Glossary of Financial Terms
Glossary of key financial terms
A
Account-based pension
Previously known as an Allocated Pension. An Account-based pension is a pension purchased with superannuation money upon retirement. You can choose the amount of pension you receive each year within minimum and maximum levels set by law. Your super money (now pension money) is progressively drawn down until it runs out or until the pensioner passes. For most people aged 60 and over, these pension payments have been tax-free since July 2007.
Accumulation fund
A superannuation fund where you accumulate your superannuation retirement savings. Your final retirement benefit will depend on the money put in by you and your employers and the investment return generated by the fund.
Active investment management
Where the fund manager or individuals responsible for specific investments takes an pro-active approach and buys and sells assets and investments on a regular basis. This is done to try to get a better return (or to mitigate possible losses) for their investors than might normally occur with a “buy and hold” approach to investing.
After-tax super contribution
Money deposited into a super fund after you have paid any tax on it (such as your take home salary). Different from pre-tax contributions (salary sacrificing), which are contributions made before income tax or where a tax deduction is claimed.
AFSL
See Australian Financial Services Licence.
Age Pension
A regular, fortnightly payment you receive from the government when you reach pension age. You must meet certain criteria to get the pension. This is a safety net for those with insufficient savings or assets in retirement.
Aggressive investment mix
A mix of investments which aims for high long-term returns by taking on greater short-term risk and volatility. Consists mostly of assets such as shares, managed funds and property. In attempting to achieve higher returns the investor will be taking on higher investment risks. Sometimes referred to as an Assertive investment mix.
Agribusiness scheme
An investment in livestock, farming, horticultural or forestry projects, usually through a managed investments scheme.
Allocated pension
A pension purchased with superannuation money on retirement. See account-based pensions.
Annual percentage rate (APR)
The interest rate charged to the borrower, excluding expenses such as account opening and account keeping fees. The APR is the basic cost of your credit as a percentage of the total loan amount. A rate that includes all fees is known as a comparison rate.
Annuity
An investment, purchased with a lump sum that guarantees to pay a set income plus an interest amount for either an agreed number of years, or for life. Generally, your money is locked away for a fixed period or for life, though some annuities allow early withdrawals or for a ‘residual capital value’. You receive the return of your capital (plus an interest amount) over time through regular payments. There is no capital left at the end of the specified period. The income payments may be indexed each year, often in line with inflation. Some annuities allow for reversionary beneficiaries.
Assets
Are things you own that have a value. It may be a financial item like money, bonds, shares or a bank account or physical items such as real estate, jewellery or a car.
Asset allocation
The proportions in which your investments are divided across different asset classes like shares, property, fixed interest or cash.
At call
Money that can be withdrawn from an account whenever required.
Australian Financial Services Licence (AFSL)
A licence given by ASIC that allows people or companies to legally carry on a financial services business, including selling, advising or dealing in financial products. A licence does not mean that ASIC endorses the company, financial product or advice or that you cannot incur a loss from the investment. ASIC grants a licence if a business shows it can meet basic standards such as training, compliance, insurance and dispute resolution. The business is responsible for maintaining these standards.
Australian Prudential Regulation Authority (APRA)
The prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance companies, friendly societies, and most of the superannuation industry. APRA is responsible for ensuring Australia has a stable, effiicient and competitive financial system.
Australian Securities and Investments Commission (ASIC)
The Australian Federal Government agency that enforces laws relating to companies, securities, financial services and credit, in order to protect consumers, investors and creditors.
Australian Securities Exchange (ASX)
Australia’s biggest exchange, where shares in public companies, futures, options, warrants, bonds and other securities and derivatives are traded.
Audit
a physical check performed by an auditor or tax official on a business’, trust or SMSF’s financial records to check that everything is accounted for correctly.
B
Balanced fund
A fund that invests across a mix of asset classes like cash, fixed interest investments, property and shares, to achieve medium- to long-term capital growth and a reasonable level of income.
Bankruptcy
A process for individuals to be legally declared as being unable to meet their debt obligations.
Beneficiary
Someone who will receive a benefit or asset in the event of the owner’s death. Beneficiaries of a super fund are the members, and their dependants (if the member dies).
Binding death benefit nomination
Where the superannuation fund, in the event of your death, must pay your superannuation benefit to your nominated beneficiary, unless it would be unlawful to do so.
Bond
A medium- to long-term investment issued by governments and companies which pays a regular and fixed interest amount for the term of the investment. The invested funds (the principal) are repaid at the end of the term (maturity). See also fixed interest investments.
Broker
A person who arranges a contract between you and, for example, an insurance or mortgage service provider. Brokers usually receive a commission or fee for arranging a contract.
Brokerage
A fee charged by a broker for service.
Budget
A listing of planned revenue and expenditure for a given period
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C
Capital
Wealth in the form of money or property owned by a individual or business.
