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Finance terms glossary

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A

AAA: AAA is the highest credit rating awarded Standard & Poor's.  If a financial institution has an S&P rating of AAA it means there is an extremely low chance of it failing.  If a bond has this rating it means there is an extremely low chance of a default.

Absolute Return Funds: are managed funds where the fund manager is able to take call and put option contracts and/or move to cash to protect the capital and the returns if the markets move down.

Accruals Regime: Is a tax on a financial arrangement, which aims to ensure that income on a debt instrument is accounted for and tax is paid on it over the life of the debt instrument.
 
Accelerated benefit: If an accelerated benefit is paid out the level of some other cover is reduced accordingly.  For example, if you have $1 m of term life insurance with an accelerated trauma benefit of $200k, if the trauma benefit pays out your life cover will fall to $800k.  Taking an accelerated instead of a stand-alone benefit reduces your premium, but whether or not it is a good idea also depends on why you need the cover.
 
AFA: See ‘Authorised Financial Adviser’.
 
After-tax Return: The return from an investment after all income taxes have been deducted.  By comparing after-tax returns an investor can determine which investment makes the most sense based on his or her tax bracket.
 
Aggressive: A bold investment approach that takes higher risks in return for potentially higher rewards.
 
Aggressive investor (Risk profile): This type of investor is likely to be an experienced investor with previous exposure to a wide variety of investments including local and global shares, and alternative investments such as futures, options and derivatives.  The investor knows that these investments have high potential returns, but also the risks are equally high and may involve longer term losses.  Almost all of their portfolio will be invested in shares and alternative investments.  This portfolio, whilst offering potentially high returns, has a high probability and short and longer-term capital losses.
 
Alpha: A measure of expected return based on an investment’s inherent value and assuming a flat market.  It is useful in evaluating investment’s risk exclusive of market risk.
 
Allocated pension of annuity: A retirement income investment where an individual invests their superannuation money and received an income monthly.  The value of the account depends on the investment earnings and amount of income taken.  The capital is accessible and the income is flexible.  There is no guarantee that the income will be paid for life.
 
All ordinaries accumulation index (All Ords.): A measurement of the average movements in share price of a selection of major Australian companies listed on the Australian Stock Exchange.  It is an accumulation index, which means that it assumes that dividends have been reinvested.
 
Alternative or non-traditional assets or investments:  Alternative or non-traditional assets of Investments don’t fit into traditional classes (such as Cash, Bonds, Property, and Shares). Because of this they tend to produce returns that are not highly correlated to the returns from traditional assets – which makes them helpful for diversifying a portfolio.  However they also tend to be riskier than other assets (more volatile over shorter periods of time).  Therefore they tend to represent a relatively small part of an overall asset allocation.
 
Annual renewal term: Each year the insurance policy is renewable by the client – insurance company guarantees to accept renewal provided premiums are paid.  The client decides to continue by simply keeping up with their premiums.
 
Annuity: A regular income stream paid to an individual from a lump sum investment.
 
Application Price: The price per unit or share of an investment in which applications are made.
 
Appreciation: The increase in the value of an asset.
 
Arbitrage: An attempt to profit from differences in security prices, such as disparities between the value of a stock index future and the value of the stocks that make up the index, by buying the undervalued security and selling the overvalued security.
 
Assessable Income: Any income not exempted from income tax by the income tax act. 
 
Asset: An asset is anything a company, fund or person owns or is entitled to.
 
Asset allocation: The proportions in which money invested is divided between different types of assets.  Many investment funds have a pre-set ratio they follow.
 
Asset class: Asset classes or sectors are groupings of securities with broad characteristics in common. Typical asset sectors include NZ or Australasian shares, international shares, property, fixed interest (bonds), and cash.
 
Asset mix:  See asset allocation.
 
Asset Planning: Asset planning combines aspects of tax planning and estate planning, and is primarily focused on.
 
Authorised Financial Adviser (AFA): An Authorised Financial Advisor can give advice on more complex financial products and services; such as Kiwisaver, investment, financial planning services including securities, any estate or interest in land and futures contracts, retirement planning services, and wealth management.  AFA’s have higher standards than RFA’s in terms of disclosure and monitoring by the FMA.  All AFA’s are required to comply with a Code of Professional Conduct and meet minimum standards for competence, knowledge and skills, client care, ethical behaviour and ongoing professional training.
 
Averaging: The practice of buying more or selling off some stock because the price has changed, thereby influencing the average cost of a holding.
 
Average effective maturity: A measure of a bond’s maturity that takes into account the possibility that the issuer may call it before its stated maturity date.  In this case, the bond trades as though it had a shorter maturity than its stated maturity.
 
Average maturity: For a bond fund, the average of the stated maturity dates of the debt securities in the portfolio.  In general, the longer the average maturity, the greater the fund’s sensitivity to interest-rate changes, which means greater price fluctuation.  A shorter average maturity usually means a less sensitive and consequently less volatile portfolio.
 

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B


Baby Boomers: This is an often-quoted expression; it refers to the population bubble with people born between 1946 and 1964.
 
Balance Sheet: A written statement of an individual or business’s assets and liabilities, the difference being the net worth.
 
Balanced fund: A balanced fund is a fund that invests in both income and growth assets, and typically includes exposure to all the major asset classes (cash, fixed interest, property and shares – both domestically and internationally). It should provide long-term capital growth and a reasonable level of income.
 
Balanced Investor (Risk profile): The balanced investor wants to protect their capital but still achieve some growth.  They will be prepared to accept a moderate level of risk (market volatility) and the likelihood that they will have some short-term negative returns.  This type of portfolio will have a fairly even weighting of income and grow investment assets.  This portfolio suits medium to longer timeframes.
 
Balanced Portfolio: An investment portfolio where roughly equal weighting is given to income producing and capital growth types of investment.
 
Bank Bills: This is a commercial bill (a loan agreement between both parties) arranged by a bank.  The ‘bill’ is the legal document containing the ‘promise to pay’.
 
Basis point: One hundredth of 1 per cent: 100 basis points equals 1 per cent.
 
Bear or Bull market: A bull market is one where share prices rise for a prolonged period, while a bear market is where share prices fall for a prolonged period.
 
Bellwether: An established share market leader.  IBM and Apple are two shares commonly referred to as bellweathers.
 
Benchmark: A standard, usually an unmanaged index, used for comparative purposes in assessing fund performance.
 
Beneficiary: A person(s) for whose benefit a family trust is established.
 
Benefit: In relation to superannuation, the entitlement to a lump sum, pension or annuity.
 
Beta: A measure of the price movement in relation to the market, for example the Standard & Poor’s 500 Index.  Securities with betas higher than 1.0 have outperformed the market; securities with beta’s lower than 1.0 have underperformed the market.
 
Bid Price: Price at which someone is prepared to buy shares or other quoted securities
 
Blue Chip shares: Shares in well-established companies that have shown ability to pay dividend in uncertain markets.
 
Bonds: A bond is a loan made by an investor to an organisation for a fixed term and interest rate.  The bond itself is the legal document recording the loan.  You may be able to sell the bond to another investor before the full time is up, for the market value at that time.  Also called fixed-interest securities, debentures and sometimes stocks.
 
Bonus issue: A free issue of shares to existing shareholders, usually determined ration, e.g. 1 for 4, made from reserves or a revaluation of assets.
 
Bonus units: The issue of extra units in a trust following a revaluatin of assets.  It is in lieu of increasing the unit price.
 
Book value: The net worth, or liquidating value, of a business.  Calculated by subtracting from total assets all liabilities, including debt and preferred stocks, and by dividing by the numer of shares in common stock outstanding.
 
Bridging finance: A short-term loan so you can buy a home, or other asset, while waiting for other money to become available.
 
Broker / Dealer: A firm or individual that brings together buyers and sellers, and also buys securities.  The terms broker and dealer are sometimes used interchangeably.
 
Brokerage: The broker’s fee (a percentage or fixed amount) for arranging your share transaction.
 
Bull market: (See Bear Market)
 
Business continuity insurance: This is a form of business insurance protection that is very flexible; it provides funding to help ensure the continuity of the business for a range events.  Whilst certain financial requirements must be met to qualify for the cover, there are no restrictions of how the money from the insurer is used, once paid out. 
 
Business cycle: The rise and fall of a country’s economic fortune over time, characterized by fluctuating employment levels, industrial productivity, and interest rates.
 
Business risk management plan: This takes many forms and includes every way that business risk can be mitigated.  Examples include ensuring the company is not too dependent on any one person, ensuring personal assets are protected and ensuring physical assets are insured.  It almost always includes personal insurance protection too, such as to retain quality staff (employee benefits) and protect against the death or disablement of a key person.  Businesses with multiple, arms-length shareholders will usually take out insurance protection to fund the repurchase of shares from the estate of a shareholder who dies or becomes totally disabled (see also Buy-Sell Agreement).
 
