A

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 - it's said to be a 'clean price' as opposed to a 'dirty price', which includes accrued interest. However a buyer would have to pay for the interest that has accrued.

Active Management

A portfolio is actively managed when the portfolio manager holds stocks of his choice with a view to performing better than a given index. The alternative is a tracker or index fund where stocks are chosen purely with a view to matching the performance of a chosen benchmark index. This is called passive management.

Adjustable-rate Preferred Stock

Adjustable-rate preferred stock is a relatively recent innovation, which ties preferred dividend rates to the market interest rates on a range of government debt. They have often included floors (upper limits) and caps (lower limits).

AIM

AIM (the Alternative Investment Market) was created as a means for small and growing companies to access the stock market with reduced listing criteria to the main market. Typical market capitalization ranges between £2 - £50m, although companies are listed at less than £2m and there are companies with a capitalization of greater than £250m.

Allotment

If a new issue is over subscribed, subscriber orders are scaled down accordingly. The amount subscribers actually get is called the allotment.

American Depository Receipts

American Depository Receipts (ADRs) are negotiable certificates in registered form, issued in the US by a US bank, certifying that a specific number of foreign shares have been deposited with an overseas branch of the bank - or another financial institution acting as a custodian in the country of origin. ADRs can be either sponsored or unsponsored. Unsponsored ADRs are issued by a depository for already outstanding foreign shares without an agreement with the issuer of the shares. However, since 1983 unsponsored ADRs may only be issued if the issuer of the underlying shares has agreed to supply certain information about itself to the Securities and Exchange Commission (SEC). Sponsored ADRs are issues by a depositary by arrangement with the issuer and with its financial support for shares which are already outstanding or for shares issued specifically for an offering of ADRs in the US. ADRs provide a practical opportunity for investors who want to invest in the shares of a foreign corporation to buy, hold and sell their interests in these foreign securities without having to take physical possession of the securities, while receiving dividends and exercising voting rights. A holder of ADRs can at any time request the underlying shares. Conversely, ADRs enable foreign corporations with shares that have not been admitted to a US stock exchange to obtain access to US public capital markets. Usually, only shares traded on a recognised foreign stock exchange are represented by ADRs.

American Style Option

An "American" style option is an option that can be exercised (i.e. you can buy the underlying with a call, or sell with a put) by the buyer at any time before its expiry.

AMEX

The American Stock Exchange (AMEX) is America’s second largest floor based stock exchange (after the NYSE). In terms of volume, market capitalization and listings however, its rivals dwarf it. In addition to equities, AMEX offers a range of derivative products, including options, index shares and depositary receipts. AMEX is an auction market, with "specialists" overseeing the auction process for each individual stock. Customer orders are electronically sent to the trading floor, then matched with the best available bid or offer currently available. Specialists are appointed in each security, whose job it is to oversee trading in their assigned stock, ensuring a fair and orderly market, and smoothing out supply and demand by trading themselves. Specialists also hold "away from the market" orders on behalf of customers: they are then responsible for executing these when the market reaches the specified price limit.

Amortization

Amortization is an accounting practice that companies use to write off intangible rights or assets — such as goodwill or copyrights. Where the assets being written off are fixed assets the process is referred to as depreciation. Expenses calculated by either process are subtracted from a company's operating revenues to give a figure for net income.

Analyst

An employee of a brokerage or fund management firm who studies companies and makes buy and sell recommendations on stocks of these companies. Most specialize in a specific industry such as telecommunications, semiconductors or banks.

Annual Report

An annual report is a record published every year by a publicly held corporation that details its financial condition. The report, which must be distributed to all shareholders, contains a description of the company's operations, its balance sheet, income statement, and other relevant information.

Annualized Return

A way to calculate the return on an investment of more than one year. The annualized or average annual return is calculated by adding each year's return on an investment and dividing that number by the number of years invested. The return takes into account the reinvestment of dividends (and distributed capital gains for mutual funds) as well as the change in the price of the investment over time.

Annuity

An annuity is a financial contract whereby the investor pays a principal sum and, in return, receives a series of equal cash payments for a specific number of years.

Appreciation

An exchange rate changes when one unit of the base currency buys more or less units of the quoted currency. So if the USD/JPY rate changes from 112.85 to 113.14, one USD buys more yen. The dollar has strengthened or appreciated against the yen. If the USD/JPY rate changes from 112.85 to 112.42, one USD buys fewer yen. The dollar has weakened or depreciated against the yen.

Arbitrage

Arbitrage means dealing simultaneously in the same product in two markets to take advantage of temporary price distortions with minimal risk. For example, a share with a bid-offer price of 100 - 101 in New York, and a bid-offer price of 102 - 103 in London, can be bought in New York at the offer price of 101 and simultaneously sold in London at the bid price of 102 - a risk free profit. In practice, the speed and global nature of financial markets means that simple arbitrage opportunities like this no longer exist in highly developed markets. However, in less developed marketplaces, where prices are less transparent - spreadbetting and CFDs for example - simple arbitrage is still possible.

Asset

Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Within a portfolio, shares, bonds and property are known as assets. Generally the term asset refers to something that has a realizable value or will generate net revenues greater than the cost of the item itself. Otherwise it is a liability.

Asset Allocation

An investment technique that diversifies a portfolio among different types of assets such as stocks, bonds, cash equivalents, precious metals, real estate and collectibles. When it comes to risk and reward, different asset classes behave quite differently. Stocks, for instance, offer the highest return, but they also carry the highest risk of losses. Bonds aren't so lucrative, but they offer a lot more stability than stocks. Money-market returns are puny, but you'll never lose your initial investment. An asset allocation strategy allows you to achieve the optimal blend of risk and reward.

Asset Backed Securities

Asset-backed securities are debt securities backed by the collateral (the security) of a pool of ringfenced assets.

Asset Stripping

Asset strippers take over a company and then sell parts of it for a profit. The concept behind asset stripping is that, for some companies, the sum of their parts is worth less than those parts are worth individually.

At The Money

An at-the-money option is an option where the exercise price is the same as the market price of the underlying security. An at-the-money option can be contrasted with an in-the-money option and an out-of-the-money option. For puts (the right to sell) an option is in-the-money if the market price is below the exercise price and out-of-the-money if it's above the exercise price. For calls (the right to buy) an option is in-the-money if the market price is above the exercise price and out-of-the-money if the market price is below the exercise price.

Authorized Share Capital

Authorized share capital is the amount of shares that a company is allowed to issue. In the UK the amount of authorized capital is specified in a company's memorandum of association and there needs to be a shareholder meeting to change the amount. Not all of the authorized share capital has to be issued.

B

Back Stop-Loss

A back stop-loss is an exit price set by a trader, which establishes a maximum loss. It’s damage limitation in case things go horribly wrong from the off. It allows you to place far more cash on a position than you can afford to lose, maximizing your upside potential whilst limiting your downside to ‘money you can afford to lose’. The back-stop is an essential for long-term survival. All traders should use a back-stop to be able to walk away with enough capital to try again.

Balance of Payments

A statement of the balance of a country's trade and financial transactions with the rest of the world over a specific period - usually a year.

Balance of Trade

The difference between the value of a country’s imports and its exports over a specific time period.

Balance Sheet

A financial statement that lists all the sources (namely, the liabilities and net worth) and uses (or assets) a firm has at the close of its accounting period.

Bank for International Settlements

The Bank for International Settlements (BIS) was established in 1930 to coordinate the payment of war reparations between European Central Banks. Since then the BIS has fulfilled several roles including acting as a trustee and agent for various international groups, such as the OECD. The frequent meetings of the BIS directors have been a useful means of cooperation between Central Banks, especially in combating short-term speculative monetary movements. Since 1986 the BIS has acted as a clearing house for interbank transactions in the form of ecu’ - now superceded by the advent of EMU and the European single currency. The BIS also sets capital adequacy ratios for banks in European countries. The original members were France, Belgium, West Germany, Italy and the UK but now most European Central Banks are represented, as well as the USA, Canada and Japan.

Bank of England

The Bank of England is the UK central bank. The bank is responsible for issuing currency and government debt (gilts). It also sets interest rates. In 1997 the UK Government gave the bank the authority to set monetary policy and a committee (the Monetary Policy Committee) meets once a month to do this.

Bankers' Acceptances (BAs)

A bank, which discounts an accepted term draft for an exporter, can offer to sell the paper direct to investors.

Bar Chart

The bar chart forms the foundation of technical analysis. Constructed using an x-axis measuring time and a y-axis measuring price, the individual time periods are displayed by a bar with the high, low, open and close for that period. The bar represents the high and low while a tick on the right of the bar represents the closing price and a tick on the left the opening price.

Basis Point

A basis point is 1/100th of 1%. So 50 basis points is 0.5%, 25 basis points is 0.25% and so on. Basis points make for a handy way to state small differences in yield. For example, it's much easier to say one bond yields 10 basis points more than another than it is to say it yields one-tenth of one percentage point more. It is also used for interest rates. An interest rate of 5% is 50 basis points greater than an interest rate of 4.5%.

Bear

Investors have different strategic objectives but, at any one time, an individual will - in the terminology of the financial markets - be either a bull, a bear or undecided. The battle between these positions determines price movements. Bulls: The bull attacks with an upward strike of the horns. They anticipate a rising market and they do their best to create one by borrowing short-term cash and buying. Bulls push prices up. And a market, which rises over a sustained period, is said to be a 'bull market'. Bears: The bear attacks with a downward strike of the claws. They anticipate a falling market and they do their best to create one by selling and depositing cash in the money markets. Bears push prices down. And a market, which falls over a sustained period, is said to be a 'bear market'. The undecided waits to become bull or bear.

Bearer Security

Securities can be issued in either bearer or registered form. In bearer form, possession alone is sufficient evidence of ownership. The owners of registered securities, on the other hand, are listed on a register, which is maintained by the borrower.

Bearer Stock

Benjamin Graham

Benjamin Graham was one of the first investors to develop a systematic approach to stock picking. Graham stressed that investors should look at a company’s financial value before looking at market share price i.e. they should look for ‘fundamental’ value not currently reflected in the share price. Graham emphasized the need for careful selection with a view to a long-term buy and hold strategy. He had learnt the lesson of the 1920s speculative boom and bust frenzy and sought to inject rigor and foresight into what had previously been treated as a speculative arena. For Graham, the idea behind stock-picking is to find companies which will perform better than their market price suggests – then, over time, the fundamentals will work through and the market will bid up the share price. Graham took a top-down approach – focusing on quantitative screening methods to work down to a portfolio (the numbers must pass certain tests).

Beta

The risk of any individual share can be measured as the volatility of a share relative to the market as a whole. This ratio is known as the beta of a share. For standard reference, the entire market has a beta of 1.00, with a return corresponding to the market risk premium. The riskiness of the market as a whole is measured against a riskless rate of return. This is constituted by the highest quality money market instruments, which are considered to be riskless but still generate a return to make up for the time value of money. Stocks that magnify general market moves, that are more volatile than the market average, have betas greater than 1. Stocks that dampen market moves and are less volatile on up or downswings are assigned betas of less than 1. A dedicated stockholding portfolio will feature a range of different beta stocks relative to the policy stance of the trust.

Bid Price

Marketmakers quote securities in terms of what's called a bid-offer price. The bid price is the price at which they will buy a particular security. The offer price is the price at which they will sell a security.

Bid-Offer Spread

Marketmakers quote securities in terms of what's called a bid-offer price. The bid price is the price at which they will buy a particular security. The offer price is the price at which they will sell a security. So a bid-offer price of 102-104, means the marketmaker will buy at 102 and sell at 104. The difference between the bid and offer price is known as the bid-offer spread; and the spread is the marketmakers profit i.e. the difference between the price at which he buys and the price at which he sells, which in this case is 2. The mid-price is, as the name suggests, the middle point between the marketmaker's bid and offer price; in the case of our 102-104 bid-offer price, the mid-price would be 103. Mid-prices are often the prices you will see quoted in newspapers. But when you actually buy or sell a security it's the bid-offer price you'll be quoted.

Big Bang

The first big shake-up of the stock market, in October 1986. This marked the end of single capacity, in which jobbers bought and sold shares for their own account and stockbrokers acted as agents only. Afterwards brokers could hold and trade shares and many of them were wise enough to do so at the time of the 1987 crash. This was followed in 1996 by the introduction of CREST and then in 1997 by Big Bang II.

Black Scholes Options Pricing Model

Developed by Fischer Black and Myron Scholes in 1973 to judge whether options contracts are valued fairly the Black Scholes model uses volatility of an underlying instrument, interest rates, time left until expiry, exercise price of option and price of the underlying instrument as inputs for the formula to generate a theoretical price - the premium.

Block Trader

A broker or trader who specializes in trades involving blocks of stock - usually 10,000 or more shares per transaction.

Blue Chip Stocks

Stocks of companies known for their long-established record of earning profits and paying dividends. Blue chips tend to be large, stable and well known.

Bond Dealers

Dealers maintain their own inventory of bonds and make trades with either the general public or brokers. Dealers make money off the difference between the bid and ask price of a bond. If your broker offers to act as a dealer, that means he can sell you bonds from his own inventory. This is usually a better deal since it removes a layer of commissions that will be added if your broker has to go to another dealer to find you a particular bond.

Bond Fund

A bond mutual fund specializes in pooling the purchase of bonds into a diversified, managed portfolio. Most bond fund portfolios pay income, which can be reinvested or distributed, on a monthly basis. Bond fund maturities can be a short as one year and as long as 30-years. The disadvantage of a bond fund is that it's not a bond. It has neither a fixed yield nor a contractual obligation to give investors back their principal at some later maturity date — the two key characteristics of individual bonds. There are many varieties of bond funds, including government, corporate, and municipal.

