A measure of the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates the fund’s underperformance, given the expectations established by the fund’s beta.

The average annual return over a period of years, taking into account the effect of compounding. Annualised rate of return also can be called compound growth rate.

Securities with similar features. The most common asset classes are stocks, bonds and cash equivalents.

For a bond fund, the average of the stated maturity dates of the debt securities in the portfolio. Also called average weighted maturity. In general, the longer the average maturity, the greater the fund’s sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive – and consequently, less volatile – portfolio.

A bear market is a prolonged period of falling stock prices, usually marked by a decline of 20% or more. A market in which prices decline sharply against a background of widespread pessimism, growing unemployment or business recession. The opposite of a bull market.

A standard, usually an unmanaged index, used for comparative purposes in assessing performance of a portfolio or mutual fund.

A measurement of a stock’s volatility to market movements. The market is 1 by definition; above 1 is more volatile than the market; and less than 1 is less volatile.

The bid is the price that someone is willing to pay for a security at a specific point in time, whereas the ask is the price at which someone is willing to sell. The difference between the two prices is called the bid-ask spread.

A high-quality, relatively low-risk investment; the term usually refers to stocks of large, well-established companies that have performed well over a long period. The term Blue Chip is borrowed from poker, where the blue chips are the most valuable.

A financial security which represents the promise of its issuer (usually a company or a government) to repay a loan over a specified time period, at a specified rate of interest. The bond can then be bought and sold to other investors, over and over again. When the rate of interest falls, bond prices rise (and vice versa) – since when interest rates are lower, the bond’s promise to repay interest at the specified fixed rate becomes more valuable.

Any market in which prices are advancing in an upward trend. In general, someone is bullish if they believe the value of a security or market will rise. The opposite of a bear market.

An option contract that gives the owner of a security the right to buy a specific number of shares at a specific price, within a specified period of time. Buyers use call options when they think a stock will go up in value.

A company or economy’s capacity represents the maximum amount of output it can produce. The rate of capacity utilisation, therefore, represents the proportion of capacity that is actually used in production. When capacity utilisation is high (so that a facility is being used fully or near-fully), pressure grows for new investment to expand that capacity. Also, high capacity utilisation tends to reduce the unit cost of production (since capital assets are being used more fully and efficiently).

Cash flow, is what a company makes minus what it spends. A company’s cash flow is its income (minus investment earnings) less what it spends on rent, equipment, and other costs. Some investors use cash flow instead of earnings to judge how well a company is doing.

Capital adequacy rules are loose regulations imposed on private banks, in hope of ensuring that they have sufficient internal resources (including the money invested by the bank’s own shareholders) to be able to withstand fluctuations in lending and profitability.

The market value of a company, calculated by multiplying the number of shares outstanding by the price per share.

A short-term money-market instrument, such as a Treasury bill or repurchase agreement, of such high liquidity and safety that it is easily converted into cash.

Securities that represent ownership in a corporation; must be issued by a corporation.

The consumer price index (CPI) is a measure of the overall price level paid by consumers for the various goods and services they purchase. Retail price information is gathered on each type of product, and then weighted according to its importance in overall consumer spending, to construct the CPI. Monthly or annual changes in the CPI provide a good measure of the rate of consumer price inflation.

A long-term bond issued by a corporation to raise outside capital.

Cash plus any assets that a company expects to convert to cash within a year, such as short-term investments, accounts receivable, and inventories. The current assets figure doesn’t mean much in isolation, but in comparison with current liabilities (see Current Ratio), it’s a good measure of a company’s short-term liquidity.

Liabilities that a company expects to pay within a year, such as short-term debt, accounts payable, and interest payable. The current liabilities figure doesn’t mean much in isolation, but in comparison with current assets (see Current Ratio) it’s a good measure of a company’s short-term liquidity.

Current assets of a company divided by current liabilities. The ratio shows the company’s ability to pay its current obligations. This ratio is used to determine how much cash is available to cover its current liabilities. This concept is also known as working capital ratio.

Stock in an industry that tends to be volatile and sensitive to changes in economic conditions, such as the mining, forestry, housing, and automobile industries.

