Glossary of terms
The following terms and definitions represent some of the more commonly used phrases and abbreviations in the financial services industry.
The definitions marked with an asterisk (*) are taken directly from the Financial Services Council Standards (IFSA Guidance Note No. 500) and are reproduced with FSC's kind permission.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
Active management (investment management style)*
A style of investment management that seeks to attain returns above a set benchmark by constantly monitoring and, if necessary, changing asset allocation and security selection.
Account-based pension or annuity
A flexible retirement income stream provided through an investment account. An account-based pension is provided by a superannuation fund whereas an account-based annuity is issued by a life insurance company using superannuation money. With an account-based pension/annuity, the income payments are not guaranteed and the investment risk remains with the investor. Prior to changes to the law in 2007, these types of income streams were called allocated pensions and many super funds still use this term to describe their account-based pensions.
Allocated pension or annuity
A flexible retirement income stream provided though an investment account (see account-based pension or annuity). All new and most existing allocated pensions are also account-based pensions and meet the more flexible rules that commenced from 1 July 2007. However some older allocated pensions continue to operate under the pre 1 July 2007 rules.
Annual report
A yearly report or statement of a company's financial health. It generally includes a balance sheet and profit and loss statement. Trustees of funds must also issue annual reports.
Annuity
An income stream paid to an individual by a life insurance company. An annuity is purchased by an initial lump sum (the purchase price) using either superannuation or non-superannuation money. Annuities can be either guaranteed for life or a particular number of years or non-guaranteed account-based annuities.
Asset allocation*
The percentage of assets held in each asset class (shares, fixed interest, etc.) in an investment portfolio.
Asset class*
A category of financial assets. The major asset classes are shares, property, fixed interest and cash, which in turn can be broken down further to include domestic or international shares, domestic or international fixed interest, direct or indirect property and so forth.
Assets
Everything that a person or company owns or has a right to, from which a benefit can be derived.
Association of Superannuation Funds of Australia (ASFA)
The peak industry body responsible for protecting, promoting and advancing the interests of Australia's superannuation funds, their trustees and members.
ASX 300 Index
The top 300 companies, by market capitalisation, listed on the Australian Securities Exchange. The index is commonly used as a benchmark for the performance of Australian shares overall.
ASX 300 Accumulation Index
An index of the top 300 companies, by market capitalisation, listed on the Australian Securities Exchange. This index takes into account share price movements and dividends. Many Australian share fund managers use this index as their benchmark.
Australian Financial Services Licence (AFSL)
A licence allowing an organisation to provide financial services in Australia. Licensees' activities and service standards are managed by the Australian Securities and Investments Commission (ASIC).
Australian Prudential Regulation Authority (APRA)
A Government agency responsible for prudential regulation of banks, insurance companies, superannuation funds, credit unions, building societies and friendly societies.
Australian Securities and Investments Commission (ASIC)
An independent Government body that enforces and regulates company and financial services laws to protect consumers, investors and creditors.
Australian Securities Exchange (ASX)
The main Australian market place for trading equities (shares) and related securities.
Authorised Representative
A person authorised by an Australian Financial Services licensee to provide financial products and/or financial advice, such as a financial adviser.
B
Bear market*
A declining financial market. The opposite of a bull market.
Benchmark*
A measure used for comparison of investment returns over a period of time.
Beneficial owner
The person (also called the investor) who has absolute rights to the asset(s) even though the legal title is held by another (such as a custodian or the operator of an Investor Directed Portfolio Service).
Beneficiary
Either:
An individual or company who, on the death of another individual, receives financial benefit. A person entitled to enjoy the benefit of property or other rights the legal title of which are held by a trustee, for example a superannuation trustee holds legal title to the assets of a fund but the fund members are the beneficiaries.
Binding nomination
The documentation of an individual's wishes regarding which of their dependants and/or estate will receive their superannuation benefits in the event of their death. A binding nomination must meet certain criteria set down in superannuation law and is binding on the trustee.