Buy or sell order: When you give a broker an instruction to buy or sell shares for you, generally at a certain price.  You can have a standing order so that the broker will automatically buy or sell when the price you’ve set is reached.
 
Buy-back price: This price (also referred to as the asset backing), is sometimes known as the exit price.
 
Buy-Sell agreement: The buy-sell agreement is a contract in which the owners of a business agrees that if one of them dies, or leaves the business for any reason, the other(s) will purchase his or her interest in the business.
 


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C


Call option: The right, but not the obligation, to buy a financial instrument, such as a share or a commodity during a given period.
 
Call protection: A provision in a bond’s indenture setting a certain period during which the bond cannot be called away by the issuer.
 
Capital: The value of an investment in a house or business, represented by total assets less total liabilities.
 
Capital appreciation, or gain: The profit you make when the value of something you own goes up.  For example, if you buy something for $10,000 and it goes up to $15,000 – the extra $5000 is your capital gain.
 
Capital gains tax: A tax on the gains of an investment, payable only when the capital gain is realised by selling the investment.
 
Capital guaranteed: A feature of life insurance contracts where the sum insured as a minimum is contractually met by the Insurance Company, and usually paid from the Company’s main fund.  It can also refer to certain investment products where a portion of the investment is set aside in Zero Coupon Bonds to ensure the initial investment capital can be repaid at maturity, even if the investment itself fails to perform.
 
Capital growth: When the value of your investment goes up.
 
Capital growth investment: An investment that consists principally of assets most likely to increase in value, such as shares and property.
 
Capital loss: The difference between the sales price and the purchase price of a capital asset. When that difference is negative, it is a capital loss.
 
Capital needs: The amount of money that needs to be provided for on the death of a policyholder to cover expenses on death.
 
Capital Note: A type of bond.  It is a long-term unsecured fixed rate investment.  It is usually subordinated, meaning other debts are repaid before the capital note.
 
Capital spending: Money spent by businesses to purchase or upgrade equipment or facilities. It's one of the major components of economic growth, the other being consumer spending.
 
Capital value: This is the value of the assets in your portfolio or investment fund.  It’s also used on rating valuations to mean the total value of your property – including the land and buildings, but not the chattels (such as light fittings, carpets and curtains).
 
Capitalisation: The market value of a company's outstanding securities, excluding current liabilities. On the US market under $250 million is generally considered small cap; $250 million to $1 billion is mid cap; and over $1 billion is large cap.
 
Capped interest rate: Where the interest rate can go up or down – but it can’t go over a certain level for a set time.
 
Cash: One of the asset classes. Cash means coin and note currency in circulation and in deposit accounts and money market securities.
 
Cash equivalents: Short-term investments, such as treasury securities, certificates of deposit, and money market fund shares, that can be readily converted into cash.
 
Cash investments: When you invest in term investments, short-term bonds and other cash investments such as bank bills.
 
Cash issue: An offer of new shares, usually at below market price, made to the company's existing shareholders in a predetermined ration.
 
Cash management fund: A fund that invests mainly in wholesale bank bills and deposits.
 
Cash management trust (CMT): A form of managed investment in which the primary investment is cash securities. While offering security, they can also offer the potential for a higher return than an ordinary bank savings account.
 
Cash surrender value: The amount that an insurance policyholder is entitled to receive when he or she discontinues coverage. Policyholders are usually able to borrow against the surrender value of a policy from the insurance company. Loans that are not repaid will reduce the policy's death benefit.
 
Certificate of deposit: A certificate is usually issued in a registered form and specifies the terms of a deposit with an institution. The term "certificate of deposit" is commonly used for debt instruments issued by registered banks. These instruments are normally issued at a discount for terms of less than one year. Early withdrawal results in a penalty.
 
Charitable trust: A Trust established for the benefit of a registered charitable organisation or organisations.  Income in trusts of this type are usually exempt from tax.
 
Chartered Life Underwriter (CLU):  An internationally recognised insurance qualification.

Closed-end fund: A regulated investment company that offers a fixed number of shares, which are traded on a stock exchange just like stocks.

Closed trust: Some trusts are only permitted to receive a certain value in funds from investors at which point they are no longer available (closed) to the public.
 
CLU: See ‘Chartered Life Underwriter’.
 
Commercial bill: A commercial bill is a loan arranged between two parties.  The ‘bill’ is the legal document containing the ‘promise to pay’.
 
Commodities: The generic term for goods such as grains, wool, coffee, livestock, oils, and metals which are traded on national exchanges. These exchanges deal in both "spot" trading (for current delivery) and "futures" trading (for delivery in future months).

Common stock: A security that represents ownership in a public corporation. This is the first security a corporation issues to raise capital.

Compound interest: Interest that is computed on the principal and on the accrued interest. Compound interest may be computed continuously, daily, monthly, quarterly, semi-annually, or annually.
 
Compounding Returns: Principally the same as compound interest, when you earn return on the returns you’ve already made.  If you don’t touch the money and reinvest all the returns, you could double your money every 10-15 years (based on interest rates of 5-7% a year after tax).
 
Conservative: A cautious approach to investing that takes only prudent risks to seek a reasonable return.
 
Conservative Investor (Risk profile): This type of investor will be more comfortable with investments that are stable and have a lower level of risk.  The timeframe may be shorter and the investor may require a regular income from their investments.  They will want to protecttheir investment against inflation, and are prepared to accept some risk to achieve this.  Their portfolio will be heavily weighted towards income investments such described above, but the portfolio may include some investments in shares also.  This portfolio have a lower volatility, however there is still a possibility of some shorter-term capital lossess.
 
Consumer Price Index (CPI): A measure of inflation that tracks quarterly movements in the prices of a fixed list of goods and services.
 
Contributions: The regular amount you pay into a savings or investment plan – every week, fortnight, or month for instance.
 
Convertible note: A type of bond that can be swapped for shares in the issuing company later on.
 
Convertible security: A fixed interest or dividend security, which converts to an ordinary share on a specified date, under, specified conditions.
 
Cost basis: The cost of an investment, used as the basis for calculating and reporting capital gains or
losses. It is adjusted for stock splits, distributions, and return of capital.
 
Coupon: The periodic cash flow due on a bond instrument. It is normal to express the coupon in annual terms, irrespective of the number of payment per year e.g. quarterly. In some instruments the coupon is detachable and can be traded separately to the underlying bond. Normal practice is to pay half the annual rate semiannually.
 
Credit Contracts Act 1981: The law covering bank lending for private use (it doesn’t cover business lending).  Under the Act, the lender must make a credit disclosure to set out your rights and their obligations.
 
Credit rating: An evaluation of the creditworthiness of a debt security by an independent rating service such as Rapid Ratings.
 
Credit risk: The potential for default by an issuer on its obligation to pay interest or principal on debt securities. Most government securities are considered to have very little credit risk.
 
Critical Care Insurance (Trauma Insurance): See Trauma Insurance.
 
Current distribution rate: The rate of payment for a fund that distributes short-term capital gains or option premiums in addition to dividend and interest income, expressed as a percentage.
 
Current dividend yield: The rate of payment for a fund that distributes short-term capital gains or option premiums in addition to dividend and interest income, expressed as a percentage.
 
Currency gains: The contribution to a security's capital gain attributed to movements in the currency in which the asset was denominated.

Custodian: The bank or trust that holds assets (shares, bonds, cash, and other securities) and handles payments and receipts for the fund's securities transactions.

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 D

 
Decreasing term: Sum insured decreases by specified amount each year until the policy expires.
 
Debenture: A bond secured by the assets of the company issuing the bond.  
 
Debt forgiveness:  When a settlor transfers assets to a Trust the Trust owes the settlor the value. The settlor can forgive the debt through gifting.
 
Debt securities: General term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, notes, bills, and money market instruments are all debt securities.
 
Deduction: An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.
 
Defensive investor (Risk profile): This type of investor is likely to have a shorter timeframe and require more stable returns.  They likely want income with little risk that their capital will go down at all.  They will be prepared to accept lower returns to achieve this.  To achieve this low volatility and stable positive returns, this type of portfolio will have a heavy weighting of cash and fixed interest investments.  This may include government stock, local government stock and high quality, investment grade bonds.
 
Defined Benefit Plan: A superannuation or pension plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in instalments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation (see also Defined Contribution Plan).
 
Defined Contribution Plan: A superannuation or pension plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee's compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee's account (see also Defined Benefit Plan).
 
