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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. |
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F |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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Free Cash Flow |