Blue chip
Stock/shares of leading, quality companies (usually highly valued) that are well known for their strong financial position and ability to make profits.
Bond
Similar to an IOU, bonds are generally a medium to long-term fixed interest debt security commonly issued by Commonwealth and State Governments and corporations to raise funds. They are issued by the borrower at a specified interest rate and repaid after a set period.
Bottom-up style
A funds management style which uses a method of analysing companies whereby an investor starts by looking at stock-specific fundamentals and then incorporates industry trends and macro-economic analysis. This style is the opposite of top down.
Broker*
Refers to an agent who handles the orders for an investor, for example they can purchase and sell securities, commodities, insurance policies or other property. The provision of this service attracts a brokerage (see below).
Brokerage*
A fee charged by a broker for the purchase or sale of a security. Also see commission.
Bull market*
An advancing financial market. The opposite of a bear market.
Buy/sell spread*
The difference between the entry and exit prices (fees) of a fund.
C
Capital
The value of your investment, represented by total assets (what you own) less total liabilities (debts or monies owed). Also refers to the initial amount you invested (for example in a capital guaranteed fund).
Capital Gains Tax
A tax applied on the increase in the capital value of an investment that is payable when the investment is sold.
Capital growth
The increase in the market value of an asset.
Capital guaranteed fund
An investment fund designed for a conservative investor where a guarantee applies to the return of the sum originally invested.
Capital stable fund
A term used to describe investments that have a high fixed interest or cash component.
Cash management trust
A pooled investment vehicle that invests in high-yielding money market investments, normally only available to professional investors.
Choice of fund
A Government scheme where employees can choose the superannuation fund into which superannuation guarantee contributions are made. If the employee does not choose a fund, the employer can make contributions to a default superannuation fund.
Commission*
A fee charged by a broker or financial adviser for the execution of a purchase or sale of a managed investment. Alternatively, it can be a fixed amount per transaction or a percentage of the total value of the transaction. Also referred to as brokerage and is normally deducted from the gross amount contributed to the investment product prior to investment.
Commutation*
The process of converting a pension or annuity into a lump sum.
Complying pension or annuity
Income streams that attract exemptions under the Centrelink Assets test, and include Term Allocated Pensions (also called market linked pensions). Complying income streams are required to meet strict criteria, such as non-commutability and be payable for life or life expectancy. New complying pensions do not receive Centrelink Assets test exemptions (unless they arise from the rollover of an earlier complying pension).
Complying superannuation fund*
A regulated superannuation fund that has not been given a notice from Australian Prudential Regulation Authority (APRA) that it is non- complying.
Compound interest
Interest that is paid on accumulated interest, as well as on the capital invested, such as if you reinvest the interest you earn on an investment, you earn interest on your interest as well as the capital amount over time.
Concessional contributions
Employer and tax deductible personal contributions. The Government sets an annual cap on the amount of concessional contributions that can be made to your super each year. Concessional contributions over this cap are heavily taxed.
Consumer Price Index (CPI)
Measures the price of a basket of items typifying goods and services purchased by Australian households across eight capital cities. CPI allows comparisons of the relative cost of living over time and is used as a measure of inflation.
D
Death benefits
Benefits paid by a superannuation fund to (one or more) dependants and/or the estate, following the death of a member.
Debt security*
Borrowed funds that must be repaid by the entity issuing the debt security.
Deductible amount
The amount of a superannuation pension that is exempt from the Centrelink income test.
Default fund
The superannuation fund into which superannuation guarantee contributions are made for an employee if the employee does not make a choice of superannuation fund. The default fund can be an employer’s own superannuation fund for employees or a superannuation fund named in an industrial award.
Default investment fund
The investment strategy or option in the superannuation fund that has been selected by the trustee to receive contributions for certain members who have not chosen their own investment strategy.
Deferred annuity
An investment account issued by a life insurance company that can accept rolled over superannuation benefits.
Defined benefit fund*
A fund where the member receives a benefit that is defined by the trust deed of the superannuation fund.