Deflation: The opposite of inflation, thus a decline in the prices of goods and services.
 
Depreciation: This means how much the value of something goes down, as it gets older or more worn.  It’s a term insurance companies often use.
 
Derivative: A financial tool that enables investors to obtain returns from an investment in a market or a particular security without physically purchasing that security. They generally require a small deposit, can usually be bought or sold more quickly than physical securities and are generally much cheaper to transact. Derivatives can be used as a risk management tool or to speculate. They provide key benefits in that they improve liquidity and reduce transaction costs.
 
Direct investment: An investment that is not managed by a third party such as a fund manager.  A stake in a company or joint venture that brings a say in how the operation is run, although it does not necessarily give a controlling interest.
 
Disability or income replacement insurance: An insurance that provides an income for the policyholder during a prolonged disability following sickness or accident. Also known as income protection insurance.
 
Disclosure statement: A financial adviser must, under the Financial Advisers Act 2008, provide certain levels of disclosure.  An AFA and a higher level of disclosure requirements than a RFA: typically a RFA will only need to provide you with a single disclosure statement, whereas an AFA will need to provide you with a Primary Disclosure Statement and a Secondary Disclosure Statement.  The disclosure statement should include, company details, qualifications & experience, method of operation, services provides, fees charged & remuneration received, type of adviser (e.g. Authorised or Registered), business relationships, obligations, how to lay complaints, how the adviser is regulated and more.
 
Discount rate: The interest rate charged by the Federal Reserve to member banks. Basically, the floor rate for interest rates in the economy.
 
Disinflation: A slowing of the rate at which prices are increasing. Not the same as deflation, when prices actually drop.
 
Discount: Selling below par, e.g., a $1,000 bond selling for $900. 2. (v.) Anticipating the effects of news on a security's value; for example, "The market had already discounted the effect of the labour strike by bidding the company's share price down".
 
Discretionary trust: A trust in which the ‘Trustees’ have absolute discretion as to which if any Beneficiaries receive benefits in any year.
 
Distributions: Payment of income made to unit holders.
 
Diversification: The principle of investing in many different types of assets.  In its broadest sense it means investing in different types of assets, across different industries, countries, and companies.
 
Dividend: The share of the company profits paid out to shareholders.  It is paid as a certain amount for each share held.  A ‘final dividend’ is paid at the end of the financial year, an ‘interim dividend’ part way though the year, and a ‘special dividend’ for some special reason.
 
Dividend imputation: Tax already paid by a company is credited to individual shareholders when a dividend is paid.
 
Dividend yield: The dividend paid or each share, shown as a percentage of the share price.
 
Dollar cost averaging: A term sometimes used to describe the effect of investing a set amount at regular intervals when the price of the investment is volatile (goes up and down).  When the price is low you get more units for your money than when the price is high.  This may lower the average cost of buying the assets.  If the average cost you paid is less than the current price, you have made a gain.

Dow Jones Industrial Average ("the Dow"): The most commonly used indicator of stock market performance, based on the prices of 30 major industrial companies. Often simply called "the Dow".

Duration: A measure of an asset's or a portfolio's sensitivity to interest rate changes. As an indicator of risk, duration is useful for two reasons. First it provides a means of assessing the degree of mismatch between the assets and the benchmark or liabilities of a portfolio. Second, it provides an indication of portfolio volatility or risk.
 
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E


Earnings per share (EPS): Net profit divided by the total number of shares in the company expressed as cents per share.
 
Economic indicators: Housing status, employment figures - signals as to the likely growth in the economy and inflation.
 
Effective rate of return: The actual return on the amount invested.
 
Efficient Frontier: A statistical result from the analysis of the risk and return for a given set of assets that indicates the balance of assets that may, under certain assumptions, achieve the best return for a given level of risk.
 
Emergency fund: An amount that is set aside (usually 3 months expenditure), in highly liquid investments to meet emergencies, should they arise. The idea is that the client will not have to liquidate other investments and risk financial loss.
 
Endowment insurance: A type of life insurance that offers a death benefit and also accumulates cash value with a specific maturity date.  If the life assured lives to the maturity date the policy pays out as if the person had died.
 
Enduring power of attorney (EPA): There are two distinct types, "Personal Care and Welfare" and "Property" The legal document that enables you to appoint a person or organization to look after you and your affairs for the rest of your life regardless of the state of your physical or mental health. Enduring powers of Attorney do not apply in the case of acting on behalf of a Trustee in a Family Trust.
 
Entry fee: Paid by the investor when purchasing units in a trust. This can range from 0.5% for income trusts to 5% for some property or equity trusts.  The fee is included in the price that new investors pay.  Most of the entry fee is paid as a commission to investment advisers and brokers.
 
Equity / Equities: Equity is the part of an asset you own yourself (what you’d end up with if you sold the asset and repaid loans owing on it).  The word equities is also used to means shares – because you have equity in a company when you own shares in it.
 
Equity Fund: In general terms, any fund that invests in company shares.  Private equity funds are funds that invest in smaller or emerging private businesses to provide businesses with start-up and working capital.
 
Equity release: The release of capital tied up in your home, used by someone in retirement who may not have saved funds outside the value locked up in their homes.
There are 3 distinct types:
·       Reverse mortgages - The consumer borrows money against the equity in his or her home, and the principal and interest is not repaid until the home is sold, (usually when the consumer dies or voluntarily vacates the home);
·       Home reversion schemes - the consumer sells all or part of his or her house to a home reversion company. The home is sold for less than its market price (typically between 35% and 60%), but the consumer can remain in the property until they die or voluntarily vacate the home. There are at least two types of home reversion schemes - a sale and lease model, and a sale and mortgage model; and,
·       Shared appreciation model - the consumer gives up the right to some of the capital gain on the property in return for paying reduced or no interest on that part of his or her borrowings.
 
Equity trust: A unit trust that invests mainly in shares with a component of cash or fixed interest investments. The pooling of funds allows for a wide spread of shares to be purchased and professionally managed.
 
Estate: Total amount of assets owned by a person.
 
Estate Duty: A tax payable upon the death.  The rate of Estate Duty in NZ is currently 0%.
 
Estate planning: Activities coordinated to provide for the orderly and cost-effective distribution of an individual's assets at the time of his or her death, including wills POS’s, and trusts.
 
Exchange Rate: The price of the NZ dollar in terms of other currencies.
 
Eurodollar CD: Short-term deposits issued by European banks, often used by money market funds.
 
Ex-dividend: Means "without the dividend". Used to refer to a security that no longer carries the right to the next dividend. An "x" will appear next to the name of the share or fund to indicate that the share price has dropped by the amount of that dividend and thus purchasers will not receive the dividend.
 
Ex-dividend date: When used in reference to funds, the date the share price drops by the amount of the dividend. (The fund's assets are reduced by the amount of the distribution before the NAV is calculated).
 
Executor: The person named in the will charged with the duty of carrying its provisions.

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F


Face value: The amount for which a bond or money market instrument will be redeemed on maturity by the issuer. The term in synonymous with nominal value or par value. Most bonds have a face value, or par, of $1,000.
 
Fair Dividend Rate: Tax rules introduced in New Zealand in 2007 state that investors holding more than $50,000 in equity investments outside New Zealand and Australia will be taxed each year at a maximum of 5% of the opening value of the investment at 1st April each year at their marginal tax rate. The 5% return includes income and capital growth. Australian unit trusts are deemed to be international investments. For New Zealand managed funds investing internationally generally these funds will adopt the PIE (portfolio Investment entity) rules, will pay tax under FDR rules at the investors marginal tax rate on 5% growth and income even if the investment earns less than 5%.
 
Family trust: See ‘Trust’.
 
FDR (Fair Dividend Rate): Tax regime applying to most overseas shares since 1 April 2007.  Other than NZ shares and shares in Australian resident listed companies (which pay tax only on dividends), most investors in overseas equity and managed investments pay tax on up to 5% of their “opening (1 April) value” each year.  See table Taxation of investments on page 30 for more details.
 
Federal Reserve System: The central bank of the United States, which has regulated credit in the economy since its inception in 1913. Includes the Federal Reserve Bank, 14 district banks, and the member banks of the Federal Reserve.
 
Fiduciary duty: A legal term meaning to act with absolute trust.  It is the role of a financial adviser to put the interests of their clients ahead of their own at all times.
 
Financial planning: The act of planning to ensure goals are reached and a financially comfortable future is secured.  The plan considers the individual’s goals and aspirations, earning capacity, investment strategy, retirement planning, and risk management.   Usually created for individuals by an Authorised Financial Planner (AFA).  
 