Bond Trading

Actively buying and selling bonds in an effort to profit from short-term changes in prices, rather than simply buying bonds and holding them as a long-term investment. The most actively traded bond markets are the 'government' markets. This is because of the volume, liquidity, and homogeneity (sameness) of the markets.

Bond Warrant

Bond warrants are less specialist products than equity warrants, as they offer a simple interest rate play. They typically entitle the holder to purchase a new bond from the issuer at a set price, with the same or lower coupon than the original issue. If interest rates fall, the warrant will become more valuable. Investors will therefore pay a premium when the bonds are issued - either in the form of a higher price or acceptance of a lower coupon. So for issuers, attaching a bond warrant can help reduce their cost of funds. Of course, both issuer and investor face risks. The issuer risks an increase in outstanding debt. If warrants are exercised, this will be because background interest rates have fallen, so the coupon on the new bond issued will be higher than current fixed rates. Bond warrants - if unstripped - also result in the investor holding an increased level of debt from the same issuer, so a portfolio may become relatively less diversified, resulting in higher levels of credit risk.

Bonds

A bond is a debt instrument issued by a borrower in the form of a certificate that states the terms and conditions of the borrowing. The certificate establishes the debt of the borrower (the issuer) and his obligation to repay the lender (the investor) a fixed amount (the principal) on a specified future date (the maturity or redemption date). The certificate also specifies the interest (coupon income calculated as a % of the principal) to be paid to the investor at stated intervals - usually annually or bi-annually- during the life of the instrument (the term to maturity). The certificate may be called a bond or a note. There's little practical difference, although, traditionally, bonds have maturities of more than 7 years, while notes carry shorter terms.

Book Value

The difference between a company's assets and its liabilities usually expressed in per-share terms. Book value is what would be left over for shareholders if the company were sold and its debt retired. It takes into account all money invested in the company since its founding, as well as retained earnings. It is calculated by subtracting total liabilities from total assets and dividing the result by the number of shares outstanding.

Breakeven Stop-Loss

A breakeven stop-loss is an exit price set by trader when he or she opens a position. The aim is to lock in enough trading profit to cover trading costs (commissions and stamp duty). Whatever happens next, you certainly won’t lose on the position. This type of stop is particularly attractive to a frequent trader managing a number of positions simultaneously.

British Pound

The British Pound (GBP) is most heavily traded of the major currencies against the USD and EUR and over half of these trades are through London, the world's largest FX trading hub. London and the GBP were at the center of all FX activity before the rise of the USD. Britain and the USA maintain a historic two-way investment relationship, with many US companies investing and operating in the UK and vice versa. As the British economy is now far smaller and has been far less fundamentally stable over time than the USA and Germany, it has made for highly volatile currency pairings with the USD and DEM, giving London dealers in particular, many opportunities for speculative position plays.

Brokers

Brokers are independent agents who bring principal parties together for a commission, finding the best price for the client and often using in-house research to bring ideas to investors to encourage them to transact. There are three broad categories of broker: execution only, advisory and discretionary. If you simply want to buy and sell shares, and you’re confident enough to choose the stocks you trade without guidance, then you’ll be looking for what's called an execution only service. This is the most common form of service offered by most brokers; and, as the name suggests, you simply tell them what to buy and sell for you. An advisory service costs more then pure execution only; and it will give you some guidance and recommendations. At the opposite end of the spectrum to the execution only service is discretionary brooking. Here, the broker takes full control of your investment capital, and makes all the investment decisions.

Buffett , Warren

Bull

Investors have different strategic objectives but, at any one time, an individual will - in the terminology of the financial markets - be either a bull, a bear or undecided. The battle between these positions determines price movements. Bulls: The bull attacks with an upward strike of the horns. They anticipate a rising market and they do their best to create one by borrowing short-term cash and buying. Bulls push prices up. And a market, which rises over a sustained period, is said to be a 'bull market'. Bears: The bear attacks with a downward strike of the claws. They anticipate a falling market and they do their best to create one by selling and depositing cash in the money markets. Bears push prices down. And a market, which falls over a sustained period, is said to be a 'bear market'. The undecided waits to become bulls or bear.

Business Cycle

The term, 'the business cycle', refers to a pattern of historically observed economic behaviour whereby growth is cyclical.

C

CAC 40 Index

CAC 40 stands for Compagnie Nationale des Agents de Change. It is made up of 40 stocks and is a subset of the new SBF 120 index. It, in turn, is a subset of the SBF 250, which replaces the old CAC General index. The CAC 40 index is the main real-time indicator for the French stockmarket.

Calendar Effects

During any day, the market tends to start by weakening (especially on Monday), then rises and holds till a mid-afternoon sink, with a rally at the end of the day. (The market often closes on a high).

Call

A call is a right to buy. So a call option is an option which gives the buyer the right to buy a particular asset at a specific price by or within a specific time. Calls can be contrasted with 'puts', which give the holder the right to sell a particular asset.

Call Risk

The risk that an issuer may redeem a security sooner than expected.

Callable Bond

A bond which the issuer can decide to redeem before its stated maturity date. A call date and a call price are always given. You face a risk with a callable bond that it will be redeemed if its stated coupon is higher than prevailing rates at the time of its call date. If that happens, you won't be able to reinvest your capital in a comparable bond at as high a yield. You also face the risk that the price at which the bond is redeemed at is below the current market price.

Capacity Utilization

Capacity utilization measures the extent to which the country’s productive capacity is actually being used. What any measure is trying to find is ‘sustainable capacity’; basically, how much more can be squeezed out of existing productive assets in terms of say, working hours, running machinery at full capacity without it breaking down, storage space for finished goods and so on. Once the economy’s running at near full capacity it’s expected that further demands placed on producers will result in producer price driven inflation.

Capital Gains Tax

A tax on the increase in the value of assets - capital gains - realized in a given tax year.

Cash Settlement

Termination with cash rather than physical delivery of some real good. For example, a futures contract on a stock market index is cash settled, the alternative being to take delivery of every stock in the index.

CBOT

The Chicago Board of Trade (CBOT) is the world’s largest futures market in terms of the volume of contracts, which are traded.

Central Bank

A Central Bank provides financial and banking services for the government of a country and its commercial banking system as well as implementing the government's monetary policy.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs) are securitised bank time deposits. The CD market is a tiered market offering securities backed by different ‘names’ and so a range of liquidities and yields. The creditworthiness of a bank is evaluated by impartial rating agencies such as Moodys and Standard and Poors.

Channels

Trendlines show which way a market is moving. They link peaks or troughs on price charts to show the overall direction prices are taking. Lines can be drawn parallel to the trend lines, to help outline what are called channels. Channels are pipes through which prices move as they zigzag along a trend line. Once a trend line has been plainly recognized, a channel can usually be determined.

Chart

A visual representation of the history of a share, commodity, index or any other set of figures that occurs regularly (e.g. a temperature chart).

Churning

Churning is often used as a generic term for buying and selling stocks rapidly. Churning is also a term referring to unconscious or conscious over-trading by an advisory stockbroker in a customer's account. Stockbrokers are paid on a commission on the consideration of a trade. The consideration is the number of shares traded multiplied by the price. As commissions have stabilized the only way brokers can make more money is to trade more shares. There is therefore a natural temptation to trade for the sake of it. It's illegal, but hard to prove.

Classified Common Stock

Some corporations issue more than one category of common stock. Multiple category stock is called classified common stock. Traditionally, stock referred to as Class A is non-voting, dividend paying stock that is issued to the public. Class B stock is voting stock held by management. Class B pays no dividend, but the owners enjoy the residual price appreciation benefits of a growing company.

Clearing House

A clearing house is a (usually) computerized system for settling indebtedness between members of that system. In this sense, clearing houses have a role as a trusted intermediary between trading partners.

Closed End Funds

Closed End Funds also known as investment trusts. They are companies whose shares are traded like any other listed company. Because of this the number of units that the Fund Portfolio is divided into is fixed, unless the fund has a new share issue. This means that investors wishing to take part in the fund have to buy shares in it on the secondary market. A unit trust on the other hand continues to issue units to any new investors wishing to take part.

Commercial Bank

A bank owned by shareholders that accepts deposits, makes commercial and industrial loans and provides other banking services for the public. Also called a full-service bank.

Commercial Paper

CP is typically issued at a discount to face value - but interest bearing notes can be requested. If paper is issued as interest bearing it will still be quoted on a discount basis. CP can be issued in bearer or registered form. The scale of any CP issue makes it exclusively a wholesale market, attracting banks, money market funds, insurance companies and other large cash rich firms as investors.

Commodity

Commodities are the raw materials used by industry and traded on specialist commodities markets. There are hard and soft commodities, soft being things such as cocoa, coffee, tea, sisal, sugar, soya, corn and pork bellies. Hard are metals, such as copper, tin aluminium etc. Commodities are dealt on a spot basis for immediate delivery and futures for later delivery.

Common Stock

1. It represents an ownership interest in a company – you’re buying a share of the company, not lending the company money.
2. A bondholder (basically, a lender) is entitled to a regular interest payment and can call for a winding up of the company if interest isn’t paid. An equityholder is not entitled to any regular payment – (although most stocks provide for the payment of a cash dividend this is at the discretion of the company’s management).

So, buy a stock and you’re buying part-ownership of a company. And as an owner, you take a share in the company’s future profits.

Compound Interest

Multiplying the initial investment, say, £100, by the compound factor gives us £133.10. This is the future value of the initial investment.

Consolidation

This is when a company proportionally increases the nominal value of each share whilst decreasing the number of shares in the issue.

Contracts for Difference

CFD’s allow you to take positions on share prices without needing to buy and sell shares themselves. How? Think of a futures contract on a stock market index. The contract price is based on the value of the index. You can’t take delivery of the index itself, so your profit (or loss) is the difference between the contract’s price when you buy it and the contract’s price when you sell it. In this sense a futures contract on a stock market index is a contract for differences; the difference between the opening and closing price of the contract at expiry. A CFD works in the same way, except that you’re trading individual shares rather than a stock market index – and there’s no expiry date. You don’t buy the share, you buy a contract which reflects its market price. Then, just like a futures contract on an index, when you close out, your profit (or loss) comes from the difference between the opening and closing share prices – hence, "contracts for differences". In this sense a CFD is a bit like an off-exchange futures contract.

Contrarian

An investor who does the opposite of what most investors are doing at any particular time. According to contrarian opinion, if everyone is certain that something is going to happen, it won’t. This is because most people who say the market will go up are fully invested so they have no more purchasing power, which means the market is at its peak. When people predict decline they have already sold out, so the market can only go up. Contrarian investing shares many qualities with value investing. The difference is, contrarian stocks aren't just cheap, they are also actively disliked by investors. That can make them risky but potentially lucrative investments

Convertible

A convertible is an adaptation of a straight bond issue, which gives an investor the ability to convert the bond into a specified number of shares of the same issuer at a predetermined price.

Corporate Debt

Corporate debt is securities short and long term debt issued by corporate. Short term debt is issued as commercial paper. Long term debt is issued as bonds/notes. Issuers place paper in their own domestic market or they may widen their investor base by issuing in a foreign market or in the international market - the Euromarket - in any number of currencies.

Cost of Capital

The rate of return an enterprise has to offer to induce investors to provide it with capital. The cost of loan capital is the rate of interest that has to be paid. The cost of equity capital is the expected yield needed to induce investors to buy shares.

Cost Push Inflation

A sustained rise in prices caused by businesses passing on increases in costs, especially labour costs, to purchasers.

Counter Cyclical Stocks

Different types of business are sometimes put into categories to help you understand how they might react to longer-term market risk factors – how the shares should respond to economic cycles of general economic growth and recession. Counter-cyclical stocks are stocks that do well during bad times and not so well during good times; accountancy firms with big insolvency departments for example. Fantastic for a diversified portfolio – but it's difficult to find an entire sector, which can be called counter-cyclical.

Coupon

The coupon is a regular payment received by a bondholder over the lifetime of a bond. If the coupon is fixed the amount (as a %) of the principal on which it is calculated will remain the same throughout the lifetime of the bond. For example, a bond with a face value of $1000 and a fixed coupon of 10% paying annually will pay $100 per annum for the term to maturity.

Credit Rating

As well as the risk deriving from movements in general interest rates, debt instruments usually carry an element of default risk. For most debt instruments, investors must assess the credit quality of the issuer and decide whether the extra yield offered compared to the relevant Treasury bond (or equivalent benchmark) is sufficiently attractive. However, most investors have neither the time nor the expertise to perform the required credit analysis. Even those who do have the appropriate skills seldom wish to waste time analyzing all companies they might possibly invest in at some time in the future. In practice, almost all investors rely, to a greater or lesser degree on the credit analysis of the rating agencies. Not only do the agencies have highly skilled analysts but they also have access to private information about the company (as part of their terms to the issuer). They may not reveal such data but do include it in their assessment. Thus, on average, their credit assessments are better informed than anyone else. The two best known rating agencies are Standard & Poors and Moody's.

Credit Risk

As well as the risk deriving from movements in general interest rates, bonds - being debt instruments - usually carry an element of credit (or default) risk. The common exception is domestic government debt, because the state has no need to default in its own currency. In extremis it can simply print more money to repay the debt.

CREST

The electronic system whereby UK listed shares is registered on a computer. This means that no certificates are issued to shareholders and purchases and sales are effected instantaneously on the computer without paper. It also means that share registers are constantly updated.

