Glossary
Demystifying Investment
One theory behind the development of Cockney Rhyming Slang is that it was used by market traders in the East End to allow them to talk among themselves and collude without their customers knowing what they were saying.
Just down the road their be-hyphened cousins were developing a lexicon all of their own and arguably for a similar purpose. Since time immemorial the City thrived as a ‘club’ that served to further the interests of its members whilst allowing them to charge handsomely to deliver their services to those not in the ‘know’.
However, all that is changing; DIY Investor believes that one of the key steps toward empowering the self-directed investor is demystifying the jargon that exists around financial services.
Clearly understood it is possible for the DIY investor to make objective comparisons of products and assess their suitability for their personal objectives.
Here is a Glossary of some of the more commonly used terms and phrases in financial services.
A
AAA
The highest rating for corporate securities such as bonds, it reflects the unquestioned solidity of the instrument. The rating is issued by Standard and Poors and Moody, two US credit rating agencies.
Absolute Return
A change in value of an investment measured in absolute, not relative, terms. An absolute return fund aims to generate positive returns in all market conditions over a set period of time, for example three years or over a market cycle.
Accrued Interest
The interest that a bond has earned since its most recent coupon was paid. The price for bonds ignores this element and quotes the price of bonds without accrued interest. However a buyer would have to pay for the interest that has accrued.
”Accumulation
Shares where the income from a fund is reinvested back into the fund to increase the share price.
Active management
Approach to investment management which aims to outperform rather than match the return of a particular market index or benchmark.
After Hours Dealing
Deals made between members of the Stock Exchange after the official close of the market. Many shares and bonds are now quoted on more than one market and the Exchange allows dealers to buy or sell outside offical hours. These transactions are usually treated as having been done at the start of the following business day.
AIM
The Alternative Investment Market is a stockmarket launched in June 1995 in London for smaller growing companies which would not normally qualify for listing on the main market.
Alpha
The additional return generated by manager skill as opposed to general market movements. Historical alpha measures the returns achieved by active management over time.
Alternative investments
Investments that do not fit into traditional categories of equities, bonds and cash, examples are private equity, venture capital, hedge funds, absolute return funds and property.
Annual management charge (AMC)
A fee charged for the day to day management of a fund based on a percentage of a fund’s value.
Annuity
A product that guarantees the purchaser – typically someone reaching pensionable age – a guaranteed income for the rest of their life. From April 2015 it is no longer compulsory for a pensioner to purchase an annuity and sales have slumped.
Arbitrage
The concept of making a profit without risk and without any net outlay of capital. The arbitrageur will simultaneously buy and sell the same asset or two bundles of assets that amount to the same and profit from the difference in price. For example an arbitrageur would simultaneously buy one bond contract in London and sell one bond contract in Germany at a higher price locking in a profit because at that moment in time the price on the two markets are different. There are many different types of arbitrage using many underlying instruments.
Asset
Within an investment portfolio shares, funds, bonds and property are known as assets. Generally the term refers to something that has a realizable value or will generate net revenues greater than the cost of the item itself. An asset is anything that might be set against liabilities.
Asset allocation
The distribution of investments across categories of assets, such as equities, bonds and cash. Asset allocation affects both risk and return and is a central concept in financial planning and investment management.
AUM
‘Assets Under Management'
B
Bargain
The colloquial name for a transaction on the Stock Exchange.
Base Rate
The lowest rate of interest that banks will charge for loans and deposits. It is related to the money markets which are in turn influenced by the minimum lending rate. The interest rate on most loans can be quoted as a percentage over base rate. In the UK, the Monetary Policy Committe of the Bank of England is responsible for setting interest rates.
Basis Point
A basis point (sometimes ‘Bip’) is 100th of a percentage point. It is used in markets where the sizes of trades mean that large amounts of money can change hands on small price movements. Thus, 100 basis points equal 1%. A yield that has increased from 6.00% to 6.70% would be said to have risen by 70 basis points.
Increasingly brokers and platforms charge a fee based upon a percentage of AUM (see above) and this is often quoted in basis points.
Increasingly brokers and platforms charge a fee based upon a percentage of AUM (see above) and this is often quoted in basis points.
Bear and Bull Markets
A bull market is one where share prices generally have been rising across the whole market for some time. A bear market, on the other hand, is where prices have been falling for some time. Investors who believe the market will rise are bullish and those who think the market will fall are bearish.
Benchmark
Measure against which a portfolio’s risk and return is assessed.