Dependant
The spouse (including de-facto or same-sex partner), child of a member of a superannuation fund or any other person who is financially dependent on that or in an interdependent relationship with that individual .
Derivatives*
A financial instrument that derives its value from the price of a physical security or an index.
Directed Termination Payment
A payment on termination of employment where the individual directs that the payment be made in the superannuation fund. Directed termination payments are concessionally taxed in the superannuation fund.
Distribution
An income payment made to unit trust investors. Under a trust deed, any income earned by the investments held in the trust may have to be distributed to the investors. The term may also be used to describe a return of capital.
Diversification
The process of distributing funds across a number of asset classes to reduce the impact that volatility in one asset class, sector or market will have on the performance of your overall portfolio of assets.
Diversified fund
An investment fund that invests in a broad range of asset classes (for example fixed interest, shares and property). The fund manager can alter the composition of the funds in light of changing economic and investment conditions in order to achieve the best results.
Dividend*
The payout from a company of a portion of its earnings to its shareholders, in proportion to the number of shares the shareholder owns.
Dividend imputation
So that company earnings are not taxed twice, investors who receive dividend payments may also receive a tax or imputation credit for the tax already paid by the company.
Dividend reinvestment plan
A scheme that enables shareholders in a company to acquire shares instead of taking their dividends in cash.
Dollar-cost averaging*
The practice of investing amounts of money at regular intervals, regardless of whether the securities markets are declining or rising.
Dow Jones Industrial Average
A price-weighted average of 30 blue-chip stocks (shares) that are generally leaders in their industry. The Dow Jones Average has been a widely used indicator of the US stock market since 1928.
E
Entry fee
A fee payable by investors on entry to certain investment options.
Equity
This is a term for shares. It is also a general word used to describe shareholding or ownership in a company. It can also refer to the value of your capital invested in an asset.
Ex dividend
A share where the seller, not the buyer, is entitled to receive the dividend.
Exit fee
A fee payable by investors when withdrawing all monies from or closing certain investment options.
F
Financial adviser*
A person who advises individuals on suitable forms of investment for their assets, considering their tax position, liabilities, personal circumstances, etc. They may also be referred to as a financial planner. Financial advisers must have certain training and skills under Australian law.
Financial Services Council (FSC)*
An industry association established in late 1997 (formerly the Investment and Financial Services Association or IFSA) which acts as the collective voice of its member companies when dealing with governments and the general public. (Mostly represents life offices and fund managers.)
Fiscal policy
The Government's policy relating to its receipts and expenditure. Its potency as an economic tool stems from the fact that by spending more or less than it receives, the Government can affect the overall level of demand in the economy.
Fixed interest
Interest paid at a predetermined and unchanging rate for a specified period of time on investments such as bonds.
Float
In relation to companies, it refers to the decision to list on a stock exchange and offer shares to the public. For currencies, it is the decision to let market forces set the exchange rates.
Franked dividends
Company/share dividends paid out of profits on which the company has already paid tax. The investor is then entitled to a reduction in income tax for that amount (imputation credit).
FTSE 100 Index (Financial Times Stock Exchange 100 Index)
The main index of the London Stock Exchange (LSE). An index of the 100 largest companies, by capitalisation, traded on the LSE. Commonly referred to as the Footsie.
Fund manager
An organisation that invests or manages money on behalf of individuals or other organisations.
Futures
A contract that obligates the owner to buy or sell a certain quantity and quality of an underlying asset at a predetermined price at a future date.
G
Gearing
Describes the practice of borrowing to invest. Gearing is usually expressed as a ratio of the borrowed amount divided by the total amount invested.
Gross Domestic Product (GDP)
A commonly used measure of the total market value of goods and services produced by an economy.
Growth At a Reasonable Price (GARP) style
This is a funds management style where a growth manager tends to employ elements of value style investing in its investment decision-making.
Growth fund
A fund that has a higher proportion of assets in investments such as shares and property that are expected to deliver most of their returns through capital appreciation.