Capital cost
A one-off substantial purchase of physical items such as equipment, building or land
Capital gain
Is the amount gained when an asset is sold above its original purchase price. It is the difference between what you paid for an asset (including buying costs) and what you got when you sold it (less selling costs).
Capital gains tax
A tax on profits made from buying or selling certain assets.
Capital growth
The increase in value of an asset over time. Also known as capital gain.
Capital stable fund
A fund that invests across a range of asset classes but with a significant portion in defensive assets such as fixed interest investments and cash and a small portion in growth assets such as shares and property. This type of fund aims to provide a moderate level of income with some possibility for capital growth.
Cash
Includes all money that is available on demand including bank notes and coins, petty cash, certain cheques, and money in savings or debit accounts
Cash investments
Money invested in short-term, interest-paying investments. Having money in a bank account is an example of a cash investment.
Cash rate
The interest rate charged on overnight loans between banks. It is used by the Reserve Bank of Australia to set monetary policy (i.e. when it raises or lowers interest rates each month to help control the economy).
CDO
See collateralised debt obligations.
CFD
See contracts for difference.
Churning
The process of moving a customer from one financial product to another in order for an adviser or broker to earn a fee. This practice usually has little or no benefit to the customer.
Co-contribution
A payment made by the government to the super fund of a low or middle income earner to reward them for making personal contributions to super. If you earn less than $34,488, the Australian Government will contribute $0.50 for every $1.00 of after-tax super contribution you make, up to a maximum of $500.
The maximum co-contribution will reduce if your income is higher and no co-contribution is payable if you earn more than $49,488 a year.
Collateral
Property or assets you put up as security for a loan.
Collateralised debt obligations (CDO)
A bundle of individual loans such as car loans, credit card debt or corporate debt put together and sold as a single investment. The buyer receives their return in the form of repayments of the outstanding debt plus interest owed.
Commission
A fee paid to an adviser or salesperson as a payment for selling a particular product. An upfront commission is based on the sale amount of the product. An ongoing commission is based on the balance of the account.
Commutation
Process of converting part or all of a pension or annuity into a lump sum.
Comparison rate
A rate that helps you work out the true cost of a loan. It includes the interest rate, and most fees and charges relating to a loan, reduced to a single percentage figure.
Compound interest
Interest paid on the initial principal and the accumulated interest on money borrowed or invested.
Condition of release
A nominated event you must satisfy to be able to access superannuation savings. Examples include permanently retiring from the workforce after reaching preservation age, reaching age 65 or becoming totally and permanently disabled.
Conflict of interest
A situation in which someone in a position of trust has competing professional and personal interests which could make it difficult for them to remain impartial. For example, an adviser or broker may sell you a product that benefits them (through the payment of a commission) more than it does you.
Consumer credit insurance (CCI)
Insurance that covers you if something happens that affects your capacity to meet the payments on your loan. CCI usually covers risks such as illness, death, disability or involuntary unemployment.
Contracts for difference (CFD)
A contract between a seller and a buyer who are effectively betting on the short-term movements in the price of shares or other traded investments. The gain or loss is the difference between the price of the asset when the contract was made and the price in the future when the contract is closed out. If the price increases, the seller pays the buyer. If the share price decreases, the buyer pays the seller. Contracts are usually made with borrowed money (leveraged) which can magnify gains or losses.
Cooling-off period
A period of time in which you can get out of a contract for the purchase of goods or services, if you change your mind. The rules on cooling-off periods vary between states and territories. Details of a cooling-off period will be included in the contract, if the good or service has one.
Credit
A lending term used when a customer purchases a good or service with an agreement to pay at a later date (e.g. an account with a supplier, a store credit card or a bank credit card).
Credit contract
A document that contains the details of a loan, including the term, interest rate, fees and charges, and repayments. Credit providers must provide you with a credit contract.
Credit file
A file kept by a credit reporting agency that shows your credit history. Lenders access the information in your file to help them decide whether to lend to you. They can also record a default on your file if you make loan repayments late, or don’t pay a utility bill. Every time you make an application for finance an entry is recorded on your file showing the lender you applied to, the type of finance, the amount and the date. See also credit report and credit rating.
Credit history
A report detailing an individual’s or business’ past credit arrangements. A credit history is often sought by a lender when assessing a loan application
Credit limit
The maximum amount a bank will lend you under a loan or a credit contract.
Credit rating
An assessment of the credit-worthiness of individuals and corporations, based on their borrowing and repayment history.
Credit report (credit reference)
A report that details your credit history, including every time you have applied for credit or defaulted on a repayment. It is held by a credit reporting agency and a lender must ask you for permission to get this report. See also credit file.
Creditor
A person to whom you owe money.
Currency risk
The risk that the value of your investments will be affected by changes in foreign currency exchange rates.
Current asset
An asset in cash or that can be converted into cash within the next 12 months
Current liability
A liability that is due for payment in the next 12 months
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D
Death benefit
A payment made from a super fund to a beneficiary when you die. For example, from a super fund or insurance policy.
