Glossary

 

Accrual of Interest

Income that builds up over time (especially on a bond) but has not yet been paid out.

Accumulation Unit

Type of Unit within a COLLECTIVE INVESTMENT SCHEME (CIS) where all income is re-invested rather than paid out periodically, so adding to the capital value of the unit.

Advisory Management

An agreement where the client receives advice and ongoing review of the portfolio, but where the manager can make no change without the client's authority.

Advisory Services

An agreement where the client receives advice and ongoing review of the portfolio, but where the manager can make no change without the client's authority.

Advisory Services

An advisory broker advises (and executes) buy and sell decisions on behalf of the client. However, the final decision to buy and sell always rests with the client. An advisory service creates a carefully-designed brief which sets out, among st other things, your investment objectives and affords the investment manager an insight into the type of advice you will need. Your investment manager will manage your portfolio by consulting you and suggesting courses of action which you may or may not choose to take. As well as verbal or written advice, you may receive regular newsletters which review the market. Depending upon the nature of the service provided you may be sent detailed reports regularly. This service can also allow you to call your professional to ask if they share your view on whether you should buy or sell a particular share.

Alternative Investment Market (AIM)

A market of the London Stock Exchange developed for smaller and growing companies to float shares.

American Depository Receipts (ADRs)

ADRs are a specific type of depository receipt which were created using UK shares and are such that they make UK shares available (via ADRs) to domestic US clients with more appropriate tax and settlement considerations.

Angel Investment

An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organise themselves into angel groups or angel networks to share research and pool their investment capital.

Annual General Meeting (AGM)

An annual meeting which is called by the directors of an organization that allows stakeholders to stay informed and be involved with company decisions and workings.

Appropriateness Test

The requirement for a financial firm to take the necessary steps to ascertain whether a financial product or service is suited to the needs of their client.

Asset Allocation

The relative amounts of your portfolio that are in cash, bonds, equities, foreign stocks, property etc.

Asset Management

The term usually given to describe companies which run collective investment funds. Sometimes investment management (the managing of investments for private clients) is interchanged with asset management as a term.

Bargain

Term used on the London Stock Exchange for a share trade (purchase or sale).

Base rate

The prevailing standard interest rate in UK, set by the Monetary Policy Committee of the Bank of England.

Basis Point

0.01%, or a hundredth of one percent.

Bear

Investor who is pessimistic (and so expects prices to fall), hence a 'Bear Market' for a market with reducing share values).

Beneficial owner

The ultimate owner of a financial instrument (as opposed to Legal Owner). For example if an individual places their shares into a nominee, the nominee is the legal owner but the individual is the beneficial owner.

Best Execution

Obtaining the overall best price available for a client on a sale or purchase.

Bearer Stock

Stock where physical possession of the certificate itself confers proof of ownership i.e. the owner name is not registered with the company (like money in the form of notes).

Bid Price

The price at which an investor (via a broker) can sell a security.

Blue Chip

A term to describe large, liquid and established companies (which generally means their shares are more liquid i.e more easily available to buy and sell).

Boiler Rooms

A boiler room is the practice of selling goods which are often highly questionable as to their worth. It typically refers to a situation where salespeople use pressurized, dishonest sales tactics (mostly via the telephone) to sell such things as penny stock or commit outright stock fraud.

Bonds

A bond is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.

Bonus Issue

Additional shares or stock in a company given by the company to existing shareholders in proportion to their existing holding.

Brokerage Commission

The payment (brokerage commission) made by an investor to a stockbroker for affecting a stock market bargain and referenced on the client's contract with the broker.

Bull

Investor who is positive and optimistic, hence a 'Bull market' for a rising market).

Buy-Back

When a company purchases its own shares in the market for cancellation. Provided that the price is sufficiently cheap, this should improve both the net asset value and earnings for each remaining share.

Call (Option)

An option that gives the buyer the right to buy an underlying asset at a future date at a specified price.

Capital Gains Tax (CGT)

The tax payable on realized capital gains which accrue in a given year. The current CGT allowance (under which no TAX is payable on gains) is £10 600. CGT can only potentially arise when an asset is sold.

Cancellation price

The lowest redemption price a Unit Trust manager can apply in poor market conditions.

Central Counter party

An entity that acts as an intermediary between security market participants. In the UK, LCH-Clearnet is one such central counter party. Central counter parties are used for the UK institutional transactions (the wholesale market) but definitely not for the majority of UK retail trades.

