Investment Glossary

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Above par

designating a security that sells at more than face value or par value. This is also called selling at a 'premium'. For example, a $1,000 par bond trading at a market price of $1,050 is selling above par. A fixed-interest security is most likely to sell above par if market rates of interest have declined since the time the security was issued.

Accrual accounting

a method of accounting that recognises expenses when incurred and revenue when earned rather than when payment is made or received. Thus, it is the act of sending the goods or receiving an inventory item that is important in determining when transactions are posted on financial statements. For example, using accrual accounting, sales are recorded as revenue when goods are shipped even though payment is not expected for days, weeks, or months in the future. Most firms use the accrual basis of accounting in recording transactions. - See also Cash Basis Accounting

Accrued interest

interest owed but not yet paid. Accrued interest is listed as a liability on corporate balance sheets. It is also added to the price at which bonds are traded. For example, if a 12% coupon bond is now trading at a price of $950 and the last record date for an interest payment was 2 months ago, the buyer must pay the seller $20 (2 months' interest at 1% per month on $1,000 principal) in accrued interest in addition to the quoted price. This additional expense will be recovered when the new owner receives six months' interest after holding the bond only four months.

Active investment management

the management of an investment portfolio that involves active trading of securities in an attempt to produce above-average returns on a risk-adjusted basis. Active management is predicated on the belief that it is possible to beat the market averages consistently. - See also Passive Investment Management

Aggressive

relating or referring to an investment philosophy that seeks above-average returns by accepting above-average risks. An example of an aggressive investment posture would be planning one's investments so that the portfolio contains all or nearly all, share or share fund investments. Likewise, seeking high current yields by purchasing bonds issued by financially weak companies is an example of aggressive investing.

Alpha

the mathematical estimate of the return on a security when the return on the market as a whole is zero. Alpha is derived from a in the formula R¡ = a + bRm which measures the return on a security (R¡) for a given return on the market (Rm) where b is beta. - See also Beta; Capital Asset Pricing Model

Annuity

a series of cash flows or cash payments made in return for the payment of a single sum of money. The term is oftern used interchangeably with pension. Retirement annuities may have different conditions such as guaranteed payment for a given number of years even if the recipient dies sooner.

Application Fee

sales charge applied to managed investment funds. Also called an entry fee. See also Load Fund

Appreciation

an increase in value, as of an asset. Often used to distinguish securities that are likely to provide profits because of increases in price as opposed to dividend payments.

Arbitrage

the simultaneous purchase and sale of substantially identical assets in order to profit from a price difference between the two assets. As a hypothetical example, if Telecom trades at $6 on the New Zealand Stock Exchange (NZSE) and at $6.15 on the Australian Stock Exchange (ASX) an investor could guarantee a profit by purchasing the shares on the NZSE and simultaneously selling the same amount of shares on the ASX. Of course, the price difference must be sufficiently great to offset commissions. Arbitrage may be employed by using various security combinations including shares and options, convertibles and so forth.

Arithmetic Mean

An average of the subperiod (periods less the the total peroid) returns. Calculated by adding the subperiod returns and dividing by the number of subperiods. See also Geometric mean.

Asset

something of monetary value that is owned by a firm or an individual. Assets include tangible items such as inventories, equipment, and real estate, as well as intangible items such as company shares, unit trusts, property rights or goodwill. The balance sheet is the financial statement listing assets.

Asset allocation

the assignment of investment funds to broad categories of assets or asset classes. For example, an individual allocates funds to bonds and equities. Likewise, an investment manager may allocate clients' funds to company shares representing various industries.

Asset Class

group of assets that have similar characteristics and behaviour. eg. NZ bonds, Global shares, Call and short term deposits (cash).

Audit

an examination of an organisation's financial documents in order to determine if the records and reports are valid and if the information is fairly presented. An independent audit is normally conducted by an independent Accountant who then issues an opinion as to whether the statements accurately and fairly represent the firm's operations and financial position.

Average down

to purchase shares of the same security at successively lower process in order to reduce the average price at which the share was acquired. If an investor purchases 100 shares of Telecom NZ at $8 per share and the price subsequently falls to $6 per share, the purchase of an additional 100 shares would reduce the investor's average cost to $7 per share. Opponents of this strategy argue that the investor is simply throwing good money after bad money and would be better advised to sell, having realised that a mistake had been made to begin with. - See also Average Up.

Average up

to purchase shares of the same security at successively higher prices. When averaging up, the investor accumulates an increasingly larger position in a security while keeping the average cost of the position however than the security's current market price. Such an investor will earn significant profits only if the share price continues to rise. The investor will suffer substantial losses if the share price quickly drops after he or she has established a large position at increasingly higher prices. - See also Average Down

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