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Scandia - Glossary of economics
Category: Economy and Finance
Date & country: 20/09/2007, UK
Words: 625

These are a series of sector groupings defined by the Association of British Insurers for all UK life company funds that it covers to ensure that all funds are grouped with similar funds for comparison purposes.

Accumulation Date
The date when income will be paid by a Unit Trust. This income is reinvested back into the Unit Trust increasing the value of the units instead of being paid out to the investor.

Accumulation Units
These units reinvest the income a Unit Trust earns, instead of paying it out to investors as an income. Unit holders or Policyholders get the benefit through the increased value of the fund.

See Authorised Corporate Director

Active Management
A traditional investment approach where fund managers actively build and change a portfolio of assets (e.g. stocks and shares) in order to take advantage of the best opportunities in the stock market.

Active Market
A market in which the volume of securities traded is heavy or above normal.

Active Position
The difference between the actual level of investment made in a particular asset class and the benchmark level of investment in that asset class.

A professional person qualified to make calculations and valuations in respect of pension funds, insurance funds or other forms of investment. Actuaries apply mathematical, statistical, economic and financial analysis to a particular emphasis on longer-term financial assessment of risk or uncertain financial outcomes.

Aggressive portfolio
A portfolio which is designed to provide above-average returns by taking above-average risk. Typically, such portfolios have a relatively high exposure to equity investments.

Allocation Rate
The percentage of the customer's money that is actually invested in the policy after any initial charges have been taken out

Alpha is a coefficient that measures the risk-adjusted performance, or the excess return, considering the risk due to the specific fund and its underlying investments, rather than the overall market. A high alpha indicates that the fund has performed better than would be predicted given its beta (volatility).

Alternative Investment Market (AIM)
A list of young and growing companies that do not meet the requirements of the London Stock Exchange listing.

See Annual Management Charge.

American Option
An option which may be exercised any time between its initiation and expiration dates (inclusive).

Annual Compound Return
The annual rate of return earned on an investment which includes any growth, for example: 1. Investment of £100 grows by 5% in the first year 2. You then have £105 at the start of year 2, this then grows by a further 3%, so at the beginning of year 3 the investment is worth £108.15. This is the effect of compounding. 3. So a growth of £8.15 on £100 over 2 years is actually an annual compound return of 4% per year, not 8.15% divided by 2.

Annual Management Charge (AMC)
A charge made each year by managers of Unit Trusts, OEICs or Investment Trusts to cover the expenses associated with running the fund. Although it is expressed in annual percentage figures it is usually split into 12 monthly amounts and taken from the fund monthly.

The expression of a rate of return over periods other than a year converted to annual terms. For example, if an investment earned minus 2% in year one and 23.5% in year two, the compound annual return would be 10%.

An arrangement under which periodic payments are made to a person in return for the investment of a lump sum, usually for the purpose of providing retirement income.

Annuity Rate
The percentage rate used to calculate the amount of income payable, following investment of a lump sum in an Annuity.

Taking advantage of countervailing prices in different markets â€` e.g. the purchase of an asset for a low price in one market and its sale for a higher price in another.

Items that are owned by an individual such as property and investments etc. Money in a bank or building society account is known as liquid assets.

Asset Allocation
The percentage split of an investment portfolio among different asset classes (shares, bonds, property, cash etc).

Asset Classes
The different types of assets available to investors. For example, equities, cash, fixed interest or property.

The transfer of ownership to another party.

At a Premium
A security is said to be selling at a premium when its market price is above its par value.

Attribution Analysis
The process by which the return on an investment portfolio is attributed to its manager`s investment decisions. Typically, the decisions in respect of which performance is attributed are stock selection, asset allocation and market timing.

Authorised Corporate Director
An Authorised Corporate Director (ACD) is responsible for operating the ICVC company in accordance with the regulations and the ICVC`s instrument of incorporation.

Additional Voluntary Contributions â€` Non compulsory payments made by a member of an employer`s pension scheme who wants to boost their retirement benefits.

Balanced Fund
An investment portfolio which diversifies its holdings over a range of asset classes which typically include shares, fixed interest, property and cash.

Balanced Manager
An investment manager whose expertise includes asset allocation and the supervision of portfolios containing a variety of classes of investment (as distinct from expertise in managing a particular asset class â€` see Specialist Manager).

Software programs developed by the international investment consulting firm Barra International used to evaluate risk profile, chiefly in equity investments.

Base Rate
An interest rate set by the Bank of England which reflects the cost of borrowing money from the money markets.

Basic Rate Tax
The amount of tax you pay on income after you have earned over the lower rate tax band allowance. Basic rate tax is currently 22%(2005/2006).

Basic State Pension
The flat rate (not earnings-related) State pension paid to all who have met the minimum National Insurance requirements. The amount paid is increased if the recipient is married and a spouse or widow(er) may claim on the record of his/her spouse.

Basis Point
A measurement of fluctuation of an investment, equal to 1/100 of one percent.

Someone who believes the market will decline (As opposed to Bull).

Bear Market
A market in which prices decline sharply against a background of widespread pessimism.