First Ranking Debenture: There is no other charge (security) over the assets of the company that would rank above debenture stock charge if the company became insolvent (unable to pay it bills).
 
Fiscal policy: Deals with government spending and revenue raising i.e. taxation and capital expenditure.
 
Fiscal year: An accounting period of 365 days (366 in leap years) for which a fund prepares financial statements and performance data. Not necessarily the same as the calendar year (January 1 through December 31).
 
Fixed income: Income from investments such as TDs, Social Security benefits, pension benefits, some annuities, or most bonds that is the same every month
 
Fixed interest fund: A fund that invests in fixed interest securities (bonds) and cash investments such as term deposits.
 
Fixed interest security: Investments that offer the investor a specified return if held to maturity. The owner of the maturity is promised pre-determined payments at regular intervals throughout the life of the security.
 
Floating interest rate: Where the interest rate can go up or down as the market changes.  Sometimes also called a variable interest rate.
 
Forward commitment: A purchase or sale of a security at a specified price with delivery and cash settlement at a specified future date.
 
FPSB: The Financial Planning Standards Board, the worldwide organisation that owns and licenses the CFPcm and associated marks.
 
Fund manager: Person who invests money on behalf of unit holders.
 
Fundamental analysis: An approach to the share market in which specific factors - such as the price-to-earnings ratio, yield, or return on equity - are used to determine what stock may be favourable for investment.
 
Future(s): A contract to trade a commodity at a certain price on a certain date.  The ‘future’ can usually be traded before that date.
 
Future value: The future value as a present amount compounding over a certain time at a certain rate.
 
FX, FOREX: An abbreviation for ‘Foreign Exchange’.


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G


 
GDP: Gross Domestic Product. A measurement in dollar terms of aggregate goods and services produced within a particular economy over a year and excluding income earned outside the country. Considered one of the main yardsticks of the health and vitality of the particular economy.
 
Gearing:  A measure of the debt ratio, which is the amount of borrowing compared with the equity in an asset.  Borrowing to invest, such as when purchasing a house using a mortgage or purchasing a share portfolio using a margin loan.  Gearing is sometimes called leveraging.  Negative gearing is when the expenses relating to the investment exceed your income from it.
 
Gift Duty: On 1 November 2010 the NZ government announced it was abolishing gift duty, effective from 1 October 2011.  The cost to the public of preparing gifting documentation far exceeded the revenue the government received.  Gift duty was previously payable on gifts over a particular value.  The rate depended on the size of the total gift made in any 12-month period according to the following schedule:  Gifts from $0 to $27,000: 0%; Gifts from $27,000 to $36,000: 5%; Gifts from $36,000 to $54,000: 10%; Gifts from $54,000 to $72,000: 20%; Gifts from $72,000 upwards: 25%.
 
Gifting: (see also ‘Trust’): The process of giving an asset or forgiving a debt – often applies to the transfer of assets into a ‘trust’.
 
GNP: Gross National Product. The GDP with the addition of interests, profit and dividends received from abroad. The GNP better reflects the welfare of the population in monetary terms, although it is not as accurate as a guide to the productive performance of the economy as the GDP.
 
Government security: Any debt obligation issued by the government or its agencies.
 
Group investment fund: A managed fund established by a trustee company, sometimes on behalf of a bank or other organisation.  They operate under different regulations from other funds and may have different tax implications for investors.  
 
Growth investor (Risk profile): This type of investor is interested in seeking good potential capital growth, and is prepared to accept a higher level of risk to achieve this.  They are not too concerned about volatility (market ups and downs) because they have a medium to long-term investment timeframe.  This type of portfolio has a high weighting in shares, both in Australasia and globally. The returns are largely achieved from capital growth.  To look for these higher returns they are prepared to accept the fact that there is a high probability of shorter-term capital losses.
 
Growth assets: A term given to assets such as shares and property which are expected to provide strong investment returns over the long term, usually in the form of capital gains rather than income.
 
Growth fund: A investment fund which is predominantly invested in growth assets.
 
Growth investments: These investments generally include local and international shares, and property investments. These assets are expected to experience capital growth and a degree of risk is involved. See also interest bearing investments.
 
 

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H


 
Hedge: A strategy used to offset investment risk. In investing, hedging involves the purchase of an offsetting position, such as a put option or futures contract, to guard against the risk of a market decline. Often used as a defensive strategy in portfolios investing in securities to reduce the negative effects of unfavourable moves in currency exchange rates.      
 
Hedge funds: A hedge fund is a manged fund that invests to try and make an absolute return, rather than investing to a predetermined benchmark.  It may invest in opposite of unrelated investments to try and make a profit regardless of market conditions.
 
Hedging: Taking steps to protect against, or at least reduce, a risk; a form of insurance. The term is common in futures and foreign exchange markets where traders use facilities available to protect themselves against future price or exchange rate variations.
 
High-growth investor (Risk profile): This type of investor is looking for high returns on their investments and are willing to have mainly growth investments in their portfolio.  This will mean their portfolio is invested mainly in Australasian and Global Shares.  They have a medium to longer investment timeframe and are not too worried about volatility.  The returns will come mainly from capital growth.  The potential returns from this profile are higher and there is also a higher probability of shorter-term capital losses; some longer-term losses are also likely.
 
Historical yield: The actual yield of an investment over a given period, measured from the beginning of the period.
 
Holding period: The length of time an investment must be in an account before it can be exchanged.
 
Home loan (Mortgage): The legal document that gives the lender ‘security’ and the right to sell the property you’ve mortgaged if you can’t pay your loan.  If you borrow the money you are the mortgagor – the lender is the mortgagee.  
 
Home reversion schemes: The consumer sells all or part of his or her house to a home reversion company. The home is sold for less than its market price (typically between 35% and 60%), but the consumer can remain in the property until they die or voluntarily vacate the home. There are at least two types of home reversion schemes - a sale and lease model, and a sale and mortgage model.

 

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I


IFA: Institute of Financial Advisers. A New Zealand organisation representing financial advisers prior to 2006 known as FPIA - Financial Planners & Insurance Advisers Association.
 
Imputation credits: Imputation credits are ‘tax credits’ passed on to you with some dividends or distributions because the company or fund has already paid the tax.  This avoids double taxation.
 
Income: Regular payments from an investment derived from interest on cash or bonds, dividends on shares, or rent from properties.
 
Income investments: Investments that primarily provide you with income, such as a term deposit or bond you earn interest on, or a property you get rent from.
 
Income protection insurance: Indemnity income protection insurance is based on 75% of earned income, premiums are tax deductible, benefit is taxable. Loss of earnings is based on last 3 years income, other income including investment income is offset. Agreed value income protection insurance the insurance company agrees on the cover amount at time of taking the insurance.
 
Indemnity: Replacement value - with an asset that is damaged, stolen or lost the insurance company will pay a sum of money that will ensure the same financial position as before the loss - no better, no worse.
 
Index: A benchmark against which to measure performance, such as Standard & Poor's 500 Index, NZSE40, MSCI.
 
Index fund: A managed fund that invests in the same companies as a selected index, such as the NZSX50.
 
Inflation: The situation of excess money in circulation relative to the goods and services available for purchase. Reflected in increasing prices. Often equated with loss of purchasing power.   Also see CPI.
 
Initial public offering (IPO):  A private company's first public offering of common shares.
 
Institute of Financial Advisers (IFA):  The IFA or Institute of Financial Advisers (www.ifa.org.nz) is the main professional body for financial advisers in NZ.  IFA promotes and enforces educational and other professional standards for the benefits of consumers by enforcing its code of ethics, practice standards and rules.  IFA has complaints and disciplinary processes for members of the public who deal with members. 
 
Instrument: A legal document, such as a security.
 
Insurance bond: Lump sum investment into an investment fund, operated as a Life Insurance Policy with a Life Insurance Company administered under the Life Insurance Act 1908.
 
Interest: The return earned on money, which has been invested or loaned, the price paid for its use.
 
Interest-bearing investments: Are investments that contractually produce income.  These investments generally include local, and international fixed interest securities (bonds) and various ‘cash’ (short-term or call) investments.
 
Internal rate of return (IRR): The return from an investment over its term.  Comparable to the constant rate from a bank account assuming interest was compounded, and allowing for the timing and size of all deposits and withdrawals. The IRR is calculated to show the rate at which the present value of future cashflows from an investment is equal to the cost of the investment.
 
Interim dividend: Dividend declared before the close of the financial year, usually at the end of the first half year.
 
Intestacy: Arises where a deceased person has made no will that disposes of all or some of their assets on death.
 
Investment: An asset purchased with the intention of producing capital growth, or income, or both, for the owner.