Beta
Statistical measure of the sensitivity of a security or portfolio to movements in the relevant market
Bid
The price at which a market maker is prepared to buy stock and the private investor is able to sell. The converse of the offer price which is the price at which a market maker is prepared to sell stock. Hence the expression “the bid-offer spread”.
Blue chip
Shares in large companies with a strong credit rating.
Bond Rating
The risk of a bond issuer going into default and failing to pay the interest and/or the capital due on the bond is rated by several credit organisations. The best known are probably Moodys and Standard and Poors. For Standard and Poors the credit ratings range for AAA the best to D, meaning that the bond is already in default. Bonds with a rating of BBB or better are considered an investment grade and good enough for institutional investors. Bonds graded below this are normally termed as junk bonds.
Bond
Bonds are debt that pay a fixed rate of interest (except in a few cases such as zero coupon bonds – see zero coupon bonds) issued by companies and governments. The repayment of the principal is due at a pre-determined date called maturity. UK government bonds are known Gilt-Edged Stocks or Gilts for short (see Gilt-Edged Stocks).
Book Price or Book Cost
The cost per share at which a holding of any financial instrument was bought, including all costs such as stamp commission etc. If more, say, shares are bought later, it is usual to calculate an average book cost for the whole holding.
BRIC
An acronym for the fast growing economies of Brazil, Russia, India and China.
Broker
Professionals who buy and sell shares on behalf of their clients.
Bulldog Bonds
Bonds issued by governments in sterling other than the British Government gilts.
Buy and Hold Strategy
A passive strategy that entails purchasing an asset and holding on to them over the long term as opposed to the more active strategies of trading in and out of shares on a frequent basis.
C
Capital
For investors, it refers to their stock of wealth, which can be put to work in order to earn income. For companies, it typically refers to sources of financing such as newly issued shares
Capital adequacy ratio
A measure of a bank’s ability to absorb losses. It is defined as the value of its capital divided by the value of risk-weighted assets (ie taking into account how risky they are).
Capital Gains Tax
A tax on the increase of a value of assets realised in a particular year. Tax is payable on gains above an individual’s Capital Gains Tax allowance (£11,100 2015/6). The rate at which the tax is payable can vary and will typically be announced in the Government’s Budget Statements.
Clean fees
Fund management fees that are all inclusive, to which there will be no extra charges added.
Closed End Fund
Closed End Funds usually refer to investment trusts. They are companies whose shares are traded on the stock exchange. Because of this the number of shares that the Fund Portfolio is divided into is fixed, unless the fund has a new share issue. This means that those wishing to invest in the fund have to buy shares on the secondary market. As a consequence, Closed End Funds rarely trade at Net Asset Value (see below), their price being determined by supply and demand.
Commodities
Products that, in their basic form, are all the same so it makes little difference from whom you buy them and therefore have a common market price.
Contracts to buy and sell commodities usually specify minimum common standards, such as the form and purity of the product, and where and when it must be delivered.
Markets range from soft commodities such as sugar, cotton and pork bellies to industrial metals such as iron and zinc.
Contracts to buy and sell commodities usually specify minimum common standards, such as the form and purity of the product, and where and when it must be delivered.
Markets range from soft commodities such as sugar, cotton and pork bellies to industrial metals such as iron and zinc.
Consumer Price Index (CPI)
The the official measure of inflation of consumer prices of the United Kingdom. The CPI calculates the average price increase as a percentage for a basket of 600 different goods and services. Around the middle of each month it collects information on prices of these commodities from 120,000 different retailing outlets.
Contract for Difference (CFD)
An agreement between two parties to exchange the difference between the opening price and closing price of a contract. You can use CFDs to trade and speculate on the price movements of thousands of financial markets regardless of whether prices are rising or falling.
Corporate Bond
A Bond issued by a company. Bonds are debt that usually pay a fixed rate of interest. The repayment of the principal is due at a pre-determined date called maturity.
Correction
A short-term drop in stock market prices. The term comes from the notion that, when this happens, overpriced or underpriced stocks are returning to their “correct” values
Coupon Yield
The amount of interest expressed as a percentage of the book cost (see book price) which an investor will receive each year on his investment in, for example, a bond. Fixed coupons are eroded in percentage terms if the price of the asset goes up.
Coupon
1. The fixed rate at which interest is paid on a bond. 2. The physical ticket attached to a bearer certificate that, when presented to the appropriate authority, usually a bank, will be redeemed for the dividend.