Growth style
This is a funds management style where a growth style manager seeks companies whose earnings are projected to be superior to the market average.
H
Hang Seng Composite Index
The main index for the Hong Kong Stock Exchange.
Hedging
An investment position taken to counteract the potential risk from another investment.
I
Imputation
The process through which a shareholder obtains a tax credit on the dividends received on Australian share investments that can be used to offset other taxable income. This credit serves as an individual rebate on any tax already paid on the dividends of an Australian company.
Imputation credit*
Tax credits available to an investor who receives franked dividends or distributions. These credits are available to offset the investor's tax liability. Should the tax liability be zero, then for certain investors the credits are refundable.
Index
A numerical measure of price movement in financial markets, such as the ASX 300 Index.
Index manager
This is a funds management style where an index manager endeavours to replicate or copy the performance (returns) of a specific market index, such as the ASX 300 Index.
Industrial shares
Shares in companies that are involved in the production of goods and services as distinct from those involved with raw commodities.
Inflation
An overall increase in the prices of goods and services in an economy. The most common measure of prices in Australia is the consumer price index.
Insurance bond*
A single premium investment product, issued by life insurance companies or friendly societies, which operates in the same manner as a unit trust except that the return is provided to the investor net of tax.
Investment manager*
An entity that specialises in the investment of money on behalf of investors.
J
No listings
K
No listings
L
Liquidity
The ease with which an investment can be converted into cash with minimum loss.
Listed company
A company whose shares can be bought and sold on a securities exchange.
Lump sum
A single payment for a total amount due, as opposed to a series of periodic payments, for example you may be entitled to receive a lump sum benefit from a superannuation fund instead of as a pension or annuity.
M
Managed fund*
Any form of investment in which a number of investors place their money with a manager to invest on their behalf.
Master trust or master fund*
Both names are used interchangeably for schemes that allow individual investors or smaller superannuation funds to channel money into one or more underlying funds. A master fund may include one or more legal entities that cover superannuation and non-superannuation investments. Where a master fund is a complying superannuation fund, it may offer several products including accumulation options, allocated and superannuation pensions.
Monetary policy
Economic policy, usually handled by the Reserve Bank, concerned with the management of money supply, interest rates and financial conditions.
Money market
A market for trading short-term securities.
Multi-manager style
This is a funds management style where the investment management is conducted by more than one fund manager. It can be used for diversified or single asset class funds.
N
NASDAQ (National Association of Securities Dealers Automated Quotations)
A computerised system that provides brokers with the price of shares and securities traded on the New York Stock Exchange (NYSE) and over the counter. Unlike the NYSE, the NASDAQ has no physical trading floor.
Negative gearing
An investment strategy where related costs (for example interest payments on funds borrowed to buy an income-producing asset) exceed the income from the asset.
NIKKEI-225 Stock Average
The main Japanese stock market benchmark that measures the top-rated 225 companies listed on the first section of the Tokyo Stock Exchange.
Non-concessional contributions
These are personal contributions and spouse contributions which are not tax deductible. The Commonwealth Government sets an annual cap on the amount of non-concessional contributions that can be made to your account. Non-concessional contributions above this cap are heavily taxed.
Non-preserved benefits
That portion of superannuation benefits that can be accessed/withdrawn at any time.
O
Option
An investment contract that gives the owner the right but not the obligation to buy or sell an asset at a predetermined price within a stated period of time.
Ordinary shares
Securities or fully paid shares that represent an ownership interest in a company. They carry voting rights (for the shareowner) and entitle the shareholder to receive dividends if the company makes a profit and decides to pay dividends.
Overweight
Taking a greater exposure to one investment market or security compared with a benchmark or neutral position. The opposite of underweight.
P
Passive management
This is an investment management style that aims to achieve investment returns in line with those of a specified market or index. May also refer to a style of investment management that focuses on holding investments for an extended period rather than trading to maximise gains.
PAYG Tax
An abbreviation for 'Pay As You Go' withholding tax, where income tax is withheld from payments made to a person and forwarded to the ATO by the payer. PAYG withholding tax applies to pension and lump sum payments made by superannuation funds to members under age 60 and to wages or salary paid to employee by their employer.
