Investment Terms & Definitions

Bond

Simply put, a bond is an IOU (abbreviation for I owe you) issued by a borrower, normally a government or a corporate, to a lender. The borrower promises to pay back to the bondholder the principal debt, which is the capital sum borrowed, as well as interest, normally paid in regular installments (the coupon) throughout the life of the bond. When interest rates rise the prices of bonds usually decline and when interest rates fall the prices of bonds usually increase.

Consumer Price Index (CPI)

This is one of the measures of consumer inflation. It reflects the rate of increase in the prices of a pre-determined basket of consumer goods and services and includes mortgage costs. It is therefore a broader measure of inflation than Headline CPI.

Headline CPI

This is one of the measures of consumer inflation. It reflects the rate of increase in the prices of a pre-determined basket of consumer goods and services, but does not include the impact of mortgage costs.

Credit

In investment terms this refers to corporate bonds that are issued by companies when they wish to raise capital.

Current Account

The current account of a country’s balance of payments reflects the net position with regard to the value of trade and services with the rest of the world. A country with a current account deficit imports goods and services of a greater value than it exports.

Dividend

Some public listed companies distribute part of their profits to shareholders, which is known as a dividend.

Dividend Yield (DY)

The dividend yield is the share of profits distributed to shareholders divided by the current share price.

Duration

This tells us how much the price of a bond will increase or decline if interest rates move.

Earnings Per Share (EPS)

This defines the total profits of a company over a specific period – usually a period of six or twelve months – divided by the total number of shares in issue. EPS growth refers to the change in profits per share over a specific period.

Equities

This refers to the shares issued by a company, which is listed on a stock exchange. Sometimes investors refer to equities as stocks or shares.

Fixed-income Market

This refers to the market where interest-paying assets are traded such as bonds and cash.

Gross Domestic Product (GDP)

This is a measure of a country’s economic output. GDP growth refers to the rate at which a country’s economic activity (production of goods and services) increase.

Inflation

This refers to the rate at which the prices of goods and services increase over a specific period.

Inflation Target Band

The South African Reserve Bank (SARB) introduced a target range of 3% - 6% for inflation. The SARB’s intention is to ensure that inflation does not exceed the upper band of this range, i.e. 6%. The overnight bank repurchase (repo) rate is the only tool at the disposal of the monetary authorities. Therefore, to help curb inflation the SARB may raise the repo rate.

Life Assurance Retirement Annuity

This is a tax-efficient personal pension invested in smoothed bonus or market-linked investment policies and offered by a life assurance company. Costs are recouped over the term of the contract. Hence, the need for transfer penalties.

Listed Property

This refers to shares in property companies or units in property trusts, listed on a stock exchange.

Long-dated and Short-dated Bonds

This refers to the date of maturity (or expiry) of a bond. For instance, a long-dated bond has a maturity of ten years or more, while a short-dated bond has a maturity of up to three years.

Price Earnings Ratio (PE)

This is one of the key ratios when assessing the value of a company. This ratio measures a company’s share price over the company’s profits. A PE multiple indicates the price investors are paying for the company’s earnings (profits).

Producer Price Index (PPI)

This is a measure of inflation pertaining to producers or manufacturers. It reflects the rate of increase in the prices of a pre-determined basket of producer goods and services. If the prices of goods and services being manufactured locally are increasing at a very rapid rate, this will usually lead to a higher rate of increase in the prices of consumer goods and services.

Recession

A period of zero growth or negative economic growth.

Smoothed Bonus Fund

This is usually one of the options available in a life assurance retirement annuity. The life assurance company smooths the fund’s investment returns over time and offers certain performance guarantees. When transferring out of a smoothed bonus fund, investors could also face an additional deduction in the form of a market value adjuster (MVA).

Stagflation

This describes an environment of zero growth or negative growth and accelerating inflation.

Unit Trust Retirement Annuity

This is a tax-efficient personal pension invested in unit trusts and offered by an investment platform or a unit trust company. Fees are paid as and when costs are incurred. Hence, no transfer penalties apply. Unit trust retirement annuities typically offer greater choice and flexibility when compared to life assurance retirement annuities.

Yield Curve

The yield curve shows the relationship between interest rates and various fixed-income assets such as bonds with different maturity dates. Market analysts study the shape of the yield curve as it can help to predict future interest rate changes and economic activity. Normally longer dated bonds would offer a higher yield (interest rate) to investors than shorter dated bonds to compensate for the increased risk over time. However, there are times when shorter dated yields offer higher interest rates to investors than longer maturity bonds. This is reflected in the shape of the yield curve, which is described as being inverted. When the yield curve flattens, shorter and longer term rates are usually moving closer to each other.