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Trading Jargon
A
Account Balance
The account balance is calculated by adding the market value of your holdings to your cash balance.
Annual Financial Statements (Annual Report/Glossies)
This report is issued by all companies on an annual basis to reflect the performance of the company for the past year. The main components of the report include an Income Statement, Balance Sheet, Cash Flow Statement, Statement of Changes in Equity, Director's Report and an Auditors' Report.
Active share/(s)
A share which trades in high volumes is said to be active.
Asset
Any item owned by an individual or a corporation with an economic value that can be converted into cash e.g. house, car, equipment, investments (such as shares and bonds) etc.
Asset class
A set of investments that have similar risk and return characteristics. For example, the cash category represents a group of investments that have the same characteristics, are subject to the same laws and regulations have similar levels of risk and respond similarly to market conditions. The same thing is true for the other classes, such as property, bonds and shares.
Asset allocation
The process of deciding what percentages of a portfolio will be held in different asset classes e.g. cash, bond, shares, and property.
At best
An order to buy or sell shares at the best market price at a certain time, determined at the discretion of the broker executing the order.
At market
An order to buy or sell shares, to be executed immediately at the market price, against the best available opposite order.
Auditor/s
A qualified person (usually a chartered accountant) or an independent firm of chartered accountants authorised to approve and sign company accounts. In South Africa, the financial statements of private and public companies have to be verified by an independent firm of accountants every year.
Available to buy shares
The portion of your cash balance that you can use to buy more shares.
Available Balance
The portion of your cash balance that is available for you to transfer or can be used to buy Krugerrands.
B
Balanced Portfolio
An investment which is spread across various sectors or asset classes of the market to limit the exposure to one sector/asset class of the market, thus protecting against loss.
Balance Sheet
The balance sheet is a snapshot of the company's financial history at a specific date. The amounts reported in the balance sheet are balances of the accounts at that precise moment in time.
Bear
Someone who believes the market will decline.
Bear Market
A market where share prices are decreasing by 15% or more.
Beta
In terms of investing, it is a measure of an asset's volatility, in relation to the market.
Bid price
The highest price a person is willing to pay to buy a share at that point in time.
Blue chip companies
Shares of companies known for having a record of sound and solid performance. They are usually the more expensive shares and have the greatest market capitalisation.
Bottom line
Accounting term for the net profit or loss.
Bond
A loan made by the investor (bondholder) to a company or to the country's government (bond issuer). The bond issuer promises to pay regular interest to the bondholder and repay the original investment on a set date in the future.
Broker (see also Stockbroker)
In the context of the share market, a person who handles orders to buy or sell shares.
Broker's note
A statement from your broker confirming a sale or purchase of shares.
Bull
Someone who believes the market will rise.
Bull Market
A period where the share prices are increasing.
C
Cash Flow Statement
Some of the entries in the income statement and balance sheet do not involve actual cash inflow and outflow of funds; for example depreciation. Although depreciation reduces the profit of the company, no money is actually spent. The purpose of the cash flow is to disclose information about the events that affected cash flow during the period, just as the name suggests
Capital growth (gain) or appreciation
This is the profit you make when you sell something (an asset) for more than the price you paid for it. You do not have access to this profit until the asset is sold.
Capital Gains Tax (CGT)
Tax levied on individuals when they dispose of capital assets.
Closing share price
This is the last price in cents, at which the share was traded the previous day (the JSE closes at 17h00).
Collective Investment Schemes (Previously referred to as Unit Trusts or Mutual Funds)
Collective Investments are investments where money from a number of investors is pooled together and invested collectively. Collective Investments may invest in a range of different asset classes, for example equities, bonds, property and cash or in a combination of these. Each investor purchases a participatory interest in a fund (i.e. owns a unit or a number of units in the fund) and by doing so participates proportionately in the income or profits of that portfolio. A team of investment managers is appointed and they make the investment decisions on behalf of the investors.
Consumer Price Index (CPI)
This measures how the price level of consumer goods and services used by a household increases between two periods of time.
Consumer Price Index excluding Mortgage (CPIX)
This is equal to CPI but excludes interest rates on mortgage bonds.
Compounding
A process of earning interest not only on your original investment but also on the gains accumulated in previous periods or years.
Compounding Interest
Interest calculated on the amount outstanding at the beginning of a certain period including interest earned in the previous period
Corporate actions
Any action by a company or by another party in relation to a company, affecting a shareholder's investments or benefits relating to those investments. This includes, but is not restricted to take-overs, capital restructuring and related activities, rights issues, stock conversions, script dividends and redemptions.
D
Director's dealings
The buying and selling of shares in a company by a director (person elected by shareholders to serve on the Board of Directors) of that company.