Credit crunch
A situation where banks and other lenders all cut back their lending at the same time, because of widespread fears about the ability of borrowers to repay.
If heavily-indebted borrowers are cut off from new lending, they may find it impossible to repay existing debts. Reduced lending also slows down economic growth, which also makes it harder for all businesses to repay their debts.
If heavily-indebted borrowers are cut off from new lending, they may find it impossible to repay existing debts. Reduced lending also slows down economic growth, which also makes it harder for all businesses to repay their debts.
Credit default swap (CDS)
A financial contract that provides protection against the risk of a third-party borrower defaulting on its debts. E.g. a bank that has made a loan to Greece may choose to hedge the loan by buying CDS protection on Greece. The bank makes periodic payments to the CDS seller. If Greece defaults, the CDS seller must buy the loans from the bank at their full face value. As well as hedging, CDSs are used by investors to speculate on whether a borrower such as Greece will default.
CREST
The system used within the London Stock Exchange whereby shares are registered and settled electronically.
Custodian
A company that is responsible for the safekeeping of assets, income collection and settlement of trades.
D
Debenture
A fixed interest stock (bond) secured on the assets of a company. In the event of the liquidation of the company, the owners of the debentures would be paid before the holders of loan stock, preference shares and ordinary shares. They would, however, you will be surprised to hear, be paid after the Inland Revenue, the liquidator and the banks.
Debt restructuring
Where a borrower renegotiates the terms of its debts, usually in order to reduce short-term debt repayments and to increase the amount of time it has to repay them.
Default
Strictly speaking, a default occurs when a borrower has broken the terms of a loan or other debt, e.g. by missing a payment.
Deficit
The amount by which spending exceeds income over the course of a year.
Trade deficit refers to exports minus imports whereas for a government budget, it equals the amount the government needs to borrow during the year to fund its spending; an indication of whether a government can repay its debts.
Trade deficit refers to exports minus imports whereas for a government budget, it equals the amount the government needs to borrow during the year to fund its spending; an indication of whether a government can repay its debts.
Deflation
Or negative inflation – when the prices of goods and services across the whole economy are falling on average.
Defined benefit (DB)
(sometimes ‘Final Salary Scheme’) a pension scheme where the benefits payable to members at retirement are clearly specified, usually as a percentage of salary at or near retirement.
Defined Contribution (DC)
(sometimes ‘Money Purchase Scheme’) a pension scheme where the rate of contribution paid by the employer and or the employee is defined (usually as a percentage of salary). The benefits paid to members will depend on the contributions paid into the scheme on behalf of the members, the investment return earned on those contributions and the terms available for converting the fund into a pension at retirement.
Deleveraging
Where borrowers reduce their debt loads repaying debts. Western economies are deleveraging, which is associated with weak economic growth; households may deleverage by repaying mortgage and credit card debts, banks by cutting back on lending. Governments are deleveraging via austerity programmes – cutting spending and increasing taxation.
Derivative
A financial contract which provides a way of investing in a particular product without having to own it directly – e.g. a stock market futures contract allows investors to make bets on the value of a stock market index such as the FTSE 100 without having to buy or sell any shares. Futures, forwards, swaps and options are all types of derivatives.
Discount
1. The margin by which a share stands below its net asset value, particularly investment trusts which are often judged on this basis. 2. The amount by which a bond or bill is issued under its maturity value in order to make it more attractive to potential investors.
Discretionary Portfolio Management
An account where the broker, adviser or investment manager manages the client’s portfolio without referring to the client or asking the clients permission to implement investment decisions which will be made by the investment manager. In all cases the investment objective will have been decided between the investment manager and the client. The client will be kept informed of all transactions and the value of the portfolio on a regular basis.
Distribution/Distribution shares
Shares where the income generated by a fund can be paid to investors rather than accumulated. This income is known as the Distribution.
Diversification
Reducing risk by spreading investments among different investments, sectors, markets and instruments.
Dividend
An income payment by a company to its shareholders, usually linked to its profits.
Downgrade
The reduction of the forecast profits or earnings for a company or the prospects for the share price or the reduction of a credit rating for a bond.
Double-dip recession
A recession that experiences a limited recovery then dips back into recession.
E
EBITDA
Earnings (profit) Before Interest payments, Tax, Depreciation and Amortisation – a measure of the cash flow at a company available to repay its debts, and a more important indicator for lenders than the borrower’s profits.
The European Central Bank is the central bank responsible for monetary policy in the eurozone.