Bearer Bond
A bond payable to its holder (bearer).

An index or other market measurement which is used by a fund manager as a yardstick to assess the risk and performance of a portfolio.

This is someone who benefits from a will, a trust, a pension fund or a life insurance policy.

Best Advice
A requirement of the Financial Services Authority that a Financial Adviser, whether independent or tied to a single product provider, must provide best advice regarding the most suitable product, having first established a full understanding of the financial background. An additional requirement is that commissions received on products sold should not influence recommendations.

Beta is a quantitative measure of the volatility of a fund or portfolio, relative to the overall market. A beta above 1 shows that a fund is more volatile than the overall market, while a beta below 1 represents a fund which is less volatile.

Bid Offer Spread
This is a form of charging whereby the price that units are bought and sold at are different. The price of units which a customer can buy is higher than the price at which they can sell the same units.

Bid to Bid
Performance of funds is often quoted on this basis as it more accurately reflects the performance of the underlying assets, although not necessarily the return that the individual would have seen due to initial commissions (if any).

A large holding or transaction of shares. Also known as a block trade.

Blue Chip
Referring to the shares of a leading company which is known for excellent management and a strong financial structure. The term has become a generic one for quality securities.

Interest bearing securities which entitle the holder to interest during their life and repayment of the loan at maturity. They can be issued by companies or governments. Not to be confused with an Investment Bond.

Bond Fund Volatility Ratings
The Bond Fund Volatility Ratings are S & P`s current opinion of a fixed income fund`s sensitivity to changing market conditions relative to the risk of a portfolio composed of government securities and denominated in the base currency of the fund. The ratings range from S1 to S6 with S1 funds possessing the lowest sensitivity to changing market conditions and S6 rated funds, the highest.

Bond Ratings
A system for measuring the relative credit worthiness of bond issues using rating symbols, which range from the highest investment quality (least investment risk) to the lowest investment quality (greatest risk).

Bonus Shares
Shares issued free by a corporation to its existing shareholders on a pro rata entitlement basis.

Book Value
The net value at which an asset or security is carried on a balance sheet. In portfolio accounting, book value generally refers to the price paid for the security, as opposed to its current worth or market value.

Books Closing Date
The date a share registry is closed off after the declaration of a dividend, for the determining of the amount to be paid to each shareholder.

Bottom Up Analysis
The search for outstanding performance of individual stocks before considering the impact of economic trends. The companies may be identified from research reports, stock screens etc. (As opposed to Top-Down Analysis).

An agent who handles investors` orders to buy and sell securities, commodities, insurance policies or other property. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated.

A fee charged by a broker for the execution of a transaction; or alternatively an amount per transaction or a percentage of the total value of the transaction. Sometimes also referred to as a commission or fee.

One who believes the market will rise (As opposed to Bear).

Bull Market
An advancing market (As opposed to Bear Market).

Referring to the incorporation of a number of services or features into a single product. For example, a bundled pension scheme contract might combine the various activities of investment management, insurance, trusteeship and administration into a single service; whereas an unbundled arrangement would see these activities being conducted by a range of different parties.

Buoyant market
A market in which prices have a tendency to rise easily with a considerable show of strength.

Business Cycle
An irregular but recurring period of indeterminate scope and origin embracing expansion, prosperity, recession and recovery (also known as an economic cycle). (Opposed to Bull Market). Bear markets are generally shorter in duration than bull markets.

Buying(Offer) Price
The price at which you can buy units in a Unit Trust or life fund.

Call Option
An option which gives its holder the right but not the obligation to purchase an asset at a predetermined date (maturity date) for a predetermined price (exercise price). See also Put Option.

Cancellation Period
The period after signing a contract for some financial products during which you are entitled to cancel and receive your money back without penalty. For single payments you might get back less if the value has fallen.

A ceiling or maximum rate of interest under a loan.

The amount you invest in any type of savings or investment product.

Capital Asset Pricing Model (CAPM)
Sophisticated model of the relationship between expected risk and expected return. The model is grounded in the theory that investors demand higher returns for higher risks. It says that the return on an asset or a security is equal to the risk free return (such as the return on a short-term Treasury security) plus a risk premium.

Capital Charge
When a Unit Trust Manager takes the management charges out of the fund`s capital instead of the income it has produced.

Capital Gains Tax
You may have to pay capital gains tax on any profits over a set allowance when you sell assets such as shares or property. You are allowed to make gains up to a certain amount each tax year which are exempt from tax. For the 2005/2006 tax year it is £8,500. Everyone has their own allowance so couples can make gains before they have to pay the tax. If your profits come to more than your allowance you only have to pay tax on the excess over the tax free limit. Some gains you make are exempt from capital gains tax. These include gains from the sale of your car, Personal Equity Plans and Individual Savings Accounts. Also, you do not have to pay capital gains tax when you sell your home provided certain conditions are met.

Capital Growth-Gain
The amount you receive in addition to the capital you`ve invested when you cash in your investment.

Capital Guaranteed
Referring to an investment product, normally offered by a life insurance company, which includes some form of guaranteed return of capital.