The debt-to- capital ratio for a stock is calculated by dividing the company’s long-term debt by its total capitalisation (the sum of common equity plus preferred equity and long-term debt) and is a measure of the company’s financial leverage. All else being equal, stocks with high D/C ratios are generally riskier than those with low D/C.

When a government, business, or household spends more in a given period of time than they generate in income, they incur a deficit. A deficit must be financed with new borrowing, or by running down previous savings ratios. Note that debt-to- capital figures can be misleading owing to accounting conventions.

The debt/equity ratio is calculated by dividing a company’s long-term debt by total shareholders’ equity. It measures how much of a company is financed by its debt-holders compared with its owners. A company with a lot of debt will have a very high debt/equity ratio, while one with little debt will have a low debt/equity ratio. Assuming everything else is identical, companies with lower debt/equity ratios are less risky than those with higher such ratios.

Stocks and bonds that tend to have relatively stable earnings and provide less risk for investors. When the stock market is volatile, defensive securities tend to decline less than the overall market.

Earnings per share is the portion of a company’s profit allocated to each outstanding share. Diluted EPS is calculated by dividing net income (plus convertible- preferred dividends and after tax amount of interest recognised in the period, associated with any convertible debt) by the sum of the weighted-average shares outstanding, and any additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

A dividend is a portion of a company’s profit paid to common and preferred shareholders. Dividends provide an incentive to own stock in stable companies even if  they are not experiencing much growth. Companies are not required to pay dividends.

EBITDA is often used instead of net income by companies with heavy depreciation charges on their income statements. Investors should always look at EBITDA with caution, because it’s not officially sanctioned by the nation’s accounting rules, and there’s no standard way of figuring it. Still, it can be a useful number to know in conjunction with – but not in place of – reported net income.

How much profit a company has made per share within a given period. EPS is a fairly arbitrary number by itself, because the company can control the number of shares outstanding through splits and buybacks. But comparing a company’s most recent EPS to its EPS in previous years and quarters (adjusted for any splits) is one of the most common ways of telling how fast the company’s profits are growing.

The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. One of the keys to finding superior long-term investments is buying companies that will be able to stay one step ahead of their competitors.

Efficient frontier is a picture showing the mix of investments that will give you the best return for the amount of risk you are willing to take on (or the mix of investments that will get you a certain return with the least amount of risk).

Exchange-traded funds (ETFs) are a basket of securities such as stocks, commodities and bonds which are traded on a stock exchange. ETF’s are affordable to invest in and have limited fees. ETFs can be more volatile than other investment vehicles such as mutual funds.

Shares issued by a company which represent ownership in it. Ownership of property, usually in the form of common stocks, as distinguished from fixed-income securities such as bonds or mortgages. Stock funds may vary depending on the fund’s investment objective.

The interval between the announcement and the payment of the next dividend for a stock.

The date on which a stock goes ex-dividend. Typically about three weeks before the dividend is paid to shareholders of record.

The spending and taxing activities of government constitute its fiscal policy.

Real capital which is installed permanently in a specific location, including buildings, infrastructure, and major machinery and equipment.

An investment by a company based in one country, in an actual operating business, including real physical capital assets (like buildings, machinery and equipment), located in another country.

A stock’s current price divided by the mean EPS estimate for the next fiscal year. This ratio can give you an idea of the relative cheapness of a stock when compared to an industry average, the entire market or even the firm’s historical level.

A banking system in which private banks are required to hold a specified proportion of assets on hand in their banks, to underpin a much larger amount of lending to the bank’s customers.

Equal to operating cash flow minus capital spending. Free cash flow represents the cash a company has left over after investing in the growth of its business. Young, aggressive companies often have negative free cash flow, because they’re investing heavily in their futures. As companies mature, though, they should start generating free cash flow.

Analysis of a security based on the fundamental facts about a company such as sales, revenue, expenses, and dividend prospects. Different from technical analysis.

The value of all the goods and services produced for money in an economy, evaluated at their market prices. Excludes the value of unpaid work (such as caring reproductive labour performed in the home). GDP is calculated by adding up the value-added at each stage of production.

Investment strategy that focuses on stocks of companies and stock funds where earnings are growing rapidly and are expected to continue growing.

