In financial services there are often unfamiliar terms used, this glossary will assist in understanding some of these terms.
Account-based pension (or annuity): is flexible retirement income stream with unlimited access to capital and flexible income payments (subject to Government prescribed minimum payment limits) but with no guarantee on how long the investment will last. The value of the account depends on investment earnings and the amount of payments made.
Accumulation fund: a superannuation fund where your account balance is calculated as your deposits to the fund (ie, contributions and rollovers) plus your investment earnings less any fees, taxes and insurance premiums you pay.
All Ordinaries Accumulation Index: 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.
Annuity: a regular income stream paid to an individual from a lump sum investment, usually for the purposes of retirement income.
Approved Deposit Fund (ADF): a concessionally taxed investment fund for superannuation monies. Similar to a superannuation fund, however an ADF can only accept rollovers and cannot accept contributions. For this reason superannuation funds have become more popular.
Application: to apply for an investment, superannuation or insurance.
Appreciation: the increase in the value of an asset.
Asset allocation: a representation of how a portfolio is invested among the various available asset classes. For example, a balanced fund may have an asset allocation of 30% Australian shares, 25% international shares, 10% property, 20% fixed interest, 10% international fixed interest, 5% cash.
Asset classes: types of investments, such as shares, fixed interest securities, property, cash and international investments.
Balanced fund: sometimes called a diversified fund, a type of managed fund whose investment strategy is to have some proportion of its investments in all major asset classes, and to create a risk/return balance between different types of investments.
Bear market: a market that is decreasing over time. The opposite to a bull market.
Benefit: in relation to superannuation, the amount of money you are entitled to receive from your superannuation fund as a lump sum or income stream.
Blue chip shares: shares in well established companies that have historically shown ability to pay dividends in uncertain markets.
Bonds: see fixed interest securities
Broker: an agent who executes an investor's orders to buy or sell securities.
Brokerage: a fee charged by a financial adviser or stockbroker for a transaction. Sometimes also referred to as commission.
Bull market: a market that is increasing over time. The opposite to a bear market.
Capital gains/growth: occur when the market value of an investment increases.
Capital gains tax: a tax on the gains of an investment, payable only when the investment is sold or disposed of in some other way.
Cash: one of the asset classes. Examples include coin and note currency in circulation and in deposit accounts and money market securities.
Cash Management Trust (CMT): a managed investment in which the primary investments are cash (as defined above). While offering security, they can also offer a competitive rate of interest.
Commission: see Brokerage.
Compound interest: interest calculated on the principal and interest already accrued.
Concessional Contributions: contributions to superannuation which are generally made from before-tax money, such as employer contributions including salary sacrifice, and personal contributions for which a personal tax deduction is claimed.
Constitution: also known as a trust deed, it is a document that governs the operation of a managed investment and setting out, amongst other things, investment, application and withdrawal procedures.
Consumer Price Index (CPI): an index measuring the prices of items of goods and services. Allows comparison of the relative cost of living over time, typically know as inflation.
Contributions: Money deposited into your superannuation fund by you or on your behalf (excluding rollovers which are not considered contributions).
Contribution fee: is the fee for the initial and every subsequent investment you make into a fund.
Contributions Tax: Income tax charged on assessable income of superannuation fund. This tax (currently 15%) is applied to assessable contributions, including employer, salary sacrifice and personal deductible contributions and investment earnings.
Currency gains: a security's capital gain due to movements in the currency in which the security was denominated.
Deductible expenses: expenses that can be offset against income assessable for tax. Some contributions to superannuation funds may be deductible to individuals.
Defined Benefit Fund: a superannuation fund which defines the member's retirement benefit as a multiple of their salary. The multiple is usually based on the member's period of service and is not linked to contributions made over the period of employment. The opposite to a defined contribution or accumulation fund.
Defined contribution fund: see accumulation fund.
Derivatives: are investment products whose value is based on, or derived from, some other item such as the price of some other asset or a market index.
Distributions: income payments from managed investments. Such payments comprise a share of any net income and realised capital gains earned over a financial year. The components which generally make up a distribution are profits from the sale of assets, income and currency gains.
Diversification: spreading an investment over a range of asset classes, sectors and regions with the aim of reducing risk. As the old saying goes "don't put all your eggs in one basket". Find out more about diversification.
Dividend: payment to shareholders from a company's after-tax earnings.
Dividend imputation: tax already paid by a company is credited to individual shareholders when a dividend is paid.
Dollar cost averaging: is investing a set amount of money, at regular intervals, over a period of time. This means an investor could gain an advantage from rises and falls in the investment price, buying more when the price is low and less when the price is high, and so reducing the risk of loss.
Equity: (1) a share investment or (2) the part of an asset owned by an individual over and above any debt against the asset.