Central Securities Depository (CSD)

An entity that enables securities (equities and bonds predominantly) to be usually settled in electronic (or dematerialised) form. Euro-clear UK & Ireland (formerly CRESTCo) is the UK CSD and does in fact have within itself a highly developed paper interface to cater for clients that hold their stock in paper form, but for which it must become electronic in order to settle a transaction.

Child Trust Fund

Tax-free savings account launched in January 2005 for children born between 1st September 2002 and 2nd January 2011. Creation of new accounts and Government payments into them ended in January 2011.

Clearing

The process used to reduce risk by providing a central hub which guarantees trades in a number of different financial instruments. This will involve a Central Counter party.

Closed end fund

An investment trust, or a collective investment scheme which has a fixed number of shares or units when formed and which does not issue further shares or units. So to obtain shares in an Investment Trusts in the open secondary market there would need to be a seller of the units. These are traded the same as company (equity) shares.

Contracts for Difference (CFD)

A CFD is an agreement between two parties to exchange the difference in value of a particular share between when the contract opens and when it closes. A position can be opened on margin, which is much cheaper than the outlay of the full cash amount for cash dealing, while the CFD does not confer share ownership so the final transaction at contract close is not subject to stamp duty.

Corporate Governance

The set of processes, customs, policies, laws, and regulators affecting the way a corporation (or company) is directed, administered or controlled.

Conventional Gilts

These pay a fixed rate of interest which is maintained until the Government repurchases the stock on a predetermined redemption date and at a predetermined price. They offer a completely predictable return of income, fixed throughout their life and if held until their redemption date the government repays the current holder. The price of gilts can rise or fall in the market as the outlook for interest rates and inflation changes, providing possible opportunities to sell at a profit or loss before redemption.

Collective investment scheme (CIS)

Term covering schemes where investors participate in returns from pooled investments, e.g. Unit Trusts, UCITS and OEICs.

Contract note

A document with information confirming a transaction.

Convertible loan

A corporate bond with an option to convert to ordinary shares at a predetermined price and time.

Corporate bond

Bond issued by a company.

Coupon

This is a regular payment received by the bondholder over the lifetime of the bond. The coupon rate is expressed as a percentage of the face value of the bond.

CREST

CREST is Euroclear UK & Ireland's real-time settlement system for UK and Irish shares. CRESTCo was the company that ran CREST before it was acquired by Euroclear in 2002 to become Euroclear UK & Ireland.

Custody Services

A very general term to refer to the safe-keeping and processing of the securities trades worldwide and servicing the associated portfolios.

Custodian Bank

A Bank specialising in safe custody services looking after portfolios of shares and bonds on behalf of others, such as fund managers, pension funds and insurance companies.

Debenture

A corporate bond (debt instrument) that is secured against a specific asset or pool of assets.

Derivatives

Financial instruments whose price is derived from the pricing of something else. The main types are futures, options and swaps. These were originally developed for agricultural commodities and precious metals, to enable producers and end users to lock in the price of a commodity at a future date. Now adapted to the securities markets they enable investors to protect themselves against unexpected price movements.

Discretionary Services

These services require clients to sign up detailed agreements with their investment manager and once all the necessary agreements are in place they provide for your investment manager the complete authority to buy and sell investments for you without obtaining your prior approval at each transaction level. This will be in the context of a carefully-designed brief, a clear framework for your portfolio manager to use when making transactions on your behalf, often referred to as 'the mandate'. The advantage is that your manager can therefore act instantly on changes in the market, rather than spending valuable time trying to contact you. Detailed reports will be sent to you regularly and this is a highly regulated service.

Discount

Typically, the difference between net asset value and the market price of a security. Also used as a comparative measure for dividend yields.

Dividend cover

The extent to which a company's earnings exceed the dividend it pays.

Dividend growth

The amount by which a company's dividend rises over a period of time.

Dividend yield

A percentage calculation of the return that the historic dividend would provide as a percentage of current market price of the stock.

Earnings Per Share (EPS)

The net earnings a company makes, divided by the number of ordinary shares in issue.

Emerging markets

A term used to describe a new, non-traditional investment market, usually in a country which is developing in a worldwide market sense.

Equities

Another term for stocks or shares

Eurobond

A bond issued (often in a foreign currency) outside the issuer domicile.