Investment company: A "company" that invests in other "companies". Actually, a separate investment company owned by its shareholders. An investment company combines the money from a number of investors and then invests the money in a large, diversified portfolio.

Investment-grade: Bonds suitable for purchase by prudent investors. Standard & Poor's and Moody's Investors Service designate bonds in their top four categories (AAA/Aaa, AA/Aa, A, and BBB/Baa) as investment grade. Rapid ratings a rating of B3 and above is investment grade.
 
Investment objective: The goal an investor or a fund seeks to accomplish. Investment objectives include current income, capital appreciation, or a combination of the two.
 
Investment sectors: These are the main categories of investment – cash, bonds, property and shares.
 
Investment statement: The main disclosure document setting out the details of the investment offered.  This document must be registered with the Securities Commission and provided by the issuer of a managed fund or other investment offered to the public.  An investment statement is designed to give a prospective investor all relevant information about that investment.
 
Investment term: That period during which the portfolio's assets remains intact without the need for withdrawals.
 
Investment timeframe: The length of time you will be investing for – it has a big impact on the type of investment that might be suitable.  A short investment timeframe generally means less than 3 years, a medium timeframe 3-7 years and a long timeframe 5-7 years or more.
 
Issue: A share or bond offering sold by a corporate or government entity at a particular time.
 

 
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J


 
Joint tenancy: If two people own property as joint tenants and one person dies, the property passes in total to the surviving tenant - cannot be gifted under a will - supersedes provisions of a will.
 
Joint and survivor annuity: Some superannuation plans offer this form of pension payout that usually pays for the life of the member with 50% of the total usually payable to a surviving spouse after the retiree dies.
 
Jointly held property: Property owned by two or more persons under joint tenancy, tenancy in common, or, in some states, community property.
 
Junk Bond:  An unsecured bond offered by an organisation with a lower credit rating.
 
 

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K

KiwiSaver: KiwiSaver was introduced to New Zealand in the Labour government’s 2005 budget, and was described by the then Finance Minister, Dr Michael Cullen, as being part of a package to increase the national savings rate in New Zealand. The enacting legislation was passed in 2006, and the KiwiSaver Scheme commenced on 1 July 2007.

KiwiSaver is a work-based savings scheme, designed to encourage participation. While membership is not compulsory, anyone aged 18 years and over who starts a new job with a new employer is automatically enrolled in KiwiSaver. However, after two weeks it is possible to choose to opt out of KiwiSaver provided this is done before eight weeks have been completed in the new job. It is also possible to opt-in to membership at any time. Contributions are deducted from an employee’s pay at a minimum rate of 3%, and the employer is required to make matching contributions of at least 3%. There is an annual tax member credit. Early withdrawal of savings is also possible to assist with the purchase of a first home, subject to certain conditions.
 
 

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L

 
Large cap: A company that has a total market capitalisation of $1 billion or more.
 
Level term: Refers to Life Insurance products. Period is fixed. Either the premiums remain constant, or sum insured remains constant.
 
Leverage: The use of borrowed money to increase the funds available for investment, used in order to achieve a greater rate of return.
 
Leveraged buyout (LBO): The purchase of a controlling interest in a company using borrowed money.
 
Liability: Any claim against the assets of a person or corporation: accounts payable, wages, and salaries payable, dividends declared payable, accrued taxes payable, and fixed or long-term obligations such as mortgages, debentures, and bank loans.
 
Life insurance: The contractual obligation to make a payment in the event of certain contingencies - either death of the life insured, or maturity of a policy.
 
Lifetime pension or annuity: A retirement income investment where an individual invests their superannuation or other money and receives an income periodically. The capital is not accessible, and there is little income flexibility. The payments are guaranteed to be made for the person's lifetime.

Liquid Assets, or Liquidity: Liquid assets are assets that are in cash form, or which can be readily cashed up if you need money.  Liquidity is the term for how easily an investment can be cashed up.

Liquidity: The ability to easily turn assets into cash. An investor should be able to sell a liquid asset quickly with little effect on the price. Liquidity is a central objective of money market funds.
 
Listed trust: Unit trusts listed on the Stock Exchange in order that purchases and sale of units can take place on the Exchange.
 
Locum cover: For certain businesses it is possible to find a locum to fill in for the business owner should they become sick or disabled.  An obvious example would be a doctor, but there are many other situations where this is applicable.  It is possible to insure the cost of finding and paying the salaries of the locum to help ensure the continuity of business.

Loan or facility agreement: Unit trusts listed on the Stock Exchange in order that purchases and sale of units can take place on the Exchange

Long-term investment strategy: A strategy that looks past the day-to day fluctuations of the stock and bond markets and responds to fundamental changes in the financial markets or the economy.
 
Loss: Occurs where the sale price of an asset is less than the initial cost. Lump sum A superannuation benefit taken in cash rather than being rolled over to a pension or annuity.
 
Limited partnership: Limited partnerships pool the money of investors to develop or purchase income-producing properties. When the partnership subsequently receives income from these properties, it distributes the income to its investors as dividend payments.
 
Liquidity: The ease with which an asset or security can be converted into cash without loss of principal.
 
Listed property: Constitutes shares in property companies or units in property trusts listed on the Stock Exchange.
 
Local authority bond: A debt security issued by a city council or other local authority.
 
Long-Term Investment: An investment that is generally suitable for investors with planning horizons longer than five years.

Lump sum payment: An amount of money you invest or repay at one time.  For instance it could be an extra $1000 you pay into a managed fund on top of your regular contribution, or a one-off payment off a loan.


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M


 
Macro: Usually in reference to economics. The study of economic aggregates and their relationships to, for example, money, employment, interest rates, government spending, investment and consumption.
 
Managed investments or funds: A unit trust which allows investors to pool their money with that of other investors so that the fund can buy a wide range of investments. A professional fund manager who makes the investment decisions manages these investments.  Called a mutual fund in the United States.  Examples include unit trusts, superannuation schemes and group investment funds.
 
Management expense ratio (MER): A ratio expressing the management, trustee and certain other expenses of a managed fund as a proportion of the net asset value of the fund.
 
Margin loan: A line of credit established for the purpose of investing in shares or unit trusts, often to make use of negative gearing.
 
Marginal tax bracket: The range of taxable income that is taxable at a certain rate.
 
Marginal tax rate: The marginal rate of income tax that applies in NZ depends on whether or not a taxpayer qualifies for a Low Income Rebate (LIR).  For those receiving NZ Superannuation, the LIR applies to all income of less than $9,500 pa, and for other natural persons it applies only to income from personal exertion of less than $9,500 pa, after other income (eg interest, rents, beneficiary income, etc).   Ordinary marginal tax rates were as follows at 1 April 2004: Income from $0 to $38,000: 19.5%; Income from $38,000 to $60,000: 33%; Income over $60,000: 39%.
 
Market index: A selection of listed companies used to measure changes in the sharemarket, or a certain part of the market.
 
Market timing: A strategy of buying or selling securities in anticipation of changes in market or economic conditions.
 
Market value: The value of an asset according to what the market will pay.  In other words the price a willing buyer will pay a willing seller.  A value works out a market valuation by taking into account recent sales of similar properties or assets.
 
Master trust: A trust set up to invest in a range of funds, often from different organisations.
 
Maturity date: The date on which the principal of a bond must be repaid.
 
Medical Insurance: This cover provides the funding to enable you to have private hospital treatment whenever you require more immediate access or a broader range of treatment options than are available to you through the public health system.  For example access to cancer medication which may be the most effective type of treatment, but which is not subsidised by the government.  Some insures only fund drugs from the government funded Phamac list, whilst other fund any drug approved for use in NZ (the Medsafe list).  The latter tends to include the latest and most expensive medications available.
 
Medium-term investment: An investment that is generally suitable for investors with planning horizons of between two and five years.
 
Modern portfolio theory: A strategic approach to investing that is an accepted standard for the investment industry.  It advocates investing in a diversified portfolio of assets across the different investment sectors, and focusing on investing for the longer-term rather than trying to time the market.
 
Money market fund: A fund designed to provide safety of principal and current income by investing in securities that mature in one year or less, such as bank certificates of deposit, commercial paper, and Government stock. The price per share is fixed at $1.00. Money market funds have the lowest risk of any type.
 
Monetary policy: The practice of using financial policy instruments to influence monetary conditions in NZ, i.e. how easy or difficult it is to obtain money and credit.
 
Money market fund: A managed fund that specializes in investing in short-term securities and that tries to maintain a constant net asset value of $1.
 
Mortgage (Home loan): The legal document that gives the lender ‘security’ and the right to sell the property you’ve mortgaged if you can’t pay your loan.  If you borrow the money you are the mortgagor – the lender is the mortgagee.  
 