Cross-currency Swap

A cross-currency swap is an agreement between two parties to exchange the basis of servicing of interest cost in different currencies. It is important to recognize with cross-currency swaps that, in addition to exchanging interest rate cash flows or coupon payments on a bond, the principal is also swapped at maturity.

Cross-currency Trades

The most commonly traded currency pairs involve the USD on one side. Trades between other currencies are calculated by going through (or across) their respective USD exchange rates - and so are called cross-rates. The USD is called the vehicle currency component in the trade.

Cum-Dividend

A share on which the right to receive the next dividend is included. At the time of the declaration of a dividend, a date will be given when the register will be closed and all people on the register at that time will receive the dividend. Shares are usually quoted cum-dividend either from the day the dividend is declared or three weeks before the register is closed, which is usually about the same amount of time. The date the register is closed is called the ex date and the shares will be quoted ex-dividend thereafter. Anyone who buys the share cum-dividend will receive the dividend and anyone who buys the share ex-dividend will not.

Currency Futures

Futures contracts are contracts to buy or sell a specific underlying instrument at a specific time in the future, for a specific price. All futures are single period exchange-traded contracts and they are standardized in terms of delivery date, amount and contract terms. Currency futures are contracts to buy or sell a specific underlying currency at a specific time in the future, for a specific price.

Current Account Balance

One of the components of a country's balance of payments, the current account balance covers the imports and exports of goods and services. The current account balance helps a country evaluate its competitive strengths and weaknesses and forecast the strength of its currency.

Current Assets

Current assets are assets that normally would be convertible into cash within the accounting cycle, usually one year. They include stocks, debtors, and short-term deposits.

Current Liabilities

Trade creditors, bank overdrafts and bank loans.

Cyclical Stocks

Different types of business are sometimes put into categories to help you understand how they might react to longer-term market risk factors – how the shares should respond to economic cycles of general economic growth and recession. Cyclical stocks are stocks whose profitability – and thus share price – tends to track the growth of the wider economy. In boom times they (and their shares) do really well, but in recession they drop more sharply than the market average…and stay there until the next boom. So they’ll only be an uncertain investment across business cycles – not during a strong up or downturn.

D

DAX

The DAX - the Deutsche Aktienindex - is Germany’s leading stock market index. The index contains 30 leading stocks listed on the Frankfurt Stock Exchange.

Dead Cat Bounce

A 'dead cat bounce' is a rather unpleasant term used to describe a small, short term recovery in a falling stock's price. Why? Well, if a cat was dropped from the top of a tall building it would bounce when it hit the ground - but it wouldn't bounce much and it would still be dead.

Dead Cross

A term used by chartists to indicate a short moving average falling below i.e. crossing, a longer moving average when both are falling. If both averages had moved in tandem for some while before the dead cross occurs then the signal is considered much stronger.

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 but after the Inland Revenue, the liquidator and the banks.

Defensive Stocks

Different types of business are sometimes put into categories to help you understand how they might react to longer-term market risk factors – how the shares should respond to economic cycles of general economic growth and recession. Defensive stocks tend to be resilient to economic downturns. They’re ‘safe’ shares- which won’t go down as much as the market average in bad times, but won’t gain as much as the market average in good times.

Delta

The delta of an option measures the change in the option price for any given change in the price of the underlying and thus enables exposure to the underlying to be determined. The delta is between 0 and +1 for calls and between 0 and -1 for puts (so a call option with a delta of 0.5 will increase in price by 1 tick for every 2 tick increase in the underlying).

Deposits

To finance its lending and investment operations, a commercial bank draws funds from various sources. Their base source comprises demand and time deposits. Demand deposits are so called because the depositor can withdraw funds without notice.

Depreciation

An exchange rate changes when one unit of the base currency buys more or less units of the quoted currency. So if the USD/JPY rate changes from 112.85 to 113.14, one USD buys more yen. The dollar has strengthened or appreciated against the yen. If the USD/JPY rate changes from 112.85 to 112.42, one USD buys fewer yen. The dollar has weakened or depreciated against the yen.

Derivatives

A derivative is a synthetic construction designed to give the same profile of returns as some underlying investment or transaction, without requiring the principal cash outlay. They are called derivatives because they derive their value from the performance of the underlying instrument. Financial derivatives can be found in debt, equity, currency and commodity markets.

Directors Dealings

The sale or purchase of shares in a company by a director of that company. Obviously, when this happens it's scrutinized because, in theory at least, a company's directors should know more about its prospects than anyone else. Additional share purchases by the directors can, but should not necessarily, be taken as a sign of good things in store for the company (and, but even less necessarily, vice versa).
Directors’ dealing tends to be restricted to certain times of the year. For example, people are generally forbidden to deal in the shares of companies in which they are directors in the six week period preceding the announcement of the annual figures.

Discretionary Portfolio Management

An account where an investment manager manages a client's portfolio without referring to the client or asking the clients permission to make specific investment decisions. Overall investment aims are agreed between the client and the manager, and the investment manager then makes specific decisions with the context of those aims.

Diversification

Reducing risk by spreading investments among different investments, sectors, markets and instruments.

Dividend

Although a stockholder is not entitled to any regular payment most stocks provide for the payment of a cash dividend - although at the discretion of the company’s management. The dividend is the amount of a company's profits that the board of directors decides to distribute to ordinary stockholders. The dividend is normally expressed as a percentage of the nominal value of the ordinary share capital or as an absolute amount per share. For example, if a company has issued equity of £10m in the form of 500,000 £20 shares and the directors decide to distribute £1m, then they would declare a dividend of 10%, or £2 per share.

Dividend Cover

The number of times a company’s available profits cover the money needed to pay dividends. It indicates the amount of spare cash flow a company has and therefore how safe a dividend might be. A ratio of two or more is considered comfortable, whilst a ratio below one and a half times is seen as risky.

Dividend Pay-Out Ratio

The dividend a company pays expressed as a fraction of its earnings.

Dividend Yield

Dividend yield is found by dividing the latest known dividend payout from a company by its current share price. Dividend yield gives investors a figure for investment return in the form of income.

Domestic Bonds

What this means in practical terms for an investor – and for the issuer – is that the whole process – from issuing to redemption – is regulated by the UK authorities.

Dow Jones Industrial Average

"The Dow", or the "Dow Jones Industrial Average" (DJIA) is probably one of the best-known indices quoted in relation to the US equity markets. In it’s most basic form, Charles Dow invented it on the 19th century, and at that time contained 12 stocks. It was calculated simply by adding up the prices of the 12 constituent stocks, then dividing by 12. The index now consists of 30 stocks, and rather than dividing by 30, an adjusted index divisor is used to preserve continuity of the index over time through such events as stock splits, changes in the component stocks. Such a "price-weighted" index is quite unusual, as it means a 5% change in a share with a high price will affect the index much more than an identical % movement in a lower price share. It is therefore relatively "crude". This index however has stood the test of time and remains one of the most widely quoted indicators. The 30 stocks it is composed of are major companies in a variety of industry sectors, and represent about a quarter of the capitalization of the NYSE in value terms.

Dow Theory

Charles Dow formed the foundations of technical analysis around 1900.The Dow theory comprises six assumptions: 1. The averages discount everything 2. The market is comprised of three trends (Primary, Secondary, Minor) 3. Primary trends have three phases 4. The averages must confirm each other 5. The volume must confirm the trend 6. A trend remains intact until it gives a definite reversal signal.

E

Earnings per Share (EPS)

To arrive at Earnings per Share (EPS) pre-tax profits are divided by the amount of shares issued to get a figure for the amount of wealth that’s been created per share by the company. As profits are reported on a quarterly basis, the ‘latest’ EPS will either be from the last quarter or the last financial year. Even though it’s net profits that a shareholder will actually benefit from, the net profit figure shouldn’t be used for EPS because changes to the tax regime and companies differing treatment of tax will affect data comparisons across time and between shares. So the pre-tax figure is best for comparison.

Efficiency of capital structure

A sufficient level of equity capital is necessary to lessen the risk of default on debt obligations and to give a credit status high enough to encourage those with funds surpluses to become creditors. Equity capital protects lenders. This is the most explicit link between the debt and equity markets. A company's use of equity relative to debt will be determined in part by the advantages of tax deductibility of interest relative to the increased financial risk that a company assumes by moving to a more highly geared status - that is, the risk that it will be unable to service debt from future anticipated cashflow .

Electronic Order Matching

Electronic order matching systems work in much the same way as voice-broking, but here price makers input prices onto a computer system, which displays on-screen prices, which a price taker can hit via a keyboard.

EMU

The term "Economic and Monetary Union" (EMU) is used to refer to the establishment of a European Single Currency. Although a high degree of sustainable economic convergence between participating Member States is a prerequisite of the establishment of a viable pan-European single currency zone, comprehensive economic union (an identifiable single pan-European economy) will not exist until there is far more consolidation and harmonisation between national business, legal, taxation and accounting practices. The establishment of a single pan-European currency union is seen as a driving force, which will eventually lead to full economic union between participating states. Commentators typically predict that it will take15-20 years for full economic union to evolve. So EMU - understood as the introduction of a single currency - is not the end of the process toward full European economic union, it is the beginning.

Equity

So, buy a stock and you're buying part-ownership of a company. And as an owner, you take a share in the company's future profits.

Equity Analysts

Equity analysts are employed by investment banks and independent brokerage firms to support their trading activity. They usually concentrate on specific sectors - media analysts, food analysts, technology analysts and so on. Analysts’ reports are used both to improve the banks own trading activity (i.e. trading on their own accounts) and to improve its service to clients.

Equity Warrant

An equity warrant is an option to buy the common stock of the debt issuer at a predetermined price on or before a predetermined expiry date. For an issuer, issuing a bond with an equity warrant can help widen their investor base by selling to both long term fixed income investors and equity speculators in a single offering; rather than incurring the cost of both a bond issue and a warrant issue. Fixed income investors will sell the warrant on to other speculators for profit. The bond itself is attractive to investors who look for returns in the form of capital gain, because the bond will now trade at a deep discount (say, 80% of par) to reflect the fair value of the low income stream. The main attraction of the stripped warrant to investors is that it is a highly leveraged instrument: the right to enter the market at a set price costs much less than cash market position. A relatively small investment now can lead to very high profit potential if the market rises.

Euro

The euro (EUR) takes over from the German Deutschmark as the world’s second largest trading currency. Before the advent of the euro, the DEM accounted for 25% of all FX transactions, with USD/DEM being the most liquid and traded pair. The euro will expand on this. Not only does the euro also take in the French franc (4% of trades) and 9 other European currencies, it is also expected to stimulate the growth of the EMU‘s euro-denominated debt and equity markets, which have the potential to rival US financial markets in terms of depth and liquidity. The euro also has a limited role as an anchor and vehicle currency for Central Europe. Many central banks are moving some foreign currency reserves into euro; but the USD will remain dominant as the global invoicing currency.

Eurobonds

Eurocurrencies

Borrowing and lending is not restricted to domestic markets. Euro time deposits comprise cash held in a banking system outside the country of that currency's origin. Originally the demand was for dollars to be held in time deposits outside the US, specifically in Europe, thus they came to be called Eurodollars. Dollars later came to be held in SouthEast Asia and the Middle Eastern banking systems, but they are still called Eurodollars. The market subsequently widened to include a range of currencies held in time deposits outside their country of origin - Eurodeutschmarks, Euroyen and so on.

Euromarket

The equity equivalent is known as the International Equity Market.

European Central Bank

As from 1 January 1999 the ECB became the independent central bank of the Euro area. It is to be responsible for making and carrying out EU monetary policy, including the setting of short-term interest rates and having the sole right to issue Euro bank notes. This it will do on the basis of inflation and money supply data from the likely eleven member states. It is intended that it will be independent of individual national governments and the EU institutions. Furthermore, under the no 'bail-out' requirement, as laid down in the Maastricht Treaty, the ECB will not be able to assist Euro area countries in debt, an obligation buttressed by the convergence criteria and the Stability and Growth Pact, both of which will constrain national borrowing. An integral part of the European System of Central Banks (ESCB), the bank will be run by a Governing Council composed of an Executive Board of six members chosen by the participating member states, and the governors of the national central banks. Central Bank Governors of member states outside the Euro area will sit on the General Council of the ECB in a largely advisory capacity. The former EMI President, Wim Duisenberg, is now ECB President, until such time as he retires. Either this will be early or at the end of his 8 year term. Should he go early - something, which remains unclear - then Jean-Claude Trichet, governor of the Banque de France, will take over.

European Style Option

A "European" style option is an option that can only be exercised by the buyer (i.e. buy - call - or sell - put - the underlying) at expiry.

Eurozone

The introduction of the European single currency is part of a process towards 'Economic and Monetary Union' (EMU); a process which adheres to a timetable established by the Treaty on European Union (the Maastricht Treaty). The establishment of a single pan-European currency union is seen as a driving force, which will eventually lead to full economic union between participating states. Commentators typically predict that it will take 15-20 years for full economic union to evolve. So EMU - understood as the introduction of a single currency - is not the end of the process toward full European economic union; but it is a key development toward that end.

Ex-dividend

Before companies make their announcement regarding dividends, the share goes XD (Ex-dividend). This is marked next to the share price in the papers, and means that if you buy the share at that time you won't be entitled to the dividend. The share remains ex-dividend until the dividend has been paid. People holding a share when it goes ex-dividend are entitled to the dividend payment even if they sell during the ex-dividend period. It’s normal for a share price to fall when it goes XD (usually by an amount similar to the dividend). This is because anyone buying the shares won’t receive the dividend.