Ex dividend

Describes a share that is sold without rights to an already declared dividend. A person who sells ex dividend retains the right to receive any declared but unpaid dividend

Exchange Traded Funds (ETF)

ETFs are a basket of stocks that are bought and sold. ETFs experience price changes throughout the day as they are bought and sold.

Execution Only

Execution only services are services for buying and selling financial instruments which do not require advice or management - you simply tell your broker to buy and sell shares for you.

Extraordinary General Meeting (EGM)

A meeting which is called by the directors of an organisation when an issue arises which requires the input of all stakeholders and is too serious or urgent to wait until the next AGM.

Financial Conduct Authority (FCA)

Part of the 'Twin Peaks' regulatory structure which came into force on 1 April 2013. The FCA is responsible for regulating conduct of business in retail and wholesale markets, and operates with the single strategic objective of protecting and enhancing confidence in the UK financial system.

Financial Planning

This is a term used to generically define a type of service which takes care of your overall strategy and planning for your entire financial affairs. This includes such things as advice on the placing of cash deposits, retirement planning, pensions, mortgages, life assurance, school fees, inheritance tax, National Savings and ISAs and anything else which impacts on your finances.

Financial Services Authority (FSA)

The previous UK Financial Regulator.

Fixed Income or Fixed Interest

A term used to describe those investments, such as bonds, which pay interest at a fixed rate throughout the term of the instrument.

Flotation

The offering for the first time of shares on a Stock Exchange (see IPO).

FTSE All Share

A broad index of around 700 of the UK's leading companies.

FTSE 100 (Footsie)

The FT index of the UK's largest 100 listed companies.

FTSE 250

An index reflecting the medium sized UK companies immediately below the top 100 (ranked by market capital).

Fund

Term used generally for a Collective Investment Scheme.

Fund of Funds

An authorised unit trust or OEIC that itself invests in a range of underlying unit trusts or OEICs (i.e. a fund that invests in other funds).

Fund Supermarket

Fund supermarkets offer access to a wide variety of unit trust and open ended investment companies (OEICS).

Gilts

(also known as Government stocks) These are sold to the investing public by the Government to help fund the difference between what it spends and what it receives e.g by way of taxes. There are two main types: conventional and index-linked gilts, both are quoted on the London Stock Exchange.

Gross

Term used to refer income or interest before any deductions (such as tax).

Hedging

Taking a position in a security or derivative in order to protect against an unwanted or unexpected price movement in another security or market.

Hostile takeover

A takeover bid that is opposed by the management of the target company.

Indexation

The linking of a rate to a standard index of prices, interest rates, share prices etc.

Index Fund

(also called a Tracker Fund) A Fund whose composition is designed to replicate the performance of a given stock market Index.

Index-Linked Gilts

These are a specific type of Gilt whose interest is linked to the rate of inflation. If you buy them on issue and hold them until their redemption date, the Government guarantees to repay you at a price which will give you protection against inflation. The income is indexed and in six monthly arrears. Under current legislation, capital gains made on gilts, both conventional and index-linked, are not generally subject to tax.

Individual Savings Accounts (ISAs)

A personal tax-efficient savings scheme, successor in 1999 to the Private Equity Plan (PEP). Each tax year everyone, aged 16 or over for cash ISAs or 18 for stocks & shares ISAs, has an allowance which is the maximum that can be saved within the tax-free wrapper in a financial year.

Initial Public Offering (IPO)

The first instance of making particular shares available for sale to the public.

Intermediation or advisory services

These services involve stockbrokers (private client services) and discount brokers. Stockbrokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages serve target individual investors. Full service and private client firms primarily assist and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds.

International Dealing

The dealing in securities that are not from ones "home" (or domestic) market..

International Securities Identification Number (ISIN)

An ISIN is a 12 character alpha-numerical code and uniquely identifies a security regardless of how many venues on which it is traded. In the US they often use a CUSIP.

Investment Grade

Term applied, usually to corporate bonds, with those having a credit rating BBB or above.

Junior ISAs

Launched on 1st November 2011 to complement the adult ISA and enable parents, grandparents, guardians and others to save and invest for their children.

Junk bonds

A non-investment grade bond commonly with both higher return and risk characteristics.

Key Investor Information Document (KIID)

The Key Investor Information Document is used for the unit trust and UCITS world and contains useful information such as a description of the associated risks and benefits of the investment. It is essential that the private investor sees the KIID before investing so that they fully understand what they are buying.