Mortgage Repayment Insurance:  Mortgage repayment cover provides a financial safety net should you suffer a total or partial disability which causes a reduction in your ability to meet mortgage repayments and which lasts longer than the chosen waiting period.  The monthly benefit is designed to cover mortgage repayments on your behalf during treatment and recovery.
 
Mortgage Trust: A managed funs (unit trust) that invests in mortgages.
 
Multi-sector fund: A fund that invests across different investment sectors – for instance in cash, bonds, property and shares.
 
Mutual fund: In New Zealand these investments are more commonly referred to as Unit Trusts. A diversified, professionally managed portfolio of securities that pools the assets of individuals and organisations to invest toward a common objective such as current income or long-term growth.  
 
MSCI: The Morgan Stanley Capital International Index. It measures the way international shares values have changed, and includes reinvestment of dividends. This index is often chosen as a benchmark for international share portfolios.


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N


NASDAQ: A nationwide electronic system established by the National Association of Securities Dealers for up-to-the-minute price quotations and trading on over 5,000 over the counter shares.
 
Negative gearing: Purchasing an investment with borrowed funds where the interest on the borrowing exceeds the income from the investment. Often used in the property investment market.
 
Nest egg: Money put aside for future needs such as retirement or a college education. An investment in a retirement plan would be part of your nest egg.
 
Net asset value (NAV): In a business, the net value of its assets less any liabilities.  In a managed fund this is the price at which the fund sells or redeems units. The net asset value of a fund is calculated by dividing the net market value of the fund's assets by the number of outstanding units.
 
Niche: A small, focused market in which a company specialises. Niche companies are often favoured investments because they can be well insulated from competition.
 
Nominal return: The actual return on an investment. See the Real Rate of Return.
 
Nominee: A company or trustee that holds investments on behalf of others.  A trust fund for instance will have a nominee that holds shares on behalf of all the unit holders.
 
Non-contributory superannuation: Type of superannuation in which the member does not personally contribute.
 
NZ Super: See NZ Superannuation.
 
NZ Superannuation (NZ Super, NZS): A guaranteed retirement income available to most NZ residents from the age of 65.   It also applies to immigrants to NZ who have worked here full-time for 10 years prior to the age of 65. 
 
NZX: The New Zealand Stock Exchange (formerly the NZSE – the New Zealand Stock Exchange).
 
NZSX50: The main index used to measure changes in the New Zealand sharemarket.  It comprises the 50 largest companies on the NZX market.
 
 

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O


 
Offer: The price at which someone is prepared to sell securities.
 
OCR: Official Cash Rate - the base overnight interest rate at which the Reserve Bank of NZ lends to, or borrows from Registered Banks.
 
OECD: Abbreviation for the Organisation for Economic Cooperation and Development.  It was formed in 1961 to promote cooperation among industrialised member countries on economic and social policies. The 25 members are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, UK and USA.
 
OEIC (Open Ended Investment Company): UK based unit trusts which have a tax advantage in that capital gains are tax free to New Zealand investors.
 
Opportunity Cost: The cost of not investing in a certain way – or the lost opportunity to make money by investing instead of using the money in another way.
 
Options and Warrants: The right to buy (or in some cases sell) a share on a certain date for a certain price.  A ‘call option’ is the right to buy and a ‘put option’ is the right to sell.
 
Ordinary share: A share that give you voting rights, right to distributions (if any) and to any capital remaining if a company is wound up.
 
 

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P


 
Par value: The nominal or face value of a security as determined by the issuers. It bears no relation to the market price of the share or security. Bonds generally have a par value of $1,000.

Passive Fund: A managed fund where the money is invested according to a set formula or to match a market index.

PE Ratio: The price/earnings ratio of a share.

Pension: This could refer to the regular income received from your employer or the New Zealand superannuation when your age 65. It is also a term that can refer to superannuation.  See NZ Superannuation.
 
Permanent insurance: Insurance cover for the entire life of the policyholder, usually in the form of a whole of life contract.
 
Personal accident & sickness insurance: This contract insures against accident or sickness. The policy usually pays out in the form of a lump sum or an income for a specified loss.
 
PIE (Portfolio Investment Entity): Tax regime for many managed investments from 1 October 2007.  Taxed under FDR rules (but with tax on a flat 5% each year for overseas shares).  Tax is payable at investor’s marginal rate, and income does not form part of individual income for tax.  See table Taxation of investments for more details.
 
Ponzi Scheme: In a Ponzi scheme, the scammer uses fresh money from unsuspecting investors to make payments to more mature investors, creating the false appearance of legitimate returns. The largest Ponzi scheme in recent years is Bernard Madoff's, estimated to be around $30 billion USD.
 
Pooled investment: An investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf. Also known as a unit trust or managed investment, or in the US a mutual fund.
 
Portfolio: A group of investments, or collectively your overall investments.
 
Portfolio Investment Entity (PIE): Tax rules effective 1st October 2007, managed funds can elect to be PIE's. In which case investments outside New Zealand and Australia will be taxed at the investors marginal tax rate on 5% of the opening value (income and capital). The fund manager will pay the tax directly. From 1st April 2008 the maximum tax deducted will be 30% even if the investor is on a marginal tax rate of 39%.
 
Preference / Preferred shares: A class of shares with claim to a company's earnings, before payment can be made on the ordinary shares, and that is usually entitled to priority over common stock if the company liquidates. Generally, preferred shares pay dividends at a fixed rate.
 
Premium: The amount by which the issue price of a share exceeds its par value. The opposite to discount.
 
Pre-nuptial agreement: A legal agreement arranged before marriage stating who owns property acquired before marriage and during marriage and how property will be divided in the event of separation or divorce.
 
Present value: The value in today's dollars of a future cash flow discounted at a required rate of return.
Price/earnings ratio (P/E ratio): The market price of a stock divided by the company's annual earnings per share. Because the P/E ratio is a widely regarded yardstick for investors, it often appears with share price quotations.
 
Prime rate: The interest rate a bank charges on loans to its most creditworthy customers. Frequently cited as a standard for general interest-rate levels in the economy.
 
Primary market: Where securities can be purchased directly from the issuers.
 
Principal: In a security, the principal is the amount of money that is invested, excluding earnings. In a debt instrument such as a bond, it is the face amount.
 
Private Medical Insurance: This cover provides the funding to enable you to have private hospital treatment whenever you require more immediate access or a broader range of treatment options than are available to you through the public health system.  For example access to cancer medication which may be the most effective type of treatment, but which is not subsidised by the government.  Some insures only fund drugs from the government funded Phamac list, whilst other fund any drug approved for use in NZ (the Medsafe list).  The latter tends to include the latest and most expensive medications available.
 
Private equity funds: Private Equity Funds are funds that invest in smaller or emerging private businesses.  The aim is to provide start-up and working capital for these businesses.  There may be extra risks involved and you can reduce your risk by investing in larger recognised funds where the money is spread across a greater number of businesses.
 
Private placement: The sale of securities to a limited number of investors at the initial stages of a company's operations, a private placement allows investors to invest in attractive companies before the company sells shares to the public.
 
Probate: The court-supervised process in which a decedent's estate is settled and distributed.
 
Profit margin: The amount by which a company's sales and other earnings exceed its expenses, expressed as a percentage.
 
Profit-sharing plan: An agreement under which employees share in the profits of their employer. The company makes annual contributions to the employees' accounts. These funds usually accumulate tax deferred until the employee retires or leaves the company.
 
Profit-taking: Selling securities after they have risen in value to realise a gain.
 
Profit: Occurs when an investment appreciates in value and is sold, or realised. Also known as a realised gain.
 
Promissory note: An instrument evidencing the obligations of the maker (issuer) to pay a certain sum of money on a certain date to the holder. They are issued without coupon for terms of less than one year.
 
Property: Usually refers to direct property investment, which covers a wide range of real assets including office (commercial), retail (shopping centres), industrial, hotel and leisure as well as residential properties.
 
Property investment: Property investments cover residential rental property, commercial property and funds that invest in a range of properties.  Properties can provide both an income (from rent) and capital gain (from an increase in property prices). 
 
Property funds: In a managed investment the term property generally refers to investments in property securities - property trusts listed on the stock exchange. Funds which invest in property securities allow diversification by investing across a range of different property sectors such as commercial, office, industrial, hotel and retail properties. A property securities fund generally invests in property trusts that are listed on the share market, or in property-related companies.
 
Prospectus: A document that sets out details about an investment that must be registered with the Securities Commission.  It must detail key information about that investment, including information on the minimum investment, the fund's objectives, past performance, risk level, sales charges, management fees, and any other expense information about the fund, as well as a description of the services provided to investors in the fund.
 
