Active Return

— The portion of returns that result from the active management of an investment portfolio. Also known as residual return.

Active Risk

— The risk that arises from active management, as measured by the volatility of the active return. Also known as residual risk.

Adviser

— Refer to Financial Adviser

Alpha

— The return earned by a fund or portfolio in excess of a particular benchmark. Historical alpha measures excess returns over time.

Asset allocation

— The proportion of your total capital you invest in different asset classes based on your investment objectives, time horizon and risk tolerance level.

ASTC Settlement Rules

— The operating rules of ASX Settlement and Transfer Corporation Pty Limited.

ASX

— ASX Limited, which is the primary Australian exchange for equities, derivatives and fixed-interest securities.

ASX Code

— A unique code issued and used by the Australian Securities Exchange (ASX) to identify listed companies on ASX.

Authorised Participant (AP)

— Specialists or institutional investors in the US who can create and deliver additional shares of an ETF into the market.

Benchmark

— An index that serves as a reference against which the performance returns of a fund or portfolio is measured. For example, a fund may be compared with the Standard & Poor's 500 Index to assess how it performs over time.

Beta

— A measure of risk expressed as the volatility of a share, fund or portfolio relative to the market. The greater the beta, the greater the volatility.

Bid/Ask

— Also called Bid/Offer. The bid is an offer made by an investor, a trader, or a dealer, to buy a security. The ask (or offer) indicates the price a seller is willing to accept for a security and the quantity of the security to be sold at that price.

Bid/ask spread

— The bid is the highest price a buyer is willing to pay for a security, and the ask is the lowest price at which a seller is prepared to sell a security. Together they form the quotation for the sale or purchase.

BlackRock

— BlackRock Asset Management Australia Limited and its parent affiliate BlackRock Institutional Trust Company, N.A., are subsidiaries of BlackRock, Inc., one of the largest institutional investment managers in the world.

Bond

— Debt obligation of a government or corporate issuer, usually paying semi-annual interest and featuring a guarantee of repayment of principal in full at maturity.

Buying on margin

— Using borrowed funds, e.g., margin loans, to buy more investments.

Capital gains tax

— Federal tax payable on capital appreciation when securities are sold.

CDI

— The CHESS Depositary Interest (CDI) is a financial product created and issued by, and quoted on the ASX. CDIs confer a beneficial interest in the foreign financial product (such as the shares in an iShares fund) to which it relates. For example, if a foreign company issues CDIs in respect of its shares, the holders of the CDIs obtain "beneficial ownership" of those foreign financial products. The main difference between holding CDIs and holding foreign financial products directly is that you have beneficial ownership of the equivalent number of foreign financial products instead of legal title. Legal title to the foreign financial products is held by a nominee company on behalf of CDI holders.

CHESS

— Stands for the Clearing House Electronic Subregister System (CHESS), an ASX computer system that manages the settlement of transactions executed on the Australian Securities Exchange. CHESS provides a service that is faster and more efficient than paper-based alternatives. The cost of using CHESS is included in brokerage paid by investors. CHESS also facilitates the paperless transfer of legal title to ASX quoted financial products.

Commission

— The fee charged by a stockbroker to buy or sell shares on behalf of an investor client. (Note: A share transaction involves transaction fees which may not be part of any commission charged by the stockbroker)

Common shares - stock, and equities

— Investment securities that represent proportionate ownership in a company, usually publicly listed.

Core Satellite Investing

— Investment strategy based on using ETFs as the "core" of an investor's portfolio in combination with other more specialised investment options, such as other managed funds or individual shares (the "satellites").

Correlation

— Correlation measures the strength of the relationship between two investments. Combining low-correlating assets can help to diversify portfolio risk. Correlation values range between +1 and -1. Assets that are perfectly correlated, or move together in the same direction, have a positive correlation of 1. Those that exhibit an inverse relationship (moving in opposite directions) have a correlation of -1. A correlation of zero implies that there is no relationship.

Discounts and premiums

— A share price trading below or above (respectively) the NAV of a fund.

