JAMES COOK UNIVERSITY

                           PROGRAM OF ACCOUNTING AND FINANCE

                                     ...
All Ordinaries Index (The 'All Ords' index) - the best known of the indices which
summarise the share price movements on t...
Brokerage - brokers are agents who buy and sell securities on behalf of their clients
i.e. the investors. Brokerage is the...
Discount security - a debt security on which no coupon rate of interest is payable.
The interest earned by the investor is...
Face value - the capital sum initially borrowed, printed on the debt security and
repaid at maturity.

Fixed Interest Secu...
Perpetual Floating Rate Notes: income securities offering a variable interest rate,
usually defined as the 90-day bank bil...
Share: one of the parts into which a company=s share capital is divided, entitling
each holder, as a part owner of the ent...
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Glossary of Financial Terms.doc

  1. 1. JAMES COOK UNIVERSITY PROGRAM OF ACCOUNTING AND FINANCE SCHOOL OF BUSINESS GLOSSARY OF FINANCIAL TERMS SUBJECT REFERENCES 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 Introduction 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 necessary. 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 magazine. Any suggestions as to improvements in focus, style etc would be greatly appreciated. I can be reached at the following e-mail address: stewart.alison@jcu.edu.au Dr Stewart Alison Head, Accounting and Finance Program School of Business LAST UPDATE: MARCH 28, 2000
  2. 2. 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 New York. 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 bull market. 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 parcel. Books Closing Date: see ex dividend
  3. 3. 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 internet. 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 interest. 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.
  4. 4. 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.
  5. 5. 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 issue. 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 other 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 contributing.
  6. 6. 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 etc.)
  7. 7. 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 alternative considerations). 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 remaining unsold. 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.

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