Proxy: When a shareholder gives someone else the right to vote on his or her behalf at company meetings.
 
Put option: The right, but not the obligation, to buy a financial instrument or a commodity within a specified period.
 


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Q

 
QFE: See ‘Qualifying Financial Entity’.
 
Quant (Quantitative): An approach or a specialist in portfolio management or bond research who develops systems that map past movements in financial markets with a view to predicting future equity, commodity, and currency values.
 
Qualifying Financial Entity (QFE): Financial advisers employed by companies that have been granted status as a Qualifying Financial Entity (QFE) by the Securities Commission will not need to be individually registered or authorised if they only provide advice only on their QFE’s own products. The QFE must ensure that its employees and nominated representatives have the competence necessary to exercise reasonable care, diligence and skill in advising clients.  A typical QFE would be a bank or insurance company.
 
 

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R


 
Rally: A substantial rise in the price of a security or an entire market.
 
Real rate of return: The return you get after taking inflation, management fees and tax into account.
 
Realise: To sell an investment and realise its value.
 
Recession: Officially defined as three negative GDP returns. Can lead to negative inflation.
 
Redemption/redeem:  To withdraw or sell an investment.
 
Redemption price:  The price at which an investor can withdraw their units from a fund or trust.
 
Registered Financial Adviser (RFA): A Registered Financial Adviser is an adviser who is qualified to give advice on simpler products; such as mortgages, life insurance, risk insurance, call debt securities, bank term deposits, consumer credit contracts, and many different insurance products.  They are required to be registered but not authorised.  They also have a lower level of disclosure, financial supervision and monitoring by the Financial Markets Authority (FMA). 
 
Registry: An institution used by the issuer of shares to maintain its shareholder records and perform all account transactions.
 
Reinvest: Where income from an investment is used to make an additional investment, generally at no fee, increasing the potential to receive higher capital growth and distributions in the future.
 
Reinvestment privilege: The right of shareholders to use income and/or capital gain distributions to purchase additional shares of their fund without paying a sales charge.
 
Relationship (matrimonial) property: Generally all property acquired during a marriage or similar relationship, excluding property one spouse receives from a will, inheritance, or gift - is relationship property, and each partner is entitled to one half. This includes debt accumulated.
 
Resource: Any physical item produced for trade purposes. For example Australia's resources include coal, gold, aluminium and oil.
 
Return of capital: A fund distribution that exceeds earned income - that is, a distribution that includes a portion of the investor's original principal. Return of capital is sometimes distributed to maintain the level of the distribution when income is not adequate to do so.
 
Returns: The money you make by investing. This includes earning interest, dividends or distributions, tax advantages and any capital gain you may make.
 
Reverse mortgages: The customer borrows money against the equity in his or her home, and the principal and interest is not repaid until the home is sold, usually when the customer dies or voluntarily vacates the home
 
Return: The amount of money received from an investment each year. Can be comprised of income and/or capital growth and is expressed as a percentage. Refer also to real rate of return.
 
RFA (Registered Financial Adviser): A Registered Financial Adviser is an adviser who is qualified to give advice on simpler products; such as mortgages, life insurance, risk insurance, call debt securities, bank term deposits, consumer credit contracts, and many different insurance products.  They are required to be registered but not authorised.  They also have a lower level of disclosure, financial supervision and monitoring by the Financial Markets Authority (FMA). 
 
Rights issue: When a company raises money by offering shareholders extra shares at a set, usually favourable, price.  The number of shares you are offered is based on the number you already hold.  
 
Risk (investment risk): The risk that you may not get all your money back, or that the returns you get may be less than you expected. Generally, the higher the level of risk an investor is prepared to accept, the higher the potential return over time.
 
Risk-averse: Refers to the assumption that rational investors will choose the security with the least risk if they can maintain the same return. As the level of risk goes up, so must the expected return on the investment.
 
Risk tolerance:  A term used to indicate how much risk you can or are willing to take.  Working out your tolerance means taking into account things like your age, income and circumstances, as well as when you need the money, what you need it for – and how you feel about risk.
 
Risk free rate: The return on a 'riskless' asset. The 90-Day Government bond is often referred to as the 'risk free rate' in terms that there is a very low default probability.
 
Risk management: The level of exposure to financial loss that death or disability would bring to an individual, that can be managed by using a professional insurer.
 
Risk profile: Defines a person’s tolerance to risk. Risk/Return profiler.
 
Roll-Over: This term means to re-invest. For example if a fixed interest investment matures it may be automatically rolled over into another investment with the same term.
 
Running yield: The interest rate on an investment expressed as a percentage of the capital invested, thus showing the actual cash flow of the amount paid for the investment.
 
 

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S


 
Salary sacrifice: An amount of pre-tax salary that an employee decides to contribute to super or allocate to a fringe benefit instead of taking it as cash salary.
 
Secondary market: The market for trading bonds and similar investments, after the initial investment.  Some secondary markets are well established – for example bonds may be traded many times before they mature.
 
Sector: A group of securities with common characteristics, such as resource sector companies or financial companies.
 
Secured Debenture: Secured means the deposit is secured by the company granting a charge (giving security) over all of its assets. This charge is given to an independent Trustee company. A charge is only as good as the assets it covers. If a company's assets comprise loans to borrowers the security taken by the charge is only as good as the realisable value of the loans. Refer also to "first ranking debenture".
 
Security: Security has several meanings.  The term is used to describe investments, like bonds, shares and debentures.  It is also used to describe an asset that will be used to provide security for a loan (this means the lender can sell the asset if you can’t repay the loan).
 
Security transfer:  A form that transfers ownership of a registered security from the owner to another party.
 
Settlement:  Settlement means payment.  So if a debt is settled it’s paid.   If the money for a loan is settled, it’s pad into your account.  If you’re buying a home the day the money is paid over is called settlement day.
 
Settlor:  The person(s) who originally established the trust - they place assets into the trust to be held for certain purposes. See Family Trusts.
 
Shares: Also known as ‘stocks’ and ‘equities’. A person who buys a portion of a company's capital becomes a shareholder in that company's assets and as such receives a share of the company's profits in the form of an annual dividend. There are different types of shares, for example ordinary, preference, cumulative preference and participating preference shares.
 
Share float:  When a company goes public and offers its shares for sale, also known as an initial public offering.
 
Share index future: A futures contract linked to the cash value of a share index such as Standard & Poor's 500 Index. Allows an investor to invest in the market, rather than individual stocks, to hedge against market declines or to speculate on a market rally.
 
Share split:  An increase in the number of outstanding shares of a stock with a corresponding adjustment in the share price. A share split has no effect on the market value or the value of the owner's shares. For example, if a share selling for $100 per share splits two-for-one, a shareholder with 100 shares worth $10,000 before the split would have 200 shares worth $50 per share after the split, with the same $10,000 value.
 
Sharemarket:  The exchange where shares and other listed securities are traded.  May also be referred to as a stock market or a bourse (the French term for a stock exchange).
 
Short-term investment: An investment that is generally suitable for investors with planning horizons of less than two years.
 
Single sector fund: A fund that only invests in one investment sector – such as a fund that specializes in property.  Single sector funds can be useful if you have a ‘gap’ in your investment portfolio.
 
Split-dollar plan: An arrangement under which two parties (usually a company and employee) share the cost of a life insurance policy and split the proceeds.
 
Spread: The difference between the offer and buy-back prices - this is the equivalent to the entry fee for the trust.
 
Standard & Poor's 500 Index: A daily measure of share market performance, based on the performance of 500 major companies. Though it does not include transaction or management costs, the S&P500 is often used as a yardstick for equity fund performance.
 
Standard deviation: How volatile is a fund likely to be? This measurement of historical volatility is often used to help answer that question. It shows the average difference between a portfolio's periodic returns and a benchmark index. The smaller the difference, the lower the standard deviation will be - and the greater the degree of stability you can expect from the fund.
 
Stock: In New Zealand is means bonds.  Elsewhere it means shares.
 
Stockbroker: A person who buys and sells securities on behalf of others in return for brokerage or commission. The terms stockbroker, broker and dealer are sometimes used interchangeably.
 
Strategic plan: A long-term plan.  In business this typically relates to a future period of 3 to 5 years.  In investment planning it typically refers to the ‘normal’ investment benchmarks adopted by an investment adviser of fund manager over similar periods.
 
Sub Prime Mortgages: Mortgages given to people with poor credit records and low ability to pay interest when interest rates increased. When the US property started dropping in 2007 some people found that their mortgage was worth more than their house and walked away from their liability.
 
Sum assured or life assurance: Where the life insurance company 'assures' they will pay the sum insured and bonuses.
 
