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Dictionary of Investment Terms - A
ABANDON
In the futures or options markets, an abandon occurs when an option with no intrinsic value is allowed to lapse on expiry. In other words, the option's value is reduced to zero.
ACCEPTANCE
When one party "accepts" a bill by signing his name after the word "accepted", this indicates an intention to honour the bill when it matures. At this point the bill becomes a promissory note. The word also refers to bankers' acceptances, if the bank "accepts" the bill.
ACCEPTANCE HOUSES
These are institutions which specialise in the "acceptance" or guaranteeing of bills of exchange. Merchant banks in some cases are also acceptance houses.
ACCOMMODATION
This refers to all forms of credit extended by the Reserve Bank to the banking sector, discount houses, central government and sometimes even foreign governments.
ACCOUNTANCY
A method of recording monetary transactions (including the valuation and re-valuation of assets) in a company. Using various different accounting techniques, the user can establish whether a company is profitable or not, the extent of assets and liabilities, how well it uses its capital, whether management are getting a good enough return on this capital, how much money came into the business, how much went out during the year, and so on.
ACCOUNTING PERIOD
A set of financial statements cover a definite accounting period, usually one calendar year or, if interim statements, six months. This period need not be from January to December, and is often from March to February. The financial statements would refer to all the monetary transactions during that period.
ACCOUNTS DUE (OR RECEIVABLE)
This is money owed to the company, also known as debtors and is a current asset. Although the company has not yet received the money, it can represent the amount as a current asset as it is due and receivable.
ACCOUNTS PAYABLE
This is money owed by the company, also known as creditors and is reflected in the balance sheet as a current liability. Although the company may not have paid the money out yet, it must make provision for the payment since it will have to pay the amount in the near future.
ACCOUNTS RECEIVABLE
See accounts due.
ACCOUNTS RECEIVABLE COLLECTION PERIOD
This measures the average time it takes to collect accounts receivable (or debtors). This is an important ratio - if it takes a long time to collect debtors the company could find itself in cash flow problems. It is arrived at by first calculating the average daily turnover figure (if annual turnover is R500 000, divide this by the number of days in the year, 365, to give a daily turnover figure of R1 370 to arrive at a collection period of 21.9 days. This means it takes almost 22 days, on average, to collect accounts receivable. This figure should be compared from one year to the next to make sure the collection period is not getting longer.
ACCRUED EXPENSES
These are expenses which have been incurred but not yet paid. This appears under current liabilities in the balance sheet. For example, if an insurance premium is paid once every six months in arrears and the accounting period ends on the third month, this expense must be reflected at the end of the third month as if it had already been paid, when in fact it will only be paid at the end of the sixth month.
ACCRUED INTEREST (GILTS)
When buying or selling a gilt or other fixed interest security, the interest accrues every six months in arrears - if the gilt is sold five months after the last interest payout, the buyer must pay for the five months of accrued interest. This interest which would have been paid to the seller had he held onto the gilt for another month, so he must be compensated for this "loss". The sales price of the gilt takes into consideration the accrued interest built up during the period of ownership of the seller.
ACCRUED REVENUE
This is money which has been earned but not yet received. It appears under current assets in the balance sheet. So if a company sells a product on credit, this is income earned but not received - or accrued revenue. See also debtors.
ACCUMULATION
When the volumes traded in a share start to pick up while the share price moves sideways or upwards, this is known as an accumulation phase. It indicates that the share is moving into stronger hands - after a period of accumulation, the supply of shares will be exceeded by the demand and this may send the share price shooting rapidly upwards.
ACID TEST RATIO
A ratio for determining the ability of a company to pay short-term obligations out of incoming revenue. Current assets less stock (from the balance sheet) expressed as a ratio of current liabilities. Stock is excluded from this ratio because it is assumed to be the least liquid of the current assets - stock can not be converted into cash as quickly as say, debtors, so it is fair to exclude this from the acid test ratio when determining the solvency of the company. There is also a current ratio which is then compared with current liabilities to arrive at a ratio, which is a measure of solvency. Also called the quick ratio.
ACQUISITION
Where one company acquires a majority or substantial shareholding in another.
ACTIVE SHARES
Shares where substantial volumes have been traded on any one day are said to be active. Where there are large volumes traded in a share with little or no movement in price, the share is said to be over-active.
ACTIVITY RATIOS
These are ratios which guide management in the most efficient use of the company's current assets. They include the inventory turnover ratio and the accounts receivable collection period ratio.
ACTUARIES INDICES
These are a series of indices or indicators which monitor the general trend of share market prices in the different market sectors of the JSE. There are a large number of such indices on the stock market, covering the gold, industrial and other sectors. The formulae for calculating the indices, which have been developed by the Actuarial Society of South Africa, give the important shares in a sector a certain weighting in proportion to their market capitalisations. These indices are not the same as simple indices such as the Dow Jones which takes the daily price of 30 leading stocks on the New York Stock Exchange, adds them up and divides by 30 to arrive at a new index value. (There is no system of weighting with this index.)
