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What's your naked position?

Sunday, April 13, 2008

Key points

  • Assets include cash and property
  • Bonds are loans to a company

More information

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By Allison Tait
MSN NZ Money writer

Money talks, so they say, but how much finance-speak sounds like double Dutch to you? Here, we define 20 common terms you'll hear, particularly when investing.

Actuary: think uber-accountant. An actuary makes calculations and valuations in relation to insurance funds, super funds and other investments, using mathematical, statistical, economic and financial analysis. The emphasis is on the long-term stuff in financial contracts, such as how much risk is involved.

Asset: things you own that have value. This could be cash, property, equipment …

Bear market: it sounds cute, but it's actually not great — it's a share market in which prices are going down.

Blue chip: the basis of a great, long-term share portfolio. Blue chip is a term for the shares of leading companies, where management is excellent and the foundations are strong.

Bond: effectively a loan to a company. Corporations and governments issue bonds as debt security, in return for cash from lenders and investors. A bond holder lends money to the issuer for a set term, in return for interest.

Bull market: nothing to do with running with bulls in Spain … rather, it's a share market in which prices are on the rise.

Capital growth: the difference between what you paid for an investment (such as a house) and what you can sell it for, if it's increased in value.

Cash management trust: this may be for you if you're interested in investing but don't have a lot of cash. By pooling the funds of many investors, the trust can buy large volumes of short-dated securities, decreasing transaction costs and resulting in higher returns to trust members. A flexible investment option.

Deductible: a beautiful word come tax time. Refers to expenses that can be offset against taxable income — contributions to superannuation funds, for example.

Depreciation: it sounds like a negative, but can have a positive effect on your tax liabilities. Depreciation recognises that assets tend to lose value as they age, so the cost of the asset is written down over the life of that asset. Considered a non-cash business expense, it can generally be offset against taxable income.

Dividend: the amount a shareholder receives out of a company's after-tax earnings. You can either take the money and run or reinvest your dividends back into the company in the form of more shares.

Equity: there's been a lot of talk about this in recent years as people realise how much money they have tied up in their homes. Basically, it's the value an owner has in an asset (in this case, a house) over and above the debt against it. Take the amount your house is worth, subtract the amount you still owe the bank and what's left over is the equity.

Gearing: a measure of just how in debt you are. How much you've borrowed compared with the assets you hold.

Hedge fund: sounds green and clean, doesn't it? It's actually an investment portfolio, under which the fund manager has the authority to use higher-risk investment techniques, including borrowing funds, to generate higher returns. Not for the faint-hearted.

IRD number: this is a unique number issued to taxpayers by the Inland Revenue Department, for taxation purposes.

Market order: "Buy, buy, buy" or "sell, sell, sell". A share will be bought or sold at the most advantageous price available after a market order hits the trading floor.

NZX: New Zealand Exchange Limited is responsible for the frontline regulation of companies listed on its three securities markets: the New Zealand Stock Market (NZSX), New Zealand Alternative Market (NZAX) and New Zealand Debt Market (NZDX).

NZSX: The New Zealand Stock Market is NZX's premier equities market. Among the 200-plus listed issuers are many of NZ’s long-established heritage companies, as well as a number of overseas companies. It also gives rise to NZX's headline index, the NZSX 50, which comprises the 50 largest companies listed on the NZSX Market.

Property trust: If you're interested in property investment but don't want to put all your eggs in one henhouse, so to speak, this may be for you. It's a collective investment vehicle with ownership of a portfolio of real property, so spreading the ownership. You can buy into a listed property trust (quoted on the stock exchange, prices fluctuate with supply and demand) or an unlisted property trust (arranged directly with the trust's manager, who fixes the prices).

Share (stock): buy a share and you own part of the company — albeit a very small part. A share is essentially a contract between the company of issue and the owner, giving the latter an interest in how the company is managed, the right to share in profits and, if it all goes pear-shaped and the company is dissolved, a claim upon assets remaining once the debts have been paid. Stock is a generic term for shares and, less frequently, bonds.

Yield: how much you make on an investment (the return), usually expressed as a percentage.

*Naked position: oh yes. Make that the 21st term. This is actually not that common in general usage, so we'll leave the definition to the expert: namely, Edna Carew in her book The Language of Money (Allen & Unwin).

"A naked position is also known as a naked option. An option whose writer has not hedged, for example, a writer of call options over shares who has sold the right to buy the underlying shares but who does not own them or the writer of a put option over shares who has sold the right to sell the shares (to the writer); if the holder chooses to exercise the option, the uncovered writer will be obliged to buy the shares at an exercise price which will be a higher-than-market price (otherwise the holder of the option would not exercise). Naked options are high-risk and can involve large losses for the writer."

Hmmm...sounded a lot sexier when you didn't know, right?