Dividend
A portion of a company's profits paid to shareholders.
Dividend Yield
A company's annual dividend expressed as a percentage of its current share price. Refer to Investor ratios for a detailed description.
Dividend Cover
The number of times the dividend is covered by its earnings. Refer to Investor ratios for a detailed description.
Derivative(s)
A financial instrument that derives its value from an underlying instrument, for example shares, interest rates, commodity prices, currencies.
Diversification
This principle means spreading out your investments between different asset classes and over sectors within the asset classes.
E
Earnings
Income after a company's taxes and all other expenses has been paid. Also called profit for the year.
Earnings Per Share (EPS)
A portion of a company's earnings allocated to each issued share, calculated by dividing earnings by numbers of issued shares. Refer to Investor ratios for a detailed description.
Earnings per share (EPS) ratio
The EPS ratio can be defined as the company's profits (earnings) allocated to each share in issue, and is calculated by dividing profit attributable to ordinary shareholders (earnings) by total number of shares in issue.
The higher the company's EPS, the better. This ratio allows you to see at a glimpse if the company is doing better than in the past year/s.
A high and growing EPS is an indication that the company is growing and doing well for its shareholders; a low and decreasing EPS is a sign that the company might be struggling.
Earnings Yield
A company's earnings per share expressed as a percentage of its share price.
Exchange
This refers to a platform where investors can issue, buy or sell financial instruments. The JSE Limited is one such example.
Exchange Traded Funds (ETF) also known as Tracker Funds
A fund which is made up of a portfolio of shares that reflects the composition of an index. The fund is listed in an exchange and trades like a normal share.
F
Financial Services Board (FSB)
The Financial Services Board is the regulating body of financial services and products in South Africa.
Financials
Another term for company reports.
Financial Year-End
The date on which a company draws up its reports for audit purposes every year.
Fundamental analysis
Fundamental analysis is the analysis of a company as a whole including its financial statements, management, competitors, markets in which it operates competitive advantages etc.
G
Gearing
Gearing refers to the amount of debt that you have in relation to your assets. If you are highly geared you have a lot of debt compared to the number of assets that you hold. Gearing also applies to companies, and the same rule is used.
Gross monthly earnings
This is your earnings before deductions and tax each month.
Gross profit
The profit before fixed operating expenses (cost of material or merchandise, labour, and overhead) have been deducted.
H
Headline earnings per share (HEPS)
Earnings per share, excluding the exceptional items effects.
I
Income (investment income)
Occurs when your investment generates cash income that you can access. This includes:
Dividend income - the profit share paid to shareholders of the company,
Interest income - the interest earned on the money deposited with an institution,
Rental income - income received in respect of a property that is rented out etc.
In over-simplified terms, investment income is a collective term used to describe interest, dividends, rental income, royalty or any other forms of income earned on an investment.
Income Statement
An Income Statement is a summary of a company's income and expenses for a specific period and reports the company's final profit or loss for that period - usually 6 months or a year (its heading will specify this). The comparable period for the previous year will also be reflected, so you should be able to see at a glance whether profits are increasing or decreasing.
Income Tax
Tax levied on individuals by the South African Revenue services on income of a revenue nature.
Index
An index is calculated from the weighted or unweighted average prices of a certain group of shares. It is useful because it describes how the share prices within the index have changed over time and it can be used as a tool to determine the directional movement of a sector or to compare the performance of a particular share against the index.
Inflation
The general increase in prices and the fall in the value of money. In South Africa inflation is measured monthly by Statistics South Africa. There are two measures of inflation, the Consumer Price Index (CPI) and the Consumer Price Index excluding interest rates on mortgage bonds (CPIX).
Insider trading
Insider trading occurs when a person has information that is not in the public domain and could materially affect the price of a share; and he or she buys or sells the share as a result of this information.
Interest exemption (from tax)
This is the tax free portion of interest earned on a local investment. For the 2008 tax year this is R18 000 if you are under 65 years of age and R26 000 if you are 65 years or older.
Interest Cover
A measure of a how well a company is able to generate earnings to pay interest on its borrowings.
Interest cover = Operating income (earnings) before interest and tax (e.g. R500m)
Interest expense (e.g.R50m) = 10 times
The higher the ratio, the smaller the risk to default. Interest payment defaults have serious implications for a company.
Interim Reports
A summary of a company's 6-months results which is usually not inspected by auditors.
International Financial Reporting Standards (IFRS)
Statements issued by the International Accounting Standards Board that most South African companies are obliged to comply with when drawing their financial statements. Auditors are required to report if auditees (clients being audited) have complied with the IFRS statements in their annual financial statements.