Debenture
A medium- to long-term investment issued by a company. You are lending money to the company. In return you will receive a regular and fixed interest amount for the term of the investment. The invested funds (principal) are repaid at the end of the term (maturity). Your money may or may not be secured by assets of the company.
Debt agreement
A legal agreement for the repayment of unpaid debts that is less formal and intrusive than bankruptcy. The agreement is between you and all of your unsecured creditors and allows you to pay back your debts over an extended period of time at an amount per week you can afford.
Debt consolidation
See loan consolidation.
Debt investment
Comprises cash and fixed interest investments. You lend money to an organisation in return for interest payments. The company you lent to now owes you or is indebted to you.
Debt to equity ratio
Total debt divided by total equity. A company’s equity represents the amount of shareholder’s funds.
Default fee
An amount of money that you may be charged if you fail to make a repayment when it is due on a loan or credit card.
Defensive asset
Cash or fixed interest investments that are generally low risk and less volatile than growth investments.
Deferred establishment fee
A fee charged by a lender when a loan is paid off before a set period has elapsed e.g. 3 years. Also known as an exit fee. It’s to cover the costs the lender incurred in setting up the loan.
Deferred payment
A debt that can be paid off at some time in the future.
Defined benefit fund
A super fund where your retirement benefits are calculated by a predetermined formula. Retirement benefits are usually calculated using your average salary over the last few years before you retire and the number of years you worked in the company or public service. In general, market fluctuations have limited effect on the value of your benefit, although in periods of prolonged economic downturn, your defined benefits could be affected. If the fund performance is poor, the trustee will generally ask an employer to help pay member benefits as required.
Dependant
A person who relies on you for financial support e.g. children under 18 or your non-working spouse.
Deposit bond
Can be used in place of a deposit when a buyer exchanges contracts on a property. It guarantees that the buyer will pay the full deposit by an agreed date.
Depreciation
A decrease in the value of an asset.
Derivative
A financial instrument whose value is ‘derived’ from an underlying asset such as a share, commodity or index. Common types of derivatives include options and futures contracts.
Direct debit
A payment collection method that allows loan or service providers to draw money from your bank account on a regular basis.
Dispute resolution
A way to resolve issues instead of going to court. All Australian Financial Services (AFS) licensees, banks and other credit providers must belong to a dispute resolution scheme.
Diversification
Spreading investments across a wide variety of different asset classes to reduce risk.
Dividend
A payment made by a company to its shareholders. The payment is a share of the profits of the company and is based on the number of shares a person holds. A franked dividend consists of profits the company has already paid tax on.
Dividend yield
A financial ratio that measures how much a company pays out in dividends each year relative to its share price.
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E
Early termination fee
A fee which may be applied if a loan is repaid earlier than the stated term.
Earnings per share (EPS)
A financial ratio calculated by dividing the company’s earnings (profits) by the number of shares on issue. The higher the EPS, the more a share is potentially worth. See also price Equity ratio.
Effective interest rate
An annual interest rate that takes into account the effect of compound interest and fees. Also known as an effective yield or the annual percentage rate (APR).
EFTPOS (Electronic Funds Transfer at Point of Sale)
EFTPOS is an Australian network for processing credit cards, debit cards and charge card payments at the ‘point of sale’. EFTPOS also allows users of the system to withdraw cash at the time of purchasing a product or service through the merchant’s EFTPOS terminal. This function is known as ‘debit card cashback’ in many other countries.
Eligible rollover fund (ERF)
A holding account designed to receive the super benefits of lost members and those with low account balances that are no longer receiving contributions.
Encumbered
An asset, such as a house or motor vehicle, which is owned by one entity but where someone else has a valid claim over it. For example, if your home is mortgaged, you own the asset but your lender has a claim over your home until the debt has been repaid.
Enduring power of attorney
Like an ordinary Power of Attorney (PoA), an enduring power of attorney authorises your nominated representative to make property and financial decisions for you. Unlike an ordinary PoA, an enduring PoA continues to have effect if you become mentally incapacitated at a later date.
EPS
See earnings per share.
Equities
See shares.
Equity
The value of an asset such as your house or property, less any money owing on it.
Equity investment
An investment where you buy and hold shares in a company or property from which you expect to receive income and capital gains.
Equity release
A way of accessing the equity in your home to provide you with additional funds in retirement. See reverse mortgage and home reversion scheme.
ERF
See eligible rollover fund.
Establishment fee
A one-off fee which may apply to set up a personal or other loan.
Estate
All of a person’s assets, whether real property or personal property, and their liabilities or debts.
Ethical investment
An investment strategy that promotes positive environmental, social or ethical issues. Avoids investment in industries and companies that produce goods harmful to health, society or the environment e.g. chemicals, tobacco, armaments. Each fund will have its own interpretation of the values it wants to protect or promote. You will find details in the company’s PDS. Also known as socially responsible, sustainable or socially conscious investing.
