JAMES COOK UNIVERSITY
PROGRAM OF ACCOUNTING AND FINANCE
SCHOOL OF BUSINESS
GLOSSARY OF FINANCIAL TERMS
CO2611:03 Applied Financial Management
CO2601:03 Business Finance I
CO2602:03 Business Finance IIA
CO3611:04 Business Finance II
CO3612:04 Investment Analysis
BU5005:03 Financial Management
This glossary is the latest step in the production of an integrated glossary facility for
students studying Finance subjects at JCU. The terms forming the basis of the
glossary are of an introductory nature and are intended primarily for those students
coming to Finance for the first time, and having little familiarity with the 'jargon' of the
industry. The relevant descriptions are therefore presented in a non-technical
language. The glossary will be continuously updated and expanded as thought
As a result of several years experience teaching Finance at an introductory level I
have come to the conclusion that the language of the securities industry causes
students much anxiety. Consequently the emphasis of the glossary content is
focussed on terms associated with investing in the stock market. The glossary has
been compiled from several sources including the February 2000 issue of SHARES
Any suggestions as to improvements in focus, style etc would be greatly
appreciated. I can be reached at the following e-mail address:
Dr Stewart Alison
Head, Accounting and Finance Program
School of Business
LAST UPDATE: MARCH 28, 2000
All Ordinaries Index (The 'All Ords' index) - the best known of the indices which
summarise the share price movements on the Australian Stock Exchange.
Movements in stock market indices are an indication of how share prices on
average have behaved over a particular period. The All Ords represents the share
prices of about 90 per cent of companies listed on the Stock Exchange. Other stock
market indices from overseas which are regularly featured in our financial news
bulletins on television and radio are: the FT 100 ( The 'Footsie') from London, the
Hang Seng from Hong Kong, the Nikkei from Japan and the famous Dow Jones from
Annual General Meeting (AGM) - All companies are required by law to hold a
meeting of shareholders at least once each year. The business of the AGM typically
includes the declaration of dividends, adoption of the company annual accounts and
the election of directors
Australian Securities and Investments Commission (ASIC): a Commonwealth
statutory body that is the market regulator and consumer protection body.
Australian Stock Exchange Limited (ASX): the national organisation, now
demutualised and itself a listed company, which runs the Australian sharemarket.
Bank bills - bank issued debt securities, generally for terms of less than 12 months,
and traded in the money market.
Bear Market - a stock market condition in which share prices are falling and
expected to continue falling. A bear 'claws' market prices down. The opposite of a
Blue chip - companies which are reckoned to be well-managed, established and
reliable and whose shares are good performers on the stock market. These tend to
be the largest companies listed on the stock market, with household names.
Investors should remember however that the status of 'blue chip' is not necessarily a
permanent feature for any company.
Bonds - debt securities, mainly government, of terms of one year or more.
Bonus issue: so-called free shares issued to shareholders in proportion to their
holdings, either in addition to or in place of dividends B effectively a share split.
Does not affect the proportion of a company held or the underlying value of the
Books Closing Date: see ex dividend
Brokerage - brokers are agents who buy and sell securities on behalf of their clients
i.e. the investors. Brokerage is the fee charged by the broker for this service. Broking
facilities were traditionally provided by 'stockbroking' firms but other organisations
such as banks will now buy and sell shares on behalf of investors. Note that, while
strictly speaking, brokerage is the fee charged for buying and selling shares etc.,
stockbrokers also provide investment advice to their clients as part of the overall
service. Competitive brokerage is now charged by organisations operating on the
Bull market - a market in which stock prices are rising and expected to continue
rising. A bull 'tosses' market prices up. The opposite of a bear market.
Chess: Clearing House Electronic Subregister System, for recording share-holdings
in companies listed on the exchange without using scrip certificates.
Closing price - the last actual recorded sale price of the stock on a particular trading
day, adjusted for any higher buying quote or lower selling quote.
Compliance Listing B When a private company already has the required number of
shareholders (minimum of 500) then the company is able to list n the ASX to provide
liquidity to current shareholders. The company does not need to issue a prospectus
because it is not raising any capital. It only needs to issue an Explanatory
Memorandum that explains what the company does.
Consolidation: the combining of a company=s shares into a smaller number of
shares, each with a correspondingly higher market value. The opposite of share
split. The total value of any investor=s holdings is not affected by the consolidation.
Convertible note - a fixed interest bearing security, not charged on any of the
borrowing company=s assets, which is convertible, at a future date, into ordinary
shares in the company. Conversion takes place under specified conditions on the
basis of a predetermined ratio.
