23 October 2020

Understanding sharemarket jargon

Information about the sharemarket and investing in shares can get quite technical and along with that comes a lot of specialised language and jargon.

This page has some of the more common terms you might come across.

If there’s a term you’ve come across that you’re not sure of, contact us and we’ll see if we can help. 

Bear market: A market in which share prices are falling dramatically (usually 20% or more) amid widespread pessimism and negative investor sentiment. This may prompt investors to sell. This is the opposite of a bull market.

Broker: A financial services provider who holds or deals with client money or property on behalf of clients.

Bull market: A market in which share prices are rising, encouraging investors to buy. It’s normal for share prices to rise and fall continuously during trading, so the term ‘bull market’ is typically only used when a large proportion of share prices are rising over an extended period. Bull markets tend to last for months or even years.

Dividend: The distribution of a reward from a portion of a company's earnings that is paid to a class of its shareholders. Dividends are decided and managed by the company's board of directors, though they must be approved by the shareholders through their voting rights.

Earnings: A company’s net profit after tax. Earnings can also be before tax, so it’s important to understand what definition of ‘earnings’ is being used.

EBIT: Earnings before interest and tax. This is the profit a company makes before expenses such as interest payments and tax.

EBITDA: Earnings before interest, tax, depreciation and amortisation’. As above, but also excludes depreciation and amortisation, which are accounting treatments used to reflect the falling value of fixed assets as they age.

Growth share: Shares in companies that have the potential to achieve above-average growth in share price over time. Growth companies tend to pay small or no dividends and re-invest their profits into growing their business.

Income shares: Shares for which companies pay out a high proportion of earnings as dividends and offer a relatively high dividend yield.

Index: An index is a measure of how a selected portion of a share market is performing. Investors and the media use indices to describe how a market is performing and to compare returns on specific investments. Common examples include New Zealand’s S&P NZX50G index, the S&P500 from America, and the ASX 200 from Australia. The number in each of these examples represents the number of companies included in the index.

Initial Public Offer (IPO): The process of publicly offering shares to investors and listing on the share market. An IPO (also called a float or listing) may involve the issue of new shares to raise more capital for the company or the sale of shares previously owned by other shareholders.

Imputation credits: When a New Zealand company pays a dividend, it may attach imputation credits to reflect the tax already paid on earnings. This is because companies pay dividends out of net profit after tax and prevents you paying tax twice.

Market capitalisation: The total market value of a company or market as a whole, as determined by the buyers and sellers. To calculate, multiply the total number of shares on issue by its market price. This enables investors to work out the market value of one company, an index or the value of all companies listed on an exchange.

Market price: The prevailing price of shares traded on a stock exchange. This may be the last price at which the shares traded, or the most recent price offered (selling) or bid (buying) for the shares.

Payout ratio: The percentage of after tax profits paid out to shareholders as dividends.

Quotes: The prices at which investors offer to buy and sell shares to each other. Final ‘buy’ and ‘sell’ quotes for each trading day are useful for investors looking ahead to the next trading session.

Rights issue: An offer of additional shares to existing shareholders in proportion to their shareholding, usually at a discount to the prevailing market price.

Stocks: An American word for shares.

Traded volume: The number of shares bought and sold in the market. There are trading volume numbers for each company.

Yield: The annual income return on an investment in percentage terms compared to either the original investment or the market value of the investment.