Excess
In relation to an insurance contract, it is the amount of an insurance claim that consumers have to pay. The amount is specified in the insurance policy.
Exchange rate
The price at which the currency of one country can be exchanged for the currency of another.
Excluded value
Anything that is not included in a mobile phone plan for a regular monthly payment.
Exclusion
In relation to an insurance contract, it is something that is specifically not covered under the insurance policy. Depending on the type of policy these may include specific events, illnesses or pre-existing conditions.
Executor
A person specified in a will, or appointed, to administer the will.
Execution risk
When a lack of market liquidity causes a gap between the price at which you place a trading order, and the price you receive. This can be a risk when trading certain complex products such as contracts for difference (CFD) and foreign exchange (FX) contracts.
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F
Fee for service
An amount paid to a service provider such as an accountant, adviser or lawyer, for specific work, completed at your request, for your benefit. Different to a commission.
Finance broker
A go-between who negotiates with banks and other credit providers to arrange loans on behalf of others. They must be licensed by ASIC or be an authorised representative of someone who is licensed. See check ASIC lists for how to check for a licence.
Financial adviser
A person or authorised representative of an organisation licensed by ASIC to provide advice on some or all of these areas: investing, superannuation, retirement planning, estate planning, risk management, insurance and taxation.
Financial counsellor
A person who gives free, confidential and independent assistance to people with financial problems. Financial counselling services are usually provided by community or welfare organisations.
Financial plan
A plan, usually created with help from a financial planner or adviser, that defines your financial goals and sets out investment strategies to reach your stated goals, with reference to your personal circumstances.
Financial planner
See financial adviser.
Financial product
A facility that helps you to save, invest, get insurance or borrow money.
Financial service
A service dealing with the management of money. It includes providing advice on financial products, dealing in financial products, making a market for financial products, operating a registered scheme or providing a custodial or depository service.
Financial Services Guide (FSG)
A guide that contains information about the entity providing you with financial advice. It should explain the financial service offered, the fees charged and how the person or company providing the service will deal with complaints.
First Home Owners Grant
A grant provided by state governments to first home buyers, to offset the effect of the GST on buying or building a home. For more information see the Government’s First Home Owner’s Grant website.
First Home Saver Account
A savings account for consumers who are saving to buy or build their first home. The Australian Government makes a contribution each year based on how much you have saved. Interest on your savings is taxed at a low rate. There is a maximum balance the account can hold.
Fixed deposit
See term deposit.
Fixed interest investment
An investment where you lend money to a government or semi-government body, a company or a fund in return for a fixed rate of interest. The investment can be held until maturity or traded beforehand. Examples include term deposits, bonds, debentures and mezzanine investments.
Fixed interest rate
Interest is paid at a fixed rate over the term of a loan or investment. Opposite of variable interest rate.
Fixed rate home loan
Allows you to lock in an interest rate on your loan, typically for 1 to 5 years. Protects against interest rate rises but also means you won’t benefit from falling interest rates. Opposite of variable rate home loan.
Fixed term deposit
Money left with a bank or other investment provider for a fixed period at a pre-agreed interest rate.
Flag fall
A fixed fee for connecting a phone call. It is added to the charge of the length of the call.
Float
When a company lists on a stock exchange and offers shares to the public for purchase. Also known as an initial public offering (IPO).
Franking credit
Your share of the tax a company has already paid on the profits you received as a dividend or distribution.
FSG
See Financial Services Guide.
Fully franked dividend
A share dividend on which the company has already paid tax. This means shareholders are entitled to a credit for the amount of tax the company has already paid. This credit is known as an imputation credit or franking credit.
Fund choice
Allows employees to choose the super fund their employer pays their super contributions into.
Fund manager
Individual or organisation responsible for investing funds on behalf of a financial institution. See also investment manager.
Funeral bond
A capital guaranteed managed fund to accumulate benefits to help meet the future cost of funeral expenses. Funeral bonds have tax and Centrelink advantages.
Futures
Legally binding contracts to buy or sell a particular asset, currency or other index, for a specified price on a specified future date.
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G
Gearing
Borrowing to invest, such as when you buy a house using a mortgage or buy shares using a margin loan.
Government co-contribution
A contribution made by the Australian Government to a person’s superannuation account based on that person’s income, source of income and personal super contribution. It is designed to help lower income earners build up their super before retirement.
Growth asset
Assets such as shares and property that not only produce an income but have the potential to grow in value over time.
Growth fund
A fund that invests in growth assets. A growth fund is more likely to produce higher returns over the long term but is usually more volatile in the short term.
Guarantor
A person who guarantees a loan for someone else. The guarantor is legally responsible for paying the other person’s debts if the debtor can’t pay them.
H
Hedge fund
A fund that aims to make money in both rising and falling markets by using strategies such as options and futures contracts to minimise any losses.