ADR
American Depository Receipt, which is a mechanism by which foreign shares are traded in the USA. Shares are registered into a nominee name that in turn issues transferable ADRs in respect of its underlying holding.
ADVANCES
Banking terminology for loans. A bank lending at an interest rate of 15% may have to pay 13% to raise that money, so it makes a margin of 2%.
ADVANCE/DECLINE LINE
This is a graph which is calculated by subtracting the number of shares that went up in price on any one day by the number of shares which went down in price. It is used to show the overall trend in the market and is a good barometer of market sentiment. See also net advance/decline.
AFTER-TAX PROFIT
The amount of profit left after tax has been deducted.
AFTERNOON FIX
The gold price is fixed in London each afternoon by a number of bullion houses, on consensus, after open market testing of gold price levels.
AGM
See Annual General Meeting
ALCO
Abbreviation for asset-liability committee. These are in-house committees appointed by banks to manage interest rate risk. The ALCO ensures that the bank's cash and reserve requirements are adequate and that the maturities and various classes of assets and liabilities are adjusted to maintain profitability while interest rates fluctuate and economic conditions change.
ALL GOLD INDEX
An index which reflects the general trend in gold share prices. It is calculated by giving a certain weighting to gold shares in proportion to their market capitalisations, and monitoring the price movements in those shares. Only certain gold shares are used in the calculation of this index.
ALL-IN ONE PRICE
In the gilts market, the cost and the accrued interest of a gilt expressed as a percentage of the nominal value.
ALLOCATION
When a company issues a prospectus with a view to listing the shares on the stock exchange, investors apply for shares. Whether they are "allocated" all the shares they apply for depends on how many times the issue was over-subscribed, or the allocation policy of the company.
ALLOWANCE FOR BAD DEBTS
Companies with a large debtors book (i.e. amounts owing) frequently make an allowance for bad debts - debts which are owed but are unlikely to ever be collected. Banks usually make a generous allowance for bad debts, since a certain proportion of their loans, based on historical experience, will never be recovered.
AMERICAN DEPOSITORY RECEIPT
See ADR
AMERICAN OPTION
This is an option which can be exercised at any time up to the strike date. See also European option.
AMORTISATION
See depreciation.
ANNUAL GENERAL MEETING (AGM)
This is a meeting of shareholders and directors of a company, required by law at least once a year. Directors must present the financial statements to shareholders who in turn may vote on various issues (such as a change of management) in accordance with the number of shares they hold. Where large numbers of small investors own companies it can be difficult to co-ordinate voting to remove management or change company policy.
ANNUAL REPORT
In terms of the Companies Act a company must produce a set of annual financial statements, known as an Annual Report, comprising the company balance sheet, income statement, cash flow statement, directors' report and the auditors' report, spelling out the accounting policies used in its compilation as well as the auditors' verification that the financial statements fairly present the position of the company.
ANNUALISED PROFIT
There a company has a trading period shorter or longer than a year for whatever reason - usually when the financial year-end is changed - the profit figure, together with all other relevant financial information, must be annualised. So a company which posts a R2,5 million profit over a 9 month period, would have achieved an annualised profit of R3,3 million. This figure of R3,3 million is arrived at by extrapolating the profit of R2,5 million over the remaining 3 months of the year. The calculation is: R2,5 million divided by 9 (months), multiplied by 12 months. If this profit of R2,5 million were achieved over a 16 month period, we would have to divide R2,5 million by 16 and multiply the result by 12 (giving us an annualised profit of R1,875 million). Annualising profit figures allows us to compare one full year's results with the next.
ANNUITY
Where payments from an investment are made in equal instalments at pre-determined periods during the year.
APPROPRIATION
This is where net income is allocated or appropriated for various specific purposes, such as a transfer to non-distributable reserves or for dividends.
ARBITRAGE
Where shares or other forms of tradeable paper are traded concurrently in different markets and certain discrepancies between different markets appear arbitrage dealers will step in to exploit the situation. For example, if copper traded at 60 US cents a pound in London and 68 cents in New York, an arbitrage dealer could both sell copper in New York on the basis that it is too highly priced relative to elsewhere, and buy copper in London, on the basis that it is underpriced (using different currencies), and so the gap between the two copper prices would narrow. In this way, the world markets very quickly fall into line with each other.
ARTICLES OF ASSOCIATION
This is a document which is required in terms of the Companies Act before a company can commence operating. It details the directors, their responsibilities, shareholdings and other matters of an internal nature.
