Key Terms Investors Need to Know
There are countless words and acronyms that can be confusing to investors – both new and old. So, whether you’re here to learn or just need to brush up on your memory – here are some of the most common terms you should know about trading shares on the ASX.
Share Price Premium or Discount to Net Tangible Assets (NTA)
Investors often talk about shares trading at a ‘discount’ or ‘premium’ to NTA. NTAs are calculated as the total assets of a company, minus intangible assets such as goodwill and liabilities.
If the share price is higher than the NTA, the stock is considered to be trading at a premium. But if the share price is trading below the NTA, the stock is considered to be trading at a discount.
Fully Franked Dividends
Many companies listed on the ASX pay a tax rate close to 30% on profits, and a dividend is paid to shareholders from after-tax profits. This means shareholders are entitled to a credit for tax the company had already paid – otherwise known as franking credits.
Net Asset Value (NAV)
NAV is the book value of a company’s assets divided by the number of shares on issue.
Dividend Reinvestment Plan (DRP)
A DRP is an easy way to accumulate more shares over time by reinvesting your dividends and enjoying the benefits of compound returns over time with no brokerage costs when acquiring additional shares. It’s entirely flexible, allowing you to join or withdraw at any time.
ETO (Exchange Traded Options)
An option is a contract between two parties conveying a right, but not an obligation to buy (Call option) or sell (Put option) an underlying security at a specified price, within a specified time for an agreed price. ETO’s offer client’s the potential to benefit from hare agreed price movements without having to hold the underlying shares. Clients are able to profit from both upward and downward movements in the underlying shares over which the options are traded.
Have a look at our ETO page: https://www.iinvestadvisory.com/exchange-traded-options/
Spread
This is the difference between the bid and the ask prices of a stock, or the amount for which someone is willing to buy it and the amount for which someone is willing to sell it. For instance, if a trader is willing to trade XYZ stock for $10 and a buyer is willing to pay $9 for it, the spread is $1.
Earnings per share (EPS)
A financial ratio calculated by dividing the company’s earnings (profits) by the number of shares on issue. The higher the EPS, the more a share is potentially worth.
If you want to know more information or are interested in more key terms that could help you in your stock trading, head to our Glossary page.
References
[1] Australian Foundation Investment Company
[2] ASX
[3] iInvest Trading & Advisory
[4] Timothy Sykes
[5] Money Smart Gov
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