Honeymoon or introductory interest rate
An interest rate offered for a short time at the start of a loan, credit card or savings account. For a loan it is a lower interest rate that will eventually revert back to a standard rate. For savings accounts it is a higher rate that will revert back to a standard deposit interest rate after the honeymoon period.
I
Identity fraud/theft
Using someone else’s personal details in order to steal money or gain other benefits by pretending to be that person.
Imputation credit
Tax credit passed on to shareholders who receive partially or fully franked dividends. The tax credit is in consideration of the tax the company has paid on its profits before passing those profits on to shareholders.
Included value
Everything you get for your regular monthly payment under a mobile phone plan – e.g. allowances for calls, data.
Income producing asset
Any asset that generates an income. For example, dividends are paid on shares, investment properties generate rental income, bonds and bank accounts produce interest.
Income protection insurance
Provides you with an income if you can’t work because of illness or injury. Most policies offer cover for up to 75% of gross wages for a specified number of years.
Index
Measures the changes in value of a market or various sectors of a market. For example, the Australian All Ordinaries Index measures the change in the overall value of shares listed on that market.
Index fund
A fund that aims to match the investment performance of a selected index.
Industry fund
A superannuation fund that originally catered to workers from a particular employment industry or industrial award. Most are now open to the general public. They are usually low cost, have limited investment options and return profits to members.
Insurance policy
A written legal agreement that sets out what is being insured and for how much.
Insurance premium
Money charged by an insurance company for coverage.
Inflation
The increase in the cost of goods and services over time.
International data pack
A special deal that gives you better value when you use your mobile phone overseas.
Initial public offering (IPO)
See float.
Interest
Payment for the use of money over time. You earn interest by lending your money. If you borrow money, interest is the amount you pay to borrow the money. The rate of interest can be fixed or variable. It is usually calculated as a percentage of the amount lent or borrowed. For example on a $10,000 car loan that has an interest rate of 10%, you would pay $1000 interest in the first year.
Interest-free deal
Allows you to buy goods or services now and pay for them later. You don’t have to pay interest for a set period. You are usually required to make regular repayments during the interest-free period. Any money outstanding at the end of the interest-free period will incur interest, often at a very high rate.
Interest-free period on credit cards
The days where you don’t have to pay interest on your credit card purchases. Interest-free periods usually start on the first day of your billing cycle, not when you make a purchase.
Interest rate
The relationship between the amount of money borrowed or lent and the money paid in return for the use of that money. Usually expressed as a percentage per year.
Interest-only home loan
Where only the interest is paid on a loan for a specified period. No principal repayments are required during that time.
Intestate
Dying without leaving a will. Your assets will be distributed according to intestacy laws in the relevant state or territory.
Investment
An asset bought with the aim of producing an income and/or an increase in value over time.
Investment choice
Making a conscious decision about how your money will be invested.
Investment manager
Individual or organisation responsible for investing and managing the assets of others. See also fund manager or responsible entity.
Investment platform
An administrative system for your investments. Platforms offer a range of investments and services, all in the one place. Reporting for all investments is usually in the one report.
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J
Joint account
An account with a financial institution that is in the name of more than one person. Any individual whose name is on the joint account can operate the account; but it is possible to restrict any withdrawals by requiring both people to sign.
Joint tenants
When property is held by two or more people together in equal shares. On the death of one joint tenant the property automatically passes to the other joint tenant(s), regardless of what may be set out in the deceased person’s will.
K
There are no glossary terms listed under ‘K’
L
Lay-by
When goods are paid for over time by payment of a deposit and then regular amounts over a certain period. You cannot take home the goods until you have paid the full price.
Lease
A document that grants someone the use of a property for a given period in return for rental payments. The document will specify the terms and conditions of the agreement.
Liability
A debt or money owed, for example, a bank loan or credit card debt.
Life cover
An insurance policy that pays a set amount of money to an insured person’s beneficiaries when the insured person dies. Also known as term life insurance or death cover.
Limit
The amount of calls, texts and data you can use in your plan each month. If you go over your limit, there is usually an extra charge.
Line of credit loan
Allows you to use a single account for your home loan and everyday spending. Interest is added to the loan each month and repayments are not necessary while the loan is within its credit limit. It allows you access to the equity in your home without having to apply for a new loan.
Liquidity
How easily an investment or financial product can be converted to cash. Shares in large publicly listed companies that are regularly traded on the ASX (Australian Securities Exchange) are considered liquid assets, while direct property investments are less liquid, due to difficulties and time delays that may be experienced when buying and selling. Liquid markets have enough trading activity to allow both buyers and sellers to easily transact as they wish.
Loan consolidation
When several loans are combined into one, with the aim of reducing repayments. Also known as debt consolidation.
Loan to value ratio (LVR)
The amount of a loan as a percentage of the value of the asset it was used to buy. It is calculated by dividing the loan amount by the value of the asset.
Low-doc loan
A loan that requires little financial documentation. Primarily for borrowers who do not meet the standard loan application criteria.
LVR
See loan to valuation ratio.
