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A |
|
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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 Bankers’ Acceptance (BA) is a vehicle created to
facilitate commercial trade transactions and a specific BA relates to a
specific transaction with underlying goods.
The value of the underlying goods is reflected in the
face value of a bill or term draft - which represents the promise of the
counterparty to the transaction to pay for the goods at a specific time in
the future. The bill becomes a Bankers’ Acceptance when a bank accepts
the responsibility to pay the creditor, (the holder of the term draft), if
the debtor (the counterparty) fails to repay. This is called discounting
the term draft. BAs are seen as very safe investments as not only do they
carry the irrevocable obligation of a least one bank to honor payment,
they also represent a natural business transaction with underlying goods.
Being such a creditworthy debt security BA’s is a relatively low yield
instrument. In fact, because BA’s are guaranteed by banks, rates closely
follow those on negotiable CDs. BAs tend to trade slightly lower than CDs
because of their slightly higher liquidity. As with CDs, the market can be
tiered. This is because some bank names are perceived as a better credit
risk than others, and some goods are not as resalable as others.
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 |
- Stock certificates that aren't registered in any name. They are
negotiable without endorsement by any person.
|
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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 |
- Warren Buffett is known as the most successful stock market investor
in the world. Starting in 1954 with $100 he is now worth around $20
billion. He learnt about the markets working for Ben Graham but really
started to make his own mark with his holding company, Berkshire
Hathaway. He bought heavily during the 73-74 US market slump – and
this contraire, value strategy paid off when the market recovered.
When Buffett buys, he holds. "My favorite holding period is
forever" he says. He only looks at companies he knows and
understands – tending to stick to a few sectors like financial
services and consumer stocks. He disapproves of portfolio
diversification. He firmly believes in staying in stocks –
reinvesting all dividends and staying with a company through temporary
share price falls. A key Buffett principle is to ignore what the stock
market is doing and focus on the company. In the long term, value will
win through
|
|
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 |
This is strange but true. It seems that share returns
are greater when stocks are bought (or sold) at particular times. Numerous
academics have researched holding periods and discovered some
statistically significant relationships, which the private investor can
benefit from. In summary, for the UK:
- Prices are relatively higher in December, January, February, April
and July.
- September and October typically see the biggest price falls.
- Prices rise at the turn of any month ( last day of one month &
the first three of next) relative to the rest of the month
- Prices rise on Friday and fall first thing on Monday
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 |
Commercial Paper (CP) is short term unsecured debt
issued by companies in the form of promissory notes as an obligation of
the issuer.
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 |
There’s two ways for companies to raise money for
business investment – they can borrow it and/or they can issue shares -
otherwise known as stocks. In corporate-finance-speak, stocks are called
equity capital and borrowed money is debt capital.
Equity (stocks/shares) differs fundamentally from debt
in two ways.
- It represents an ownership interest in a company – you’re buying
a share of the company, not lending the company money.
- 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 |
Compound interest is interest that is calculated on the
basis of the principal sum plus any interest that has accrued. It pays
interest on interest. Compound interest can be contrasted with simple
interest, which is interest calculated on the basis of the principal sum
only. A simple way of working out compound interest is to use compound
factors. The general formula for compound factor F for n years at an
interest rate i is: Fn,I = (1 + i)n
Where i is the interest rate in decimal form. So the
three year compound factor for an interest rate of 10% is: (1 + 0.1)3
= 1.331
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. |
|
Deflation |
A fall of the
price level. |
|
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 |
Deposits (and their opposite, loans) are
non-negotiable, cash money market instruments in which a sum of money is
borrowed - the proceeds - for an agreed period of time - the
term to maturity - and on which the borrower pays the lender a
pre-arranged amount of income (interest) together with the return of money
lent - the principal - at maturity. A deposit is a liability for
the borrower and an asset for the lender. Deposits and loans are the main
instruments of the interbank market (interbank deposits and loans),
where commercial banks make day-to-day adjustments in their operational
reserves (liquidity management), 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. |
|
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 |
Domestic bonds are bonds issued in the same currency as
the currency of the place where the bond issuer is domiciled. So, a
company registered in the UK, which issues bonds in sterling, is issuing a
‘domestic bond’.