Pension
A regular, periodic payment to an individual, made by either the Government or a superannuation fund.
Personal contributions
These are contributions made to a superannuation fund by the member of the fund. Personal contributions are normally payments made to a fund from an individual's after-tax salary or other financial source although personal contributions made by the self employed or retiree may be tax deductible. Tax deductible personal contributions are treated as concessional contributions whereas personal contributions made after tax are treated as non-concessional contributions.
Pooled fund
A number of individuals place their funds into one investment product fund, that is then managed by an investment manager on behalf of all the investors.
Pooled superannuation trust (PST)*
A PST is a scheme with a trustee approved by APRA, which is used only for the investing the pooled assets of regulated superannuation funds, approved deposit funds, life offices and registered organisations. PSTs are taxed under special provisions of the Tax Acts. When holders of units in PSTs dispose of their holdings, they do not need to pay any additional amounts in tax.
Portability
The ability to transfer benefits from one investment or superannuation fund to another.
Portfolio
A collection of investments that are all owned by the same individual or organisation.
Preservation
A regulatory requirement that certain superannuation benefits cannot be accessed until a condition of release has been satisfied. Conditions of release include death, permanent invalidity, retirement after preservation age or reaching age 65.
Preservation age
Age after which preserved benefits can be accessed on retirement. Preservation age is currently age 55 but for those born after 30 June 1960 preservation age of 60 will be phased in.
Preserved benefits
Benefits within a superannuation fund that cannot be accessed until the fund member turns 55 and/or retires, or a special circumstance has been met (such as severe financial difficulties or permanent incapacity).
Privatisation
The sale of Government-owned services which permits the public to gain direct ownership via an allocation of shares.
Product Disclosure Statement (PDS)
A document required by law that provides specific details about the financial product being offered.
Property trust
A unit trust that pools investors' funds into property investments.
Q
Quartile
A statistical measure dividing a sample into four numerically equal groups. Thus top quartile in a funds management context means the top 25% of the fund managers in a particular category or asset class.
R
Rally
A rise in the sharemarket or a particular share price after a period of falling prices.
Recession
A significant slowdown or minor contraction in the economy (as opposed to a depression which is a major contraction in economic output). A recession is sometimes defined as a period where a nation's Gross Domestic Product (GDP) declines over two consecutive quarters.
Regular savings plan*
An agreement in which an investor pays a regular amount at a nominated frequency into an existing scheme (investment fund).
Resource shares
Shares in companies involved in commodity-related activities such as mining and energy.
Retirement income stream
An investment product that provides a regular income in retirement. A retirement income stream can be either a pension (paid from a superannuation fund) or an annuity (paid by life insurance company).
Retirement Savings Account (RSA)
A superannuation savings account issued by a bank or other deposit taking institution.
Return
The amount of income or growth received from an investment or a transaction, usually expressed as a percentage of the amount invested.
Risk
The chance of incurring a loss from an investment.
Rollover
Transfer of superannuation money from one complying superannuation fund to another. A rollover may also include the transfer of superannuation money from one account to another account within the same fund.
S
Salary sacrifice contribution
A type of contribution to superannuation made from pre-tax salary. The employee agrees with his/her employer to contribute part of salary into superannuation as an employer contribution. Salary sacrifice contributions are treated as concessional contributions to superannuation.
Securities*
A form of contract representing ownership in shares, fixed interest and derivatives.
Self-managed superannuation fund (SMSF)
A superannuation fund with up to four members, each of whom is an individual trustee or director of the trustee company. SMSFs are regulated by the Australian Taxation Office (ATO) and have to meet numerous regulatory criteria.
Share
Part-ownership in a company. Shares include certain rights (for example to participate in the appointment of directors, to receive dividends, to receive a share of the surplus assets in a company's dissolution). Different types of shares include ordinary shares, convertible notes and preference shares.