Superannuation: A pension or payment to a person retiring from full-time work on reaching a legislated age. The term also refers to the accumulating contributions by employers and employees to a superannuation fund.  See NZ Superannuation Fund.
 
Superannuation Schemes Act 1989: The legislation covering managed funds specifically set up for retirement savings.  
 
Surplus: The excess of income or asset value over expenses or liabilities
 
Switching: Transferring units between two funds in a unit trust.
 
Systematic investment plan (SIP): A service option that allows a customer to purchase shares/units through regular deductions from a bank account.
 
 

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T


 
Tangible asset ratio: This is a measure of the tangible (physical) assets of a company as opposed to intangible assets such as goodwill.  To work it out divide the total tangible asset value of the company (less any debts) by the total number of shares issued.  The difference between this measure and the share price is what you are paying for goodwill and market sentiment.
 
Tax bracket: The range of taxable income that is taxed at a certain rate. Brackets are expressed by their marginal rate. 
 
Tax credit: Tax credits, are credits for tax that has been subtracted directly from income.
 
Tax loss carried forward: A tax benefit that allows an individual or a unit trust to offset past losses against future profits.
 
Tax planning: Activities aimed at achieving optimal tax-efficiency.
 
Tax rates: See ‘Marginal tax rates’.
 
Taxable income: The amount of income used to compute tax liability. It is determined by subtracting adjustments, allowable deductions, and any personal exemption from gross income.
 
TD: Abbreviation for Term Deposit.
 
Technical analysis: An approach to investing in shares in which a share's past performance is mapped onto charts. These charts are examined to find familiar patterns to use as an indicator of the stock's future performance.
 
Tenants or tenancy in common: A form of co-ownership. Upon the death of a co-owner, his or her interest passes to his or her chosen beneficiaries and not to the surviving owner or owners.
 
Term: Term is the time an investment or loan is for.
 
Term deposit: A fixed rate investment with a bank or other financial institution for a set period of time.  Interest may be compounded or payable monthly, quarterly or semi-annually.
 
Term insurance: Term life insurance provides a death benefit if the insured dies. Term insurance does not accumulate cash value and ends after a certain number of years or at a certain age. Term is generally cheaper than any other type of insurance cover.
 
Testamentary trust: A trust established by a will that takes effect upon death.
 
Testator: One who has made a will or who dies having left a will.
 
Top-down approach: An approach to investing in which the investor first look's at general trends in the economy and then chooses specific industries and particular companies that will benefit from these broad trends.
 
Total and Permanent Disability Insurance (TPD): TPD cover provides a lump sum payment should you lose your ability to ever work again (or carry on normal task, if you are not employed), as a result of illness or injury.  Most people figure they are covered by ACC, however does not cover illness, and it is very limiting in terms of payment.  TPD cover can provide a lump sum to reduce debt, purchase specialised equipment, pay for home modifications, provide additional care, to fund the gap left in your retirement funding due to being unable to work again or create an investment fund to generate ongoing income, amongst other things.
 
Total return: The total of all earnings from a given investment, including dividends, interest, and any capital gain.
 
Transfer agent: (also known as registrar) An institution, used by an issuer of shares to maintain its shareholder records and perform all account transactions.
 
Trauma Insurance (Critical Cover Insurance): Trauma cover provides a lump sum payment should you suffer a major condition that by nature is serious and life threatening, and as a result can have a significant financial impact on you and your family.  This type of insurance helps alleviate the financial worries and can reduce debt, purchase specialised equipment, pay for home modifications, provide additional care, or create an investment fund to generate ongoing income, amongst other things.
 
Treasury bill, bond, note: Negotiable debt obligations issued by the US government and backed by its full faith and credit. Treasury bills are short-term securities with maturities of one year or less. Treasury notes are intermediate-term securities with maturities of one to 10 years. Treasury bonds are long-term securities with maturities of 10 years or longer.
 
Trust: A legal arrangement under which an individual (settlor/trustor) gives fiduciary control of property to a person or institution (trustee) for the benefit of a beneficiary. Also known as a Family Trust.
 
Trust deed: The legal terms (documentation) under which a trust operates. It lists assets of trusts, trustees, beneficiaries and terms of trust.
 
Trust income: Income received by a trust is subject to 33% tax unless it is distributed to ‘Beneficiaries’, when tax applies at their ‘Marginal rate’.
 
Trust, Family Trust: An arrangement through which ‘Settlors’ transfer assets to a group of ‘Trustees’ to hold for the benefit of one of more nominated ‘Beneficiaries’.  A trust can operate for a term of no more than 80 years, and can usually be terminated on the happening of a specified event (such as the death of one or more of the Settlors).
 
Trustee: A trustee holds assets on behalf of others, and protects their interests.  By law, managers of unit trusts must appoint an independent trustee to hold the trusts assets and look after the investors’ interests.  Trustees may be responsible for the running of a family trust, superannuation or unit trust, and are bound by the Trustees Amendment Act.
 
Turnaround: A sharp, positive reversal in the performance of a company, industry, or the entire economy. One of the tenets of value investing is the search for turnaround situations.
 
 

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U


 
Unit price: The price for each unit of a unit trust. This is calculated by dividing the value of the assets of the trust by the number of units on issue to investors.
 
Unit trust: A managed fund where investors buy (and sell) units in the trust.  Each unit represents a share of the trust’s assets.  It is also known as a pooled investment or managed investment.
 
Unit Trust Act 1960: The legislation setting out the rules for setting up unit trusts. 
 
Units: A share of a unit trust or managed fund that represents an entitlement to the asset within the fund.
 
Unbundled Life Insurance: An insurance policy that combines a death benefit with a savings element.
 
Under/overweight: Underweight is less than the benchmark holding in an asset class; overweight is greater than the benchmark holding.
 
Unlisted: When companies, trusts or securities are not listed on the stock exchange.
 
Unsecured note: A bond that is not secured by the assets of the company.  It is paid after secured notes and other creditors have been paid.
 


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V


 
Valuation: Putting a value on a security in relation to other securities.
 
Value investing: Investing in companies whose shares appear to be undervalued by the market at large.
 
Vesting: Relates to superannuation, an employee's entitlement to optional employer superannuation contributions. Vesting is usually expressed on a scale, for example for each year of service employees are entitled to a further 20% of optional employer contributions. This means that after 5 years of service an employee is entitled to 100% of these contributions if they leave the employer.
 
Volatility: This term is used to describe fluctuations in the value of investments.  It is mainly used in relation to shares, which can vary quite a bit in value as part of normal trading patterns.  Also referred to as risk or standard deviation in returns.
 
 

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W


 
Weighting: Percentage or proportion of the portfolio invested in each asset class.
 
Whole of Life Insurance: A type of life insurance that offers a death benefit and also accumulates cash value. Whole life insurance policies generally have a fixed annual premium that does not rise over the duration of the policy. Whole life insurance is also referred to as "ordinary" or "straight" life insurance.
 
Wholesale fund: A fund designed for professional and fund investors and not usually open to smaller retail investors.  Typically have minimum investment requirements of $5m to $15m.
 
Will (Last will and Testament): A legal document that declares a person's wishes concerning the disposition of property, the guardianship of his or her children, and the administration of the estate after his or her death.
 
Withholding tax: Tax deducted from income by an employer, or from interest or dividends by the issuer of a security and paid to the Inland Revenue Department on account of a taxpayer.  A taxpayer filing a tax return can reclaim overpaid withholding tax.
 
 

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X


 
X: Appears next to a unit trust or share listing in the newspaper to indicate that the fund recently paid a capital gain or dividend. This amount was previously included in the fund's net asset value and is deducted from the net asset value when it is paid out. The "x" stands for "ex-dividend".
 
 

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Y


 
Yield: The return you will get from your investment after taking costs into account.
 
Yield curve: A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux, and one of the key activities in managing any income-orientated unit trust is to study trends reflected by comparative yield curves.
 
Yield spread: The variation between yields on different types of debt securities; generally a function of supply and demand, credit quality, and expected interest-rate fluctuations. Treasury bonds, for example, because they are so safe, will normally yield less than corporate bonds. Yields may also differ on similar securities with different maturities. Long-term debt, for example, carries more risk of market changes and issuer defaults than shorter-term debt and thus usually yields more.
 
Yield to maturity: A term used to express the yield you get if you hold a bond until maturity date.  It takes into account any discount or premium paid if you bought the bond on the secondary market.
 
 

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Z
 

Zero coupon bond: A security that pays no interest but is instead sold at a deep discount from face value. The bondholder receives the rate of return through the gradual appreciation of the security, which is redeemed at maturity for the full face value.