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 |
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,
corporate 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. 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 |
There are two ways for companies to raise money for
business investment - they can borrow it and/or they can issue shares -
otherwise known as stocks. In corporate-finance-speak, stocks are called
equity capital and borrowed money is debt capital. Equity (stocks/shares)
differs fundamentally from debt in two ways.
- It represents an ownership interest in a company - you're buying a
share of the company, not lending the company money.
- 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 equity holder 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. |
|
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 |
Distinct from domestic bonds and foreign bonds,
Eurobonds fall outside the regulatory jurisdiction of any one country.
Some of their key features are:
- they can be issued in any major currency
- they are issued outside the country in whose currency they are
denominated
- they can be bought by investors in any country
- they can be issued at any time to take advantage of market
conditions
- they can be structured in any way to satisfy the special
requirements of investors or issuers
- they are unregistered or bearer securities so offering anonymity to
the investor
|
|
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 Euromarket is the international capital market.
Historically, capital markets developed as a series of domestic markets,
each with their own market practices and regulations. These domestic
markets shared (and share) a number of common features in terms of
structure and practice. The international capital markets, which have
developed over the last thirty years, have evolved independently and the
prime force behind their development has been the powerful attraction of
regulatory and tax treatment less burdensome than that prevailing in most
domestic markets. This relative freedom has contributed to the Euromarkets'
rapid emergence as a rival to the leading domestic markets in the United
States and Japan as a source of investment capital, and as a proving
ground for experimentation by intermediaries in new capital market
products. Euromarkets exist for all the major market services:
- Eurobonds
- Euro Money Markets
- Euro interbank deposits
- Eurocurrencies
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 eurozone is composed of the twelve countries that
have adopted the euro as their national currency. These countries are:
- Austria
- Belgium
- Finland
- France
- Germany
- Ireland
- Italy
- Luxembourg
- Netherlands
- Portugal
- Spain
- Greece
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 |
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. 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 |
Government securities - as the name suggests - are
securities issued by governments. What this means in practice is short and
long-term debt issued by governments.
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 |
Growth investing is the most commonly followed
stock-picking approach. Shareholder value is driven by the company’s
earnings growth. This is the net profit from operations, which belongs to
shareholders. This may be distributed to shareholders as dividends or
reinvested to support further expansion. When a company looks like it's
going to increase its growth rate, investors buy the stock, increasing the
market value of the company to reflect its increased future profitability.
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 |
A market index shows the movement of a particular
market as a whole: revealing if the total value - the market
capitalization - of all companies listed has increased or decreased.
What's more, indices aren't just calculated on an entire market. They're
also available on particular sectors of a market: the largest capitalized
companies, technology stocks, smaller companies, and so on. The FTSE 100
share index, for example, is made up of the 100 largest UK registered
companies in terms of their market capitalization. A market index is a
series of pure numbers (typically ratios of underlying sterling values)
and is used for making comparisons between different index numbers and for
following (and/or predicting) the fortunes of particular sample groups.
Index numbers are constructed with a fixed base date and base value. The
base date is chosen to give a meaningful time perspective to the index;
the base value is usually set at 100, 10 or 1. Different mathematical
expressions are used to combine stock prices in the construction of
indices, so users must be careful when comparing the movement of one index
with that of another. There are two main types of index:
- A geometric index: This is compiled by multiplying the prices of the
chosen constituents together and then taking the nth root (where n =
the number of constituents in the index).
- An arithmetic index: This is compiled by adding the prices of the
constituents and dividing by the number of constituents used.
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 |
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|
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 |
All products traded on LIFFE apart from commodity-based
contracts are now traded on LIFFE CONNECT™. This is a screen-based
exchange system that matches off buy and sell orders at the best
achievable price. Only firms that are registered with the SFA and have a
trading subscription are able to access LIFFE CONNECT™ directly. This
ensures that access to the market is through 'responsible persons'.
Private investors need to trade on LIFFE through a broker. Trading will
either be conducted over the phone, or online. The LIFFE CONNECT™
software has been designed so that third party companies build their
trading system, which then inks into it for inputting trades. This makes
it possible for some brokers to make electronic dealing available to
clients. Clients in this case link to the exchange through the broker's
software systems.