Entry Price: the price per unit or share of an investment in which applications are made.
Exit price: the price at which an investor can withdraw their units from a fund or trust.
Financial adviser: (or financial planner) an individual who is licensed to provide investment advice to others for a fee. Find out more about Financial Advisers.
Fixed Interest securities: include bonds and represent loans to borrowers, which could include governments, banks and companies. In return for the loan, the borrower generally pays a pre-determined rate of interest for an agreed term.
Flexi Payment Plan: a BT term for an investment arrangement which allows the investor to specify the regular amount of money they are to receive from their managed investments. This payment will firstly comprise income derived from the distributions of the fund. Any shortfall in meeting the flexi income payment is withdrawn from the capital investment, any surplus in income is reinvested as additional units.
Franked dividends: dividends on shares which include an imputation credit.
Fund: see managed investment.
Futures: a derivative investment in which parties agree on an obligation to buy or sell a specified quantity of an underlying asset at some time in the future, and the price.
Gearing: (1) a measure of the debt ratio, which is the amount of borrowing compared with the equity in an asset. (2) borrowing to invest, such as when purchasing a house using a mortgage or purchasing a share portfolio using a margin loan.
Growth assets: a term given to assets such as shares and property which are expected to provide strong investment returns over the long term.
Growth fund: a managed investment which is predominantly invested in growth assets.
Hedge fund: a managed investment where the fund manager is authorised to use derivatives and borrowing with the aim of providing a higher return.
Hedging: undertaking one investment to protect against the potential loss in another investment. Options and futures are often used to hedge an investment.
Immediate annuity: a regular income stream purchased with a lump sum investment, where the income stream starts immediately after the purchase. They are usually provided by a life insurance company for the purposes of retirement income.
Imputation credit: taxation credits which are passed on to shareholders who have received franked dividends from holding shares or managed share investments.
Income: regular payments from an investment derived from interest on cash or bonds, dividends on shares, rent from properties or income.
Indirect Cost Ratio: an industry-standard measure expressing the management fees and certain other expenses of a managed fund as a proportion of the net asset value of the fund. See also Management Expense Ratio.
Inflation: see Consumer Price Index.
Interest: the return earned on money which has been invested or loaned, the price paid for its use.
Investment: an asset purchased with the intention of producing capital growth or income, or both, for the owner.
Investment risk: the variability of returns. Generally, the higher the potential return over time, the higher the level of risk involved.
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Lifetime pension (or annuity): a retirement income stream where regular payments are guaranteed to be paid for a person's lifetime and in some cases their spouse's lifetime as well. There is no access to capital and generally little or no income flexibility.
Liquidate: to sell an investment or to convert an investment into cash.
Listed security: a security which is bought and sold via an exchange, such as shares on the stock exchange.
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 another super fund or a pension or annuity.
Lump sum tax: tax payable on a lump sum benefit payment from a superannuation fund.
Managed fund: see managed investment.
Managed investment: an investment product where investors pool their money with that of other investors in a fund so that the fund can buy a wide range of investments. These investments are managed by a professional fund manager who makes the investment decisions. Also known as a managed fund, managed investment scheme or unit trust.
Management expense ratio (MER): a ratio expressing the management, fees 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.
Maximum contribution base: this is the maximum limit on an employee's earnings base for each quarter of a financial year above which their employer is not required to provide superannuation guarantee.
Money market: a market where short-term securities, such as promissory notes and bills of exchange, are traded. Securities in the money market all have terms of one year or less.
Negative gearing: purchasing an investment with borrowed funds where the interest on the borrowing exceeds the income from the investment.
Net asset value: the value of a company, or managed investment, which is the assets less liabilities.
Non-Concessional Contributions: contributions to superannuation which are generally made from after-tax money, such as personal contributions for which a tax deduction has not been claimed, and spouse contributions.
Options: a derivative investment giving the holder an option to buy or sell a specified quantity of an underlying asset at some time in the future, at a price which is agreed when the contract is executed.
Other Management Costs: an individual measure of indirect costs (see ICR) of managing and administering an investment account. Expressed as a dollar value.
Pension: a regular income stream paid to an individual, either by the government (such as an Age Pension) or from a superannuation fund (e.g. account-based pension).
Percentage Factor: the age based percentage used to determine the minimum annual payment a member of an account-based pension is required to receive from the pension under superannuation law.
Portfolio: the full range of an investor's, or managed fund's, investment holdings.