Exchange

An exchange is a marketplace in which financial contracts are bought and sold; traditionally in a central, physical location - a trading floor. Increasingly though, exchanges don't work like this. Rather they're made by dispersed marketmakers using computer links to post prices and buy and sell traded instruments. What's the difference between a market and an exchange then? Answer, not a lot nowadays. If a market’s made under the regulation of something called 'an exchange' it’s an exchange-traded market. If it isn’t though, it’s still a market.

Exchange Traded Funds

Exchange traded funds (ETFs) are pooled investment vehicles designed to track the value of a particular stock market index. They share characteristics of both investment trusts and unit trusts. Like investment trusts you can trade them on an exchange - hence the name - and they pay dividends. But unlike investment trusts (and like unit trusts) they are open ended, so they are likely to trade closer to the net asset value of the fund than an investment trust. Another feature of ETFs are that their prices are continuously updated throughout the trading day; a feature which means that - unlike unit trusts, whose prices are updated only every 24 hours - they are always trading close to net asset value. Like investment trusts, the up-front costs of buying into an ETF are included in the spread. You will also have to pay broker commissions and stamp duty (although some ETFs are stamp duty exempt). As well as the up-front costs, ETFs charge an annual management fee. The fee, which tends to be lower to those charged on either unit trusts or investment trusts, is usually deducted from annual dividend payments. ETFs have been extremely popular in the US for a number of years and account for up to two thirds of daily stock market volume. The first UK ETF - the so-called iShare - was launched by Barclays Global Investors this year, and Barclays have plans for a further 12 funds. The London Stock Exchange has created the new market, ExtraMARK, on which ETFs are to be quoted.

F

Face Value

It's also the figure on which the amount of coupon interest paid to the bondholder is calculated. The face value of the bond remains the same throughout its life and should not be confused with either the issue price of the bond (which may be at a premium or discount to face value) or the bond's market price.

Federal Bank

One of the twelve banks in the USA, which with their regional branches make up the Federal Reserve System. The role of each bank is to monitor and regulate the commercial and savings banks in the region. The Federal Reserve Board governs them.

Federal Reserve System

The Federal Reserve system is comprised of 12 regional Federal Reserve Banks. Its main functions are to regulate the money supply, act as a clearing house for the transfer of funds throughout the banking system, specify reserve requirements for member banks, and make sure they meet various Federal Reserve regulations.
The system is governed by the Federal Reserve Board which is made up of 7 members, appointed by the President of the USA and confirmed by the Senate.

Fixed Assets

Anything a corporation owns is considered an asset. These are listed in a company's Balance Sheet in increasing order of liquidity, i.e. beginning with those that are not easily converted into cash. Intangible assets are usually patents, branded values and goodwill. These are difficult to value objectively. Tangible assets are usually land, buildings, plant, and fixtures and fittings. Investments under fixed assets are investments in other companies.

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.

Floatation

The issue of shares in a company for the first time on a stock exchange or unlisted securities market. The various methods of flotation include an introduction, intermediate offer, placing or an offer for sale. If a private company converts into a public company and has its shares listed in this way it is known as going public.

Floating Rate Notes (FRNs)

Floating Rate Notes (FRNs) are bonds with interest payment rates - the coupon rate - linked to a money market index. The coupon rate is pegged to a benchmark floating rate, commonly Libor. Payments are refixed quarterly to three-month Libor or semi-annually to six-month Libor.

Floor Broker

An employee of a member firm who executes orders on the floor of an exchange acting as an agent for clients. Once an order is received on the trading floor the broker would then execute the order among other brokers and traders at the best price available. This would take place in a designated trading area for that particular security.

Foreign Bonds

Many domestic markets are also open to foreign borrowers who, although domiciled outside the country, can issue bonds in the domestic currency for sale to local investors as long as they comply with the same local regulations as their domestic counterparts. So, a Japanese company which issues a bond denominated in sterling for sale to UK investors is issuing a foreign bond. Foreign bonds have colourful names indicating the domestic market in which they’re issued. For example: a bond issued in sterling by an issuer domiciled outside the UK is called a Bulldog; a bond issued in Yen by an issuer domiciled outside Japan is called a Samurai; and a bond issued in US dollar by an issuer domiciled outstide the US is called a Yankee.

Foreign Exchange

The global foreign exchange (FX) market is the largest financial marketplace in the world and on an average day over $1 trillion change hands. Only about 15% of FX is directly driven by cross-border trade in goods and services. Approximately 85% is driven by capital transactions conducted by banks for financial engineering and speculation. Each sovereign state issues and manages its own currency through a national central bank. The exception is the eurozone. This new currency area is made up of 12 European Member States. A politically independent European Central Bank issues and manages the trans-national currency, the euro. The euro should not be confused with eurocurrencies, which are currencies held in deposits outside their national banking system.

Forward Market

Currencies, commodities and securities can be dealt with either for immediate delivery (known as the spot market) or for delivery at sometime in the future at a price agreed now, the forward market.

Forward Rate

The price a currency with maturity beyond the spot dates (the price today). Forward rates may be either the same price as a spot rate or different. In the first case, the forward is said to be flat, in the second, it's trading at a premium or discount to the spot rate.

Frankfurt Stock Exchange

The Frankfurt Stock Exchange is the largest of Germany's eight regional Stock Exchanges and is run by a company, which is owned by the major banks.

Free Cash Flow

The cash generated by a business that is left over after the prior claims needed to keep the business running have been met.

Frictional Costs

Frictional costs are the costs of doing a transaction (commissions, fees, brokerage, bid-offer spread).

FSA

The Financial Services Authority (FSA) – until October 1997 known as the Securities and Investments Board (SIB) – is an independent non-governmental body, which regulates the UK financial services industry. The FSA and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

FT 30

The FT 30 is the UKs oldest stock market index and is composed of 30 leading stocks chosen by the Financial Times of London. The stocks are not chosen on the basis of market capitalization - as is the case with the rest of the FTSE indices - but is at the discretion of the FT. The companies represented in it are supposed to be the 'leading' companies in their sectors.

FTSE 100

The FTSE 100 share index is a stock market index made up of the 100 largest UK registered companies in terms of their market capitalization.

FTSE 250

The FTSE 100 share index is a stock market index made up of the 100 largest UK registered companies in terms of their market capitalization. The FTSE 250 is made up of the next 250 largest companies by market capitalization.

FTSE All-Share Index

The FTSE All Share Index represents about 900 LSE (London Stock Exchange) listed stocks. These stocks make up over 95% of total market capitalization, and around 99% of all trades.

Fund Managers

Professional managers investing pooled funds are the most significant group of international investors. Investment strategies are tailored to the needs of the particular fund.

Fundamental Analysis

Fundamental analysis looks at a share’s market price in light of the company’s underlying business proposition and financial situation. It involves making both quantitative and qualitative judgements about a company. Fundamental analysis can be contrasted with 'technical analysis’, which seeks to make judgements about the performance of a share based solely on its historic price behavior and without reference to the underlying business, the sector it's in, or the economy as a whole. This is done by tracking and charting the companies stock price, volume of shares traded day to day, both on the company itself and also on its competitors. In this way investors hope to build up a picture of future price movements.

Funds

Funds are pooled investment vehicles, whereby a professional fund manager invests the monies paid into the fund on the investor’s behalf. The main types of investment fund in the UK are: unit trusts, investment trusts and open-ended investment companies (OEICS). Different funds have different investment objectives and so different risk/return profiles.

Futures

A futures contract is a contract to purchase a specific underlying instrument at a specific time in the future, for a specific price. All futures are exchange-traded contracts and they're standardized in terms of delivery date, amount and contract terms. Traders use futures contracts to speculate on the direction of an underlying instrument (including indices). Banks and other financial institutions use them to hedge their portfolios against adverse fluctuations in the price of an underlying exposure. Such hedging is possible because you can short futures contracts - i.e. sell the futures contract.

FX Swaps

A foreign exchange swap is a combination of a spot transaction and an opposite outright forward. Foreign exchange swaps are the most important type of forward foreign exchange instrument. They are used for risk management, cross-currency liquidity management and to exploit interest arbitrage opportunities.

G

Gamma

The gamma of an option measures the change in delta for a given change in the underlying. For example, if a call option has a delta of 0.5 and a gamma of 0.05, this means that the new delta will be 0.55 if the underlying price moves up by one full point and 0.45 if the underlying price moves down by one full point.

GDP

A country’s Gross Domestic Product (GDP) is a measure of the total flow of goods and services produced over a specified time period, usually a year. The word ‘gross’ means that no deduction for the value of expenditure on capital goods for replacement purposes is made. The word ‘domestic’ means that income arising from investment and possessions owned abroad is not included; and this distinguishes Gross Domestic Product (GDP) from Gross National Product (GNP).

Gearing Ratio

The ratio of debt to equity. The higher the ratio of debt to equity the more highly geared a company is said to be. The debt:equity ratio suitable for a particular company will, to some extent, depend on the nature of that business. Generally speaking, low risk businesses can afford higher gearing than high risk businesses. Companies rarely make primary issues of shares, making use of debt markets for ongoing financing needs; and to attract debt finance, corporates have to maintain their creditworthiness, which is in part determined by the debt:equity ratio. A sufficient level of equity capital is necessary to lessen the risk of default on debt obligations and to give a credit status high enough to encourage those with funds surpluses to become creditors. Equity capital protects lenders. This is the most explicit link between the debt and equity markets.

Gilts

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.

Golden Cross

In technical analysis a Golden Cross is formed when a short moving average breaks above a longer one when both are rising. The signal is considered much stronger if the cross is formed after the moving averages have stayed close to each other for sometime.

Government Benchmark

In most major currencies, the government debt market represents the deepest and most active sector. Also, it is usually regarded as without default risk. For these two reasons, it is usually used as the benchmark, and one refers to other bonds as, using a US$ example, "yielding Treasuries + x", x being measured in basis points or percentage points.

Government Securities

The public sector generally faces a funds deficit. Bonds provide long-term finance, but these tend to be supplemented by regular issues of short-term securities, either rolled-over regularly to finance part of the public debt or to cover temporary shortfalls in fiscal revenue.

Graham (Benjamin)

Benjamin Graham was one of the first investors to develop a systematic approach to stock-picking. Graham stressed that investors should look at a company’s financial value before looking at market share price i.e. they should look for ‘fundamental’ value not currently reflected in the share price. Graham emphasized the need for careful selection with a view to a long-term buy and hold strategy. He had learnt the lesson of the 1920s speculative boom and bust frenzy and sought to inject rigor and foresight into what had previously been treated as a speculative arena. For Graham, the idea behind stock-picking is to find companies which will perform better than their market price suggests – then, over time, the fundamentals will work through and the market will bid up the share price. Graham took a top-down approach – focusing on quantitative screening methods to work down to a portfolio (the numbers must pass certain tests).

Greeks

Delta, Gamma, Rho, Theta and Vega are a set of factors written as Greek symbols in algebraic equations. They are used to model the behavior of options in correlation to changes in the value of the underlying financial instruments, interest rates, time and volatility.

Grey Market

A grey market is a market where there is trading of a stock that is about to be issued for the first time, before it's issued. Grey market trading is risky because sellers' don't know how many shares they have - i.e. they're selling shares they don't own yet - and buyers don't know what the final issue price is going to be when the allocation is complete.

Gross National Product (GNP)

Gross National Product is a measure of an economy's total output. It is the sum of the money values of all the final goods and services produced in a year by the residents and nationals of a particular country regardless of where they are domiciled. It's different to GDP because GDP does not include income earned abroad; it's the market value of final goods and services produced within a nation's borders. The preceding definition of GNP is oten referred to as 'nominal GNP' because it doesn't take account of inflation. 'Real GNP' is nominal GNP adjusted to take account of inflation.

Growth Investing

So the market tends to bid up the price of shares in companies exhibiting earnings growth. Growth investors tend to buy shares which are already ‘doing well’. "Success breeds success" is the motto. The trick is to find companies, which will do even better than the market expects. A growth approach to stock-picking is usually contrasted with a ‘value’ approach. Value investing focuses more on ‘bargain-hunting’, seeking out neglected stocks whose share prices are far lower than they should be given the company’s earnings potential. Growth investors treat the market price with more respect. They don’t sniff at more ‘obvious’ choices. They are not ‘contrarian’ investors, picking shares that most everyone else doesn’t want.

H

Hang Seng Index

The Hang Seng Index is the main Hong Kong stock market index and is made up of 33 companies divided into four sectors: financial, utilities, property, and commerce and industry. It's an arithmetic index, which is weighted by market capitalization.

Head and Shoulders

A head and shoulders pattern is a price reversal pattern used in technical analysis. There are two main types: a head and shoulders top, and a head and shoulders bottom. The head and shoulders top is made up of three peaks, with the middle peak being the highest (the head). The head and shoulders bottom is simply the reverse of the head and shoulder top i.e. it's represented by three downward pointing peaks with the middle peak being the lowest. A head and shoulders top can indicate the arrival of a major market downturn. A head and shoulders bottom signals the end of a downtrend and the beginning of an uptrend.

Hedging

Hedging is a risk reduction strategy whereby investors and traders take offsetting positions in an instrument to reduce their risk profile. The practice usually involves taking both a long and a short position in an instrument and so, usually, necessitates using financial derivatives with which it's possible to short sell. Hedging strategies are also employed by professional fund managers to control the risk exposure of large managed funds. In this context, hedging is a more complex process as it involves a whole portfolio of different investments - each with its own unique risk/return profile.