Spoiler title
ECB
Efficient Portfolio
A portfolio which provides the best possible return for a given level of risk, or which offers the least risk for a given return.
Emerging Markets
An emerging market is the stock exchange of a country with a low income per capita but where industry is developing in such a manner that the country can be expected to have a greater influence on the world economy. There are likely to be stringent controls in the inward and outward flow of investment capital. Emerging markets have the potential to produce rapid but volatile economic growth.
Equity
The value of a company, which is the property of its shareholders in the form of stocks. These shares are commonly called equities.
Ethical Fund
An investment fund which invests in companies that follow certain ethical standards whilst avoiding companies whose activities involve manufacturing weapons or environmental pollution etc.
Exchange Traded Products (ETPs)
A family of collective passive investments including Exchange Traded Funds (ETF), Exchange Traded Commodities (ETC) and Exchange Traded Notes (ETN). These products are priced and able to be traded at net asset value throughout the trading day and aim to provide the same return as a specified benchmark or asset.
ETPs are liquid, trade like shares and generally have low management fees.
ETPs are liquid, trade like shares and generally have low management fees.
Exercise Price
(sometimes ‘Strike Price’) is the price at which an option holder has the right to buy or sell the underlying asset.
Eurobond
A Bond which is issued by a Government or international corporation outside its country of origin and issued on the eurobond market. This is an important source of capital for international corporations and governments.
Eurozone
The 17 countries that share the euro.
Exchange Traded Commodities (ETCs)
ETPs that track individual commodities (gold, oil, agriculture), commodity baskets and currencies.
Exchange Traded Fund (ETFs)
ETPs that passively track the widest range of indices, industry sectors and geography. Access to equities, commodity indices, fixed income, money markets, private equity indices, hedge funds.
Exchange Traded Notes (ETNs)
ETPs that provide access to an asset or benchmark using an uncollateralised debt security.
Execution-Only Service
Broking service which executes buy and sell orders for clients, but does not offer any investment advice or portfolio management.
F
Face Value
The nominal value of shares in a company that appears on the face of the certificate or document of entitlement. For example: ‘ordinary 25p’. The nominal or face value bears little relationship to the market value. Rather it is important in respect to the Authorised Share Capital. The Authorised Capital is the number of shares that the company is allowed to issue multiplied by the face value. The Issued Capital is the amount of shares that have actually been issued to shareholders multiplied by the face value. For debt instruments, face value relates to the amount to be repaid at maturity. This is also known as par or nominal value.
Federal Reserve
The US central bank.
Fiscal policy
The government’s borrowing, spending and taxation decisions. If a government borrowing too much can engage in austerity – raising taxes and/or cutting spending; a government afraid that the economy is going into recession can engage in fiscal stimulus – cutting taxes, raising spending and/or raising borrowing.
Fixed Income Security
A security on which the borrower agrees to pay fixed amount of income at regular intervals, often half yearly. The principal investment will be repaid at a specific date in the future.
Fixed Interest
Often used as a synonym for bonds. Fixed interest securities are a form of debt paying interest every year until they are redeemed at maturity.
Floating-Rate Note
A bond paying a variable interest rate. The rate is linked to those of the wholesale money markets, normally the London interbank rate or LIBOR. There are variations such as drop lock bonds whose interest rate floats until a specific trigger event happens when the interest rate becomes fixed for the rest of the bonds life. Flip flop floating rate notes. A long dated floated rate note which can be converted into a short dated floating rate note and then if the holder wishes back into a long dated one.
FSCS (The Financial Services Compensation Scheme)
The UK’s compensation fund of last resort for customers of authorised financial services firms. Where you can find out whether it could compensate you when a firm goes bust.The FSCS can cover eligible individuals who are or were customers of an authorised financial services firm that has been declared in default
FTSE 100
An index of the 100 companies listed on the London Stock Exchange with the biggest market value. The index is revised every three months.
Fundamentals
Determine a company, currency or security’s value in the long-term; fundamentals include assets, debt, revenue, earnings and growth.
Futures
A futures contract is an agreement to buy or sell a commodity at a predetermined date and price used to hedge or to speculate on the price of the commodity. Futures contracts are a type of derivative, and are traded on an exchange.
G
G7
The group of seven major industrialised economies, comprising the US, UK, France, Germany, Italy, Canada and Japan.