Investing
Putting money into different asset classes for the medium to long term with the purpose of generating wealth.
J
JSE Securities Exchange (JSE Limited)
This is the South African stock or share exchange. This is where investors can buy or sell shares in listed companies (secondary market). It as also where companies can raise capital for their business by listing (primary market).
L
Liability
An obligation by a company or individual to settle a debt. E.g. a home loan, credit card payments, store accounts for individuals, accounts payable, bank loans for companies etc.
Liquid (shares or investments)
Shares or investments that can easily and quickly be converted into cash. The more liquid a share the more easily it can be converted into cash.
Listed Shares
Shares that are traded on an exchange between willing buyers and sellers.
M
Market price (of a share)
This is the price at which a knowledgeable and willing buyer or seller could buy or sell a listed share on the exchange. The closing market price is the last price at which the share traded on the day and is the price that you will find quoted in the newspaper.
Market capitalisation (market cap)
Reflects the value of the company and is calculated by taking the number of shares in issue (i.e. the company's shares that are in the hands of the public) and multiplying them by the market price. Categories of market capitalisation include large, mid and small caps.
Refer to Investor ratios for a detailed discussion.
Market Sector (Industry)
The JSE classifies listed companies into sectors, taking into account the company's core business activities and groups companies together in such a way that general industrial and economic themes may be common to all companies in the sector. The broad economic sector (industry) categories are:
1. Basic Material
2. Oil and Gas
3. Industrials
4. Consumer Goods
5. Consumer Services
6. Telecommunications
7. Financials
8. Exchange Traded Funds
Market correction
A market correction occurs when the prices of shares which have been increasing (bull market) drop over the short term. It usually provides a good buying opportunity for potential investors. It is different from a bear market because it is much smaller and has a shorter time period.
Market crash
A market crash is a sudden and dramatic decline in share prices across the majority of the stock market. There is usually selling triggered by panic. A crash does not always result in a bull market.
N
Net Worth
The amount by which assets exceed liabilities.
Net Assets
The amount by which the total assets of a company exceed liabilities.
Net Asset Value (NAV)
For companies, it is the value of assets minus liabilities. For collective investments (mutual funds), it is the value of all investments held in the fund's portfolio minus the liabilities. The NAV is usually calculated on a daily basis, at the close of the market.
Net Asset Value per share
This is calculated as follows:
| Net Asset Value (NAV) per share = | Assets Liabilities (Source: Balance Sheet) Number of ordinary shares |
This calculation gives a possible value of a share in the company, if the company was to be sold.
This value is usually lower than the market price for the share and is just an estimate, as in reality, the money raised from selling the company is usually not the same as the net assets of the company.
In cases when the NAV is above the market price of the share, it may be a good indicator that the company is undervalued and the company may be a target for a take over
Note:If the market value is very different from the net asset value, you will pay more for the company's real value.
Example:
A company has R50m assets and R10m liabilities. It has 4 million shares in issue. What is the equity (net asset value) per share?
Answer:
| Equity (NAV) | = Assetsliabilities |
| = R50m R10m | |
| = R40m |
No of shares = 4m
| Therefore Equity per share | = R40m
4m |
| R10m | |
| A point to remember is that this value will not necessarily equal the market value per share. |
O
Offer price
Price at which you would sell a share.
Option
An option is a contract which gives the holder the right, but not the obligation to buy or sell a specific quantity of an asset at an agreed upon price, at or before a date in the future. A call option gives the holder the right to buy an asset in the future. A put option gives the holder the option to sell at a date in the future.
Ordinary shares
An investment that represents part ownership of a company. The holders of such shares are entitled to distributed profits after preference dividends have been paid.
P
Penny shares (stocks)
These are the cheapest shares on the market (less than 10c) and have the lowest market cap.
Portfolio
Refers to the range of investments held by a person or organisation.
Primary market
The place where shares are issued for the first time so that companies can raise equity finance.
Price Earnings ratio (PE)
The Price Earnings ratio is calculated by taking the company's share price and dividing it by its earnings-per-share figure. Refer to Investor ratios for a detailed description.
This ratio is calculated by dividing the Current Market Price of a share by Earnings per share using Headline Earnings per Share (HEPS).
Generally, the lower a company's PE, the better.
A PE ratio of 15 for example, means that it will take 15 years for the company to recover the money originally spent to buy the share. In reality this is not usually the case, as companies can earn the same profits in a much shorter time.
You can compare PE ratios of different companies to see how they rate against one another. You should compare companies in the same industry, as different industries may have different PE ratios. You can also compare a company's PE ratio with its industry/sector.
