Glossary of terms

The stockmarket can be a complex place. However most of the key terms that describe market processes are relatively easy to understand.

This section gives a guide to some of these key terms – including terms that are found in the sharemarket tables in the newspaper. New terms are added to this list often, to ensure investors have an easy reference place for key phrases and terminology.

Accrued interest The amount of interest that has accumulated on a debt security since the last coupon (interest payment) date.

Arbitrage
Taking advantage of different rates, prices or conditions between different markets or maturities. This typically involves buying an asset in one market at a lower price and simultaneously selling it in another market for a higher price.

American Standard Code for Information Interchange (ASCII)
This is the de facto world-wide standard for the code numbers used by computers to represent all the upper and lower-case Latin letters, numbers, punctuation, etc. There are 128 standard ASCII codes each of which can be represented by a 7 digit binary number: 0000000 through 1111111, plus parity.

Ask yield
The yield a seller is asking for when selling a debt security.

Asset allocation
Selecting and weighting assets in an investment portfolio.

Bears/Bulls
"Bears” are investors who generally expect share prices to fall. “Bulls” expect prices to rise. When most prices rise over months or years, this is called a “bull market” (and vice versa).

Bid
The price a buyer is willing to pay for a security.

Bid-ask spread
The bid is the price offered; the ask price is the price requested. The bid ask spread is the difference between the buying and selling price.

Bid yield
The yield a buyer is willing to pay to buy a debt security.

Blue chip
A well-established and financially-sound company with a record of steady or growing profits and dividend payments. Typically, blue chip shares are regarded as less risky than other shares.

Bonds
Medium to long-term debt securities that pay a regular coupon and are redeemed at face value at a fixed maturity date.

Brokerage
The fee investors pay an NZX Firm for buying or selling shares as instructed.

Buy on margin
Use money borrowed from broker or bank to purchase securities.

Capital note
A debt security that pays a fixed rate of interest for a specified time period. At maturity the investor is offered the option of investing for a further period or converting to ordinary shares, usually at a discount to the prevailing market price.

Company analysis
Research using the calculation of financial ratios and/or complex forecasting of profits, cash flows and dividends. Analysis gives a basis for the valuation of shares and decisions on when to buy, sell and hold shares.

Constituent company
A company whose securities are included in an index.

Contract notes
NZX Firms send these documents to clients confirming their share trades, and showing relevant prices and other details.

Convertible note
Security offering investors the option of converting the notes into the equity of the company at a later date usually on a fixed ratio.

Corporate bonds
Bonds issued by a company.

Coupon
The interest rate paid on a specified date to a debt security holder.

Coupon date
The date on which the coupon is paid to a debt security holder.

Coupon frequency
How often the coupon is paid each year.

Debenture
A type of debt security issued by large companies.

Debt security
A security that represents a loan to a company or the Government. Debt security holders receive interest payments at regular intervals, and receive their money back on the security's maturity date.

Default
When an issuer cannot meet their payment obligations.

Diversification
Spreading investment over multiple products or securities. Diversification usually reduces portfolio risk because the returns on various asset classes are not perfectly correlated.

Dividend
Part of a company's profits paid to shareholders as a reward for their investment in the company.

Dividend Times Covered
The number of times a company could have paid its annual dividends from its annual net profit after tax. Note that annual dividends exclude imputation credits. This is different to interest times covered, which shows the number of times a company could pay its interest payments.

Dividend yield
The rate of investment return received by way of dividends. The yield is calculated by dividing the annual dividend (cents per share) by the market price of the share (cents).

Diversification
The practice of spreading investment across a range of companies, business types and locations to reduce risk. Diversification is a core principle in successful investing.

Earnings per share (EPS)
The amount of annual profit (after tax and all other expenses) that is attributable to each share in the company. EPS is calculated by dividing profit – future or “prospective” profit is of most interest – by the average number of shares on issue from the company in the current year.

Efficiency
The degree to which the knowledge and expectations of all investors about companies are factored into the market prices of shares. The market is said to be efficient when prices reflect all the information available to investors. Rules and practices on company reporting and disclosure promote market efficiency as well as fairness.

Equities
Another word for shares, which represent part ownership in a company (or a share in a company’s “equity”).

Exchange traded
A security that is traded on an exchange such as NZX.

Exchange traded fund
An exchange traded fund (ETF) is a fund that trades like a single security. It is a basket of securities that reflect the composition of a stockmarket index. The ETF's value is based on the net asset value of the underlying stocks that it represents.

Face value
The amount that is paid to the security holder on maturity.

FASTER
The electronic system used in all buying and selling of shares on NZX Markets. FASTER stands for Fully Automated Screen Trading and Electronic Registration System.

Fairness
A core principle for everyone in the market, most notably companies which must treat investors fairly on information disclosure and all other matters. A share price is said to be “fair” when both buyers and sellers make rational decisions on the basis of the same information.

FIN
FASTER Identification Number. You need to quote this number to your broker when placing an order to buy or sell securities.

Financial statements
The set of financial records all companies must produce to certain accounting standards: profit and loss statements (or income statements), balance sheets and cash flow statements. Listed companies must publicly issue these twice a year within strict deadlines. The statements – and accompanying notes – are the starting point for all company analysis and share valuation.

Float
The process of publicly offering shares to investors and listing on the stockmarket. A float may involve the issue of new shares to raise more capital for the company or the sale of shares previously owned by other shareholders. Float and “IPO” are terms often used interchangeably.