High Yield Bonds

High yield bonds (formally known as ‘junk bonds’) are non-investment grade securities; that is to say, they are debt instruments issued by corporate without a credit rating usually considered appropriate for debt issuance. In accordance with the basic principles of risk and return, the higher risk of default inherent with such securities means the issuer has to offer a higher return (higher yield) to compensate for the higher risk of default.

Historic Volatility

A distinction can be drawn between historic volatility and implied volatility: historic volatility is a figure derived from past price data calculated over different periods, 60 days, 90 days, 6 months etc. Sometimes weighting is used by giving more importance to recent price movements than less recent price movements: there is no definitive figure. The drawback with historical volatility, no matter how calculated, is that it describes things in the past rather than in the future. This is where implied volatility is useful as it is derived from the market price of an option. The correlation between historic and implied volatility is often used.

I

Implied Volatility

The figure derived from the market price of an option. Implied volatility can be thought of as a measure of the risk of an instrument or portfolio right now, as opposed to in some period in the past (historic volatility).

In The Money Option

An option with intrinsic value. A call option (the right to buy) is in-the-money if its strike price (the future price at which you can buy) is below the current price of the underlying instrument. A put option (the right to sell) is in-the-money if its strike price (the future price at which you can sell) is above the current price of the underlying instrument.

Index Tracking

Index tracking involves building an investment portfolio designed to track a particular benchmark index. At its simplest, it requires holding all stocks in the index, and weighting each stock-holding so each investment is held in proportion to its contribution to the index being tracked. Index tracking is often referred to as 'passive' investment and can be contrasted with 'active' management, where fund managers seek to outperform a market benchmark.

Indices

Security market indexes and averages are tabulated and published each day all over the world

Individual Stock Option

An option on a stock, either exchange-traded or OTC. An exchange will only offer selected options on its local stock market. The OTC market can tailor an option for almost any reasonably liquid listed stock. Each stock option is a block of shares - say 100 per contract - and the product works like any other financial option. If an individual equity option is exercised, a holder will receive the underlying stock, unlike stock index options, which are cash settled. But as a specific stock view is achieved, single stock options allow a precision in speculation or hedging which the proxy index basket cannot achieve.

Inflation

An overall increase in the general price level. Where inflation is rising, even though some prices may fall, the overall cost of living and cost of business rises because most prices increase. The rate of inflation is the percentage change (usually annualized) in a price level index. Inflation reduces the real purchasing power of business and the consumer and creates business uncertainty.

Initial Margin

A deposit required by an exchange as a 'good faith' guarantee against a loss from adverse market movements.

Interbank Market

The interbank market is where banks make day-to-day adjustments in their operational reserves, offering a fine return on liquid funds. To finance its lending and investment operations, a commercial bank draws funds from various sources. Their base source comprises demand and time deposits. Demand deposits are so called because the depositor can withdraw funds without notice. If a bank ties up demand deposit funds in longer term assets, effectively borrowing short and lending long, it exposes itself to a liquidity risk. Funding loans with overnight money is equivalent to drawing on demand deposits, and is a cheap and convenient way to make day-to-day adjustments to reserves. Equally, selling in the interbank market gives a return on excess reserves whilst not sacrificing liquidity. In this sense, the interbank interest rate reflects levels of demand and supply in all money markets as buying interbank funds either serves to finance loans and the purchase of debt securities, or acts as an alternative to selling Certificates of Deposit.

Interbank Rates

Interbank interest rates are determined in the interbank market for short term loans. In this sense, the interbank interest rate reflects levels of demand and supply in all money markets as buying interbank funds either serves to finance loans and the purchase of debt securities, or acts as an alternative to selling Certificates of Deposit.

Intrinsic Value

The difference between the exercise price of an option and the market value of the underlying instrument. Option at-the-money or out-of-the-money has no intrinsic value.

Inverse Relationship between Price and Yield

For all option free-bonds, as market interest rates rise bond prices fall, and vice versa. There is an inverse relationship between price and required yield. This follows directly from the fact that a bond's price is simply the present value (PV) of its constituent cashflows. As the required yield rises, the PV of each cashflow shrinks, and thus so does the total. The opposite occurs as the required yield falls, following changes in market rates.

Investment Bank

Investment banks provide a range of financial and investment related services, advising clients on security issues, acquisitions and disposals of businesses, arranging and underwriting new issues, distributing securities and running fund management companies. They stand at the heart of financial markets in that they help make both the primary market and, through their trading desks and marketmakers, the secondary market too.

Investment Trust

An investment trust is a company that is quoted on the stock exchange and exists to invest in the equity of other companies. By buying shares in an investment trust the idea is that the investor is getting access to the performance of a wider spread of shares. Different Investment trusts specialize in different types of investments.

IPO

IPO is an abbreviation for an 'initial public offering'. An IPO (also known as floatation) is the process by which a company goes public i.e. offers its shares to the public for sale for the first time.

ISA

ISAs (Individual Savings Accounts) were introduced by the UK Government in April 1999 to promote saving and investment amongst individuals in the UK. An ISA allows you to save in a tax-free way. There are three types of investment types, which can be held in an ISA. These components are cash, stocks and shares and life assurance. There are two kinds of ISA: maxi ISAs and mini ISAs. You can invest into either one maxi or up to three minis ISAs in any one tax year. For the tax year 2000/01, you can invest a maximum of £7,000. From the tax year 2001/02, the overall subscription limit to ISAs will be reduced from £7,000 to £5,000.

J

Junk Bonds

Junk bonds (now usually referred to as high yield bonds) are non-investment grade securities; that is to say, they are debt instruments issued by corporates without a credit rating usually considered appropriate for debt issuance. In accordance with the basic principles of risk and return, the higher risk of default inherent with such securities means the issuer has to offer a higher return (higher yield) to compensate for the higher risk of default.

L

Leading and Lagging Indicators

Economic variables that tend to anticipate, and therefore lead, changes in the general level of business activity are said to be leading indicators. Economic variables that tend to follow, or lag behind, changes in the general level of business activity are said to be lagging indicators.

Leverage

An American term for not paying the full prices upfront for a financial asset. This is usually achieved by using borrowed money. Derivative products are said to be ‘leveraged’ because only a proportion of their total market exposure needs to be paid to open and maintain a position. This percentage of the total is called a ‘margin’ in futures & CFDs; and it’s a ‘premium’ in options markets. In this context, ‘leverage’ is the word used in all English-speaking derivative markets. In US corporate finance, a ‘leveraged’ company is one, which has a high debt-to-equity ratio. So the majority of a leveraged company’s assets aren’t owned by shareholders. They’ve been paid for with borrowed cash, not equity issues, so until the debt is paid off, banks or bondholders own these assets. In UK corporate finance, people call this type of operation a ‘geared-up’ company. But ‘gearing’ is a neutral word (you can have low or high gearing - a high or low debt:equity ratio ), but you only use leverage to refer to a high debt exposure. A ‘leveraged’ buy-out is a corporate merger or acquisition where stock is taken into control with borrowed money (or a bond issue). The effect of leverage is to amplify investment returns – whether positive or negative – so it’s a high risk/high return game.

LIBOR

Traditionally LIBOR (the London Interbank Offered Rate) has been defined as the rate at which a prime commercial bank is offered deposits by other banks in London. It is used as a measure of the cost of wholesale funds to banks and as a basis for pricing bank loans to customers. Dow Jones Markets fix LIBOR each day for the British Bankers Association (BBA) - under whose auspices it functions -. Every business day in London, Dow Jones contacts 16 reference banks listed by the BBA for each of 13 currencies and asks for their observations of LIBOR at 11.00 am London time for 12 round maturities from 1 to 12 months. For each of the 12 maturities in each of the 13 currencies, the highest 4 quotes and the lowest 4 quotes are deleted. The remaining eight are averaged and rounded up to 5 decimal places. The averages are then published. Despite the name, LIBOR is an international reference rate and is used by the international market as a benchmark against which to price borrowing and lending.

LIFFE

The London International Financial Futures and Options Exchange (LIFFE) trades futures and options contract in financial instruments and commodities. Although LIFFE has always been committed to open outcry trading it has recently had to convert its method of trading to a screen based operation. Contracts traded on LIFFE are cleared by the London Clearing House, which acts as the central counterparty to all trades, thus guaranteeing trade performance. LIFFE products are standardized, making them easily tradable. The LIFFE CONNECT™ computerized exchange is order driven, matching off buy and sell orders input by members/brokers subscribed to the market worldwide.

LIFFE CONNECT

LIFFE CONNECT™ is currently the world's most advanced options trading system; enabling electronic trading of strategy trades in one go, rather than constructing them from the component options.

Limit Order

A limit order is 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 or time restriction.

Liquidity

Liquidity means how easy it is to buy and sell a financial instrument for cash without causing any significant change in its price. A very actively traded market, where it's easy to sell whatever you're holding for cash without discounting its price heavily is said to be a liquid market. A market where it's difficult to sell whatever you're holding for cash unless its price is discounted is said to be an illiquid market. Liquidity is prized because it increases the 'efficiency' of a market - that is, its capacity to find the 'true price' of whatever is being traded. Similarly, a financial asset itself can be illiquid - even in a liquid market.

Listing Requirements

The requirements that a particular securities exchange has of an issuer before it will make a market in (list) those securities.

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.

London Stock Exchange

The London Stock Exchange provides a forum for both UK and internationally based companies to raise capital and have their shares publicly traded. Trading methods vary between markets, but all trading is either done electronically, or over the telephone, based on screen quotation systems. The market for equities on the London Stock Exchange is divided into the "Main" market, which the majority of shares are listed on, and "AIM" (the Alternative Investment Market).

Long

A trader or investor who holds a particular stock or commodity would be known as long in that stock. Long is the opposite of short.

Long Position

Buying and holding an asset in the hope of profiting from an increase in its price. If you hold a security you are said to be 'long' whatever that security is.

M

Major Currencies

Foreign exchange activity is concentrated in four ‘major’ currencies in trades against the USD - EUR (the euro), JPY (the Japanese yen), GBP (the pound) and CHF (the Swiss franc). This concentration of liquidity in a few currency pairs reflects the importance of the underlying financial and physical product markets denominated in those currencies.

Margin

Traders on futures markets are obliged to put up relatively small collateral deposits called the margin. If the price moves against the dealer the broker will ask for additional funds to maintain the ratio, which is called a 'margin call'.

Market Capitalization

A company's market capitalization shows the current market value of the company and is found by multiplying the share price of the company by the number of ordinary shares. So if a company has a share price of £8 per share and has 10 million ordinary shares, it has a market capitalization of £80 million.

Market Efficiency

Modern financial markets are said to be efficient in the sense that the price of a traded asset is constantly changing as the market analyses and incorporates new information about the company’s future prospects. The market is driven by skilled analysts and traders who use sophisticated information technology and it is the speed of modern telecommunications and the power of computer systems to process and present a wide range of complex data in a readily understandable form that creates this efficiency. This has important ramifications for fund managers because - if the market is efficient - it means that when they get a price quote from the market, that price will accurately reflect its future profitability, based on all currently existing information.

Market Order

An order from an investor to a broker to buy or sell a security at the best prices available at the time of the order.

Market Price

The price of a financial security - the market clearing price - which is found in the secondary market. The market price is determined by the buying (demand) and selling of investors (supply).

Marketmaker

The marketmaker is a dealer who stands ready to buy and sell, posting prices and effectively creating the continuous secondary market with the help of brokers who link the dispersed market investors. So a secondary market creates liquidity as marketmakers allow investors to on-sell financial assets for cash with speed and at the going market price. Marketmakers trade on behalf of clients and on their own accounts.

MATIF

Matif is the Paris Financial Futures Market. The market uses a screen based computer system to trade a variety of products, including: government bond futures, CAC 40 futures, currencies and some commodities.

Maturity

In debt markets the maturity of an instrument is, essentially, the length of the loan i.e. the amount of time before the principal amount lent is repaid. The date on which the principal is repaid is known as the redemption date. Once an instrument has been issued the length of time left until the redemption date is known as the term to maturity.

Mid Price

The difference between the bid and offer price is known as the spread; and the spread is the marketmakers profit i.e. the difference between the price at which he buys and the price at which he sells. The mid-price is, as the name suggests, the middle point between the marketmaker's bid and offer price; in the case of our 102-104 bid-offer price, the mid-price would be 103. Mid-prices are often the prices you will see quoted in newspapers. But when you actually buy or sell a security it's the bid-offer price you'll be quoted.

MONEP

MONEP is Paris's traded options market. Its offer contracts on the CAC 40 Index of leading French companies, as well as options on a further 30 major corporations.

Monetary Policy Committee

The Monetary Policy Committee - set up by the UK's Chancellor of the Exchequer in 1997 - is a group of seven 'wise men and women' who, under the chairmanship of the Governor of the Bank of England, decide on the UK's interest rate policy.

Money Market Fund

A money market fund is a mutual fund or unit trust that invests its capital into short term money market assets, such as bank certificates of deposit or commercial paper.

Money Market Instruments

Money Markets

Money markets are wholesale cash markets through which banks, corporates and government bodies fund short-term deficits and invest short-term surpluses - so-called, liquidity management. A wholesale market is a market involving professional counterparties (banks, large corporates and government bodies) and large deal sizes. The borrowing and lending in money markets is high volume, low risk and short-term. Short-term is generally understood as ‘less than one year’, although, in fact, most money market activity is concentrated in terms to maturity between overnight and one-week. This is in contrast with capital markets, where borrowing and lending is for periods of ‘more than one year’; and, indeed, it is this distinction between maturities that is often used to distinguish between money markets and capital markets.

