Glossary of Terms

We have compiled a list of common investment terms together with brief definitions thereof. Browse through the complete list of terms or click on the alphabetised list above to find a particular term.

A B C D E F G I J L M P R S T V

Term Description 
Association for Savings and Investment SA (ASISA)

In 2008, the Association for Savings and Investment SA (ASISA) was formed to incorporate within one body these previous associations: ACI (Association of Collective Interments), LOA (Life Offices Association), IMASA (Investment Management Association of South Africa) and LISPA (Linked Investment Service Providers Association).

ASISA represents the majority of South Africa’s asset managers, collective investment scheme management companies, linked investment service providers, multi-managers, and life insurance companies and their investors.  The primary aim of the Association is to facilitate the development and growth of the industry, through its dealings with the authorities and regular communication with the media and investing public. Working on behalf of its members, the Association acts as the custodian of codes of practice and standards throughout the industry, and is the forum for identifying and fulfilling common goals.

Bonds A bond is an interest-bearing debt instrument, traditionally issued by governments as part of their budget funding sources, and now also issued by local authorities (municipalities), parastatals (Eskom) and companies. Bonds issued by the central government are often called “gilts”. Bond issuers pay interest (called the “coupon”) to the bondholder every 6 months. The price/value of a bond has an inverse relationship to the prevailing interest rate, so if the interest rate goes up, the value goes down, and vice versa. Bonds/gilts generally have a lower risk than shares because the holder of a gilt has the security of knowing that the gilt will be repaid in full by government or semi-government authorities at a specific time in the future. An investment in this type of asset should be viewed with a 3 to 6 year horizon.
Cash An investment in cash usually refers to a savings or fixed-deposit account with a bank, or to a money market investment. Cash is generally regarded as the safest investment. Whilst it is theoretically possible to make a capital loss investing in cash, it is highly unlikely. An investment in this type of asset should be viewed with a 1 to 3 year horizon. 
Collective Investments Collective Investments are investments in which investors’ funds are pooled and managed by professional managers. Investing in shares has traditionally yielded unrivalled returns, offering investors the opportunity to build real wealth. Yet, the large amounts of money required to purchase these shares is often out of reach of smaller investors. The pooling of investors’ funds makes Collective Investments the ideal option, providing cost effective access to the world’s stock markets. This is why investing in Collective Investments has become so popular the world over and is considered a sound financial move by most investors.
Compound Interest Compound interest refers to the interest earned on interest that was earned earlier and credited to the capital amount. For example, if you deposit R1 000 in a bank account at 10% and interest is calculated annually, your balance will be R1 100 at the end of the first year and R1 210 at the end of the second year. That extra R10, which was earned on the interest from the first year, is the result of compound interest (“interest on interest”). Interest can also be compounded on a monthly, quarterly, half-yearly or other basis.
Compulsory Purchase Annuities Compulsory purchase annuities must be bought with at least two-thirds of the benefits you receive from a tax-incentivised retirement vehicle, such as a pension fund or a retirement annuity. A compulsory purchase annuity will provide you with a pension for the rest of your life.
Dividend Yields The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. The higher the yield, the more money you will get back on your investment.
Dividends When you buy equities offered by a company, you are effectively buying a portion of the company. Dividends are an investor’s share of a company’s profits, given to him or her as a part-owner of the company.
Earnings per share Earnings per share is a measure of how much money the company has available for distribution to shareholders. A company’s earnings per share is a good indication of its profitability and is generally considered to be the most important variable in determining a company’s share price. 
Equity A share represents an institution/individual’s ownership in a listed company and is the vehicle through which they are able to “share” in the profits made by that company. As the company grows, and the expectation of improved profits increases, the market price of the share will increase and this translates into a capital gain for the shareholder. Similarly, negative sentiment about the company will result in the share price falling. Shares/equities are usually considered to have the potential for the highest return of all the investment classes, but with a higher level of risk i.e. share investments have the most volatile returns over the short term. An investment in this type of asset should be viewed with a 7 to 10 year horizon.
Financial Markets Financial markets are the institutional arrangements and conventions that exist for the issue and trading of financial instruments.
Financial Sector Funds These funds invest in financial services companies, including banks, insurance companies, brokerage firms and other companies whose principal business operations involve the provision of various financial services or where at least 50% of their earnings are derived from the provision of such financial services.
Financial Services Board (FSB)  The Financial Services Board (FSB) is the regulatory body of the Collective Investment industry. The Registrar of Collective Investment Schemes is an official of the FSB. Collective investment schemes must be registered with the FSB in order to operate legally.
Fixed Interest Funds Fixed interest funds invest in bonds, fixed-interest and money market instruments. Interest income is a feature of these funds and, in general, capital should remain stable. 