Know Your Customer (KYC)

A client information-gathering requirement placed on investment managers as part of obtaining all relevant data on their clients and assists investor protection.

Leveraged

Another term for gearing.

Limit Price

A price fixed by the seller or purchaser of a stock, indicating the maximum or minimum price at which a trade is acceptable.

Listed or Quoted Company

A company that is quoted on a recognised stock exchange such as the London Stock Exchange. A company tends to be listed on one exchange (although it can be dual-listed) but its shares may be quoted on a number of trading venues.

The London Stock Exchange (LSE)

The primary stock exchange in the UK.

 

Market capitalisation

The value of a company expressed as its share price multiplied by number of shares in circulation.

Market maker

A broker who makes a two-way price (buying and selling) for a security. The UK retail market utilises market makers as part of a system called the Retail Service Provider (RSP) market. This system provides quotes for shares and facilitates the buying and selling of shares.

Maturity

The stage at which a financial instrument, such as a bond, is due for repayment.

Mid price

The price half-way between bid and offer price, often used for client valuation purposes.

Money laundering

The process of making money obtained illegally appear legitimate.

Multilateral Trading Facility (MTF)

An MTF is a specific type of European financial trading system that brings together buyers and sellers according to a defined set of rules resulting in trades. MTFs were introduced in MiFID 1 in 2007 and

Net asset value

The true intrinsic value of a stock, taking account of all assets and liabilities.

New issue

A class of shares or stocks that have just been circulated or floated on the exchange.

Nominee

A company often owned and administered by an investment company, Bank or Broker for the purpose of holding securities on behalf of investors. A nominee company is the legal owner of these securities whilst the beneficial owner remains the underlying investor.

Offer price

The price at which a broker offers a share of a stock for sale.

Offshore funds

Any non-UK domiciled Funds.

Online dealing services

This is a term typically used to refer to execution-only trading via the Internet. Some firms offer access to research information as part of the service and new additions to services are being developed all the time in an open commercial way.

Open-ended fund

A form of Fund, such as a unit trust, where new investors may be allocated new units. The Fund thus increases in size. The Fund normally has no end date.

Open-ended investment company (OEIC)

An OEIC works in a very similar way to a unit trust except that it is legally constituted as a limited company (Plc).

Option

An option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price.

Ordinary share

Shares that entitles the holder to a dividend from the company's profits after holders of preference shares have been paid.

Par, Par value

The nominal value of a security used initially in the creation of the number of securities issued, in bonds normally 100.

Personal Equity Plans (PEPS)

A tax-efficient savings vehicle, now superseded by ISAs, which enjoyed restricted tax benefits.

Platforms

Platforms are online services, used by intermediaries (and sometimes consumers directly) to view and administer their investment portfolios. As well as providing facilities for investments to be bought and sold, platforms are often used to aggregate, and arrange custody for customers' assets.

Pooled

When several people's assets are collected together. A pooled nominee holds client securities and client bank accounts held by investment firms at banks often hold pooled client money.

Portfolio

The term used to describe all of a person's investment when they consist of several different types of instruments, such as shares, unit trusts, bonds, cash etc.

Preference shares

A class of share that entitles the owner to preference over ordinary shares in the distribution of dividends and the proceeds of liquidation in the event of bankruptcy.

Price Earnings Ratio (P/E; PER)

A share's price divided by its earnings.

Private Equity

Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets

Prospectus

A public document which gives full company and transactional details at the time of a new share issue.

Proxy

A person or body (for example a Nominee Company) authorised by a shareholder to vote on his behalf.

Prudential Regulation Authority (PRA)

Part of the 'Twin Peaks' regulatory structure which came into force on 1st April 2013. The key feature of the PRA is its statutory objective for prudential supervision, with a clear emphasis on the promotion of the stability of the UK financial system, supporting the objectives of the Bank of England generally and its new Financial Policy Committee in particular. The PRA regulates banks, insurance companies and a small number of very large investment firms.

PTM Levy

A £1 charge automatically imposed on investors and collected by their brokers when they buy or sell shares with an aggregate value in excess of £10 000. This money is used to help finance the Panel of Takeovers and Mergers.

Put (Option)

An option that gives the buyer the right to sell an underlying asset at a future date as a specified price.

Redemption date or Maturity

The date at which the security or bond is to be paid back to the current investor, normally at par.

Redemption Yield or yield to maturity (YTM)

The theoretical yield calculated by allowing mathematically for all income over the life of a bond, and the final return of capital.