Moving Average

Moving averages are a key tool of technical analysis. By ironing out daily price fluctuations moving averages help traders reinforce their identification of trends. Also, moving averages, when looked at in relation to daily price charts, can provide traders with buy and sell signals. A simple moving average shows - as the name suggests - the average price of a stock over a specific number of days. A simple moving average is calculated by totaling the closing prices of a stock over a prescribed period (say, 30 days) and dividing that total by the number of days in the period (i.e. 30). The resulting number is the average. In order for the average to move, the most recent closing price is added to the previous total and the oldest closing price used in that total is subtracted. The new total is then divided by the number of days of the moving average, and the process is repeated. The moving average that cover around 200 days is a favorite among analysts as a measurement of long range trends.

Multiple Price Auction

There are two ways of pricing an issue after it has been allocated through a competitive auction - single or multiple pricing. In a single price system the highest accepted yield bid is called the stop-out yield. The entire issue is then priced off the average between the lowest accepted yield bid and the stop-out yield. Price and coupon are then retrofitted to achieve this yield. In a multiple price system, here again, the borrower awards securities to the highest price/lowest yield bidders, up until the point where the required funding is achieved. The highest accepted yield bid is again the stop-out yield. However, once a stop-out yield is arrived at all bidders who come in at or under the stop-out yield are awarded securities at their actual yield/price bid.

Mutual Fund

Known also as an open ended fund, or in the UK as unit trusts, mutual funds 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

Naked Option

The writing (selling) of a call option with no underlying security position. A writer of a naked call option does not own a long position in the instrument upon which the call has been written. Although naked option writing can potentially be very rewarding it is also very risky.

NASDAQ

NASDAQ (the National Association of Securities Dealers Automated Quotation System) is the world's fourth largest stock market, behind New York, Tokyo and London. NASDAQ is a screen based market with over 500 marketmakers.

Negotiable

A negotiable instrument is one that can be bought and sold after being issued - in other words, it is a tradable instrument. Negotiability is a prerequisite of secondary markets.

Net Asset Value

The Net Asset Value is simply the Book Value of the company’s net assets divided by the number of shares issued. The resulting figure is the company’s Net Asset Value (NAV) - its ‘book value per share‘ - a ‘base-line’ indicator of what a share is worth. At the very least, it's worth what the shareholders tangibly own.

New York Stock Exchange

Also known as NYSE, the New York Stock Exchange is the World's biggest stock exchange in terms of market capitalization. There are around 2000 companies and 5000 securities listed on the NYSE.

NIKKEI 225

The NIKKEI 225 Stock Average is a measure of share values on the Tokyo Stock Exchange. It is the simple average of the price of its 225 components with an adjustment made to take account of stock splits.

Nominal Value

The value ascribed to a share when it is first authorized and issued by a company. A share's nominal value bears no relation to a share's market value.

Non-Voting Shares

Some companies have two types (or class) of shares normally called A and B. Voting rights can be restricted to one class, with the intention of retaining control of the company in the hands of its original owners. Non-voting shares are normally class A.

Notes

A note is a negotiable record of an unsecured loan with a maturity greater than one year - in other words, a bond. There's little difference between bonds and notes, although generally, when an instrument is referred to as a note it will have a maturity of less than 5 years.

O

Odd Lot

Purchase or sale of securities in any amount less than 100 shares. An investor buying or selling an odd lot often pays a higher commission rate than someone making a round lot trade. This odd-lot differential varies between brokers.

Offer Price

Marketmakers quote securities in terms of what's called a bid-offer price. The bid price is the price at which they will buy a particular security. The offer price is the price at which they will sell a security.

OFFEX

OFFEX is an unregulated over-the-counter trading facility in unquoted securities based in London. It was founded in 1995.

On The Run

Bonds and notes most recently issued by the US Treasury. They are heavily traded and therefore tend to move at finer rates than other treasury securities.

Open Market Operations

Open market operations are a process used by Central Banks whereby they manipulate the level of liquidity available to commercial banks by buying/selling short-term instruments. By selling short term instruments the Central bank drains liquidity, as cash is transferred from commercial banks operational reserves. By buying short term instruments the Central Bank increases liquidity, injecting cash into operational reserves. This increase in liquidity - an increase in the supply of money - causes the interbank rate to fall and leads to a general increase in loans extended and in securities purchased. This is because the availability of funds has increased and their cost has decreased. This supply effect accentuates the reduction in yields on all securities caused by the Central Banks initial increase in demand for bills. By selling short term instruments the Central Bank stimulates the reverse price effect.

Open Outcry

A decreasingly used method of trading carried out in pits on the trading floor of futures exchanges. It is a continuous auction where traders are calling out bids and offers carried onto the point where prices are settled and deals are concluded

Open-Ended Fund

Open-ended funds are investment funds where the number of units in issue changes in line with the amount of monies invested in the fund. In the UK unit trusts are open-ended. Worldwide, open-ended funds include US mutual funds, European UCITS and SICAVs and the majority of offshore funds. An open-ended fund can be contrasted with a closed-end fund, which has a fixed number of shares in issue.

Option

The standard definition of an option states that it’s "the right but not the obligation to buy or sell a given amount of a standardized product at a predetermined price on or by a given date". An option that gives you the right to eventually make a purchase at a predetermined price is called a "call" option. An option that gives you the right to eventually make a sale at a predetermined price is called a "put" option. Options are either exchange traded - in which case they are standardized in terms of contract sizes and expiry cycles - or OTC - in which case the investor can specify or negotiate the terms of the contract.

Option Writer

A seller of puts and calls options. A writer of a call option guarantees to sell the call option buyer the underlying instrument at a fixed price by a certain date. A writer of a put option contracts to buy the underlying instrument from the put option buyer for a fixed price by a certain date. The option writer receives a premium for granting this right.

Out of the Money

A term used to describe an option worth nothing if exercised immediately. In the case of a call option (the right to buy), it means the strike price (the future price at which you can buy) is higher than the current price of the underlying security. In the case of a put option (the right to sell), it means the strike price (the future price at which you can sell) is lower than the current price of the underlying security.

Over the Counter Market

An off-exchange market in which securities transactions are conducted by dealers through a telephone and computer network. The Over-the-Counter or OTC market for short, is made by the trading desks of investment banks. OTC products are tailored to meet specific client needs and can be contrasted with exchange-traded products, which are standardised in terms of amounts (contract sizes), delivery dates (maturities) and terms. The tailored character of OTC products tends to make them more expensive than their exchange traded alternatives.

Over the Counter Securities

Securities that aren't listed and traded on an organized exchange. Over-the-counter securities are traded via a telephone and computerized network linking OTC security dealers. NASDAQ is the best known market for trading OTC securities.

Overbought

Overbought (the opposite of oversold) is a term describing a market where people think prices have risen too high given underlying factors and so where a correction (a downturn) is expected.

Oversold

Oversold (the opposite of overbought) is a term describing a market where people think prices have fallen too low given underlying factors and so where a correction (an upturn) is expected.

P

Par Value

Par value (also known as nominal value) is the face value of a security. The par value of a security - whether a stock or a debt instrument - needs to be distinguished from both its issue price and its market price. So, for example, a bond with a face value of $1000, may have been issued at a price of $950 (issued at a discount to par) and be trading in the market at a market price $1050 (trading at a premium to both its issue price and its face value). Despite the difference between market price and par value, par value is very important with debt instruments because it is the price, which the lender receives at maturity. With stocks, however, par value is of little or no importance and usually bears no relation whatsoever to the market price.

Participating Preferred Stock

Participating preferred stock entitles the stockholder to a stated rate of dividend plus a share of any cash dividends paid to common stock that are in excess of the participating preferred dividends. Such issues are rare and are generally used as a form of sweetener to help sell preferred stock.

PEG

PEG stands for price/earnings growth and is calculated by dividing the P/E by the projected earnings growth rate. So if a company has a P/E of 20 and analysts expect its earnings will grow 15% annually over the next few years, you'd say it has a PEG of 1.33. Anything above 1 is suspect since that means the company is trading at a premium to its growth rate. Investors usually look for a PEG of 1 or below.

Penny Shares

A penny share is a share whose market price is (usually) less that £1. Because of this, every penny represents a high percentage of the share's value for a low outlay. Such shares are low cost but - as the price suggest - high risk.

Peter Lynch

Peter Lynch is known as the most successful growth investor ever. He managed Fidelity’s Magellan Fund for thirteen years, turning $20 million into $14 billion – 2700% growth over the term. With such a large fund to manage (14,000 odd stocks!) Lynch couldn’t focus exclusively on growth companies; but those were his big ‘winners’ – and he later tailored his experience to the private investor in his books (with John Rothchild) "One Up on Wall Street" and "Learn to Earn".

Portfolio Theory

Originally developed by Harry Markovitz in the early 1950's, Portfolio Theory - sometimes referred to as Modern Portfolio Theory - provides a mathematical framework in which investors can minimize risk and maximize returns. The central plank of the theory is that diversifying holdings can reduce risk, and that returns are a function of expected risk.

Pre-emption Rights

The rights of existing shareholders to maintain there proportionate ownership of a company. Therefore if a company has a rights issue, existing shareholders must be offered their pro-rata entitlement to the new shares.

Preferred Stock

Companies raise equity capital through the issue of two basic types of stock: common stock and preferred stock. Preferred stock is a hybrid security with elements of both debt and equity. Although it is technically a form of equity investment, it has many of the characteristics of debt, such as fixed income and call provisions. Preferred stockholders have legal priority (seniority) over common stockholders in respect of earnings and, in the event of bankruptcy, in respect of assets. However, preferred stockholders are still in a more risky (subordinate) position than bondholders and, as a result, will require a higher return than bondholders.

Price/Book Ratio

The Price/Book ratio - also known as the ‘price to net asset value ratio’ - is a continuation of Net Asset Value analysis. By factoring in the company’s share price, this ratio gives a clearer indicator of comparative – market against book – value. (NAV simply identifies an absolute value). All the PBR does is divide a share's market mid-price by the book value per share (NAV).

Price/Earnings Ratio (P/E)

To get the Price/Earnings Ratio (P/E) the current share price is divided by the latest reported 12 month earnings per share. This gives you a figure, which indicates how much the market values the company’s growth potential. A P/E is only meaningful (‘high’ or ‘low' ) by comparison with other P/Es. You need to compare against the current market and sector averages. If a lot of people are piling into the stock market in general (as against bonds, deposits or alternative investments like property), then nearly all P/Es will be historically high. So look at market and sector averages and take 5+ as a bullish indicator. 10+ reveals strong enthusiasm, a psychological ‘high’ (P/E). 5 – indicates a lack of enthusiasm and 10 – is a positive aversion, psychological ‘low’ (P/E).

Price/Sales Ratio

The price to sales ratio is another way to value a company’s share price in light of potential profitability. This measure is not based on earnings, but on the revenues generated by the company. The PSR is usually used to value fast growing, loss making young companies. Sales can be healthy, but profits have yet to appear because of spending on research and development, marketing – all the costs associated with a new venture. No profits history means no EPS or P/E, so to get at some indicator of potential profitability, sales figures are used instead of earnings. So the price to sales ratio (PSR) uses a sales-equivalent to earnings per share which is then compared against current market price.

Primary Dealers

Primary markets bring together borrowers and lenders - either directly or through intermediaries - by providing an arena in which borrowers' investment propositions can be priced and sold to lenders. Primary dealers are primary market marketmakers offering two-way prices in the primary market.

Primary Market

Primary markets bring together buyers and sellers - either directly or through intermediaries - by providing an arena in which sellers’ investment propositions can be priced, brought to the marketplace, and sold to buyers. In this context, the seller is called the issuer and the price of what’s sold is called the issue price.

Principal

Unless a bond is issued at a premium or discount, the principal is the amount borrowed by the issuer of the bond. This amount is referred to as the par value of the bond and it is the amount that will be repaid at maturity. (par = 100% of face value). It's also the figure on which the amount of coupon interest paid to the bondholder is calculated.

Profit and Loss Account

A company's profit and loss account shows revenue, expenditure and the profit and/or loss resulting from operations for a given 'financial year'.

Put

Puts can be contrasted with 'calls', which give the holder the right to buy a particular asset.

Q

Quantitative Analysis

Quantitative analysis is a form of analysis, which uses numbers, and ratios derived from a company's financials to assess its prospects.

Quotation

The price at which a market maker will trade securities. A quotation is usually expressed as a bid-offer price; where the bid price is the price the marketmaker will buy at and the offer price is the price the marketmaker will sell at. The difference between the bid and offer price is known as the bid-offer spread, and is the marketmaker's profit margin. A price often quoted in newspapers - as opposed to in the market itself - is actually a mid-price; basically, the mid point between the marketmaker's bid and offer price.

Quote Driven

A quote driven system is a marketmaking system used by a stock market, usually electronic, in which prices are initially determined by quotations of dealers, or marketmakers. 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

Rating Agencies

As well as the risk deriving from movements in general interest rates, debt instruments usually carry an element of default risk. For most debt instruments, investors must assess the credit quality of the issuer and decide whether the extra yield offered compared to the relevant Treasury bond (or equivalent benchmark) is sufficiently attractive. However, most investors have neither the time nor the expertise to perform the required credit analysis. Even those who do have the appropriate skills seldom wish to waste time analyzing all companies they might possibly invest in at some time in the future. In practice, almost all investors rely, to a greater or lesser degree on the credit analysis of the rating agencies. Not only do the agencies have highly skilled analysts but they also have access to private information about the company (as part of their terms to the issuer). They may not reveal such data but do include it in their assessment. Thus, on average, their credit assessments are better informed than anyone elses. The two best known rating agencies are Standard & Poors and Moody's.