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 |
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 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 |
Short-term money markets are the short end of the
capital market, where high volume, low risk borrowing and depositing are
undertaken. Money markets are wholesale cash markets through which banks,
corporates and government bodies fund short-term deficits and invest
short-term surpluses.
Money market instruments are prime quality securities,
such as:
- Treasury Bills - Central government debt
- Certificates of Deposit (CDs) - Securitised bank time deposits
- Bankers Acceptances (BAs) - Securitised commercial trade debt
obligations
- Commercial Paper (CP) - Securitised debt issued by highly
creditworthy corporates
|
|
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 |
A put is a right to sell. So a put option is an option
which gives the buyer the right to sell a particular asset at a specific
price by or within a specific time.
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. |
|
Reflation |
The intentional reversal of deflation through a monetary action by a government. |
|
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 |
A reserve currency is a currency which governments and
international institutions are willing to hold in their gold and foreign
exchange reserves and which finances a significant proportion of
international trade. The prerequisites for these two conditions are
normally that:
1. the value of the currency must be stable in relation
to other currencies.
2. the currency is that of a country which holds an
important share of world trade.
3. there exists an efficient foreign exchange market in
which the currency may be traded.
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 31st 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. |
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S |
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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. |
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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. |
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Scrip Dividend |
A benefit distribution in which a company distributes
dividends in share form or a combination of share and cash. |
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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. |
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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. |
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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. |
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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. |
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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. |
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Settlement |
The payment of cash for securities and, conversely, the
delivery of securities against payment - the conclusion of a securities
transaction by delivery. |
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Shares |
There are two ways for companies to raise money for
business investment - they can borrow it and/or they can issue shares -
otherwise known as stocks.
In corporate-finance-speak, stocks are called equity
capital and borrowed money is debt capital. Equity (stocks/shares) differs
fundamentally from debt in two ways.
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. |
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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. |
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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. |
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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. |
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Short term debt securities |
Short-term money markets are the short end of the
capital market, where high volume, low risk borrowing and depositing are
undertaken. Money markets are wholesale cash markets through which banks,
corporates and government bodies fund short-term deficits and invest
short-term surpluses. Money markets are also markets in loans at fine
terms secured against prime quality securities, such as:
- Treasury Bills - Central government debt
- Certificates of Deposit (CDs) - Securitised bank time deposits
- Bankers Acceptances (BAs) - Securitised commercial trade debt
obligations
- Commercial Paper (CP) - Securitised debt issued by highly
creditworthy corporates
|
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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 |
When a company divides its shares it is said to have
had a stock split. For example, if a corporation had 4 million shares
outstanding and split them 3 for 1, it would have 12 million shares
outstanding. A stock split will have two main consequences:
- The corporation must change the par value (if any) of the stock.
- The market value per share will change in proportion to the split.
|
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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 |
There are two ways for companies to raise money for
business investment - they can borrow it and/or they can issue shares -
otherwise known as stocks. In corporate-finance-speak, stocks are called
equity capital and borrowed money is debt capital. Equity (stocks/shares)
differs fundamentally from debt in two ways.
- It represents an ownership interest in a company - you're buying a
share of the company, not lending the company money.
- 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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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T |
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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. |
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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. |
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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 short term government debt
instruments. In the United States, for example, the market for short term
central government debt is mainly comprised of Treasury bills with a
maturity of one year or less. Standard maturities are 3 months, 6 months
and, in some cases, 1 year. Liquidity in short-term government debt is
usually high. This is because of:
- the high credit standing/low default risk of the issuer i.e.
government
- the homogeneity of the instruments
- the high (and regular) volume and low denomination size of the debt.
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 |
|
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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 |
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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 |
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|
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 |
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Yen |
The Japanese Yen 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 Swiss Franc (CHF). The Yen is the third most
traded currency of the majors behind the USD and the EUR.
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. |
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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. |
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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. |
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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. |
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Z |
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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. |
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Zero Dividend Preference
Shares |
Zero dividend preference shares are shares that pay no
income (i.e. no dividend) but have a fixed redemption value. |