Typically a well-known, successful company that is experiencing rapid growth in earnings and revenue, and usually pays little or no dividend.

A rise in the prices of goods and services, often equated with loss of purchasing power.

The fixed amount of money that an issuer agrees to pay the bondholders. It is most often a percentage of the face value of the bond. Interest rates constitute one of the self-regulating mechanisms of the market, falling in response to economic weakness and rising on strength.

A lower-rated, usually higher-yielding bond, with a credit rating of BB or lower.

The market capitalisation of the stocks of companies with market values greater than R10 billion.

The ability to buy or sell securities quickly and easily without substantially affecting the asset’s price. Large volume, blue-chip stocks like the banks are highly liquid securities. Shares in small companies with low volume activity are not considered liquid. High-level liquidity is considered a good feature for a security or a commodity.

The total equity market value of the company. It equals shares outstanding times the stock price.

The market capitalisation of the stocks of companies with market values between R1 to R10 billion.

Monetary policy reflects the use by government and government agencies (especially the central bank) of interest rate adjustments and other levers (such as various banking regulations) to influence the flow of new credit into the economy, and hence the rate of economic growth and job-creation. A “tight” monetary policy tries to reduce the growth of new credit (through higher interest rates); a “loose” monetary policy tries to stimulate more credit creation and hence growth.

Mutual funds are professionally managed investment funds from pools of money gathered from investors with the purpose of investing in securities. Mutual funds allow investors to benefit from capital markets without any experience or knowledge of the markets, because they are managed by professionals. There are different types of mutual funds, increasing the likelihood of an investor finding something that caters to their budget and financial interest and objectives. Mutual funds can prove to be a lucrative deal. Their biggest advantage is that they offer more diversity in a portfolio, as a fund consist of several different securities. The disadvantage of mutual funds is that they are usually associated with high fees – the price to be paid for having the fund managed by a professional.

The current dollar value of a single mutual fund share; also known as share price. The fund’s NAV is calculated daily by taking the fund’s total assets, subtracting the fund’s liabilities, and dividing by the number of shares outstanding. The NAV does not include the sales charge. The process of calculating the NAV is called pricing.

This figure is a measure of profitability. It is equal to annual net income divided by revenues over the trailing 12 months. The resulting figure is then multiplied by 100. This figure gives a more accurate picture of a company’s recent performance than the most-recent annual net margin figure, which may be more than a year old. The company’s net income and revenues are found in the income statement of its annual report and recent 10-Qs. Example: A major retailer’s net margin declined from 7.7% to 2.9% over a four year period. Over the trailing 12 months, the company’s net margin continued to decline, to 2.5%.

Par value is the amount originally paid for a bond and the amount that will be repaid at maturity.

A class of stock with a fixed dividend that has preference over a company’s common stock in the payment of dividends and the liquidation of assets. There are several kinds of preferred stock, among them adjustable-rate and convertible.

The amount by which a bond or stock sells above its par value.

The price per share of a stock divided by its book value (net worth) per share. For a stock portfolio, the ratio is the weighted average price-to- book ratio of the stocks it holds.

A stock’s price divided by its earnings per share, which indicates how much investors are paying for a company’s earning power.

Price/cash-flow represents the amount an investor is willing to pay for a dollar generated from a particular company’s operations. Price/cash-flow shows the ability of a business to generate cash and acts as a gauge of liquidity and solvency. Because accounting conventions differ among nations, reported earnings (and P/E ratios) may not be comparable across national boundaries. Price/cash-flow attempts to provide an internationally standard measure of a firm’s stock price relative to its financial performance.

Price of a stock divided by its earnings from the latest year.

Price of a stock divided by its projected earnings for the coming year.

A stock’s price/earnings ratio divided by the company’s projected EPS growth. The price/earnings ratio used in the numerator of this ratio is calculated by taking the current share price and dividing by the mean EPS estimate for the current fiscal year.

The annual earnings retained by a company after payment of all expenses and dividend payments. Generally reinvested in the core business or used to pay off debt.

