Glossary of terms used on this website
Bonds
Fixed interest securities which can be bought and sold, and which may be traded on a stock exchange.
Brokerage
The fee you pay to a broker for buying or selling shares.
Capital
The money you initially put into an investment, e.g. when you invest $100 in a bank term deposit this is your "capital" amount on which you get paid interest.
Capital gain or capital loss
The profit or loss you make when you sell or cash up your investment e.g. the difference between the price you pay for shares and the price you sell them for.
Conflicts of interest
Conflicts of interest can occur when you use an investment adviser if the adviser's interests are different from yours. For example, if an adviser is being paid to sell a particular investment to people they could be tempted to sell you that product even if it is not suitable for you. An adviser must tell you what fees they receive from the company offering the investment.
Continuous disclosure
Companies that are listed on a stock exchange have to disclose any important information that could affect the price of the company's shares as soon as it is known. This keeps the whole market informed of changes to a company. The aim of the law is to stop insider trading, i.e. trading in a company's shares by a person who has information not known to other people.
Contributory mortgage
A type of investment where investors' money is pooled and lent to someone else and this loan is secured against a piece of land. Most of the time investors' funds are lent to a property developer, and the value of the security on the land depends on the developer successfully completing and selling the development.
Debentures
A type of fixed interest or debt security where the issuer's obligation to repay investors is secured by the issuer's assets. The value of a debenture depends on the value of the issuer's assets.
Debt securities
Investments where you lend your money to a bank, other financial institution or other issuer, and are paid interest on your money. Fixed interest securities are debt securities.
Diversifying
Putting your money into several different investment types to reduce your risk. If one type of investment fails or doesn't do as well as you expect, not all your invested money is lost or affected.
Dividend
A payment a company makes from its profits to shareholders at a rate of a certain amount of money per share. For example, a company may decide to pay 5c per share as a dividend. If you hold 1000 shares you will be paid $50. Some companies have a scheme for dividend reinvestment. If you sign up to this your dividend is not paid in cash but reinvested in shares and your holding of shares increases. For example, the company might set a rate of $5 per share and add 10 shares to your holding rather than pay you cash. This enables you to increase your holding without brokerage costs.
Equity securities
See Shares
Financial institution
Financial institutions include registered banks (i.e. banks that are registered with the Reserve Bank of New Zealand) and non-bank financial institutions (e.g. building societies, financial services cooperatives, credit unions, friendly societies, industrial and provident societies, and finance companies).
Financial plan
See Investment plan
Fixed interest
Fixed interest is a general term for debt securities that pay a specified amount of interest. Usually the fixed interest rate is for a specific term. You are paid interest on your money and at the end of the term your money is returned to you. Often you also have the option of rolling over your money, i.e. continuing the investment at an agreed rate of interest for another term.
Futures
Investments in things like foreign currency, oil, electricity or wool where you invest now on a prediction of what the commodity will sell for at a later date. Futures contracts are a way of trying to profit (or minimize loss) from future movements in prices or values, without actually buying the commodity that the contract relates to.
Government retail deposit guarantee scheme
Under this scheme, the Government guarantees existing and new deposits of up to $1 million per person in approved financial institutions. The guarantee applies until 12 October 2010. If an approved financial institution goes bust between now and then depositors will get their money back, along with the interest due.
Currently all the major retail banks, and many credit unions, building societies and finance companies belong to the scheme. The guarantee covers investments such as savings and current accounts, term deposits, bonds and debentures. It doesn't cover shares, managed funds, superannuation schemes, unit trusts, and insurance schemes.
A list of approved institutions is on the Treasury website, along with answers to common questions about the scheme.
Group investment fund
See managed fund
Insider trading
Insider trading is when a person with secret knowledge about a company buys or sells the company's shares to make a profit or avoid a loss, at the expense of other investors. New Zealand law prohibits insider trading. Share markets have rules that require companies to publicly announce any changes that could affect the price of their shares. These rules are policed by the stock exchange and the Securities Commission.