ASSESSED LOSS
Is the calculation of a loss for tax purposes, after giving due consideration to tax allowances. A loss made in one year can be written off in another year when a profit is made. For example, if Company A makes a loss of R50 000 in year 1 and a profit of R100 000 in year 2, it can write off the tax loss of year 1 against the profit of year 2, (R100 000 - R50 000 - R50 000). Companies with large assessed losses are sometimes targets for a takeover by companies making large profits and paying high taxes - this allows them to write-off the assessed tax loss against their own profits.
ASSETS
These are possessions such as buildings, machinery, furniture (tangible assets) or even trademarks and goodwill (intangible assets) which an auditor must value and reflect in the financial statements. Assets are paid for out of the capital or liabilities of the company and therefore belong to the shareholders.
ASSET BASE
This is the capital raised by the issue of shares, plus all the accumulated profits of the company which were not distributed as dividends.
ASSET STRIPPING
Where the asset value of a company is more than the market price of its shares, an asset stripper may be tempted to purchase all the shares and sell off the assets, making a profit on the difference between the cost of the shares and the sale price of the assets.
ASSET STRUCTURE
A company's assets can be classified into various types of assets for purposes of analysis. For example, the ratio of fixed assets to total assets indicates how capital-intensive the company is, stock to total assets indicates what proportion of working capital is tied up in stock, debtors to total assets indicates whether a company needs to tighten its credit management, and so on. These ratios are important from a bank's point of view when assessing whether or not to extend credit to a company. The bank will also want to know what the cash reserves of the company are in relation to total assets, and any intangible asset (such as brand names) is generally excluded from the asset side of the balance sheet in order to assess the liquidation value of the company.
ASSET TURNOVER
This is a ratio used in management accounting which indicates the efficiency of the assets used in an operation in generating revenue. It is generally calculated as total assets divided by turnover. A higher ratio indicates more efficient use of company assets. It can be used to compare one year's performance with the next, or, one company with another. The ratios vary from one industry to another. A low ratio indicates poor utilisation of assets and it this persists, management may decide to sell the assets.
ASSOCIATED COMPANY
This is where one company has a substantial holding (usually more than 20% but less than 50%) in another - if the holding company held more than 50% of the shares, the "owned" company would be a subsidiary.
AT BEST
An order given to a broker to purchase or sell shares at the best available price.
AT PAR
A price equivalent to the nominal value of a gilt or other form of security. For example, a gilt which was originally issued at R1 million and is sold at this price two years later for the same price, is said to have been sold "at par".
AT THE MONEY
In the options market, an option will start to reap a profit when the strike price of the option is approximately equal to the current market price of the underlying contract. At this point it is said to be "at the money". See also away from the money.
ATTRIBUTABLE PROFIT
This is the profit available for distribution to shareholders. It is the profit of the company after tax; extraordinary items and preference dividends have been deducted. In a group with numerous subsidiaries, attributable profit would include the above deductions, but outside shareholders' interests would also have to be deducted.
AUDIT
This term generally refers to the process of scrutinising and verifying a company's financial records by an independent and certified "auditor" (accountant). The audit is carried out in accordance with accepted auditing principles. Financial transactions are examined for possible contraventions of the law and the auditor then gives his or her opinion of the state of the company financial record-keeping.
AUDITORS' REPORT
This is simply a report by the auditors, included in the annual report, indicating that figures represented in the report fairly present the financial position of the company over the reporting period. The auditors' report may also be accompanied by a statement qualifying the auditors' assessment of the financial position of the company, where certain information is difficult to quantify or estimate.
AUTHORISED CAPITAL
Authorised capital is the amount of capital the company is legally allowed to raise by the sale of shares to the public - once the shares are exchanged for cash they become issued shares. A company generally does not issue all of its authorised capital at one time. The balance between authorised and issued capital is a reserve of unissued shares.
AVAILABLE ORE RESERVE
Ore which can be mined, as opposed to ore which is not available for mining, for reasons of safety - for example, where the ore forms part of the roof or a supporting pillar underground.
AVERAGE PERSONAL TAX RATE
Income tax is applied on a sliding scale, the percentage rate of tax increasing with income. For example, a person earning R150 000 a year in South Africa may be taxed at the rate of 18% on R140 000 of that income and at the rate of 25% on the excess over R140 001 (i.e. R9000).
So the tax would be calculated as follows:
R140 000 @ 18% = R25 200
R9 000 @ 25% = R 2 250
Total tax payable = R27 450
Average tax rate = 18.03%
Marginal tax rate is 18%
The average tax rate is different to the marginal tax rate. The marginal tax rate in the above example is 18%, since this is the rate applied to all additional income, although the average tax rate was 18.03%.
AWAY-FROM-THE-MARKET (or MONEY) - See out-of-the-money.
