Stock market jargon explained

Equity markets can seem fairly daunting for many people so in this article we demystify investing and tackle some common market terms.

Ordinary shares

Ordinary shares — commonly referred to simply as “shares” — give their holder part-ownership in a company. Holders of ordinary shares are entitled to voting rights and company dividends.

Dividend imputation

A tax rule whereby tax paid by a company is credited to individual share holders. Share holders are assessed on the total amount of the dividend and imputation credit and then allowed to claim a tax rebate equal to the imputation credit. This is particularly useful for clients in the pension phase of Supers.

Dividend yield

The yield — or income — from shares expressed as a percentage. Dividend yield is calculated by dividing a company’s total annual dividends by its share price.

Franked dividends

Dividends paid out of company income that have already been taxed. Shareholders receive a reduction in income tax in line with the amount of tax paid by the company. Up to 100 per cent of a dividend can be franked.

Dead cat bounce

A short-lived rise in a company’s stock price after a sustained drop in its share price.

It is a common issue that arises in markets around the world where investors are led to believe that a market correction is over only for it to start again as soon as funds have been invested.

PE ratio

A price-earnings ratio is a measure of the attractiveness of a stock relative to other stocks. It is calculated by dividing a share price by a company’s current or forecast earnings per share. A high PE ratio tends to mean that the market has high growth expectations for a company.

Earnings per share

Earnings per share — commonly referred to as EPS — is a company’s net profit after tax divided by the number of shares issued by the company. It is one way of measuring the performance of a company.

Return on equity

Return on equity — or ROE — is a measure of how well a company uses funds invested by shareholders. It is calculated by dividing a company’s net income by the total equity of shareholders. The higher the ROE, the better off the shareholder.

EBIT

EBIT — or earnings before interest and tax — measures a company’s total revenue less expenses other than interest and tax.

Cyclical stocks

Companies whose fortunes ebb and flow with the business cycle.
When the economy is in an upswing, cyclical companies prosper. But in economic slowdowns, they don’t perform so well.

Derivatives

Investment products whose value is linked to an underlying stock, index, commodity, currency or fixed interest product. Futures, options and warrants are all examples of derivatives.

Martin Morris, March 2014

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