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

Contracted Out-In
A pension scheme is contracted out when it provides benefits in place of State Second Pension. You can contract out if you are in an Occupational Pension Scheme that is contracted out or have elected to contract out via a Personal Pension Plan, Stakeholder Pension Plan or FSAVC scheme.

An amount of money placed into a fund. In relation to pension funds, contributions may be made by either employers or employees or both.

Contributory Pension
An occupational pension scheme where the employee contributes a proportion of their salary in addition to a contribution made by the employer.

Controlling Director
This is a director who owns or controls 20% or more of the voting capital of a company either directly or indirectly. This 20% includes shares held by the director`s family and associates.

Core Funds
Core funds are often considered the essential building blocks or cornerstones of a portfolio because these funds take a 'middle of the road' approach to generating returns for shareholders. Core funds are focused on producing solid long-term results while attempting to manage risk

Core Portfolio
A portfolio comprising (generally), the bulk of a fund`s assets, which is invested in a highly controlled fashion in an attempt to secure the fund`s liabilities with a reasonable degree of confidence. The balance may then be invested in a satellite portfolio(s), which may be invested more aggressively.

Corporate bonds
A debt security issued by a company (non-government bond) to raise capital. The company undertakes to make regular payments of interest at a fixed rate and to repay capital at a future maturity date (see debenture stock, loan stock and unsecured loan stock).

Corporate Governance
A generic term covering issues associated with the management practice, Board structures and personnel policies of companies. From the investor`s point of view, corporate governance is normally concerned with the degree of influence which should be exerted over companies by their shareholders in order to advance their financial interest, normally through the exercising of voting rights.

Corporation Tax
Tax paid by companies on trading profits and capital gains.

A movement in prices which reverses a previous trend. The term is normally used to refer to a lowering of share prices after a sustained period of increase.

The interest rate applied to the value of a Corporate Bond or Gilt.

Cover Note
A temporary document that can be used as evidence of insurance cover, while the actual policy and insurance certificate are being prepared.

Credit Risk
The risk of suffering loss due to another party defaulting on its financial obligations.

Credit Scoring
A test of an individual`s financial status. Points are awarded on a range of criteria that include income, home ownership, debts and repayment history.

Critical Illness Insurance
An insurance policy that pays out a capital sum if the Life Assured is diagnosed as suffering from certain critical illnesses.

Cum Dividend
Referring to a share which is trading such that buyers rather than sellers qualify to receive the next dividend payment. This is usually reflected in the price of the security in question.

Cumulative performance
The performance of a fund`s price over a given period of time.

A country`s unit of exchange that has a value in terms of purchasing goods and services within the country.

Currency Option
An option contract which gives the buyer the right (but not the obligation) to buy or sell a specified amount of a foreign currency in exchange for another on or before a specified future date. Sometimes used to hedge securities held in overseas markets.

Currency Overlay
An investment management technique aimed at protecting an investor`s overseas currency exposure by means of a dynamic hedging model.

Currency Risk
Risk of incurring losses in relation to the value of overseas investments as a result of movements in international exchange rates.

Custodial Charges
Charges made by the bank or other financial institution that keeps custody of stock certificates and other assets on behalf of clients.

A bank or other financial institution that keeps custody of stock certificates and other assets on behalf of clients.

Possession of securities by a financial institution on behalf of others, for purposes of safekeeping.

Cyclical Stocks
Shares which move directly with the business cycle; generally they advance as business conditions improve and decline when business slackens.

An individual who places orders to buy or sell securities.

A type of debt security backed by the general credit of the issuer and not by a specific security.

A statistical measure dividing a sample into ten numerically equal groups. See also Percentile and Quartile.

Deed Poll
This is the document you will be given if you decide to legally change your name for a reason other than marriage.

Deferred (delayed) Annuity Purchase
An option available to a member of certain types of pension scheme, under which the purchase of an Annuity can be delayed to no later than age 75.In the meantime, income can be withdrawn from the fund.

Defined Benefit
An occupational pension scheme where the final pension an employee receives is linked to the size of their final salary They are also referred to as Final Salary Schemes.

Defined Benefit Fund
A pension fund in which the benefits to be paid to the member are defined in advance of the member`s retirement. The benefit is usually expressed as a proportion of the member`s salary on retirement. In these funds it is generally the company or sponsor of the fund (rather than the member) which carries the risk as to the ability of the fund to meet its liabilities. See also Defined Contribution Fund.

Defined Contribution
An occupational pension scheme where the contributions made by the employer and employee are set and the final pension an employee receives depends on the size of their fund on retirement. This final fund is then used to buy an annuity. Also referred to as Money Purchase schemes.

Defined Contribution Fund
A pension fund in which the amount of the contribution payable (as distinct from the end benefit) is defined. In these funds, the benefit payable to a member on retirement constitutes the aggregate of contributions to the fund (both employer and employee) in respect of the member, plus the investment earnings on those contributions. Unlike a defined benefit fund, the investment risk in a defined contribution fund is borne by the fund members.

A general price decline during which consumer spending is substantially curtailed, bank loans contract and the amount of money in circulation is reduced. It is the opposite of inflation and generally applies to more than just a temporary decline.

Delegated Switching Authority
A legal document in which a policyholder advises the Life Company that he/she is giving permission to an authorised person/company (usually a Financial Adviser) to switch the investments within his/her policy without requiring a specific signature each time.

