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AAA rating
The highest credit rating for a bond or company. The risk of default (or non-payment) is negligible.
Active management
An investment management approach that seeks to outperform the market through the application of informed, independent judgement. The opposite of passive management.
ALSI
All share index of the South African stock exchange
Annual charge
A charge levied for the management of the mutual fund.
Arbitrage
The making of profits from a mis-match of the prices of the same investment in different markets or from a mis-match between the price of an investment and the price of its derivatives.
Asset allocation
Deciding what proportion of a fund will be held in different asset classes – cash, bonds and shares.
Annuity
An annual (or more frequent) payment made by an assurance company to an individual in exchange for a lump sum investment.
B
Bear market
A market where prices are influenced by sellers.
Bid-price
The price at which a dealer buys securities or the price paid to holders redeeming their holdings.
Bid/offer spread
The difference between the bid and offer prices expressed either as an amount or as a % of the offer price.
Blue chip
Shares in companies which are highly regarded, usually large and well established.
Bond
Interest bearing security that is usually issued by a company or government, with a fixed rate of interest (coupon) and redemption date.
Bull market
A market where prices are influenced by buyers.
Bottom up management
A method of active portfolio management where securities are selected on their own merits without consideration of the asset class or security sector.
CAC 40
Index of the Paris Stock Exchange.
Capital Protected Annuity
An annuity where the total amount paid is guaranteed to be at least as much as the premium.
Coupon
The amount of interest payable on a bond. It is usually fixed at the time of issue of the bond but could be variable.
Consumer Price Index
The measurement of retail price inflation, also called Retail Prices Index.
Convertibles
A bond that can be converted into shares of the issuing company on terms specified at the time of issue rather than receiving nominal value on redemption.
Cost averaging
For regular savings the average per share or unit paid by the holder can be lower than the average price for the period in which savings are made.
Correlation
The extent to which the returns of investments move in line with each other.
D
DAX
Index of the German Stock Exchange.
Debenture
Bond of company acknowledging debt and providing for payment of interest at fixed intervals. Also known as a corporate bond.
Deferred annuity
An annuity which first becomes payable at a future date.
Dematerialisation
Shares which are recorded in a central computer system and for which no certificates exist. Transfer is by book entry.
Derivatives
Securities whose values are linked to, or derived from, other securities.
Distributions
Payments of investment income or realised capital gains to mutual fund share or unit holders.
Diversification
Spreading investments and risk among a number of securities.
Dividend
A distribution of profits to the shareholders of a company.
Dividend yield
The yield on a share defined as:
| Dividend per share
Current market price per share |
x 100% |
Dow Jones index
Index of the New York Stock Exchange.
Equity shares
Shares in a company which are entitled to the balance of profits and assets after all prior charges.
Eurobond
Bond issued across national boundaries outside the regulations of any national market.
Exchange rate
The price of one currency expressed in terms of another currency.
Fund of funds
A mutual fund which may only invest in other mutual funds.
FTSE 100 Index
Index of the London Stock Exchange.
Gearing
The effect of derivatives where a small movement in the price of the underlying asset is turned into a larger percentage increase in the price of the derivative.
Gilts
UK Government issued bonds. Full name is gilt edged securities.
Guarantee annuity
An annuity which is payable for a minimum period, regardless of whether the annuitant survives.
Hedging
The process of protecting a fund’s assets from the effects of exposure to currency fluctuations or other investment risks, by the use of derivatives.
Index
A figure calculated from the share prices or market capitalisations of a specific number of shares on a Stock Exchange.
JSE
Johannesburg Stock Exchange of South African.
Managed fund
A unit linked policy where the managers decide on the allocation of premiums to different unitised funds
Management fee
The amount paid to mutual fund managers for their services.
Market risk
The risk that the market as a whole will fall. Hedging is used to protect against it. This risk is separate from investment specific risk.
Mutual fund
An open-ended investment company or trust which combines the contributions of many investors with similar objectives.
NASDAQ
An American based stock market which is quote driven. Often also used in the context of the NASDAQ index which refers to an index of the mainly technology stocks quoted on this exchange.
Nikkei Stock Index
Index of the Tokyo Stock Exchange
Nominal value
The minimum price at which a share can be issued. Also called par value.
Offer price
The investor’s purchase price of units.
Portfolio
A collection of financial assets which is designed to achieve a specific investment objective.
Price/earnings ratio
A ratio used by investors in shares that is calculated as:
| Market price per share
Earnings per share |
Redemption date
Date on which the nominal value of a bond will be repaid.
Rights issue
A new issue of shares offered to the existing shareholders in proportion to their existing holdings.
Shares
The unit of ownership of a company.
Spread
The difference between the bid and offer prices.
Standard & Poors 500
Index of the New York Stock Exchange
Switching
The facility to move the money invested in a unit linked policy from one fund to another. A discount may be given when an investor switches from one mutual fund to another.
Top down management
A method of active portfolio managed where different classes of security (cash, bonds, shares) are selected; then within each class different sectors are selected; and within each sector individual securities are selected.
Underwriting
Undertaking to support an issue of shares. The procedure by which the proceeds of a new issue are guaranteed to the issuer. Organisations receive a fee in return for which they agree to buy the securities if there is insufficient general demand for them.
Volatility
Change in the price of a bond in response to a change in interest rates.
Yield
The percentage of the quoted offer price that represents the prospective annual income of a mutual fund for its current annual accounting period, after deducting all charges.