Reference Currency

A reference currency is the currency in which an investor's total portfolio wealth is ultimately measured. It is typically the currency in which the bulk of an investor’s cash in and out flows are denominated.

Registered Security

Securities can be issued in either bearer or registered form. In bearer form, possession alone is sufficient evidence of ownership. The owners of registered securities, on the other hand, are listed on a register, which is maintained by the borrower.

Repo

A repurchase (repo) agreement can be seen as a short term swap between cash and securities. Repurchase agreements, or repos, are specialized but important aspects of many markets, especially those for government securities. In essence, if a security holder wants to maintain his or her long-term position but needs cash for a short period, he or she can enter into a repo contract whereby the securities are sold together with a binding agreement to repurchase them at a future date, usually fairly near-term. The effect is to provide the security holder with a short-term loan based on the collateral of the government securities he or she owns. In major markets with repo systems, it is a cheap, simple and effective way to raise short-term funds.

Reserve Currency

The US Dollar and sterling were the dominant reserve currencies between 1945 and the early 1970s. Since then, the Swiss franc, the Deutschmark and the Japanese Yen have all been seen as reserve currencies. The US Dollar remains the world’s dominant reserve currency.

Resistance

A technical analysis barrier the opposite of support marked by a previous price peak that provides enough of a barrier above the market to halt a price advance. Often support and resistance areas occur at round numbers. Resistance levels show pauses in the up trend that are usually surpassed at some point. Whenever a drop in price penetrates a support level or a rise in price penetrates a resistance level, they potentially reverse their roles and become the opposite i.e. a support level becomes a resistance level and a resistance level becomes a support level. They can also be used to spot a potential trend reversal when either a previous support level in an up trend or a previous resistance level in a downtrend has been penetrated by a certain amount.

Return

In finance, return is the profit – in the form of income and capital appreciation – on an investment. The rate of return is a percentage, which measures the rate of gain or loss of an investment over a given holding period. Gains or losses are measured by positive or negative rates of return respectively.

Return on Equity (ROE)

This is the most popular indicator of financial performance. It basically measures the company’s efficiency in earning profits on behalf of its shareholders. Basically, the return on equity is found by dividing pre-tax profit by shareholders funds. More precisely: ROE = (profits after interest and preference dividend but before tax) divided by (average shareholders funds plus any reserves and retained profits). This is a book ratio which in some ways is like the ‘Earnings per Share’ market ratio. Instead of dividing profit between the number of shares in the marketplace, it divides it by the capital sum which equity financing has actually raised for the company. Shareholders funds are the book value of the amount shareholders own – a company’s total assets minus total liabilities. As the ratio indicates how much profit is generated from assets, the higher the figure the better.

Rights Issue

A rights issue is an issue of shares made when a company asks its own shareholders to subscribe for new shares, often at a discount to the current market price, to fund expansion or to pay off debts.

Risk

Risk is a measure of the variability of return. Thus, an investment where the return is guaranteed is less risky than an investment with uncertain returns.

Risk Premium

The term 'risk premium' refers to the difference between the return attached to investments with different levels of risk. Given the basic principle of risk and return in financial markets - the higher the risk the higher the return required to compensate for that risk - the return offered by an investment should increase with the level of risk attached to that investment. The extra return offered by higher risk investments is the risk premium.

ROTA

ROTA measures the efficiency of the overall trading return on the business as a whole. It’s a figure that indicates how efficiently a company is using its assets to generate operational profits (before creditors and the taxman take their slice). The basic formula is : ROTA = profit before debt, interest and tax / average total assets.

Russell Indices

Russell maintain 21 market capitalization weighted US stock indices. The indices were created in 1984 in an attempt to give a more accurate and comprehensive system for evaluating performance of investment managers. All Russell indices are subsets of the Russell 3000 index, and only include common stocks of US based companies. The Russell 3000 Index itself captures roughly 98% of the US equity market. Index constituents are reviewed on an annual basis, reflecting stock market value as of 31^st May each year. Russell 3000 Index: Includes the 3000 largest US based companies according to market capitalization. This index includes companies with market capitalization’s ranging from in excess of $500bn down to around $200m. Russell 2000 index: This is the most commonly quoted Russell index on financial information sites, alongside the other major US indices. It measures the performance of the 2000 smallest companies in the Russell 3000. Growth and value indices: Russell also divides companies into growth or value indices. For example, companies in the Russell 2000 with High price to book ratio companies are listed in the Russell 2000 Growth Index. Those with low price to book ratios would be listed in the Russell 2000 Value Index.

S

S&P500 Index

Abbreviation for the Standard & Poors 500 composite index. The index is a consolidation of other stock market indicators produced by the American rating house Standard & Poors. Unlike the Dow, the S&P is a capitalization weighted index, which includes 500 stocks chosen for market size, liquidity and industry group representation. It is one of the most widely used measures for US equity performance, being used by well over 90% of US money managers and pension plan sponsors. The index is most heavily represented by "industrials", with the majority of component companies being listed on the NYSE.

Sales Desks

International banks buy and sell financial instruments on behalf of clients. Sales desks cultivate good relationships with frequent transactions on their client lists, keeping them informed of market opportunities for profitable trades. Clients also contact the sales desk and sales people will inform traders - who will try to fill the order either transacting off their own book or by going into the market to find a counterparty.

Scrip Dividend

A benefit distribution in which a company distributes dividends in share form or a combination of share and cash.

Scrip Issue

Shares given without charge to existing shareholders in proportion to the shares they already hold. It is a pure bookkeeping transaction. Dividends after a Scrip Issue will be divided amongst a large number of shares, but since each shareholder owns proportionately more shares there is no net gain or net loss.

SEAQ

SEAQ - the Stock Exchange Automated Quotation system is a computer based trading system designed to ensure that deals are executed at the best available market prices. The system displays marketmakers bid and offer prices and registers the size, time and price of every deal that goes through the system. SEAQ is not an electronic trading system: member firms use it to view prices, then contact the relevant marketmaker by phone to arrange the trade. Once executed, the trade is reported using SEAQ.

SEAQ International

SEAQ International (Stock Exchange Automated Quotations system – for International stocks) fulfils the same service as SEAQ but for international stocks. Stocks on SEAQ(I) are normally quoted in their home currency and when traded, are then settled through local settlement systems.

SEATS PLUS

SEATS PLUS (Stock Exchange Alternative Trading Service) provides a combination of quotes and/or firm orders. It displays current marketmaker quotes, orders entered by member firms, and company information and trading activity records.

Secondary Market

A secondary market brings together investors wishing to sell and investors willing to buy, and in the process discovers a market price determined by current levels of supply and demand. Secondary market prices also help determine the pricing of new issues in primary markets; as an indicator of the market's current, collective valuation of an issuer.

Securities

A large proportion of debt in advanced economies has become securities. Income yielding paper is sold in a primary market, which channels funds from surplus to deficit units. Securities are tradable claims against the deficit unit.

SETS

SETS (Stock Exchange Electronic Trading System): Otherwise known as "The Order Book" this is an electronic trading system that matches buy and sell orders at the best available price. London Stock Exchange member firms enter bids or offers orders into the system, which then displays them to all members. Member firms can see the number of orders at different prices in the market allowing them to build up a picture of what the market is doing. Not all trades in SETS listed stocks are executed through the system. They might be traded "off exchange" between two counterparties. However, SETS establishes the benchmark for pricing of the shares, with around 75% of trades in SETS stocks being done at the order book price.

Settlement

The payment of cash for securities and, conversely, the delivery of securities against payment - the conclusion of a securities transaction by delivery.

Shares

So, buy a stock and you're buying part-ownership of a company. And as an owner, you take a share in the company's future profits.

Sharpe Ratio

The Sharpe ratio is a measure of what is called, risk-adjusted return, and is used by investors and fund mangers to assess the relative performance of (usually) alternative investment products. The Sharpe ratio is calculated by dividing the excess return on the fund, over and above the risk-free rate of return (on cash, for example), by the amount of risk that manager has taken to generate the excess return, which is measured by the annualized standard deviation of returns. In simple terms, it represents the return generated by the manager’s skill, compared with the amount of risk taken in the process. Or put yet another way, it indicates the unit of return per unit of risk. Most investors look for a Sharpe ratio above 1, which indicates that the manager is generating one unit of return for every one unit of risk taken. A Sharpe ratio of 2 indicates that two units of return are generated for every one unit of risk. A Sharpe ratio of less than 1 either indicates a negative return or that a large amount of risk was taken to generate a positive return.

Short

A trader who has committed to deliver stock at a specified price at some time in the future, which he does not own, is known as short. Such a trader anticipates the price of the stock will fall allowing them to buy the security on the market at a lower price than the agreed sale price. This is what's known as a bearish play - because the trader is expecting prices to fall.

Short Sale

Selling an asset the seller doesn't own at the time of the sale in the hope of purchasing the asset profitably at a lower price in the future to make the promised delivery.

Short term debt securities

Single Price Auction

There are two ways of pricing an issue after it has been allocated through a competitive auction - single or multiple pricing. In a single price system the highest accepted yield bid is called the stop-out yield. The entire issue is then priced off the average between the lowest accepted yield bid and the stop-out yield. Price and coupon are then retrofitted to achieve this yield. In a multiple price system, here again, the borrower awards securities to the highest price/lowest yield bidders, up until the point where the required funding is achieved. The highest accepted yield bid is again the stop-out yield. However, once a stop-out yield is arrived at all bidders who come in at or under the stop-out yield are awarded securities at their actual yield/price bid.

Slippage

Slippage is an unpleasant word for an unpleasant event. It's the experience of not getting filled at (or even very close to…) your expected price when you place a market order. This can happen because either: market price is simply moving too fast, the market is not liquid or you're talking to an unmotivated broker. Or, of course, all three.

Small Cap Stock

Companies with a low stock market capitalization.

Speculation

The purchase or sale of a financial instrument for the sole purpose of making a capital gain.

Split Capital Trust

An investment company comprising of two or more share classes. These are typically income and capital but are frequently expanded to include zero dividend preference shares, stepped preference shares and highly geared ordinary shares.

Spot FX

A spot foreign exchange transaction is a contract to exchange two currencies, typically in two business days (spot value date), at an exchange rate agreed today. The spot market is the market is the 24-hour global market in which these transactions take place.

Spot Price

The price of an asset for immediate delivery. The spot price of an asset can be contrasted with the forward price, which is a price for an asset, which is to be delivered at a fixed time in the future.

Spread

Marketmakers quote securities in terms of what's called a bid-offer price. The bid price is the price at which they will buy a particular security. The offer price is the price at which they will sell a security. So a bid-offer price of 102-104, means the marketmaker will buy at 102 and sell at 104. The difference between the bid and offer price is known as the bid-offer spread; and the spread is the marketmakers profit i.e. the difference between the price at which he buys and the price at which he sells, which in this case is 2. The mid-price is, as the name suggests, the middle point between the marketmaker's bid and offer price; in the case of our 102-104 bid-offer price, the mid-price would be 103. Mid-prices are often the prices you will see quoted in newspapers. But when you actually buy or sell a security it's the bid-offer price you'll be quoted.

Spread Betting

Financial spread betting lets you back your trading judgement without having to buy the underlying instrument or product you want to trade. How? Basically, like any other bet, a spread bet is a bet on an unknown outcome made at odds set by someone else - in this case, a spread betting company. The spread betting company takes an instrument and quotes two prices; let's say, 101 - 103. These two prices, which they call a spread, are effectively a bid and offer price. The offer price (103) is the price you can buy at, the bid price (101) is the price you can sell at. The spread represents a prediction of a future outcome. And because spread bets have an expiry date, it's a prediction of a future outcome within a set time frame (although you can close out your position at any time before expiry). What you need to decide is whether to buy or sell the spread betting company's prediction of the future outcome.

Spread Trades

Spread trades (also known as pairs trades) involve a trader taking a two-position play, one long and one short, on two different instruments. Risk and return on spread trades is not directional. If both prices fall or both rise, it’s still possible to profit from a change in the difference between the two. Imagine the price of two assets: A and B. If you believe A will perform better than B, you buy A and sell an equivalent amount of B. You profit if the difference between the two – the spread – widens. Profit comes because A performs better than B, whether they both rise, both fall and if A goes up and B goes down. No profit can be made on a spread if both prices rise together or fall together by exactly the same percentage. And in real terms, you lose because you’ll be paying transaction costs. But as we mentioned in the last topic, this scenario is extremely unlikely to occur. If you’ve bought the spread – that is, you’ve bought into the first price (A) because you expect it to rise relative to (B) ….then you lose money if the spread between the two prices narrows.

Stag

A stag is someone who buys newly issued shares with the aim of selling them immediately for a profit as soon dealing in the market begin.

Stamp Duty

Stamp duty is a UK tax on buying shares and is applied as a percentage - currently 0.5% - of the value of any given share transaction. For example, if you buy £1000 of a particular stock you will pay £5 in stamp duty on purchase.

Stock Dividends

Stock dividends are dividends paid in shares of the issuing corporation’s stock instead of cash. Their effect is the same as that of a stock split. For example, just as a $200 per share stock will sell for $100 after a 2-for-1 stock split, so it will sell for $100 after a 100% stock dividend. In a 100% stock dividend or a 2-for-1 stock split, there are twice as many shares outstanding.

Stock Splits

Stockbroker

An individual or company who buys and sells securities on behalf clients in return for a commission based on the value of business done. Otherwise simply known as a broker.