GDP
Gross Domestic Product – a measure of economic activity in a country, namely of all the services and goods produced in a year; calculated through output, through income and through expenditure
Gilt-Edged Stocks
Gilts are bonds issued by the UK government to fund its debt. Gilts are normally redeemed at face value between specified dates which can be up to forty years away. Short dated or short gilts have a life span of five years or less, medium dated are between five and fifteen years and those with more than fifteen years are long dated or longs.
Gross Domestic Product
Annual value of goods sold and services paid for inside a country in a period of time, usually a year or a quarter. Included are goods only for final consumption or investment as all the costs incurred at various stages of production are reflected in the final price. Gross Domestic Product is distinguished from Gross National Product by the exclusion of income on investment abroad.
Guaranteed Stock
This is a bond, which is issued perhaps by a public body where the investor is given the comfort of knowing that a third party is guaranteeing the issue.
H
Hedge Fund
Fund which is usually formed as a partnership or an offshore investment corporation, open to a small number of wealthy investors which invests in many markets often taking large risks on speculative strategies. Hedge funds may use derivatives and take long and short positions, so they can potentially profit in any market environment.
Hedging
Making an investment to reduce the risk of price fluctuations to the value of an asset. E.g. airlines hedge against rising oil prices by agreeing in advance to buy fuel at a set price. In this case, a rise in price would not harm them – but nor would they benefit from any falls.
Horizon Premium
The excess return that investors seek for holding comparatively risky long-term bonds as opposed to comparatively safe short-term ones.
I
Income
Funds generated from an investment usually as a proportion of profits. A key objective for those taking advantage of the new pensions freedoms.
IMF
The International Monetary Fund is an organisation set up after World War II to provide financial assistance to governments.
Index-Linked Gilts
Security issued by the UK Government whose principal and interest payments are tied to the retail price index.
Inflation
The term used to describe rising prices and the amount by which money loses it purchasing power. A very low rate of inflation, i.e. below 3%, is considered beneficial in keeping the country’s economy buoyant or in the very least it is seen as harmless. However high rates of inflation erode savings and the value of money.
Initial charge
A fee charged on the purchase of shares in a fund based on the value of the initial investment.
Initial Public Offer (IPO)
A new issue. The first offering of shares to the public in a previously private company by listing on an exchange. A device used by companies to raise funds.
Investment Banks
Investment banks provide a range of financial and investment related services, from advising clients on security issues, acquisitions and disposals of businesses, arranging and underwriting new issues, distributing securities and running fund management companies.
Investment grade bonds
Bonds issued by a company that has a higher credit rating, and so are considered more secure.
Investments Trusts
An investment trust is a company whose purpose is to invest in other companies. Shares in the investment trust are traded on the Stock Market in the same way as any other share. The share price is reflected by the success of the Fund Managers. Investment trusts are useful for small investors since the fund normally will invest across many companies and several industries. An investment trust is different from a unit trust because it is quoted and has a fixed number of shares.
ISA
The Individual Savings Account (ISA) was launched by the government to encourage people to save for the future. It is a tax-efficient wrapper in which you can hold either stock market-based investments or a traditional savings account. As an incentive, any interest earned on savings or bonds and any capital gains made on investments held within an ISA are tax free. This is particularly attractive to those on higher incomes who are taxed at the rate of 40% on all their savings and investment income.ISAs replaced personal equity plans (PEPs) and the tax exempt special savings accounts (TESSAs), which closed to new investors in April 1999.The maximum subscription to a ‘new’ ISA (‘NISA’) – either stocks and shares or cash is £15,240 pa in tax year 2015/6.
Issuing House
As the name suggests Issuing Houses issue shares on behalf of companies trying to raise capital. This can be either through the Company issuing the shares direct to the public which are then underwritten by the Issuing House, or by the Issuing House buying the shares itself and then selling them on to the public.
J
Junk Bond
Normally a high yield fixed income security that has a very low credit rating. This normally means below Grade BB in Standard & Poors bond rating which makes them more volatile than investment grade bonds.
K
Kicker
An extra benefit, possibly to add extra lift to a bond. Also known as a sweetener.
L
Leverage
(sometimes ‘gearing’) means using debt to supplement investment; the more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are which can increase both gains and losses.
LIBOR
London Inter Bank Offered Rate. The rate at which banks in London lend money to each other for the short-term in a particular currency.
Limit Order
An order where the buyer or seller of a security or commodity has a set limit on the price or the time allowed for the contract to be completed. The broker will execute the trade only within the price restriction.