Preservation: a requirement to retain superannuation benefits within the superannuation environment until a specified condition has been met. Under current laws most benefits are compulsorily preserved until a person satisfies a condition of release such as retirement (between 55 and 60 years depending on a member's date of birth as shown in the table below) or reaching age 65.
|Date of Birth||Preservation Age|
|Before 1 July 1960||55|
|1 July 1960 - 30 June 1961||56|
|1 July 1961 - 30 June 1962||57|
|1 July 1962 - 30 June 1963||58|
|1 July 1963 - 30 June 1964||59|
|From 1 July 1964||60|
Product Disclosure Statement (PDS): an offer document that sets out information on a product, including the features of the product, fees that apply, the benefits and risks of investing in the product, commissions that may affect returns, information about complaints handling and cooling-off rights, and other information that might reasonably be expected to have a material influence on an investor's decision to invest. Download a PDS.
Profit: occurs when an investment appreciates in value and is sold, or realised. Also known as a realised gain.
Property securities: in a managed investment the term "property" generally refers to investments in property securities - which are units or interests in property trusts listed on the stock exchange. Funds which invest in property securities usually diversify 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 sharemarket, or in property-related companies.
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Realise: to sell an investment.
Realised capital gain: when an investment is sold and a capital gain is realised.
Redemption/redeem: to withdraw, or sell, an investment.
Regular Investment Plan: a BT term describing a regular periodic investment plan whereby the investor makes use of the principle of dollar cost averaging.
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.
Responsible Entity: the entity that operates a managed investment under the constitution.
Return: the amount of earnings from an investment in a given timeframe — usually expressed as a percentage per year.
Risk: the variability of returns. Generally, the higher the level of risk an investor is prepared to accept, the higher the potential return over time may be. Learn more about risk.
Rollover/rolling over: the transfer of superannuation benefit between superannuation funds, or from a superannuation fund to a pension or annuity.
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.
Sector: a group of securities with common characteristics, such as resource sector companies or financial companies.
Security: (1) an asset traded on a financial market, such as shares or bonds or (2) an asset pledged to ensure the repayment of a loan
Shares: represents ownership in part of a company. When you buy a share in a company you become a part of the business and share in the future of that business. Also known as an equity.
SPIN (Superannuation Product Identification Number): The standard method of identification for superannuation products within the financial services industry in Australia.
Spouse contribution: a contribution made to superannuation on behalf of a spouse. The receiving spouse must be under age 75. The contributing spouse may be entitled to a tax offset.
Stockbroker: a person who buys and sells securities on behalf of others in return for brokerage or commission.
Superannuation: a tax effective means of putting aside money during your working life for use in retirement.
Superannuation benefit: used to describe money that is already in the superannuation environment. A payment from a superannuation fund, approved deposit fund or employer to a person upon resignation, retrenchment, disablement, death or retirement. Sometimes such payments can be taken in cash, at other times they must be rolled over.
Super co-contribution: an amount contributed to an eligible person's super fund by the Government under the superannuation co-contributions scheme. If you're a low or middle-income earner and make personal (after-tax) contributions to your super fund, the government may also make a contribution (called a co-contribution) up to a maximum amount of $500.
Superannuation fund: a concessionally taxed trust run by a trustee or trustee board with the primary purpose of holding superannuation assets for the beneficiaries of the fund (ie. members and their dependants).
Super choice: ability to choose the super fund to which your employer directs your super contributions.
Superannuation Guarantee (SG): a compulsory minimum level of superannuation an employer must contribute for all eligible employees. This is currently 10% (2021/22) of an employee's Ordinary Time Earnings (OTE).
Switching: transferring units between managed investments by selling the units of one managed investment and using the proceeds to buy units in the other. This may trigger a capital gain.
Synthetics: see derivatives.
Tax rebate/offset: now known as tax offsets - an entitlement which reduces the amount of income tax payable.
Trust deed: for a managed investment, see constitution. For a superannuation fund, a trust deed is a legal document that sets out Trust's constitution, objectives, purpose and also includes the rights, duties and responsibilities of the Trustees and the beneficiaries (ie, member and their dependants).
Unit price: the price for each unit of a managed investment. This is calculated by dividing the value of the assets of the managed investment by the number of units on issue to investors.
Units: a share of a managed investment, which represents an entitlement to the asset within the fund.
Unit trust: see managed investment.
Unrealised capital gain: occurs when an investment increases in value but is not sold or realised.
Vesting: relates to superannuation – super benefits are vested when a member becomes fully entitled to the benefits. All members benefits in an accumulation super fund become the members minimum benefits unless certain conditions were met.
Work test: to allow you to add more to your super once you have turned 67, you need to have been gainfully employed for at least 40 hours in a period of no more than 30 consecutive days in the financial year in which you wish to contribute.
Work test exemption: if you are aged between 67 and 74 you may make voluntary contributions where you do not satisfy the work test provided that:
Wrap: an investment vehicle which combines or 'wraps' investments into a single account. It is a single account that can manage an entire investment portfolio, buy shares, and managed funds at wholesale prices.
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Yield: the dividend, or interest rate, on an investment expressed as a percentage of the price.
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