Fundamentals
Anything that is “fundamental” to the working of a company’s business and its profitability: operating costs, product prices, technical innovations etc. Company analysis taking account of these fundamental factors facilitates share valuation.

Government stock
Bonds (debt securities) issued by the New Zealand Government.

Imputation
A tax credit shareholders often receive along with dividend income. Dividends are paid out from profits on which the company has already paid tax – and imputation credits mean shareholders do not have to pay tax again on their share of the same profits.

Income stream
The coupon payable to holders of a debt security.

Index
A statistical construction that measures relative or absolute price changes and/or returns for a given group of securities.

The purpose of an index calculation is usually to provide a single number which represents the movements of a variety of prices or rates and is indicative of the behaviour in a market.

Indexation
A relatively passive investment strategy that attempts to replicate the return of a benchmark index in a fund.

Index fund
A fund designed to track the performance of a market index.

Initial public offering (IPO)
The first sale (or issue) of shares to investors publicly, when a company is raising capital to fund the growth of its business. "IPO" and float are terms often used interchangeably.

Insider trading
The illegal practice of using company (or inside) information as a basis for buying or selling shares. Because the information to not available to all investors, this breaches the basic principle of fairness in the market.

Interest Times Covered:
The number of times a company could have paid its annual interest from its earnings before interest (e.g. EBIT). This is different to dividend times covered, which shows the number of times a company could pay its dividends.

Issuer
A company (or other organisation) has raised capital through selling shares or other securities – shares that are issued for an “IPO” or issued in various at other times to particular investors.

Limited liability
The common legal structure in which shareholders are not liable for debts incurred by their companies – liability is limited to the value of their shares. Very few listed companies are not limited liability.

Liquidity
The ability to easily trade shares, even in large parcels, with prices not pushed up or down by individual trades. In a “liquid market” there are many buyers and sellers willing to trade large volumes at small price differences.

Managed funds
Companies or trusts that offer a means of investing indirectly in shares (and other securities and assets). They combine money from many investors who seek a higher return by having professional managers buy, sell and hold shares within a portfolio of investments. Managed funds are sometimes called “mutual funds”.

Management company
The firm that organises, manages, and administers a fund.

Marketability
A measure of a security’s acceptance in the market – whether it can be easily on-sold by a holder.

Market capitalisation
The value placed on a company by the market. It is the number of shares on issue multiplied by market share price.

Market risk
All investments involve some degree of risk: the possibility that an investor will not recover all of their original investment if the security price falls, a company goes into liquidation, or a number of other reasons.

Maturity date
The date at which a bond matures.

Net asset value
The total assets (securities, cash, and accrued earnings) of a fund minus any liabilities, divided by the number of units outstanding.

Net tangible asset backing (NTA)
A ratio showing the value of company assets attributable to each share on issue – the relevant assets are usually tangible assets or equipment, buildings etc that could be readily sold. NTA is a theoretical measure of what shareholders would receive if their company had to be broken up.

Nominal value
The face value of a bond.

Offer
The price a seller is willing to accept for a security.

Par
A bond at par is one whose price is the same as its face value.

Passive management
Investing in a fund or other pooled investment vehicle that attempts to match the risk/return pattern of a market index.

Perpetual bond
A bond with no fixed maturity date.

Portfolio
A collection of securities and/or other financial instruments under common ownership and management.

Premium
When the price of a bond exceeds its face value.

Principal
The face value of a bond.

Price : earnings ratio (P:E)
A ratio showing the fundamental relationship between a company’s share price and profits. P:Es are calculated by dividing market price by earnings per share – future or “prospective” earnings are of most interest. Company P:Es can be compared to each other and the market average. A low relative P:E signals a general expectation of low profit growth in that company.

Quotes
The prices at which investors offer to buy and sell shares to each other. NZX Advisors enter these quotes into the FASTER system and when they match, a market price is established and the shares traded. Final “buy” and “sell” quotes for each trading day are useful information for investors contemplating the next session.

Re-balancing
Periodic revisions to a portfolio. These are necessary because of the effect of time on the make-up of a portfolio, changes to the constitution of an index, portfolio cash flows or market-driven departures from a target allocation.

Rights issue
A rights issue is when a company issues the right, to existing shareholders of a security, to buy more shares at a given price (usually at a discount to the market price) within a fixed period. Rights issues can be renounceable (the shareholder has the option of selling or transferring their right to buy more shares) or non-renounceable (the shareholder may not sell or transferring their right to buy shares. A non-renounceable rights issue is also called an entitlement.)

Securities
A broad term for shares and other investments that are essentially a legal claim to part ownership of a company and/or to financial entitlements (eg interest payments). By definition, securities can be traded among investors. Capital notes, bonds and some other interest-paying investments are securities tradable through NZX Markets.

Sell short
Selling a security that you do not own yet, but believe will fall in price so that it can be bought back later at a lower price.

Share buyback
A share buyback is when a company buys back its own shares from shareholders, reducing the number of outstanding shares.

Technical analysis
Research on patterns in past share trading as a basis for predicting future trends in prices. Technical analysis – in contrast to company or fundamental analysis – assumes that prices rise and fall at different rates in patterns that can be exposed. Analysis of past changes enables prediction of future movements.

Traded volume
The number of shares bought and sold in the market. There are trading volume numbers for each company and each price at which sales are made, and for each trading period.

Yield
The return on an investment compared to either the original investment amount or, more commonly, the current market value of the investment. Yield is always quoted on an annualised basis.