Liquid Market
A market, which permits relatively easy entry and exit of large orders because there are so many buyers and sellers. Usually a characteristic of a popular market. In terms of assets cash in your current account is more liquid than the equity you have in your house and if you needed to sell your house quickly to release cash you would probably have to do so at a discount.
Loan Stock
A fixed interest stock that may or may not be secured against all or a specific part of the assets of a company. The interest will be paid whether the company is profitable or not. In the event of the liquidation of the company (when interest will not be paid), loan stock holders will be paid out before preference shareholders or ordinary shareholders are considered, but after debenture holders have been paid in full if possible. (see Debentures)
Long Bond
1. Any long dated bond, typically with a term of more than 10-15 years 2. The 30-year US Treasury bond.
LSE
M
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Market Maker
Market makers are firms or individuals, prepared to make continuous markets at quoted bid and offer prices, in the stocks they are registered to trade. They display buying and selling prices on the stock markets SEAQ computer system along with the size of deal they will accept which may be governed by the Normal Market Size rules.
Market Size
The number of shares in which a market maker is prepared to deal, either as a buyer or seller, at his advertised bid/offer spread.
Maturity
Repayment date for investment, applied to a bond or life insurance policy.
Merchant Banks
Institutions whose primary aim is to raise money for the corporate sector. Nowadays they carry out a variety of financial services such as acceptance of Bills of Exchange, placing of loans and securities, Unit Trust and portfolio management and some banking services. Merchant banks also advise companies on mergers and other financial matters.
Middle Market Price
The average between the price at which a stock can be sold and the price at which a stock can be bought. The middle market price is the one normally quoted in the newspapers.
Money Markets
Global markets dealing in borrowing and lending on a short-term basis.
Mortgage-backed securities
Banks repackage debts from a number of mortgages into MBS, which can be bought and traded by investors.
Mutual Fund
Known also as an open ended fund (OEIC), or Unit Trusts (UT), are pooled investment vehicles. They mostly invest in stocks and bonds of companies and public authorities. They offer the small investor the chance to spread their investment widely. An investor who wishes to invest in a mutual fund simply buys new shares in the fund, which then expands in size. Sellers can only sell their shares back to the fund, which shrinks accordingly. Specialist companies typically run mutual funds.
N
Net Asset Value (NAV)
The value of the total assets of a company, less the sum of its liabilities, loan stock and debentures.
Nominal Value
The value ascribed to a share when it is first authorised and issued by a company. Bears no relation to a share’s value.
Nominee Holding
Securities owned by an investor but which are registered in the name of the nominee company of a broker for ease of administration and cost. Although the nominee name will appear on the share register, the investor remains the beneficial owner. Holdings of over 5% must be declared.
O
Open-Ended Investment Company (OEIC)
A form of pooled fund investment, which is governed by company law (as opposed to a unit trust which is governed by trustees)
Offer Price
The price at which a dealer will sell a security in the market.
Options
Derivatives that gives an investor the right to buy (or to sell) something – anything from a share to a barrel of oil – at an agreed price and at an agreed time in the future. Can insure against price swings.
ORB
the London Stock Exchange launched the electronic Order book for Retail Bonds (ORB). It offers electronic trading in gilts and retail-size corporate bonds in smaller denominations of £1,000 or similar. It also provides corporate issuers with an efficient mechanism for distributing bonds to private investors.
ORBIG
The Order Book for Retail Bond Issuer Group. Designed to provide a unified voice for retail bond issuers and educate the financial community on the benefits of retail bonds for companies and investors.
Out-of-the-money
A call option whose exercise price is higher than the current underlying share price, or a put option with an exercise price below the current underlying share price.
Over-The-Counter (OTC)
A transaction that does not take place via an exchange. Many derivatives contracts are traded in this way.
Overweight
Exposure to a specific asset (or asset class) which is higher than the proportion it represents in the market index or benchmark against which the portfolio is measured. Investment managers may take overweight positions in shares or sectors they expect to outperform in order to add relative value to the portfolio.
P
Passive funds
Another name for funds which track market indices such as the FTSE 100 or the S&P 500. Also called index funds and tracker funds.
Penny shares
Typically a volatile, high-risk share of a company with generally low market capitalisation. Share price used to be less than 10 pence but can be higher now
Pincs
Two-tier property bond, part rental income, part capital growth.
Ponzi scheme
a pyramid scheme where funds from new investors – instead of genuine profits – are used to pay high returns to current investors.