Distributions

— The regular payment of dividends and other income and capital gains from fund investments.

Electronic Holdings Statements

— Since 1999, instead of paper share certificates, ownership of shares is provided in the form of a holding statement. Share certificates have now been phased out and all share holdings on ASX are registered electronically. A new shareholder receives an initial statement when the holding is first established, and then receives updated holding statements whenever they have made a change in their share holdings statement. A statement records the number of shares an investor owns at the beginning and end of the period by detailing all changes made since.

Equities

— Refer to Shares

Exchange traded fund (ETF)

— An ETF is an open-ended mutual fund which is listed and traded on major stock exchanges around the world. An ETF seeks to generally correspond to the price and yield performance of a particular index before fees and expenses.

Financial Adviser

— A person who is licensed to provide financial advice. To be licensed an adviser must work for, or represent, a financial advisory business that holds an Australian financial services (AFS) licence. iShares recommends you speak to your financial adviser before investing in an iShares fund.

Futures

— Agreement to buy or sell a set number of shares of a specific stock in a designated future month at a price agreed upon today by the buyer and seller. The contracts themselves are traded on the futures market. A futures contract differs from an option because an option is the right to buy or sell, while a futures contract is the promise to actually make a transaction. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying investment.

Futures contract

— A legally binding agreement to buy or sell a commodity, financial instrument or other interest on a designated exchange at a specific price on a designated future date.

Hedging

— The practice of reducing exposure to risk of loss resulting from fluctuations in exchange rates, commodity prices, interest rates etc, by taking an equal but opposite position in a derivatives market.

Index Fund

— A fund designed to seek the investment performance that correspond generally to the price and yield performance, before fees and expenses of a particular market index developed by a index provider.

Index or underlying index

— An index is a selection of securities selected by an index provider to be representative of a market, market segment, or specific industry sector of one or more countries. The index representation can be as broad as the U.S. share market (such as the S&P 500) or as narrow as one country or industry (such as MSCI Japan). Each index has its own construction methodology, or rules for inclusion, established by its index provider. The companies that compose an index are commonly referred to as 'constituents'.

Index shares

— Individual shares that comprise a particular index, e.g. the 2000 small cap companies that comprise the Russell 2000 Index.

Indexing

— Investment style which seeks to replicate recognised index benchmarks in both equity and bond markets.

Instalment warrants

— A security that entitles the holder to buy issued securities of a company at a specified price typically in two instalments (payments): an initial payment followed by a second, which includes fees and interest, paid optionally about 14 months afterwards. Depending on the terms of the instalment warrants issued, the instalments confer full dividends, franking credits, and voting rights of the securities bought. Instalment warrants are issued by financial institutions.

Investment Adviser

— Refer to Financial Adviser

iShares

— Is the trademark name of two open-ended management investment companies in the United States of America, registered under the Investment Company Act of 1940.

Large-cap stocks

— The largest companies as measured by market capitalisation. Usually domestic or multinational industry leaders; also often the most liquid (heavily traded) stocks. An example is the S&P 500 Index.

Leverage

— The use of borrowing to seek a larger rate of return on an investment or the use of margin accounts or securities that require payment of only a fraction of the underlying security's value. For example: Assume an investor buys a stock at $10 with a $5 investment and borrows the rest. If the share price goes to $11, the $1 gain translates into a return of 10% on the stock itself ($1/$10), but a 20% return on the investor's equity ($1/$5).

Limit Order

— An order to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being cancelled.

Long and short selling

— An investor holds a long position when they have bought a stock in expectation that its share price will rise. Short selling involves selling borrowed stock, with the hope that its price will fall. If the price does fall, the share can be bought back and returned to the lender. The investor realises the difference between the price at which they sold and the price at which they bought as profit.

Managed fund

— An actively managed pooled investment fund sponsored by an investment company or financial institution covering a wide range of Australian and international asset classes.

Management Costs

— Total fund management fees and expenses as a percentage of average net assets, and is equivalent in calculation to the indirect cost ratio ('ICR') and the management expense ratio ('MER').

Margin (loan)

— The amount a broker will lend a client to purchase stock.