Coupon rate - the nominal rate of interest, printed on the debt security, and paid at
regular intervals on the security's face value.
Cum Dividend (CD): see ex dividend.
Debentures - debt securities issued by corporations and finance companies for
terms of more than one year, and with a stated face value and coupon rate of
Debt security - any investment whereby you provide a capital sum and earn interest
for the borrower's use of your money.
Derivative - a financial instrument, the value of which is derived from the price of
another more basic instrument or product. Examples of derivative securities are
futures contracts, options, swaps and warrants.
Discount security - a debt security on which no coupon rate of interest is payable.
The interest earned by the investor is the difference between the buying and selling
price of the security. Examples of discount securities are treasury notes, bank bills
and promissory notes.
Dividend - the amount of a company=s profits which is paid out to the shareholders.
Companies paying dividends normally make both an interim and a final dividend
payment each year.
Dividend Cover - the number of times that the profit after tax covers the dividend
amount. Also know as >times covered.=
Dividend Payable Date: see ex dividend.
Dividend per Share (DPS): the annual dividend expressed in cents per share.
Dividend yield - The dividend return from an investment in a particular share. The
dividend is expressed as a percentage of the share price. For example, a dividend of
6 cents on a share which is trading at $1.20 represents a dividend yield of [6/120] x
100 = 5%.
Dow Jones Industrial Average (DJIA): an index which is often used as a proxy for
the United States equity market, although it is not as broadly based as our All
Ordinaries Index. The Dow covers only 30 stocks listed on the New York Stock
Exchange and its construction (based on an unweighted average of the individual
share prices rather than the market capitalisation of the companies concerned)
leaves a lot to be desired.
Earnings: consolidated net operating profit.
Earnings per share - the company's net profit divided by the total number of shares
in the company. Usually expressed as cents per share.
Earnings Yield: the return from an investment in ordinary shares if all earnings (net
of preference dividends) were paid out as ordinary dividends, a figure obtained by
dividing a company=s earnings (in cents per share) by the current market price (also
expressed in cents) and multiplying by 100. See also price earnings ratio.
Equity - this means 'ownership.' An equity investment in a company usually means
ownership of ordinary shares in the company.
Ex Dividend (XD): dividend announcements involve two dates B the Abooks closing
date@ (which determines who is entitled to the payment, namely, holders on the
company=s register) and a Adividend payable date@ some weeks later, when the
actual cheques are posted or electronic credits are put through. For securities listed
on the stock exchange a third date is also used. Five working days before the books
closing date the stocks go Aex dividend@ , meaning that sellers of shares rather than
purchasers become entitled to the payment. Before that the stock is traded on a
Acum dividend@ (cd) basis, meaning the reverse.
Face value - the capital sum initially borrowed, printed on the debt security and
repaid at maturity.
Fixed Interest Security: an investment involving a defined and guaranteed
periodical return, as distinct from an investment known as an equity which involves a
variable and performance based return. Examples include bonds, debentures,
notes, deposits, mortgages and most preference shares.
Franked Dividend: see imputation.
Franking Rebate: see imputation.
Imputation: the system under which shareholders receive credit for the income tax
(currently 36 per cent) paid by companies, ensuring that corporate profits are not
taxed twice. Dividends paid out of profits that have borne such company tax are
known as Afranked dividends@ and carry with them an associated Aimputation
credit@ (currently being 36/64 of the amount of franked dividend). Shareholders pay
tax on unfranked dividends in the normal way. They also pay tax on the total of their
franked dividends and the associated imputation credits, but the latter are treated as
a prepayment of tax (Afranking rebate@ ) usable to cover all or part of the
shareholders= total tax liability for the year concerned (other than the Medicare
levy), but not refundable in cash, or applicable to any other tax year (although this is
to change from July 1, 2000).
Income Securities: see perpetual floating rate notes.
Liquidity - a measure of how easily you can sell your investment.
Market Capitalisation: the worth of a company as set by the stockmarket. It is
calculated by multiplying the number of shares on issue by the price per share.
Net Tangible Asset Backing (NTA): the net worth of a share, the theoretical value
of the net assets attributable to each ordinary share on issue. It is calculated by
dividing the company=s total shareholders= funds, net of any minority interests,
preference share capital and intangible assets, by the number of ordinary shares on
Option: a security which gives its holder the right but not the obligation to acquire
a share in a company at a specified price (called the exercise price) on a stipulated
date (called the exercise date) or, sometimes, at any time up to a maximum date.
An option that is not exercised by the latest possible exercise date lapses and
becomes worthless. Options are usually transferable and can be themselves traded.