Small APRA Fund (SAF)
A small superannuation fund with up to 4 members that has a professional APRA regulated trustee. A SAF allows members to invest in similar investments to an SMSF, but without the requirement that each member be a trustee of the fund.
Spouse
In superannuation, this includes a legal spouse, de-facto spouse and same-sex partner.
Spouse contributions
A situation where a spouse makes contributions to their spouse's superannuation fund. A spouse contribution is a non-concessional contribution. The contributing spouse may be entitled to a tax rebate for some or all of the contributions if the receiving spouse is a low income earner.
Spouse contribution splitting
Where a member elects to split concessional contributions made to his/her superannuation account in favour of his/her spouse’s super. Up to 85% of concessional contributions can be split and rolled over to the spouse’s superannuation account.
Stockbroker
A stock exchange member who is authorised to buy and sell shares on behalf of others.
Strategic asset allocation*
The composition of an asset mix within a portfolio, constructed with the objective of meeting the long-term liabilities of a fund, rather than being based on short-term views of relative performance of the various asset classes.
Superannuation (super)
A system where individuals set aside funds during their working life to fund retirement. The Government supports this system by requiring employer contributions on behalf of employees, providing tax concessions and regulatory controls for the benefit of contributors.
Superannuation Guarantee contribution
An employer contribution to superannuation under the compulsory Government scheme whereby employers must contribute a prescribed level (currently a minimum of 9%) of an employee's salary and wages into superannuation. Superannuation Guarantee contributions are treated as concessional contributions to superannuation.
Superannuation Guarantee Charge
A charge imposed on any employer that fails to contribute the prescribed level of superannuation for their employees.
T
Tactical asset allocation*
An investment approach by which the allocation of a fund to different classes of asset is changed on a short-term basis to take advantage of perceived differences in their relative values.
Tax free component
That part of a superannuation lump sum or pension payment paid before age 60 that is deemed to be a return of non-concessional contributions. The tax free component is excluded from assessable income for tax purposes.
Taxable component
That part of a superannuation lump sum or pension payment paid before age 60 that is included in assessable income for tax purposes. The taxable component comprises of a “taxed element” (arising from a taxed super fund) and/or an “untaxed element” (arising from an untaxed source such as a public sector super fund).
Top down style
A funds management style using a method of analysing companies whereby an investor starts by looking at macro-economic factors and then incorporates industry trends and stock-specific factors. This style is the opposite of bottom up.
Transition to retirement pension (TTR)
This is an account based pension available to members who have reached their preservation age but have not yet retired or reached age 65. A TTR pension has a maximum drawdown of 10% of the account balance each financial year.
Trust deed*
A document that sets out the rules for the establishment and operation of a fund.
Trustee
The person or company that has the legal responsibility to ensure that the trust or superannuation fund is operated in accordance with the trust deed.
U
Underlying investments or securities*
In relation to managed investments, this normally means the investments selected by the investment manager. In the case of master trusts, underlying investments are the investments offered through menu options for an investor to select. The menu may include both listed and unlisted investments and investments only available through the master trust the investor has elected to use.
Underweight
Taking on a smaller exposure to one investment market or security compared with a benchmark or neutral position. The opposite of overweight.
Unit trust
A pooled investment structure set up under a trust deed where investors buy units in a trust that is managed by the fund manager on behalf of the investors. The value of units is set either by the market (if a listed trust) or by the trustees (if unlisted), who adjust the price according to valuations.
V
Value style
A funds management style where a value investor seeks to invest in assets that are underpriced on the expectation prices will increase. With shares, the key ratio to judge whether stocks are underpriced or not is their relative price/earnings ratio.
Volatility
The extent to which total returns from an investment fluctuate over time.
W
Wrap account/service*
A portfolio reporting and custodian service in which investors hold assets via a custodian arrangement and receive reports on all assets within the portfolio. Assets held may include direct investments such as shares, and managed investments including master funds, etc.
X
No listings
Y
Yield
The income earned from an investment expressed as a percentage.
Z
No listings