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M
Managed fund
An investment fund where your money and that of other investors is pooled and used to buy assets such as cash, shares, bonds and listed property trusts. The fund is managed by a fund manager.
Margin call
Occurs when the value of an asset falls below the agreed loan to valuation ratio. The lender will ask the borrower to deposit enough money to bring the loan back to the agreed lending ratio.
Margin loan
A loan that is taken out to invest in shares or managed funds. The investment is used as security for the loan. Margin calls are possible if the value of the investment falls below a set amount.
Marginal tax rate
The highest rate of tax a taxpayer will pay on their income. Find out your marginal tax rate.
Market index
See index.
Market-linked investment
A pooled investment scheme where the value of the investment depends on the movements of a particular market.
Market sector
A group of companies that produce or buy and sell such similar goods that they are in competition with each other. Examples include the mining, retail and technology sectors.
Master trust
Allows individual investors to pool their funds so that they can invest in a wide choice of investments, usually at wholesale prices. Typically used by financial planners for reporting convenience. Also known as an investment platform or wrap account.
Maturity
The date on which a debt or investment and all outstanding interest payments must be paid in full.
Mezzanine finance
A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies or build development projects. It is usually debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. This type of investment tends to be high risk and suitable only for sophisticated investors.
Minimum payment
The lowest amount that must be paid each month on a debt such as a loan or credit card.
Mining tenement
A license, permit or lease providing rights to explore for and/or extract minerals under the surface of an area of land.
Mobile broadband
Internet access from mobile phone providers.
Mobile phone plan
A description of the services a mobile phone company will give you, what they will charge you and how you will pay.
Money transfer request
When one individual or entity asks another to send them money. See also advance fee fraud.
Mortgage
A form of security (usually over real estate) that is used to secure repayment of a debt (usually a home loan).
Mortgage broker
A person who matches borrowers to lenders and arranges mortgage contracts between the two parties.
Mortgagee
Someone who lends money in a mortgage arrangement.
Mortgage fees
Fees paid by mortgagors for setting up, administering and ending a mortgage.
Mortgage scheme
A scheme that invests in mortgage loans or in companies that lend money for mortgages.
Mortgagor
Someone who borrows money in a mortgage arrangement.
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N
Negative gearing
Borrowing money to invest where the return from the investment is less than the borrowing costs. For example, the rental income from your investment property is less than the interest payments on the loan used to purchase the property.
No-Interest Loans Scheme (NILS)
A community program that provides interest-free loans for individuals or families on low incomes.
Non-binding nomination
Guides your super fund trustee on who will get your super if you die. The trustee is not bound to follow these instructions.
Non-commutable income stream
An income stream that cannot be converted into a lump sum payment.
No Negative Equity Guarantee (NNEG)
Protects you from owing more on your reverse mortgage than your home is worth. The NNEG puts a limit on the amount owed.
O
Offset account
A transaction account that is linked to a mortgage account. It reduces your interest payable as interest is only charged on the net balance, i.e. your mortgage balance less your offset account balance.
Option
A contract between two parties that gives the buyer/seller the right, but not the obligation, to buy/sell an asset, at a set price, on or before a specific future date.
Overdraft facility
An arrangement that allows you to withdraw more funds than you have in your account.
Overdrawn account
When the limit on a credit card or bank account (including any overdraft facility) has been exceeded.
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P
Payday loan
A cash advance against your next pay. These short-term loans charge a high interest rate and must be paid back by a certain date.
PDS
See product disclosure statement.
Pension
An income stream that makes regular income payments. Examples include the government age pension or an account-based pension from your super fund.
Personal identification number (PIN)
A number used as a security access code for phone banking and to withdraw money from an ATM or via EFTPOS.
Personal insolvency agreement
Similar to a debt agreement but more structured and formal and costs more. Your property comes under the control of a trustee who must investigate your financial affairs. Your name, some personal details and details of the controlling trustee and creditors meeting must be advertised in a local or national newspaper.
Personal loan
A low-value loan for personal use such as to buy a car or take a holiday. These loans are usually not secured by an asset and are usually payable over 2-7 years.
Phishing
Emails or text messages that attempt to trick you into giving out your personal information such as usernames, passwords or banking details.
PoA
See Power of Attorney.
Ponzi scheme
A type of fraud that uses money from new investors to make interest payments to earlier investors. The schemes typically offer high rates of return and fall apart when no new investors can be found.
Power of Attorney
A document that appoints someone to act on your behalf in a legal or business matter. A Power of Attorney (PoA) may be general or specific and may be unlimited or limited to a specific act. It is different to an enduring power of attorney.
Premium
In relation to an insurance contract, it is the price charged by an insurance company for providing the insurance cover.
Preservation age
The age at which you can withdraw your super. You must also meet a condition of release.
Preserved benefit
A super benefit that remains in a super fund until the member reaches preservation age and, in most instances, retires from the workforce.