Ordinary Shares: shares forming the bulk of a company=s capital. All companies
listed on the stock exchange must have ordinary shares. They may or may not have
classes of shares as well B for example, preference shares. In the event of
liquidation, ordinary shares rank after everything else. They may be fully paid or
Perpetual Floating Rate Notes: income securities offering a variable interest rate,
usually defined as the 90-day bank bill rate each quarter plus a specified margin, and
often with a guaranteed minimum rate for a specified initial period B for example, one
year. These notes have no fixed maturity trade but the issuing company usually
reserves the right to redeem them at par plus accrued interest at a time of its
choosing as from some specified date. Until redeemed they can be traded on the
stock exchange. Their market value will fluctuate. The notes are unsecured but they
rank ahead of ordinary and preference shares.
Preference Shares: shares with a fixed rate of return and with priority over ordinary
shares in regard to dividends and the company=s assets in the event of a wind-up.
They rank after all the company=s liabilities and can take various forms B for
example, with or without cumulative dividend entitlements; with or without
participating or partial participating rights. They can be redeemable or irredeemable;
convertible or non-convertible; voting or non-voting.
Price Earnings Ratio: a figure obtained by dividing the earnings per share (in cents
per share) into the current market price of the share (also expressed in cents); 100
divided by the earnings yield. The PE ratio shows the number of times the market
price covers earnings and is a valuable tool for comparing profit performance relative
to price. It should, however, be noted that dividing a historical earnings figure into a
current market price can be misleading. The PE ratio can be an indicator of the
market=s anticipation of future earnings and the quality of the company=s
management and performance. See also earnings yield.
Prospectus - a legal document which all companies which offer shares for sale to
the public must prepare. The prospectus must contain certain information regarding
the terms of issue of the new securities.
Right: an entitlement given to existing ordinary shareholders to take up new shares
at a specific price and by a specific date. Rights are issued pro rata to existing
shareholdings and may be either renounceable or non-renounceable.
Renounceable rights can be traded on the exchange in the same way as shares but
only during a limited period governed by the terms of the issue.
Rights issue - if a company requires additional funds it may issue new shares.
When the new shares are offered, at a discount to the current market price, to
existing shareholders in proportion to their existing shareholdings, the issue is called
a 'rights issue.' The entitlement to these new shares being offered are known as
'rights', and shareholders may have the right to either buy these shares or to sell the
rights on the share market.
Secondary bond market - the trading of second-hand bonds by brokers.
Security - a financial asset on which the investor will expect to earn future cash
flows. (examples: debt securities, shares, bank deposit, units in a unit trust, options
Share: one of the parts into which a company=s share capital is divided, entitling
each holder, as a part owner of the enterprise, to a proportion of the profits and to a
proportion of the net assets after satisfying the creditors in the event of a wind-up.
The shareholders collectively control the company. All the shares in any one class
of shares rank equally. Most shares are either ordinary or preference. A company
can also have deferred shares.
Share Split: the subdivision of a company=s shares into a larger number of shares,
each with a correspondingly lower market value. The opposite of consolidation. The
total value of any investor=s holdings is not affected by the split.
Spread - the difference between the buy and sell prices of a security.
Stag - an investor who applies to buy shares in a company when the shares are
being issued by the company for the first time. The stag has no intention of investing
in the company on a long-term basis and hopes to make a quick profit by selling the
new shares immediately they start trading on the stock market, for a price higher
than what was paid to the company for them.
Takeover: an offer to all the shareholders of a company to buy all or part of their
shareholdings for a specified consideration (or for a choice between two or more
The consideration may be cash; or shares, options or loan securities in the bidding
company or a related company; or some combination of these. Takeovers may be
of two sorts, an off-market or an on-market bid. Off-market bids involve the offeror
sending a Part A statement to the company setting our details of the bid and how it
will be financed, etc. Directors of the offeree company respond with a Part B
statement which sets out their recommendation to shareholders.
The offer documents are then sent to shareholders. The offer may be conditional
upon minimum acceptances or other constraints. In an on-market bid the offeror
must stand in the market at a fixed price for a fixed time. Both off-market and on-
market bids can take place simultaneously.
Underwriter - when a company makes an issue of shares for the first time there is a
risk that not all the shares on offer will be bought by investors and the company
might find itself short of the funds necessary for expansion. The company can
arrange with an underwriter, usually a bank or other financial organisation, to
'underwrite' the issue. In return for a fee the underwriter will agree to buy any shares
Yield - the 'actual' rate of return you are getting on your investment.
Yield to maturity - a debt security's internal rate of return i.e. the discount rate
which will discount the future interest payments and capital repayment to a present
value equal to the security's current market price.