Registrar

The institution which maintains the shareholder register of a company, and handles the issue of certificates, dividend payments and company notices.

Rights issue

An issue of new shares to existing holders who have the right to buy them, usually at a discount to the market price.

Running Yield

The simple calculation of income received from a bond as a percentage of the cost or market price of the host bond.

Scrip dividend

A dividend that shareholders can accept in the form of shares in the company instead of cash.

Security

A generic term covering shares, stock, bonds and certain other investments, that can be bought and sold on the financial markets.

SEDOL number

SEDOL stands for Stock Exchange Daily Official List, a list of security identifiers used in the United Kingdom and Ireland. SEDOLS are 7 characters in length and forms part of the ISIN.

Self-Invested Personal Pensions (SIPPs)

These are actively managed pension funds on behalf of an individual investor tailored to the individual investor's requirements.

Settlement

The process of transferring stock from seller to buyer and arranging the corresponding movement of money between the two parties.

Shares (also known as equities)

Any of the equal parts into which a company's capital stock is divided, whose owners are entitled to a proportionate share of the company's profits.

Share capital

The amount of capital that a company raises by issuing shares.

Share certificate

A document that provides evidence of ownership of a share in a company. Full ownership rights are reflected by the stakeholders name appearing on the company register and the best way to check a holding (if at all unsure) is to contact the company's Registrar.

Short Selling

Short selling is the selling of a stock that the seller does not own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. Note: in some systems across the world , if a client sells a stock they own but there is a delay in settlement, this can appear "in the system" as a short sale.

Spread

The difference between the buying and selling price.

Stag

Term applied to a speculative investor who purchases stock in a new issue, with the intention of making a rapid sale and hopefully a profit.

Stamp Duty

A tax levied in respect of all paper stock purchases made within the UK.

Stamp Duty Reserve Tax (SDRT)

A tax levied in respect of all paperless stock purchases made within the UK.

Standard Settlement

The settlement period that is used for the vast majority of securities. In the UK, standard settlement for equity trades is T+3 (trade date plus 3 working days). Non standard settlement can apply to trades involving certificates which cannot be settled in such a short timeframe. Such transactions usually incur more cost to the client due to the added administration involved.

Stock

Another term for Share, equity, or bond.

Tracker fund

A fund that aims to replicate the performance of a specified index.

Touch Price

The highest bid and lowest offer price in a security.

Treasury bill

Term applied to a short-dated Government issued security, normally referring to the USA.

Trail Commission

The payment made by a Product Provider such as an Insurance Company to financial advisers for selling products to customers.

Unlisted security

A stock that is not officially listed on one of the world's principal Stock Exchanges. It may be possible to deal in an unlisted security in the UK, for example through AIM, the Alternative Investment Market.

Unit Trust

A unit trust is a form of collective investment constituted under a trust deed. Unit trusts are open-ended investments; therefore the underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged by the funds product provider and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations.

Unregulated Collective Investment Scheme (UCIS)

A scheme which is not authorised by the Financial Conduct Authority (FCA) where a number of investors pool their money to invest in one or more assets, with the intention of receiving income or a profit. These schemes per se are not covered by the Financial Services Compensation Scheme (FSCS).

Venture Capital Trust (VCT)

A company specially structured to pool investors' money for investment in fledgling (often unquoted) companies. This is a closed end fund.

Voting Shares

Shares that give the stockholder the right to vote on matters of corporate policy making e.g, remuneration as well as who will compose the members of the board of directors.

Volatility

Term applied to the statistical measure of the tendency of a market or a security to rise or fall within a period of time.

Wrap

Wraps offer access to a greater variety of products and usually support advisers that want to agree remuneration with clients, instead of receiving commission.

Yield

The financial calculation, usually expressed as a %, of the return generated by holding a stock (e.g. a 'Dividend yield' see above.). When applied to fixed interest security, treatment of capital and regular income payments throw up two main approaches.

Yield Curve

The graph plotted by expressing yield on bonds in relation to their expected maturity date. In theory, and normal markets, the longer the wait for capital to be returned the higher should be the yield enjoyed by the investor. The principle has tended to give a gentle upward moving curve over time. However, low interest environments worldwide will impact this.

Zero Coupon Bond

A corporate bond which has no coupon and pays no interest to the bondholders during its lifetime, but is issued at a discount to par value and then redeems at par value. Any profits on sale are subject to income tax.

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