Glossary of Commonly Used Terms
To reveal the definition please click on the appropriate term.
Australian Business Number - A number issued to registered businesses in Australia by the Australian Tax Office (ATO). Each business has its own ABN and must use it on official paperwork and transactions and for tax (GST) purposes.
The total cost of acquiring an asset. This will include stamp duty, legal fees, building report, valuation fees, survey fees and any other due diligence costs directly related to the acquisition. Generally allowed for in a discounted cash flow approach, but not in a traditional capitalised income approach.
Australian equivalents to International Financial Reporting Standards for the preparation and presentation of financial statements.
(1) The process of recovering, over a period of time, the capital investment through scheduled, systematic repayments at regular intervals.
(2) Periodic contributions to a sinking fund to discharge a debt or make a replacement at a future date.
Australian Securities and Investments Commission. ASIC is an Australian government body that regulates banks and other financial services companies. ASIC is responsible for, among other things, consumer protection in superannuation, insurance, banking and credit. ASIC also regulates and enforces laws that promote honesty and fairness in financial products and services, in financial markets and in Australian companies.
The process by which you select how the amount of your investment is spread over each of the asset classes. The main asset classes are shares, property, bonds and cash In a managed investment, this task can be the responsibility of the fund manager.
The amount at which the asset is recorded in the accounting records as at a particular date after deducting accumulated depreciation or amortisation. (See Written Down Value; Carrying Amount).
An option contract that gives the holder the right, but not the obligation, to purchase a specified asset at the given strike price, on or before the contract’s expiration date.
Those items that are significant replacements or additions to existing properties or for new developments, as distinguished from cash outflows for expense items that are normally considered part of the current period’s operations. Capital expenditure does not include general maintenance and repair items.
Capitalization rate defines the percentage number used to determine the current value of a property based on estimated future operating income. In other words, taking the rental income from an apartment complex and multiplying it times the capitalization rate would yield the approximate current value of the complex.
The capitalization rate would be determined based on an appraisal and/or the cap rates of similar properties that have sold recently. By taking another apartment project that sold recently, determining it's rental income, you would divide the income by the sold price to get the cap rate.
Consume Price Index. The CPI is a measure of inflation produced quarterly. It measures the price of a basket of typical household goods and services.
Capital Gains Tax. The tax payable on the disposal of an asset (e.g. shares and investment properties).
For accounting tax purposes, a deduction set against the cost of income producing assets. (e.g. building office partitions, hotel decor, canopies).
Discounted Cash Flow. A method analyzing investment opportunities in which annual cash flows are discounted and accumulated to arrive at their Present Value (PV). Also used as a basis in certain types of property valuations.
Rate at which future cash flows are discount to present value. Referred to as the “Target IRR”.
A concept aimed at reducing investment risks (i.e. 'not putting all your eggs in the one basket'). You can diversify by spreading your money across asset classes, sectors, markets and fund managers.
Distribution of part of a company's profits to shareholders expressed as a number of cents per share. A dividend yield is the dividend expressed as a percentage of the last sale price for the share. Companies typically pay dividends twice yearly –an 'interim' dividend and a 'final' dividend.
Dividends paid by a company out of profits on which the company has already paid Australian tax, and which entitles shareholders to a tax credit.
A tax credit available to shareholders that represents the tax paid by an Australian company on its profits.
Equity can mean shares in a company. For example, owning equity in a company is having an ownership interest in a company. Where you have borrowed money to buy an asset, equity also means the difference between the value of an asset and how much you owe on it. If your property or asset is worth $300,000 and you owe $100,000 on your home loan, you have $200,000 in equity.
Borrowing to invest. “Negative gearing” is when interest payable exceeds assessable income from the geared investment, resulting a deduction against other assessable income.
A system of varying an amount (e.g. a benefit, wages, prices) in line with the movement of an appropriate index.
The capacity of an investment to be readily converted into cash. Shares, for example, are relatively liquid because they can be easily sold on the market.
A company whose shares are listed on the stock exchange and which are available to be bought and sold.
Listed Property Trust. A trust whose shares are listed on the stock exchange and are available to be bought and sold.
Loan to Value Ratio. The ratio of the whole loan principal dollar amount divided by the property’s appraised value amount.
A managed investment scheme (or 'managed fund') is the collective term given to investments that pool your money with the money of other investors to form a fund which is then invested into assets based on set investment objectives. A 'specific sector' fund invests in only one asset class (e.g. global shares) while a 'multi-sector' (or 'diversified') fund invest in a number of asset classes.
Management expense ratio. The MER is the total annual fees and expenses of a fund divided by its average net assets.
In a margin loan the lender is prepared to lend up to a maximum limit (expressed as a ratio of equity versus borrowings). When you exceed this limit, you will be required to make a 'margin call' which means you must either repay part of your loan or increase your loan limit by providing further security.
A means of borrowing money in order to increase your investment into growth assets such as ASX listed securities. The geared asset (e.g. the units) becomes the security for the loan.
The value of securities issued by a company, based on the current market price.
A measurement reflecting the value of a defined group of securities. For example, the S&P/ASX200 Accumulation Index reflects the collective value of Australia’s largest 200 publicly listed companies.
The price you would get if you sold your asset. The market value of a unit would be the last price at which the unit traded on the ASX.
A right given for a consideration to purchase property on or before a fixed date, on terms previously agreed upon. An option entitles, but does not oblige, the person having the option to make the purchase. An option in a lease refers to a further term of tenancy.
Product Disclosure Statement. Usually prepared and issued by the Responsible Entity of the Managed Investment, providing relevant information to assist people in deciding whether or not to purchase a product/investment.
A 'basket' of investments. A managed investment contains a portfolio of investments, which is managed by a portfolio manager.
Property securities, which include shares in listed property companies or units in property trusts, are an alternative to investing in property directly because of greater liquidity and diversification.
A document that describes the investment being offered (hence the general term 'offer document'). Prospectuses must be registered with ASIC. You must complete an application form attached to a current offer document in order to invest in shares, and managed investments.
Recoverable (Outgoings): The expenditures paid in connection with operating a property, which are properly charged to tenants in accordance with the lease.
The return from an investment after taking account of inflation. For example, if your investment pays 5% and inflation is 4%, your real rate of return is 1%.
Registered with ASIC, the responsible entity’s role is to properly administer a fund according to its constitution, investment policy, PDS and relevant legislation.
A form of contract representing ownership in shares, units, fixed interest investments and derivatives.
An analysis of the impact on the investment return assuming graduated variations to each of the major variables, e.g. interest rates, holding period etc.
The permanent attachment of shares and units for trading purposes on the ASX which allows an opportunity to invest in activities that clearly separate: i. Taxable profits derived from business management; and ii. Rents that accrue to a related collective investment. Basic model for a stable security is a bundle of units in a trust and shares in a company that cannot be traded separately.
Tax file number - A nine digit number issued by the Australian Taxation Office to individuals and companies to identify them for taxation purposes. Every Australian resident, and registered company should have a TFN. A TFN is different to an ABN. See also 'ABN'.