Gross Domestic Product (GDP) The Gross Domestic Product measures the total volume of goods and services produced in the economy. Therefore, the percentage change in the GDP from year to year reflects the country’s annual economic growth rate.
Growth Funds Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-than-average price/earnings ratio.
Industrial Funds Industrial funds invest in selected industrial companies listed on the JSE, but excluding all companies listed in the resources and financial economic groups.
Investment Portfolio An investment portfolio is a collection of securities owned by an individual or institution (such as a Collective Investment scheme). A fund may include a combination of financial instruments such as bonds, equities, money market securities, etc. The theory is that the investments should be spread over a range of options in order to diversify and spread risk.
JSE Securities Exchange The primary role of the JSE Securities Exchange is to provide a market where securities can be freely traded under regulated procedures.
Linked Investment Service Provider (LISP) In layman’s terms a Linked Investment Service Provider is a financial institution which packages, distributes and administers a broad range of unit trust based investments spanning voluntary to retirement planning products. Any investment made through these products provides a client a single entry into a selection of investment elements wherein a financial adviser assists in designing a suitable investment plan.
Liquidity A liquid asset is one that can be bought easily and sold easily - converted into cash at a fair market price. 
Management Companies The management company, or “manager” as it is more often referred to, is the central coordinating element of a Collective Investment scheme (CIS). It is usually the company that launches a CIS, and which maintains overall responsibility for administration, appointing asset managers, appointing trustees, and the marketing of the fund to investors. While some of these functions might be outsourced, it is the CIS manager who directs activities.
Portfolio Managers The person(s) responsible for implementing a fund’s investing strategy and managing its portfolio trading activities. A fund can be managed by one person, by two people as co-managers and by a team of three or more people.
Price to earnings ratio Price to earnings ratio or p:e ratio, is calculated by dividing the price per share by the earnings per share. This ratio provides a better indication of the value of a share, than the market price alone. For example, all things being equal, a R10 share with a P/E of 75 is much more “expensive” than a R100 share with a P/E of 20.
Property Property has some attributes of shares and some attributes of bonds. Property yields are normally stable and predictable because they comprise many contractual leases. These leases generate rental income that is passed through to investors. Property share prices however fluctuate with supply and demand and are counter cyclical to the interest rate cycle. Property is an excellent inflation hedge as rentals escalate with inflation, ensuring distribution growth, and property values escalate with inflation ensuring net asset value growth. This ensures real returns over the long term.
Rand Cost Averaging To reduce the risk of investing all your cash at once when the unit trust price is high one can break the contributions into a number of smaller contributions. Should share prices begin to fall, a fixed sum will buy more units than during high market prices.
Real, Absolute and Targeted Return Funds Often the term absolute return funds has been used interchangeably with real return funds and targeted return funds, when in fact they are quite different. In its purest form, an absolute return fund targets a return above zero. Real return funds target a given return above inflation, whilst targeted return funds aim to deliver a predetermined target.
Resources and Basic Industries Funds These funds seek capital appreciation by investing in the shares of companies whose main business operations involve the exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry and other natural resources, or where at least 50 percent of their earnings are derived from such business activities, and excludes service providers to these companies.
Retirement Planning Investment An investment made in a pension fund, provident fund or retirement annuity, for the purpose of saving for retirement. If you are paying income tax, you may claim a tax deduction for your contribution, up to a certain maximum limit.
Smaller Companies Funds Smaller Companies Funds seek maximum capital appreciation by investing in both established smaller companies and emerging companies. At least 75 percent of the fund must be invested in small- to mid-cap shares which fall outside of the top 40 JSE-listed companies by market capitalisation.
Strategic Asset Allocation The portfolio is managed with a long-term view with no, or limited deviation from the chosen asset allocation.
Tactical Asset Allocation Tactical asset allocation allows for major movements away from the original asset mix, based on an investor’s valuation of the markets.
Value Funds These funds aim to deliver medium- to long-term capital appreciation by investing in value shares with low price/earnings ratios and shares which trade at a discount to their net asset value.
Voluntary Investment Mostly referred to as a discretionary investment. As an investor you have the freedom to withdraw your funds at any time. Contributions made to the fund cannot be deducted from income tax.
Voluntary Purchase Annuities This is an annuity of your choice in which you invest a lump sum from any source and from which you can draw a regular income. A voluntary purchase annuity can be bought for a fixed period or to provide an income until you die.


Sources

  • Unit Trusts and Collective Investments (September 2007)
  • The Financial Sector Charter Council
  • Personal Finance (30 November 2002)
  • Introduction to Financial Markets
  • Personal Finance, Quarter 4 2007
  • Investopedia (www.investopedia.com)
  • The South African Financial Planning Handbook 2004