Market capitalisation

— Is the value (or size) of a company. To calculate, multiply the total number of shares on issue of the company by its share price.

Market Maker

— A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security is known as a Market Maker. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares.

Market Order

— An order to buy or sell a share immediately at the best available current price.

Market-cap index

— Weighting technique used to determine the holdings of an index. With a market-cap index, the weight or representation of each constituent company in the index is proportional to the total market value of its outstanding common shares. This in turn determines the number of shares an index fund will hold of each constituent index stock.

Maturity

— For bonds, refers to the term (time period) before the bond matures. Maturities are short-term (1-3 years), mid-term (5-15 years) or long-term (over 15 years).

Mid-cap stocks

— The mid-sized companies, as selected by an index provider, that represent the second tier of stocks by market capitalisation and comprise up-and-coming market leaders in their respective industry groups.

Net asset value (NAV)

— The NAV is calculated by dividing the total value of the net assets by the total number of shares outstanding for the fund.

Option

— An agreement which conveys to the holder the right, but not an obligation, to buy (receive) or sell (deliver) a specific security at a pre-determined price and within a stated period of time.

Options

— An option gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Investors, not companies, issue options. Buyers of call options bet that a stock will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the stock's price will drop below the price set by the option. An option is part of a class of securities called derivatives, which means these securities derive their value from the worth of an underlying investment.

Price to Book Ratio (P/B)

— The price to book ratio is the latest closing price divided by the book value per share. Book value is an accounting term representing total assets less intangible assets and liabilities, and represents the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. P/E and P/B ratios are useful in comparing different equities in the same sector, e.g., individual financial companies. They are less commonly used by iShares investors because iShares ETFs represent a basket of securities across a wide universe of companies.

Price to Earnings Ratio (P/E)

— The price/earnings ratio is the latest closing price divided by the latest 12 months' earnings per share. P/E and P/B ratios are useful in comparing different equities in the same sector, e.g., individual financial companies. They are less commonly used by iShares investors because iShares ETFs represent a basket of securities across a wide universe of companies.

Return

— Dividend and/or interest income plus any capital gains accruing to an investor.

Secondary market

— Refers to the trading of shares and other financial products on ASX after the primary market issuance by a company. To illustrate, after a company has listed on ASX and issued shares to investors (This process is known as an “IPO” or Initial Placement Offering), the shares in that company are then available for trading (buy / sell) to other investors on ASX in the secondary market.

Share Certificate

— A document with a unique number that states that the person is a registered holder of a number of shares. Since 1999, paper share certificates were replaced by electronic holding statements.

Shares

— Also known as equities, and represents part-ownership of a company, as distinct from debt securities such as bonds and debentures. Shares can either be ordinary shares, preference shares or partly-paid (contributing) shares. The more shares an investor owns, the more of the company they own.

Short sale

— Where an investor or fund manager borrows a security, and subsequently sells the security with an obligation to purchase the security and return it at a later date.

Specialist

— A member of an exchange who acts as the Market Maker to facilitate the trading of a given stock is known as a Specialist. The Specialist holds an inventory of the stock, posts the bid and ask prices, manages limit orders, and executes trades. Specialists are also responsible for managing large movements by trading out of their own inventory. If there is a large shift in demand on the buy or sell side, the Specialist will step in and sell out of their inventory to meet the demand until the gap has been narrowed.

Spread

— The difference between the bid and the ask price of a security.

Stop Order

— An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.

Stop-loss order

— A client's instruction to a broker to sell in the event that a share price falls to a certain level.

Swaps

— An arrangement in which two entities lend to each other on different terms, e.g., in different currencies and/or at different interest rates: fixed or floating.

Taxable income

— The excess of assessable income over allowable deductions calculated according to the applicable income tax legislation.

Ticker symbol

— The trading symbol assigned by an exchange to a particular exchange.

Tracking Error

— The difference between a portfolio's actual return and its benchmark return.

Undistributed net income, undistributed net earnings

— Profits retained by a fund that have yet to be distributed to shareholders.