The PE ratio should be looked at in conjunction with other positive factors, such as strong industry, growth prospects, etc. If the other factors are positive and a company has a low PE, you can take it as a good sign. If the industry is weak and/or the company has no growth prospects etc., the high PE might serve as a warning.
Sector (Price Earnings) PE
This is the industry PE. You may use this ratio as a benchmark.
Prospectus
A printed booklet containing information about the company that is distributed to the public when a company is planning to list.
Purchase Cost
Purchase cost is calculated using the actual price paid per unit as well as the charges incurred when buying
R
Real returns
Real return on amount invested is calculated by subtracting the inflation rate and tax you'll pay on interest earned.
Rand cost averaging
Investing the same rand amount each month or quarter in the same company so that you obtain an average price for your investment over the period you invest.
Repurchase Rate (Repo rate)
The interest rate that is fixed by the South African Reserve Bank (SARB) in terms of its monetary policy. It is the rate levied by the SARB when lending to other local banks.
Return (see also Yield)
The amount of money that an investor earns on the money invested. Also known as yield.
Return on equity (ROE)
A measure of how much the company earns on the investment of its shareholders. It's a snapshot of how efficiently the management of the company is using the capital at its disposal, to grow the business. It is calculated as follows:
| Return on equity | = | Earnings for the period (less preference dividends) |
| Shareholders' equity (less preference dividends) |
Generally, the higher the percentage, the better.
This ratio may be compared with industry averages and other investment alternatives.
Return on assets (ROA)
This ratio measures the return generated by the company's assets. It is calculated as follows
| Return on assets | = | Revenue (Turnover) |
| Total assets |
Generally, a high return means that the assets are well managed and productive.
RMB MidCap ETFs
The aim of the RMB MidCap ETF is to provide returns linked to the performance of the FTSE/JSE MID CAP Index. The ETF tracks the component equities of the Index in proportion to the Index weightings. The FTSE/JSE Mid Cap index contains the largest 60 companies listed on the JSE that are not included in the FTSE/JSE Top40 Index in terms of market capitalisation. The ETF thus holds the 41st to the 100th largest companies on the JSE in terms of market capitalisation. The RMB MidCap ETF pays a quarterly distribution to investors, which is made up of any dividends or interest earned from the underlying shares.
RMB Top40 ETF
The RMB Top40 ETF aims to provide returns linked to the performance of the FTSE/JSE Top 40 Index. The ETF tracks the component equities of this index in proportion to the Index weightings. The FTSE/JSE Top40 index contains the 40 largest shares in terms of market capitalisation listed on the JSE. The RMB Top40 ETF pays a quarterly distribution, which is made up of any dividends or interest earned from the underlying shares.
S
Secondary market
Companies 'list' by issuing shares in the primary market. After listing all shares trade on the secondary market.
Settlement date
This is the date on which a shareholder has to pay for the shares that he or she has purchased. Currently it is T+5, which means that payment for the share has to be made 5 business days after the date of purchase.
Real return on amount invested is calculated by subtracting the inflation rate and tax you'll pay on interest earned.
Share(s)
An investment that represents part ownership of a company.
Shareholder
An investor holding one or more shares in a company.
Small Caps
See market capitalisation.
South African Futures Exchange (SAFEX)
SAFEX is the platform where equity derivatives, agricultural futures and exchange rates are traded in South Africa.
Speculating
Taking a higher than average risk by buying or selling shares in the market, purely for the purpose of generating a higher than average profit potential in the short term.
Stock Exchange (Stock or Share Market)
Market place for trading securities (e.g. shares, bonds, derivatives etc.)
Stock Exchange News Service (SENS)
All information which a listed company wishes, or is required to make public, is distributed through SENS by the JSE.
Stop loss
A stop loss is a pre-determined level at which you plan to sell some or your entire share holding in a particular company, in order to limit your losses.
T
Taxable income
Gross income minus allowable exemptions and deductions. It is the net value of income on which you are assessed for personal income tax.
Technical analysis
Analysis of a company using charts to study past share prices, volumes and indices to predict future share price trends and to assist with the timing of purchase and sale decisions.
Trading
Buying and selling for the purpose of making a profit in the short term.
Take Over
Where one company takes over the majority of shares in another.
Exchange Traded Funds (also known as tracker funds)
investor deposits money (buys shares/units in the tracker fund) for a fixed term and the interest that is earned on this deposit is linked to the performance of a stock market index. The fund buys shares in all (or as closely as possible) the companies listed in that particular index.
U
Unit Trusts
See Collective Investment Schemes.
Unlisted shares
Shares that are bought and sold privately and do not trade on an exchange.
Y
Yield
The amount of money an investor earns on the money invested, also known as a return.