of the structure, supervision, and evolution of Australia’s financial services industry, commissioned by the Commonwealth Government in May 1996, and delivering its final report in April 1997. The recommendations of the inquiry were the catalyst for an extensive restructure of financial regulatory agencies and legislation in 1998, including the establishment of the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. The FSI is also commonly known as the Wallis Inquiry after its chairman, Stan Wallis.

Firm Bid - A bid to buy a specified quantity of a security at a definite price. If a firm bid is ‘hit’ (accepted) then the transaction is done. See also firm offer.

Firm Commitment - An arrangement under which an investor irrevocably agrees to a specified quantity of securities at a definite price. Often used in relation to new issues of securities.

Firm Offer - An offer to sell a specified quantity of a security at a definite price. If a firm offer is accepted then the transaction is done.

Firm Price - A stated price that the maker of a firm bid or firm offer is obliged to meet if the bid or offer is accepted within the specified time.

Firming Of The Market - A period when security prices tend to rise from a depressed condition or to stabilise at current levels.

Fiscal Policy - The economic policy setting that emanates from a government’s budget position. A budget deficit is an expansionary policy setting, and a budget surplus is a contractionary policy setting. See also monetary policy.

Fixed Assets - Fixed assets are among the resources owned by a company, fund, or individual, and include such items as buildings and machines. See also assets.

G7 - Abbreviation for Group of Seven.

GAAP - Abbreviation for generally accepted accounting principles.

Gamma - A measure of how quickly the delta of an option will change as the price of the underlying security changes.

GARP - Acronym of growth at reasonable price.

GATT - Acronym of General Agreement on Tariffs and Trade.

GDP - Abbreviation for gross domestic product.

Gearing - A measure of indebtedness; that is, the extent of borrowings against the assets held by a person or company.

General Agreement on Tariffs and Trade (GATT) - Struck in 1947 to reduce international trade barriers and establish fair trading standards, GATT evolved into a quasi-international trade organisation with its own offices in Geneva. Eight rounds of trade negotiations have occurred since GATT was established; the most recent being the Uruguay Round, completed in 1994, which limited agricultural subsidies, extended the agreement to trade in services and intellectual property rights, and established the World Trade Organization (WTO) and the WTO agreement based on the same principles as the GATT agreement. On 1 January 1995, the WTO officially replaced GATT as the organisation overseeing the multilateral trading system. On 20 May 2002, the WTO Secretariat approved a schedule by which the WTO would be disbanded and transformed into the Trade Regulation Organization (TRO), whose charter would be based on the Universal Declaration of Human Rights.

Generally Accepted Accounting Principles (Gaap) - A set of accounting rules established and recognised by international accounting authorities.

Geometric Average - A compounded average rate of return that is time weighted for a specified period. Geometric averages are often used for measuring the performance of an investment portfolio, adjusted for the timing of new deposits and withdrawals.

Gilt Edged - Low-risk investments, such as government bonds.

Gilts - Domestic bonds issued in the UK by the United Kingdom Government.

GIPS - Acronym for Global Investment Performance Standards.

Give - The sale of a security or derivative.

Global Custodian - A custodian who holds assets on behalf of clients in a number of different countries.

Global Industry Classification Standard (GICS) - GICS is an enhanced industry classification system jointly developed by Standard and Poor’s and MSCI. It classifies companies around the world according to the main business operation. The GICS system consists of four levels of classification: ten sectors, twenty-three industry groupings, fifty-nine industries, and 122 sub-industries.

Global Investment Performance Standards (GIPS) - A framework established to create a set of principles that ensure accurate performance comparability throughout the international investment management industry.

GNP - Abbreviation for gross national product.

Gold Standard - A monetary system where a country’s currency is valued and convertible into a fixed quantity of gold.

Goods and Services Tax (GST) - A tax on individual goods or services that is added on to the price of those goods or services. Goods and services taxes are often advocated as a means of increasing savings in the economy as an alternative to income taxes, which are perceived to penalise savings and to reward spending. Also known as consumption tax or, in some countries, value added tax.

Goodwill - An intangible asset of a company, reflecting the value of attributes such as customer loyalty and reputation. In merger and acquisition transactions, goodwill is calculated as the excess of the purchase price over the market value of the company’s net physical assets.

Greenback - A colloquial term for the US dollar.

Greenmail - A term that describes when a hostile bidder threatens a company with takeover by purchasing a large number of its shares, forcing the management of the company to repurchase the shares at an above-market price.

Gross - The total, before deductions have been taken away. Opposite of net.

Gross Domestic Product (GDP) - GDP is a measure of the total market value of goods and services produced in an economy. It can be measured in both current and real (or volume) terms. GDP is one of the main measures of economic activity in an economy.

Gross National Product (GNP) - An economic statistic that includes GDP plus any income earned by residents from their overseas investments, minus income earned within the domestic economy by overseas residents.

Group of Seven (G7) - A group of leading industrial nations whose leaders meet periodically to discuss economic issues and policies. The G7 nations are Canada, France, Germany, Italy, Japan, the UK, and the USA.

Growth Assets - A general term for assets such as shares and property that provide investment returns comprising both capital growth and income. Growth assets compare to debt securities such as fixed interest or cash investments, which only provide income.

Growth at Reasonable Price (GARP) - An investment management style that attempts to combine aspects of value and growth investing styles into an ‘in between’ style. GARP investment managers look for a stock with growth potential, but only if it is reasonably priced. They search for companies with solid growth prospects and share prices that do not reflect the real value of the business. For their analyses, GARP managers use fundamental analysis ratios and are more concerned with historical growth and the price of a stock rather than qualitative factors.

Hang Seng Index - The principal index of the Hong Kong Stock Market. The Hang Seng is a capitalisation-weighted index of thirty-three companies that represent around 70% of the total market capitalisation of the Hong Kong stock exchange.

Hawk - One who supports aggressive policies; adj. hawkish. Opposite of dove.

Head - A charting term similar to a peak.

Headline Inflation - The published overall inflation rate, as opposed to underlying inflation, where specific volatile items are ignored.

Hedge - (a) (noun) An investment position taken up to counteract the risk of another position; for example, the purchase of a put option to offset potential losses from ownership of physical stock; (b) (verb) to take up such an investment position.

Hedge Fund - A type of investment portfolio under which the fund manager is authorised to use a number of higher risk investment techniques, including using derivatives, short selling, and borrowing funds, in order to generate a higher return.

Hedge Ratio - A ratio, usually expressed as a decimal between 0 and 1, representing the likely movement in an option premium for a given move in the underlying market price of the relevant commodity, currency, or investment instrument. The hedge ratio indicates how much of the underlying asset to hold against an option position in order to neutralise the risk. See also delta.

Hedging - The practice of undertaking one investment activity in order to protect against loss in another; for example, selling futures. Although hedges reduce potential losses, they also tend to reduce potential profits. Typical hedges include currency forwards and share and bond futures, and options.

Historical Volatility - The actual volatility (variability in price) exhibited by an underlying instrument over an established period.

Holding Company - A corporation that owns enough voting stock in another firm to control management and operations either by influencing or electing its board of directors.

Holding Period - The length of time over which a security is held.

Horizontal Integration - The acquisition by a company of another company that is operating in the same market; for example, a sugar refining company acquiring another sugar refining company. See also vertical integration.

Household Sector - The part of the economy that is made up of individuals, families, and so on, as distinct from businesses and government enterprise.

Hurdle Return - The minimum acceptable return an investor requires from an investment.

Hyperinflation - A state of excessive inflation.

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