Interest
Money paid to you by a bank or other financial institution or other issuer in return for having the use of your money lent to them as a fixed interest or debt security. Sometimes the interest is paid at regular intervals. The interest is either paid directly to you, or it may be added to the money you have invested. The latter is called compounding. It means that you get interest on the interest. Under other arrangements interest may be paid out at the end of an agreed term.
Investment adviser
The legal term for a person who gives investment advice to a member of the public. Stockbrokers, financial planners, financial advisers, asset managers etc are investment advisers, as are some accountants and lawyers.
Investment plan
An investment plan can help you achieve your investment goals. You can do it yourself, perhaps with some help from www.sorted.org.nz, or you can get an investment adviser to draw up a plan for you. A plan should take into account your personal financial situation and your investment goals. You should check what it will cost to prepare your plan. It is a good idea to revise your investment plan from time to time as your circumstances change.
Issuer
A person or company or financial institution which offers investments to the public.
Managed fund
A fund of money paid in by several people which is managed by a professional fund manager. Managed fund is a broad term which includes superannuation schemes, unit trusts, group investment funds (GIFs) and some life insurance. If you join KiwiSaver you invest in a superannuation scheme which is a managed fund.
Management fee
A fee you pay as an investor to have your money managed by a fund manager. Other fees can also apply e.g. an exit fee if you want to cash in your investment. Ask the person who is making the investment for you exactly what fees you will pay, and how and when they have to be paid.
Market participants
Companies and individuals who are listed on or registered with a stock exchange to take part in the activities of the stock market.
NZX
The New Zealand Exchange Limited.
Participation deed
A legal document, similar to a trust deed, that sets out what a fund manager can do with investors' money. The deed also explains investors' rights, such as the trustees' powers to look after investors' interests.
Registered bank
A financial institution that is registered as a bank with the Reserve Bank of New Zealand. Registered banks are supervised by the RBNZ and must comply with the conditions of their registration. The list of banks currently registered can be seen at www.rbnz.govt.nz
Risk profile
People have varying feelings about risk. Some people worry about quite small risks while others are happy taking a bigger risk. You can assess whether you have a low, medium, or high risk profile at www.sorted.org.nz. Knowing your risk profile helps you choose investments that are right for you.
Savings account
An account with a registered bank or other deposit-taking financial institution in which your money is paid interest in return for the use of your money. These accounts are fixed interest securities or debt securities i.e. you lend your money to the bank or other financial institution.
Securities
Investments including:
- fixed interest and debt securities (where you lend your money to someone else to use in return for interest paid to you); and
- equity securities (where you buy shares in a company and may be paid a dividend by the company and have the chance of making a capital gain if you sell your shares at a higher price than you paid for them); and
- managed funds (a fund of money paid in by several people which is managed by a fund manager).
Shares
Shares are equity securities, i.e. you buy a share in a company. You may be paid regular dividends on your shares, and you have the chance of making a capital gain on your money later if you sell your shares for more than you paid for them.
Statutory supervisor
A person appointed to look after investors' interests for certain fixed income securities.
Stock exchange
The market place where shares are traded in companies that are listed on the exchange. The New Zealand Exchange is known as NZX.
Superannuation scheme
See managed fund.
Term deposit
An account with a registered bank or other deposit-taking financial institution in which you put money for a fixed term e.g. 6 months or a year. The bank or other institution pays you an agreed rate of interest and will repay your money at the end of the term. Term deposits are fixed interest or debt securities i.e. you lend your money to the bank or financial institution.
Trust deed
A legal document that sets out what a fund manager can do with investors' money. The deed also explains investors' rights, such as the trustees' powers to look after investors' interests.
Trustee
A person appointed to look after investors' interests for certain fixed interest securities e.g. those offered by credit unions, building societies and finance companies, and for unit trusts.
Unit trust
See managed fund.