Portfolio Theory
Originally developed by Harry Markovitz in the early 1950’s, the Portfolio Theory is intended to provide a mathematical framework by which investors can minimise risk and maximise returns. A central concept of the theory is that risk can be reduced by diversifying holdings, and that returns are a function of the expected risk.
Preference shares
(sometimes ‘Prefs’) are shares that do not offer voting rights, but do offer a superior type of dividend, paid ahead of dividends to ordinary shareholders.
Private equity fund
An investment fund that specialises in buying up troubled or undervalued companies, reorganising them, and then selling them off at a profit.
Profit margin
This is the profit as a percentage of sales after expenses have been deducted, a figure to use to compare companies.
Q
Quantitative easing (QE)
Central banks increase the supply of money by “printing” more which may mean purchasing government bonds or other categories of assets, using the new money. This adds more money into the system, which depresses the value of the currency, and pushes up the value of the assets being bought and lower longer-term interest rates, which encourages more borrowing and investment. The danger is higher long term inflation.
Quote Driven
A system used by the Stock Market, usually electronic, in which prices are initially determined by quotations of dealers, or market makers. It is the opposite of an order driven system where prices of securities react to orders. In both cases market values will eventually prevail.
R
Recession
A period of negative economic growth.
Retail Bond
A Bond is simply an ‘IOU’ in which an investor agrees to loan money to an individual, company or government in exchange for a predetermined interest rate for a defined period of time.
Retained earnings
Profits not paid out by a company as dividends and held back to be reinvested.
RDR
The Retail Distribution Review (RDR) was launched by the Financial Services Authority with the aim of giving consumers greater confidence and trust in the retail investment market. Central to the RDR has been the aim of raising the professional standards of investment advisers, giving consumers greater confidence in the advice being offered and ensuring that fees charged are transparent. The outcomes of the RDR apply to all retail investment advisers.
Redemption
The repurchase of a security by the issuer on maturity. A corporate action in which a company pays repays the loan stock to stock holders. Also known as a “repayment”. Date when a security is redeemed.
Rights issue
When a public company issues new shares to raise cash for investment or because it is short of cash. This dilutes the value of its existing shares and is called a “rights” issue, because existing shareholders have the first right to buy the new
Risk and Reward
Risk is the possibility that an investment will not produce the expected rewards. Therefore the rewards must rise to compensate for the greater elements of risk.
Risk tolerance/appetite
Extent to which an investor is prepared to accept volatility risk in a portfolio to achieve higher returns.
S
SEAQ
The Stock Exchange Automated Quotation system is a computer based, quote driven, trading system that displays market makers buy and sell prices. The system registers the size, time and price of every deal and therefore ensures that deals are executed at the best available prices.
Secondary market
A market in which an investor purchases a security from another investor rather than the issuer.
Securities
Any tradable financial instrument.
Securities lending
When one broker or dealer lends a security (such as a bond or a share) to another for a fee. This is the process that allows short selling – betting that the price of an asset will fall.
Securitisation
Turning something into a security – e.g. taking the debt from a number of mortgages and combining them to make a tradable financial product. Investors receive income when the original home-buyers make their mortgage payments.
Security
A contract that can be assigned a value and traded. It could be a share, a bond or a mortgage-backed security.
SETS
Stock Exchange Electronic Trading Service, an order driven, electronic system introduced by the Stock Exchange in 1997 to match bargains between buyers and sellers, without using the market makers. SETS matches the most liquid stocks. The system is capable of processing four types of orders; Limit ( buy at up to 100p a share) ; At Best; Fill or Kill (all or nothing); Execute and Eliminate (buy as much as possible at the specified price).
Settlement
The payment of cash for securities and, conversely, the delivery of securities against payment – the conclusion of a securities transaction by delivery.
Share certificate
This is a document representing ownership of a shareholding. If stock is held in certificated form, the certificate must be delivered to the market upon sale.
Shares
Shares represent ownership of a portion of the company and the right to receive a share in the profits. Normally shareholders are entitled to receive the company’s accounts, attend its general meetings and vote on proposals.
Short selling
A technique used by investors who think the price of an asset, such as shares or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market with the aim is to buy back the asset at a lower price and return it to its owner, keeping the difference.
SIPP
– First introduced in 1989, Self-Invested Personal Pensions have grown in popularity and are now used by well over 800,000 investors in the UK to save for their retirement. SIPPs are tax-efficient “wrappers” that are put around investments to ensure they benefit from the considerable tax advantages that pension savings attract. A wide range of investments may be held in a SIPP – from shares, unit trusts and bonds to commercial property, gold bullion and securitised derivatives – and the decision on what and when to buy, and when to sell is the investor’s to make. Successful investment choices may achieve a much bigger pension fund and retirement income than other types of pensions.