Price earnings ratio (P/E ratio)
A financial ratio that can be used to work out whether the price of a share is over or undervalued compared to its competitors. To work out a P/E ratio, the current price of the share is divided by the earnings per share (EPS).
Principal
The original sum of money invested, or the amount borrowed or still owing on a loan.
Probate
A document issued by a court certifying the validity of a will and authorising the executor to administer the estate in accordance with the provisions of the will.
Product disclosure statement
A document that financial service providers must provide to you when they recommend or offer a financial product. It must include information about the product’s key features, fees, commissions, benefits, risks and the complaints handling procedure.
Property investment
Land and/or buildings, purchased to provide an income and/or capital growth.
Property trust
A fund that invests in residential or commercial properties on behalf of a group of investors.
Prospectus
A document issued by a company that wants to raise money from the public by offering shares in the company or a trust. It must contain all the information you or your adviser would need to make an informed decision about investing in the company, including what the company plans to do with the funds raised.
Public trustee
Government agency or business that provides professional and independent services such as making wills, acting as an executor in deceased estates, managing trusts and Powers of Attorney.
Pump and dump scam
When scammers artificially inflate the share price of a stock by posting positive news items (not necessarily true) to increase trading. Once the price increases, the scammers sell the shares at the inflated price.
Pyramid scheme
Illegal form of multi-level marketing where you receive benefits for recruiting others to join the scheme. Most of the income is earned by recruiting others, rather than selling the good or service.
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Q
There are no glossary terms listed under ‘Q’
R
Redraw facility
Gives you access to any extra money you have deposited into your home loan.
Refinance
When you replace or extend an existing loan with funds from either the same or a different bank or financial institution.
Regulatory risk
The risk that changes in government policy or regulation may affect your benefits e.g. changes in superannuation policy. Changes typically happen after elections or around the time of the Federal Budget. See also taxation risk.
Renter’s insurance
Insurance cover for the contents of a rental home.
Rent to buy
A purchasing arrangement where you rent an item, such as an appliance of piece of furniture, for a specific time. At the end of the rental period, you can continue to rent the item or buy it outright. This should not be confused with rent to buy home ownership schemes which are high risk and often targeted at people who do not qualify for home loans from traditional lenders.
Responsible entity
A licensed entity or body that operates a managed investment scheme.
Retirement savings account
An account offered by financial institutions that is used to save money for retirement. These are simple, low cost, low return accounts.
Return
The amount of money your investment earns.
Reverse mortgage
A type of home loan used in retirement as a way for people to access the equity in their home. The loan amount depends on your age, the value of the home and how it is taken (lump sum, regular payments or draw down as needed). Interest is added to the loan and does not have to be repaid until the house is sold, usually as part of a deceased estate.
Risk
The possibility that your investment may fall in value or earn less than expected.
Risk tolerance
The degree of uncertainty you are prepared to accept in relation to investment returns, in particular the extent to which you are prepared to experience a negative investment return while trying to achieve positive investment returns.
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S
Salary sacrificing
When you and your employer agree to pay a portion of your pre-tax salary as an additional contribution to your superannuation. This can be a tax-effective strategy and usually suits middle to higher income earners.
Scam
A trick designed to cheat you of your money.
Secondary card
An additional credit card given to a person you have nominated where any money they spend will be borrowings against your credit card account. You are liable for transactions on both cards.
Secured loan
A loan that is backed by an asset. The lender may sell the secured asset to get its money back if you cannot repay the loan. Opposite of unsecured loan.
Security
In relation to financial assets, a security is an investment such as shares or bonds which can be traded in financial markets.
Security for a loan
An asset that is put up to guarantee a loan. If the loan is not repaid, the lender may sell the asset to get its money back. See also mortgage.
Self-managed super fund (SMSF)
A private super fund you can manage yourself. SMSFs are regulated by the Australian Taxation Office and can have one to four members. All members must be trustees to ensure they are fully involved in the decision-making of the fund.
Share
A share is part ownership of a company. Shares are also known as equities or stocks. Shareholders are entitled to dividends which represent their portion of the company’s profits.
Short selling
The practice of selling a security or commodity that you do not own. You borrow the commodity or security from a third party (usually a broker) and immediately sell it to a buyer.You then buy identical securities back at a later date, to return to the lender. This is a speculative investment, made when you believe the price of the security is going to fall and therefore you will make a profit.
SOA
See statement of advice.
Stamp duty
A state tax imposed on certain transactions, such as car registrations, mortgages and property transfers.
Stapled securities
When two or more securities are contractually bound together so that they cannot be bought or sold separately.
Statement of advice (SOA)
A document that sets out the advice given to a consumer by their licensed financial planner or adviser. It must include the basis on which the advice is given, details of the providing entity, and information on any payments or benefits the adviser or licensee will receive.
Statutory warranty
A guarantee required under law that says traders and manufacturers must ensure their products are suitable for the purpose for which they are supplied.
Stocks
See shares.
