Glossary Financial Terms
D - F Debenture
An investment instrument issued by companies
which pays a regular and fixed interest amount for the term of
the investment. The invested funds (principal) are repaid at the
end of the term (maturity).
Debt
The amount a person or entity (such as a
business) owes to lenders.
Diversification. Spreading invested amounts among several
different savings or investments to reduce risk.
Derivative
A derivative is a financial instrument that
derives its value from that of an underlying instrument (such as
shares, share price indices, fixed interest securities,
commodities, currencies etc). Warrants Futures and, exchange-
traded options and some warrants are types of derivatives.
Directors
Persons elected by shareholders who are
responsible for the implementation of corporate objectives. Can
include Chairman, Deputy Chairman, Managing Director, Joint
Managing Director and Chief Executive Officer.
Diversification
Spreading investments over a variety of
investment categories in order to reduce risk. You may also
invest in different countries to spread your risk.
Diversified portfolio
A portfolio that holds a variety of assets
over more than one asset class or one market. This may include
shares, property, or fixed interest.
Dividend
The payment to shareholders in a company of
their portion of a company’s distributed profits. The portion is
based on relative shareholdings.
Dividend imputation
The tax credits passed on to a shareholder
who receives a franked dividend. Under provisions of the Income
Tax Assessment Act, imputation credits entitle investors to a
rebate for tax already paid by an Australian company.
Dividend reinvestment plan (DRP)
An alternative to cash dividends, allowing
shareholders to receive new shares instead of cash. These shares
are often issued at a discount and no brokerage or stamp duty is
paid.
E Earnings
Income or profit of an entity. May be
expressed as gross or net.
Earnings Before Interest and Tax (EBIT)
A key measure of the financial performance
of a company. It is similar to net profit, except that the
effects of tax benefits, deductions and loans are factored out,
providing a better measure of companies underlying performance.
Earnings per share (EPS)
Measures the earnings that are attributed to
each equivalent ordinary share over a twelve month period. It is
calculated by dividing the company's earnings by the number of
shares on issue in accordance with AASB 1027 'Earnings per
share'.
Employee benefits
Additional benefits received by someone from
their employer, such as bonuses and reimbursement for study.
Entry fee
The fee set by the fund manager for buying
units in a managed investment expressed as a percentage of the
amount invested. The fee is deducted from the amount invested by
the fund manager.
Equities
In share market terms, equities is a synonym
for shares and represent part-ownership of a company, as
distinct from debt securities such as bonds and debentures.
Equity
The value of an asset after deducting any
money owing on it.
Escrow
Escrow is the practice of depositing an
instrument of title to securities with a third party custodian
in order to prevent the holder from transferring those
securities during a period agreed between the holder and another
party (being the issuer, the underwriter, or any other party
with whom the holder makes such an agreement).
This process acts as a control mechanism to ensure risk factors
are managed appropriately. Escrowing securities prevents the
promoter or vendor of a start-up company from extracting value
prematurely by selling their securities before the market has
had the opportunity to assess and value the assets and prospects
of the company.
Excess
The amount of an insurance claim which you
are required to pay before the insurer becomes liable to pay on
the claim. This amount is specified in the insurance policy.
Exit fee
The fee set by the fund manager for selling
units in a managed investment expressed as a percentage of the
amount invested. The fee is deducted from the amount invested by
the fund manager.
Expense
As a verb, to write off a past or current
expenditure in the current period. As a noun, a sacrifice
involved in carrying out the earning process of an entity during
a period resulting in a decrease in proprietorship; an outflow
or other using up of assets or incurring of a liability (or a
combination of both) during a period from delivering or
producing goods, rendering services, or carrying out other
activities that constitute the entity's ongoing operations. The
AASB Statement of Accounting Concepts 4 defines expenses as
consumptions or losses of future economic benefits in the form
of reductions in assets or increases in liabilities of the
entity, other than those relating to distributions to owners
that decrease in equity during the reporting period.
F Fair value
Fair value of a stock index futures contract
is the current value of the underlying shares or index, plus an
amount referred to as the ‘cost of carry’. This amount reflects
the cost of the money required to buy and hold the basket of
stocks which make up the index, less the value of the dividends
paid on those shares during the term of the futures contract.
Financial institution
An entity which accepts money as savings or
investments and in turn provides funds to borrowers.
In an investment context, financial
institution refers to organisations with large funds to invest,
for example, pension funds and insurance companies.
Many investors with limited time or interest
choose to invest indirectly in the share market by selecting an
equity fund managed by a financial institution.
Financial planning
The process a financial planner follows to
understand each client’s different needs and financial
objectives and to recommend an appropriate strategy. There is an
established six step financial planning process which all
professional advisers follow with every new client:
1. Gather financial information about the client
2. Identify financial and lifestyle goals
3. Identify any financial issues
4. Prepare a financial plan
5. Implement the plan
6. Review and revise the plan at regular intervals, or when
circumstances change.
Financial Planning Association
FPA is the peak professional body for
financial planning in Australia . The FPA has an office in each
capital city and a network of 31 Chapters across the country,
which provide a focus for business networking and professional
development activities for more than 12,000 members. FPA
practitioner members manage the financial affairs of more than 5
million Australians whose investments are valued at $630
billion.
Financial year
Also known as the income year, runs from 1
July through to 30 June.
Fixed expenses
Expenses that remain the same, week after
week, or month after month.
Fixed interest rate
Where interest is paid (received) at a
constant rate over the term of a loan (investment).
Franked dividend
A dividend paid by a company out of profits
on which the company has already paid tax. The investor is
entitled to an imputation credit, or reduction in the amount of
income tax that must be paid, up to the amount of tax already
paid by the company.
Fund manager
The individual or organisation in charge of
investing funds on behalf of a financial institution.
Fundamental analysis
Method of analysis using ratios and
percentages calculated from financial data of a company to
assess the company's quantitative and qualitative aspects.
Ratios of particular industry groups and /or major competitors
may also be included in the analysis to determine it's
suitability for investment.
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