Stocks

So, buy a stock and you're buying part-ownership of a company. And as an owner, you take a share in the company's future profits.

Stop Loss

The price at which a security is sold automatically to protect the investor against furthers losses. In some of the more volatile securities a stop loss is considered vital.

Straight Bond

The straight or 'plain vanilla' bond is the most common debt security and all other bond types are variations of, or additions to standard straight bond features. An investor pays a single capital sum to receive interest payments, called coupons, until a fixed maturity date when the last coupon is accompanied by redemption of the bond's face value. The coupon is simply a fixed rate of interest - paid annually or semi-annually - on the principal sum or face/par value. The debt is of fixed maturity - the principal redemption date. The maximum term is 30 years, but 7-10 years is most common.

Strike Price

The price at which an option is due to be exercised at some time in the future. When you buy an option you will pay (called the premium) for the privilege of being able to buy the stock upon which the option is based at a definite price at some time in the future. This price is the strike price or exercise price.

Support

The opposite of resistance, a technical analysis price level beneath the current market price, where buying power is sufficient to stop a price decline so prices bounce off this level as if hitting a floor. Often support and resistance areas occur at round numbers. Support levels in a downtrend are usually not adequate to stop a decline for long, but are able to at least stall it temporarily. Whenever a drop in price penetrates a support level or a rise in price penetrates a resistance level, they potentially reverse their roles and become the opposite i.e. a support level becomes a resistance level and a resistance level becomes a support level. They can also be used to spot a potential trend reversal when either a previous support level in an up trend or a previous resistance level in a downtrend has been penetrated by a certain amount.

Swap

A swap is a contract where two parties agree to exchange their interest payment liabilities on an agreed amount of each other’s debt, for a fixed time period. There are two basic kinds of swap transaction; the single-currency swap and the cross-currency swap. A single-currency swap is an agreement between two parties to exchange the basis of servicing the interest cost on a common principal amount in the same currency. A cross-currency swap is an agreement between two parties to exchange the basis of servicing of interest cost in different currencies. It is important to recognize with cross-currency swaps that, in addition to exchanging interest rate cash flows or coupon payments on a bond, the principal is also swapped at maturity.

SWIFT

SWIFT is an acronym for the ‘Society for Worldwide Interbank Financial Telecommunications’. SWIFT is a communications system, which advises member banks to transfer funds from one member to another - it is an information and instruction system not a payment system. Based in Brussels, the SWIFT network of terminals links over 1500 banks worldwide.

Swiss Franc

The Swiss Franc CHF) is one of the world's five so-called major currencies, along with the Dollar (USD), the Euro (EUR), the British Pound (GBP) and the Yen. The Swiss economy does not warrant its currency’s place in the ‘big five’, but the nature of its society does. It is demanded as a major currency because Switzerland is seen as the safest safe haven for investors. The economy and society are conservative and stable. The banking system still maintains a strong reputation for strict confidentiality and excellent customer service. And, as long as (for whatever reason) investor’s fear for the safety of their assets, then some global funds will always move into CHF. The CHF has tracked the DEM and is tracking EUR, but it tends to be more volatile as the lack of liquidity in CHF means that large size orders will move market prices far more readily than in the other major currency markets.

T

T. Rowe Price

Along with Benjamin Graham, T. Rowe Price was one of the first investors to develop a rigorous, systematic approach to investing in stocks, and is considered the father of 'growth investing'. The 1929 Wall Street crash and 30’s Great Depression had put people off investing for growth. Identifying that business profitability was starting to rise again, T. Rowe Price popularized the idea that a company with rising earnings could develop the momentum to keep on growing. Price emphasized the need to find the industry leaders of the future. His approach was ‘classic’ top-down: find the industry sectors with the brightest future, then look for the dominant companies. A high and rising profit margin with above average rises in EPS are key signals. But he looked mainly at qualitative factors, finding the competitive advantage, which will secure market dominance in products and business organizations. Balance sheet strength and efficiency ratios supplied supporting ‘hard’ evidence.

Technical Analysis

Technical analysis is a form of analysis which seeks to make judgements about the performance of a share based solely on its historic and current price behavior and without reference to the underlying business, the sector the company's in, or the economy as a whole. This is done by tracking and charting the company's stock price, volume of shares traded day to day, both on the company itself and also on its competitors. In this way investors hope to build up a picture of future price movements. Technical analysis can be contrasted with fundamental analysis which looks at a share’s market price in light of the company’s underlying business proposition and financial situation, and which involves making both quantitative and qualitative judgements about a company.

Term Structure of Interest Rates

The term structure of interest rates is a graphic representation of how interest rates vary with maturity; it shows the relationship between the yield from a financial instrument and its maturity. Yields across different outstanding maturities can be plotted to create a yield curve - and the term structure of interest rates is better known as the yield curve. Yield curves come in different shapes but they always refer to instruments of a homogeneous (the same) nature. As interest rates change - or as expectations of future interest rates change - investors will typically switch between maturities to try to achieve capital gains (or at least to avoid capital losses). Such repositioning changes the shape of the yield curve because of the inverse relationship between price and yield.

Theta

Theta measures the result of time decay on an option. As time passes, options will lose time value and the theta indicates the degree of this decay. Both call and put options are wasting assets and therefore have a negative theta. Note: the decay of options is non-linear in that the rate of decay will accelerate as the option approaches expiry. Theta will reach its highest value immediately before expiry.

Thundering Herd

A term which refers to the power of the market i.e. a mass of buyers or sellers will move a market in an unstoppable stampede of buying or selling. The term originates with the Investment Bank Merrill Lynch, whose logo is a bull. Merrill Lynch were the US's biggest brooking house and, so the story goes, when they took a position - when the herd started thundering - the market took notice.

Tick Value

The minimum price change of a quoted instrument.

Time Decay

The process by which an option’s value drops over time i.e. as the option nears its expiry. Time decay occurs because, as an option nears expiry there is less time for the price of the instrument underlying the option to behave in the way the option's holder would like in order for the option to be profitable. As time runs out so does hope.

Time Value

The time value of an option is the value over and above intrinsic value that the market places on the options. It can be considered as the value of the continuing exposure to the movement in the underlying product price that the option provides. The price that the market puts on this time value depends on a number of factors: time to expiry, volatility of the underlying product price, risk free interest rates and expected dividends.

Time Value of Money

Most financial transactions involve a series of cash flows - regular or irregular - over a period of time. When evaluating these cashflows the basic concept used is the time value of money. If you are offered the choice between having £100 today and having £100 at a future date, you will usually prefer to have £100 now. If the choice is between paying £100 now or paying the same £100 at a future date, you will usually prefer to pay £100 later. Cash today is almost always worth more than the same amount of cash later and for this reason - among others - if you lend someone money you expect to receive interest until the loan is repaid.

Tracker Fund

A fund whose components mirror the composition of a stock exchange index. The aim of such a fund is to match the performance of the index it's tracking.

Treasury Bills

Treasury bills are usually issued at a discount and are redeemed at their full face value at maturity.

Treasury Note

Treasury notes or bonds are long-term government debt instruments. They share all the characteristics of any other kind of bond or note but with the added credit quality of government debt. Long-term government debt issues tend to fall into specific maturity bands e.g. 2-year, 5-year, 10-year, 20-year, 30-year and so on.

Trendline

A straight line in technical analysis that connects a series of chart low points to define an uptrend or a series of chart high points to define a downtrend. The breaking of a trendline usually signals a trend reversal.

U

Umbrella Fund

An umbrella fund - sometimes known as a 'fund of funds' - is an investment fund, which invests in other funds rather than in direct investments.

Underwriting

Underwriting basically involves the bank (the underwriter) guaranteeing the issuer of securities a certain amount of cash for them. However this guarantee is made (buying the securities from the issuer and then reselling them for example) the bank's obviously taking on the risk of not realizing the money they've guaranteed the seller - which is why pricing an issue right (making it attractive to potential investors) is so important. To spread the risk the lead underwriter's taking on, they'll usually organize a group of banks as part of what's called an 'underwriting syndicate'.

Unit Trusts

A unit trust is a trust formed to manage a portfolio of securities in which small investors can buy units. It differs from an investment trust in that investors who buy units are not shareholders.

V

Value Investing

A ‘value’ approach to stock-picking looks for companies whose stocks are trading at less than their true worth. All value investors will be ‘contrarian’ in outlook, going against the herd, avoiding rising stocks and investigating falling prices for the best buys. A search for value is a search for currently neglected stocks – businesses that can generate far better shareholder returns than the market price suggests.

Vega

The vega of an option measures the sensitivity of the option’s price to changes in the level of price volatility of the underlying instrument. The greater the volatility of the underlying instrument the higher chance the option has of being in the money before maturity which means that both calls and puts will tend to increase in value as volatility increases. Vega shows the increase in value that should be expected if the volatility goes up by one point.

Venture Capital Trusts

A Venture Capital Trust is a type of Investment Trust, which buys shares in the sort of small business ventures, which would normally attract venture capital. In other words, they're pretty high risk investment vehicles. As with any other type of investment trust, VCT shares are quoted on the Stock Exchange. The main attraction of VCTs is the tax advantages they enjoy under UK law. As long as you're 18, and based in the UK, you can invest up to £100,000 in any given tax year and set off 20% of the amount you invest against your income tax liability in the year the VCT shares are issued. (Although you have to hold the VCT shares for at least five years and if you don't you have to repay the relief). What's more, you can defer chargeable capital gains by investing an amount equal to those gains in VCT shares.

Volatility

Volatility is a measure of the variability of returns over a chosen time-period. It reveals the extent by which the daily/weekly/monthly price changes from the average. A low percentage volatility shows that the price has stayed quite close to the average whereas a high percentage volatility shows that the price has moved up and down a lot over the time-period. So volatility is a market measure of uncertainty – investors keep changing their minds as to the value of the share, which reflects uncertainty surrounding the company’s future profit potential. As such, it's an excellent indicator of investment risk.

Volume

Volume refers to the total number of individual financial instruments traded in a particular period (hour, day, week, month etc.). It's used - particularly by technical analysts - as an important indicator of the strength and significance of price movements.

Voting Rights

Common stockholders are owners of the corporation and have a voice in management through their voting rights. The specific nature of these rights will vary from stock to stock (depending on the details of the share agreement) and between regulatory jurisdictions. However, at their most basic, common stock voting rights are likely to include the right to elect the board of directors and to vote on major issues affecting the company. Most stockholders do not vote themselves; they sign and return proxies sent to them by the company, which allows a named person, usually a member of corporate management, to vote the shares of the proxy signer at the stockholders’ meeting. The pre-emptive right (not always provided) gives existing stockholders the right of first refusal on any new issue of stock so they can maintain their previous proportion of the total outstanding stock. If exercised, the preemptive right prevents dilution of ownership control when additional stock is issued.

W

Warrant

A warrant is similar to a call option in that it gives the holder the right but not the obligation to subscribe for ordinary shares in a company. Warrants, however, are issued by the company itself and are therefore a liability to the shareholders of that company. Warrants tend to have much longer maturities than options, being anything from three to ten years’ duration.

Wilshire 5000

Probably the most comprehensive index of the entire US equity market: this index measures the performance of shares in all US based companies with readily available price data. Although it’s called the Wilshire 5000 index, it’s actually calculated using the returns on over 7000 companies, on a capitalization weighted basis. Wilshire 4500 Completion Index This index includes all Wilshire 5000 companies minus those in the S&P 500, as a performance measure of small and madcap stocks. The breakdown of stocks by exchange is reversed for this index, with NASDAQ stocks dominating the index by market value.

With-Profits Endowment Policy

A with-profits endowment policy pays a guaranteed sum assured, plus bonuses. Bonuses derive from the life company investing a proportion of the premiums paid; and contributions are higher than a non-profits policy as the policyholder shares in the profits of the life company's life fund. If the policy runs to maturity, bonuses will generally be higher than if it becomes a death claim because they will have accrued for longer. With-profits endowment policies are a basic element in many savings schemes and mortgage repayment arrangements.

Y

Yen

Japan’s domestic financial markets are difficult for foreign players to access. As such, demand for Yen is predominantly from Japanese companies repatriating trade profits, investment returns and debt capital. The Yen is particularly sensitive to the profitability of these companies and to the domestic property market.

Yield

The income from an investment expressed as a percentage of its price. Yield can be expressed in a number of ways, including nominal yield, yield to maturity, current yield and so on.

Yield Spread

Yield - in whatever way it is measured - is effectively the return offered on an investment. The yield spread is the difference between the yield on one security and that on another. One of the key factors in determining yield is the credit standing - the extent to which there is a risk of default - of the issuer of the security. Government securities are considered to have the lowest default risk and so yields are often measured relative to those offered on government securities.

Yield to Maturity

Yield to Maturity (YTM) is the interest rate that, if inserted in the DCF price equation, makes the given price of the bond exactly fair. It takes into account not only the cashflows coming from the bond (thus automatically including any capital gain or loss at maturity) but also their timings.

Z

Zero Coupon Bond

A zero coupon bond is a bond paying no coupon at all during its life. Where’s the return? We’ve already said a bond’s effectively a loan. So if you don’t get any interest on your loan where’s the upside? Well, with a zero coupon bond all of the return for the bond holder is achieved in the form of the repayment of principal at a value of par (100% of face value) at the maturity date. In order to achieve a positive return the bond is issued at a discount to its face value, the return being the capital gain represented by the difference between the value at the time of purchase and the face value at maturity.

Zero Dividend Preference Shares

Zero dividend preference shares are shares that pay no income (i.e. no dividend) but have a fixed redemption value.