Superannuation (super)
Money that you and your employers put into a special fund during your working life to provide you with money to live on when you retire.
Superannuation guarantee (SG)
The minimum amount that your employer must pay into your superannuation fund. It is currently 9.5% of your gross salary.
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T
Takeover
When one company makes a bid to take control of another company.
Taxation risk
The risk that changes to the tax system could affect the outcome of your investments. With regard to your superannuation, it is the risk that changes to the way superannuation is taxed could affect the amount of super earnings. See also regulatory risk.
Tax-driven scheme
A scheme that attracts investment mostly for the tax benefits it offers, such as an agricultural or film scheme. An investment is said to be ‘tax-effective’ if investors pay less tax on it than they would have on another investment that gives the same return.
Tax file number
A unique number assigned to taxpayers by the Australian Taxation Office for tax administration. You need to quote the number to employers, benefit and allowance providers, banks and other investment bodies.
Tax-free threshold
The level of annual income, as set by the Australian Taxation Office (ATO), on which you do not have to pay income tax. See ATO: Individual income tax rates.
Telecommunications Industry Ombudsman (TIO)
A free independent service to help resolve telephone and internet complaints.
Tenancy
A person’s right to occupy land or buildings as per the terms of a lease or other agreement.
Tenants in common
Where two or more people hold shares in a property. Each owner has the right to deal with their share of the property separately to the others. Tenants in common may pass on their share to a nominated beneficiary in their will.
Term
The length of time a loan or an investment will run for.
Term deposit
An account with a financial institution where money is deposited for a set period of time. The interest rate is usually fixed for the term of the deposit and is generally higher than a transaction account but not always higher than some other at-call high interest savings accounts. Also known as a fixed deposit.
Third party, fire and theft insurance
A type of car insurance that covers damage to other people’s property, and provides limited cover for damage to your own car, as a result of theft or fire.
Third party property insurance
A type of car insurance that covers damage you cause to other people’s property (e.g. their car or home), as well as your own legal costs.
Trail Commission
See Ongoing Fee
Transaction account
An account with a financial institution where your money is readily available for day-to-day transactions. eg. If you have a superannuation or investment account there may be a transaction account associated with it into which your cash contributions are deposited – when an asset such as a share is bought or sold, the funds used to purchase the asset will be taken from, or returned to, this transaction account.
Transaction fees
Charges for any account transactions you or your adviser may conduct on your account i.e. withdrawals, deposits, transfers, purchase of underlying investments such as shares or managed funds.
Transition to retirement scheme
A scheme that allows you to reduce working hours in the lead-up to retirement without reducing take-home pay, or to continue working full-time and make significant tax savings by salary sacrificing heavily into super and supplementing take-home pay with a super pension.
Travel insurance
Covers travellers for cancellations, medical care and loss of possessions while they are away from home on business or leisure trips.
Trustee (super fund)
People or a company appointed to manage a super fund on behalf of the members.
Trustee
A person or company that holds or administers assets for the benefit of someone else.
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U
Under insurance
When there is not enough insurance to cover the value of the insured property.
Unencumbered
An asset that has no money owing on it and no individual or entity has any claim over the asset.
Unit price
The value of a company or investment expressed as a single unit. A unit is similar to a company share.
Unlisted mortgage scheme
A mortgage scheme that is not listed on a public market, such as the Australian Securities Exchange.
Unlisted property trust
A property trust that is not listed on a public market, such as the Australian Securities Exchange.
Unsecured loan
A loan for which no asset has been used as security. The interest rate is usually higher than for a secured loan as there is a higher risk to the lender of not getting their money back.
Upfront Fee
A fee paid at the time of purchasing an asset or establishing a service. Up-front fees usually involve a set-up fee and some sort of commission, though this will vary by service and type of product purchased. In the case of the provision of a financial service, in certain instances the upfront fee may be negotiated with the service provider prior to the purchase of the product or establishment of the service.
V
Variable interest rate
Where consumers receive interest on an investment or pay interest on a loan at a rate that may go up or down during the term. Opposite of fixed interest rate.
Variable rate home loan
A home loan where payments increase or decrease in line with rises or falls in official cash rates. Opposite of fixed rate home loan.
Vendor finance
Where the seller of a house or other asset, such as a car, offers to lend you money to buy the property or asset as part of the sale.
Volatility
The rate at which the price of a security moves up and down.
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W
Warrant
A financial product issued by a bank or other financial institution which gives you the right to buy shares (or currency, an index or a commodity) at a set price within a specified time and traded on the Australian Securities Exchange.
Will
A legal document that sets out how you want your assets and other belongings to be distributed when you die.
Wrap account
Allows managed investments to be combined or ‘wrapped’ into a single account. Generally used by financial planners for convenience. See also investment platform and master trust.
X
Xero
An accounting software used by accountants with an online tool for clients
Y
Yield
The rate of return on an investment.
Z
There are no glossary terms listed under ‘Z’