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