Capital Markets
The markets for medium to long term investments, i.e. 3 years and over, in securities such as shares and bonds, as distinct from the shorter term money market.

Capital Protected
Referring to a type of investment portfolio which is managed in such a way as to reduce or eliminate the risk of capital losses, usually through the use of quantitative techniques such as protection overlays. See also Capital Guaranteed.

Capital Redemption Bond
A Capital Redemption Bond is a policy of assurance that will mature after a certain period of time with a minimum maturity value being calculated on an actuarial basis. A redemption contract has no lives assured, and therefore can be passed to future generations.

The sum of the total amount of various securities issued by a corporation, multiplied by the price of those securities. Similarly, the capitalisation of the share market is the sum of the value of listed shares.

Abbreviation for Capital Asset Pricing Model.

Carry Back
A member can sometimes transfer pension contributions to an earlier tax year for tax relief purposes. This is called carry back. The carry back rules no longer apply after 31 January 2002.

Generally, coin and note currency of a country in circulation and deposited in cheque accounts and other deposits that are available on short notice. One of the asset classes invested in as part of a typical balanced investment portfolio.

Cash Equivalents
Short-term investments held in lieu of cash and readily converted into cash within a short time span (i.e. bank bills, Treasury Notes etc), generally with maturities of no longer than 180 days.

Cash-in Value
The amount you might get if you cash in an investment.

CAT Standards
CAT stands for Charges, Access, and Terms. CAT standards were introduced by the Government on ISAs in order to help consumers choose financial products. However it is important to remember that CAT standards are not a Government guarantee and that they are not necessarily the best option for an individual consumer.

Certificate of Deposit
A written certificate by a bank or financial institution stating that a fixed amount has been deposited with it for a fixed period of time at a predetermined rate of interest.

A document showing details of units held within a Unit Trust or Shares or Bonds.

Technical analyst who charts the patterns of stocks, bonds and commodities to make buy and sell recommendations to clients. Chartists believe recurring patterns of trading can help them forecast future price movements. See also Technical Analysis.

Chinese Wall
An imaginary “wall� comprising procedures and policies adopted to avoid conflicts of interest within an organisation (e.g. to separate the stockbroking and investment management operations of a financial services group).

The practice of acquiring a holding of shares and then placing both buying and selling order for those shares (usually at about the same price or slightly higher) in order to build up turnover.

Citywire Ratings
The Citywire Ratings provide a totally objective statistical gauge of the individual fund manager`s risk adjusted performance. Citywire considers all managers who run actively managed retail funds within 24 IMA sectors and assigns AAA, AA or A Ratings to managers who achieve or exceed demanding performance thresholds based on their 36 month risk records.

Closed End Fund
A pooled fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds, closed end funds do not stand ready to issue or redeem shares on a continuous basis.

Closed funds
Funds which are no longer accepting new investments, but where the fund is still invested and managed in the usual manner.

Closing Price
The price at which the final transaction in a security took place on a particular business day. Share prices are quoted daily in the financial pages of leading newspapers and show opening, high, low and last sale (closing) prices, plus net change from the previous day.

Referring to a loan facility in which both maximum and minimum interest rates are specified. The maximum acts as a cap while the minimum rate is a floor below which the interest rate will not be allowed to fall.

Collective Investments
Funds which take money from a number of private investors and pool it together in one fund. This method of investment enables investors to invest in a larger number of investments than would otherwise be the case and therefore spreads their risk. Examples are: Unit Trusts and OEICS.

Collective Redemption Bond
The Collective Redemption Bond is an offshore based single premium redemption contract. A redemption contract has no life cover and therefore does not end on the death of the policyholder and can be passed to future generations. The bond offers access to almost all open-ended funds on the Skandia platform and investment is tax efficient because of the offshore structure, though withholding tax may be payable on certain dividend income in its country of origin.

Commingled Fund
The collective investment of the assets of a number of small funds, sometimes through a master fund arrangement, allowing for broader and more efficient investing.

Money paid by an insurance company to a middle man (e.g. an financial adviser or direct agent) for selling a product.

A tradeable item that can generally be further processed and sold; for example metals, wheat, sugar, coal etc.

Procedures undertaken at regular intervals or on an on-going basis to ensure internal and external controls and regulations are complied with.

Compound Interest
In, for example, a deposit account, this is where interest is added to both capital and the accrued interest from time to time. The longer a customer leaves an investment the more advantage they can make of compound interest. E.g. In Year 1 a customer is paid 10% on his/her £100 investment. At the end of Year 1 this investment is worth £110. In Year 2 with compound interest taken into account the customer now earns 10% on £110, giving him/her £121 by the end of Year 2. In Year 3 they earn 10% on £121 giving a grand total of £133.10.

Compulsory Purchase Annuity
An annuity which must be purchased on retirement for a member of an insured pension scheme.

An agreement between individuals, companies or other entities, which binds each party and is legally enforceable.

Contract Note
A contract note is evidence that you've bought or sold shares or funds. It is an important legal document given that certificates are rarely physically issued these days.