Sovereign debt
Bonds issued by a central government.
Spread
The difference between the price at which a marketable security is bought and sold. This is the Market Makers turn or profit.
Spot price
The present market price of the relevant commodity, currency or investment instrument.
Stamp Duty
A form of taxation applied as a percentage of the value of share transactions made in the UK.
Stockbroker
An individual or company who buys and sells securities on behalf clients while not acting as principal.
Stop Loss
An instruction to sell a security should the price fall to a pre-specified level.
Sub-investment grade bonds
These tend to be issued by a company that has a lower credit rating and so have a greater possibility of failing to make their repayments
Strategic asset allocation
(sometimes ‘Tactical Asset allocation’) is the development of a long-term asset allocation that is expected to meet the investor’s return objectives at an acceptable level of risk.
Sub-prime mortgages
High risk to the lender because they are offered to people who have had financial problems or who have low or unpredictable incomes. Often higher rates.
T
Total expense ratio (TER)
The annual costs of running a fund summarised into a single figure
Term
The length of time until the maturity date of a bond when the principle will be repaid.
Tobin tax
A tax on financial transactions, proposed by economist James Tobin as a levy on currency conversions; intended to discourage market speculators by making their activities uneconomic, and thereby stabilise financial markets.
Total return
The overall return on a stock or portfolio taking into account changes in capital values and income earned.
Touch
The best bid and offer prices for a security currently available in the market. This may not be the two-way price of one market maker but is derived from prices submitted by all market makers.
Toxic debts
Debts that are very unlikely to be recovered from borrowers.
Tracker Fund
A fund whose components mirror the composition of a stock exchange index, often the FTSE 100 and hopes as a result to mirror the performance of the relative index.
Transaction Costs
Normally the mark up charged by market makers, agents’ fees, taxes on fees and possibly a charge levied by the stock exchange itself, along with stamp duty.
Treasury Bonds
A fixed interest security issued by the US Treasury to meet its long term funding needs. As such it is the American equivalent of the UK Treasury Gilt.
Trend
Refers to the direction of prices. An uptrend is a succession of higher highs and higher lows; a downtrend is a succession of lower highs and lower lows. Trends can be classified into major: one year or longer, intermediate: one to six months, or minor : one month or less.
U
UCITS
Undertakings for Collective Investment in Transferable Securities – UCITS funds can be marketed within all countries that are a part of the European Union, provided that the fund and fund managers are registered within the European Union.
Unit Trust
An open-ended fund which pools cash from many investors to establish a diversified portfolio. A Unit Trust continuously creates and cancels its units with demand. The price of each unit is reflected in the value of shares held by the Trust (NAV). Known as Mutual Fund in the US.
V
Value Investing
Value investors seek out hidden ‘value’ that the market has missed. They invest in what they consider to be undervalued stock and wait for other investors to reach the same conclusion. Shares whose price is below the net asset value of a company are often sought by value investors.
Volatility
The statistical measure of the price variation of an instrument over a period. An instruments volatility rating is a calculation of how volatile an instrument is by calculating how much its performance is divergent from the normal pattern.
Volume
Total number of individual financial instruments or contracts traded in a particular period (hour, day, week, month etc.).
W
Warrants
A document entitling the bearer to receive shares, usually at a stated price.
Wrap account
An internet-based account that allows investors to aggregate all of their investments, such as personal pensions and unit trusts, onto one platform. They can then buy, sell and manage their investments through this platform.
X
XD dates
(ex-dividend) The dates by which you have to hold shares in a fund in order to be entitled to the next income payment from that fund.
Y
Yellow Strip
The Yellow Strip refers to the best bid – offer prices available on the London Stock Exchange at a particular time.
Yield
The percentage return on an investment, usually expressed at an annual rate. Current yield refers to the income from security as a proportion of its current market price. Redemption yield is an adjustment of the current yield of a redeemable stock to take account of capital gains or losses on redemption at par.
Yield To Maturity
Yield that would be realized on a bond or other fixed income security if the bond was held until the maturity date. It is greater than the current yield if the bond is selling at a discount and less than the current yield if the bond is selling at a premium.
Z
Zero Coupon Bond
A bond that pays no interest but is issued below par to provide a capital return on redemption.