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Glossary of Important Financial Terms

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Term Definition
Balance Sheet

Refers to a financial table which lists the values of a company's assets, liabilities and shareholders' equity. A "strong" balance sheet usually refers to one which has a low level of liabilities relative to assets and/or a low level of accounts receivables relative to total assets. A high level of inventory as a proportion of assets is also often seen as a sign of a "weak" balance sheet.

Basis-Points

One-hundredth of a percent (as applied to changes in interest rates)

Bonds

A type of debt instrument issued by companies, which promise to repay the holder the principle value of the bond at maturity, plus interest at pre-determined intervals. However, bond holders may choose to sell the bonds at any time on the open market instead of holding it to maturity. Bonds are often rated by agencies, for the likelihood that the issuers have the ability to redeem the bonds. An issuing company which does not have the ability to pay bond holders is said to be in "default".

Book Value

Refers to the valuation of assets according to a company balance sheet. This may be different to real/actual value as companies do not routinely re-mark their assets to market values. Over time, it may be possible for a company’s assets to be marked at an unrealistically low or high level compared to the market values.

Cash Flow

The sources of inflows and outflows of cash in a company. If inflow exceeds outflow, a company's cash position rises. Cash flows are generally classified into operating, financial and investment flows.

Closed End Fund (CEF)

A closed-end fund starts as a new fund which calls for investors and is then closed for subscription once the targeted fund size is reached.

Convertible Bonds (CB)

A type of bond which pays interest and grants the holder the option (but not the obligation) of converting the bonds to shares of the company issuing the bond. A convertible bond allows the holder to benefit from potential upside from the increase in the issuer's share price. On the other hand, the issuer benefits by raising funds without immediately diluting the shareholding base of the company.

Credit Default Swaps (CDS)

A financial instrument that allows bond investors to insure against default. CDS are typically quoted in in five-year terms and denominated in basis points (bps). For example, a 500 bps five-year CDS means that it costs $5 million per year to insure $100 million of a particular debt. CDS prices of 1,000 bps and above are generally associated with distressed debts.

Current Assets

Current assets are those which can be liquidated at short notice. A company whose current liabilities well exceed its current assets would be in danger of defaulting on its debt unless new current assets are raised. Cash, fixed deposits, inventories and trade receivables are common current assets.

Current Liabilities

Current liabilities are those which are due to be repaid within one year. A company whose current liabilities well exceed its current assets would be in danger of defaulting on its debt unless new current assets are raised. Short-term loans and trade payables are common forms of current liabilities.

Deleverage

The reduction of borrowings to a lower level relative to a company’s assets, often forced upon by the recall of loans by banks.

Dividends

Money to shareholders paid out of a company’s earnings or retained earnings. Dividends may also be in the form of a “stock dividend”, in which shareholders receive more shares in-lieu of cash.

Dollar Cost Averaging

Dollar Cost Averaging is the practice of investing at fixed regular intervals, regardless of market conditions. The benefit of such a strategy is that it removes the need to spend effort on reading trend signals and trying to time the market. It also reduces the effects of emotions (such as fear and greed) on investment decisions.

Earnings per Share (EPS)

The net profit of a company, divided by the total number of shares outstanding.

Enterprise Value (EV)

Enterprise value is a measure of the value of a company, by adding market capitalization to debt and subtracting cash equivalents. Enterprise value is often used in the valuation of a takeover target company, as it takes into account the net debt obligations assumed by the acquirer.

Equity

(1): Also known as Shareholders’ Equity. It is the value of a company’s assets, less its liabilities. Equity is built up from shareholders’ investments and retained earnings (2): Refers to shares/stocks and their derivatives

Exchange Traded Fund (ETF)

An Exchange Traded Fund is a passively managed fund which attempts to closely mirror the performance of a market index, by investing in the stocks that make up the index. An ETF usually does not carry an initial sales charge. Instead, a sales charge is indirectly charged via a bid-ask pricing mechansim. An ETF has an annual management fee much lower than a unit trust since it is less actively managed.

Foreclosure

Usually used in the context of homes being repossessed by banks when home owners are not able to keep up with loan repayments.

Forex

Short form for foreign exchange

Forward P/E

Forward P/E refers to the ratio of share price to future (expected) earnings per share.

Free Cash Flow

A company's cash generated from operations, less the cash incurred in capital investment. It is a measure of how a company can generate cash without having to resort to borrowings.

Fundamental Analysis (FA)

A method which attempts to identify investment targets (especially stocks), based on an assessment of a company's intrinsic value and value-generating ability, relative to its current market price.

Gearing

The ratio of a company’s borrowings to its assets

Government Linked Company (GLC)

A GLC is often used in the Singapore context to refer to Singapore-based companies which are directly or indirectly, fully or partially owned by the Government of Singapore. These companies may be subsidiaries or associates of Temasek Holdings, ministries, statutory boards or other GLCs. A Temasek Linked Company (TLC) is a more narrow group of GLCs which are owned by Temasek Holdings.

Hedge Fund

A highly-leveraged type of fund which are not limited to investing in any category of assets and are subject to a somewhat less rigorous accountability standards compared to unit trusts or mutual funds. Funds are normally drawn from high net-worth individuals or organizations.

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