This figure represents the percentage growth in a company’s revenue over either the trailing 12 months or the trailing three years. Revenue growth gives a good picture of the rate at which companies have been able to expand their businesses. All things being equal, stocks with higher revenue growth rates are generally more desirable than those with slower revenue growth rates.

Offering of shares to existing shareholders who hold rights to buy newly issued shares at a discount, before the shares are offered to the general public.

This figure is the percentage a company earns on its assets in a given year (Year 1, 2, etc.). The calculation is net income divided by average total assets. The resulting figure is then multiplied by 100. ROA shows how much profit a company generates on its asset base. The better the company, the more profit it generates as a percentage of its assets. The company’s net income is found in the annual income statement. The company’s total assets are found in the annual balance sheet.

This is the percentage a company earns on its total equity in a given year (Year 1, 2, etc.). The calculation is return on assets times financial leverage. Return on equity shows how much profit a company generates on the money shareholders have invested in the firm. The mission of any company is to earn a high return on equity. The company’s net income is found in the annual income statement. The company’s net worth is taken from the company’s annual balance sheet.

This figure is the percentage a company earns on its invested capital in a given year (Year 1, 2, etc.). The calculation is net operating profit after tax divided by average invested capital. The resulting figure is then multiplied by 100. Invested capital equals the sum of total stockholders’ equity, long- term debt and capital lease obligation, and short-term debt and capital lease obligation. ROIC shows how much profit a company generates on its capital base. The better the company, the more profit it generates as a percentage of its invested capital. The company’s net income is found in the income statement. The components of the company’s invested capital are found in the balance sheet.

The danger that the stocks of many of the companies in one sector (like health care or technology) will fall in price at the same time because of an event that affects the entire industry.

A risk-adjusted measure that measures reward per unit of risk. The higher the Sharpe ratio, the better. The numerator is the difference between the Fund’s annualised return and the annualised return of the risk-free instrument (T-Bills).

The Sortino ratio, a variation of the Sharpe ratio, differentiates harmful volatility from volatility in general by using a value for downside deviation. The Sortino ratio is the excess return over the risk-free rate divided by the downside semi-variance, and so it measures the return to “bad” volatility. (Volatility caused by negative returns is considered bad or undesirable by an investor, while volatility caused by positive returns is good or acceptable.) In this way, the Sortino ratio can help an investor assess risk in a better manner than simply looking at excess returns to total volatility, as such a measure does not consider how often returns are positive as opposed to how often they’re negative.

The market capitalisation of the stocks of companies with market values less than R1 billion.

A statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. Investors use the standard deviation of historical performance to try to predict the range of returns that are most likely for a given share. When a share has a high standard deviation, the predicted range of performance is wide, implying greater volatility.

These are issued by a company in order to raise money. Stocks in a company enable you to gain a percentage of ownership in that company. The amount of ownership is proportional to the amount of stocks you own.

Dividing a company’s outstanding common shares into a larger number of shares. If a company had a three-for- one-split, for example, and a shareholder held 100 shares before the split, they would own 300 shares after the split. But the value of the company equity owned by the shareholder would remain the same, only the number of units held would differ as the share price changes accordingly. Share splits are subject to the approval of the company’s shareholders.

Tangible assets are any assets that can be physically identified such as cash, equipment, and real estate. Accounts receivable is also considered a tangible asset for accounting purposes. It is generally easier to assign market value to tangible versus intangible assets, since tangible assets are often not unique in the marketplace, and hence market signals such as price can be used to help determine their worth.

When using an indexing or any other bench-marking strategy, the amount by which the performance of the portfolio differed from that of the benchmark.

Five assets in a portfolio that generated largest negative returns (losses).

Top five industries in a portfolio based on amount of invested assets.

A strategy whereby investors purchase equity securities that they believe are selling below estimated true value. The investor can profit by buying these securities then selling them once they appreciate to their real value.

The amount and frequency with which an investment fluctuates in value. Wtd. Avg. Market Cap – Most indexes are constructed by weighting the market capitalisation of each stock on the index. In such an index, larger companies account for a greater portion of the index. An example is the S&P 500 Index.

Annual percentage rate of return on capital. The dividend or interest paid by a company expressed as a percentage of the current price.

Concept used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its maturity date.


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