The transfer of possession of securities from one individual or firm to another in fulfilment of contracts made on an exchange and on terms which meet all of the requirements of that exchange.

Deposit Account
A savings account from a bank or building society that pays interest on the amount of money held in it.

The Depository is responsible for the safekeeping of securities and independent monitoring of the ICVC`s compliance with FSA regulations.

The writing-down of the cost of an asset systematically over the life of that asset.

A prolonged slump in economic activity, characterised by rising unemployment and serious falls in production and consumption of goods. See also Recession.

A financial contract that derives its value from an underlying security, liability or index. Derivatives come in many varieties, including forwards, futures, options, warrants and swaps. Also known as Synthetic.

Development Capital
Usually refers to investments in relatively small, unlisted companies either in a start-up position or embarking on new or turnaround ventures that entail some investment risk but offer the potential for above average future profits. See also Venture Capital.

A reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities.

Dilution Levy
A charge levied by the ACD of an ICVC to be made for the purposes of reducing the effects of dilution

Direct Debit
An electronic way of making a payment directly from an individual`s to a company`s bank account.

Discrete performance
The performance of an investment during a defined time period.

Discretionary Trust
This is a type of trust where the trustees can decide who will benefit from the trust and how much they will get.

When a company pays money (dividends) to its shareholders.

Distribution Fund
A fund which is invested to provide a distribution payment of income on a regular basis to policyholders.

The spreading of investment funds among classes of securities and localities in order to distribute and control risk. This is a fundamental law of investment meaning simply: 'don`t put all your eggs in one basket'.

The amount of a company`s after-tax earnings which it pays to shareholders.

Dividend (distribution) Yield
The return on share investment, calculated by dividing the dividend rate by the market price of the share.

Dividend Discount Model
A model for determining the price of a security based on the discounted value of its projected future dividend payments. These models are very sensitive to interest rates.

Dividend Warrant
If a company pays a dividend it provides each shareholder with a dividend warrant. This gives information about the Dividend such as the class of share, the amount and the tax credit.

Divorce Credits and Debits
During pension sharing, section 29 of the Welfare Reform and Pensions Act 1999 (WRPA 99) makes provisions for the creation of a pension debit against the member`s pension rights and for the former spouse to become entitled to a pension credit equal to the amount of the debit. As a result of a pension sharing order the former spouse will be entitled to a pension credit being equal to that in value to the pension debit against the member`s pension rights.

Dow Jones
A set of indices compiled daily from New York Stock Exchange closing prices. The averages are unweighted arithmetic indices, useful for showing general price movements. The Industrial Average consists of 30 industrial stocks. Referred to as the 'Dow Jones' and is probably the most widely quoted US index.

EAFE Index
Abbreviation for Europe, Australia and Far East Index, a stock market index, often used as an ex-United States world equity benchmark by United States investors.

Early Retirement
When a member starts to take his/her pension before the normal retirement date of the scheme. This is a limit on how much of a Member`s earnings may be used to work out the limits on Contributions and Benefits in an Approved pension Scheme. This limits the amount that a high earner can put into a pension scheme and still get tax relief. £102,000 for tax year 2004/05

Earnings Per Share (EPS)
A measure of a company`s performance, calculated by dividing the company`s net operating profit after tax divided by the number of shares in issue.

Earnings Yield
A ratio calculated by dividing a company`s earnings per share by its current share price. The reciprocal of the price earnings ratio.

Efficient Frontier Modelling
An investment portfolio is said to reside on the “efficient frontier� if it is expected to produce returns greater than other portfolios (i.e. with different asset mixes) of the same or lesser risk, where risk is defined as the standard deviation of the returns. In order to calculate an efficient frontier, future investment returns and their standard deviation need to be known. These are, of course, unknown and need to be estimated from past market data. However, there is no guarantee that the past will be a suitable guide to the future and so efficient frontiers cannot be determined with certainty.

Emerging Markets
Financial markets in countries with developing economies, where industrialisation has commenced and the economy has linkages with the global economy. The financial markets in these countries are immature compared to those of the world`s major financial centres, but are becoming increasingly sophisticated and integrated into the international markets. These markets provide potentially high returns but are subject to high risk and volatility.

Endowment Assurance
A life assurance policy that pays out a lump sum after a specific period of time or on death of the policyholder. They can be used as a vehicle for saving or as a way to repay a mortgage. It is important to remember than endowment is a long-term commitment. A customer who surrenders early may not get back the amount of money they have invested. N.B. The definition does not apply to either an Endowment or a Pure Endowment.

Another name for Shares held in a company.

The value of an asset (e.g. a property) less any money owing on it (e.g. loans/mortgages).

Equity Investment Funds
An investment fund that invests in Shares in UK or overseas companies. International Equity Investment Funds invest either within developed economies or within emerging markets

Equity Risk Premium
The difference between the rate of return available from risk-free assets (such as government bonds) and that available from assuming the risk inherent in more volatile investment such as shares.

When a pension in payment is automatically increased at regular intervals by a fixed percentage rate or the increase of a specific index such as the Retail Price Index (RPI).

Ethical Investment
An investment approach which takes into account considerations other than solely the financial return potential of particular investments. An ethical portfolio might, for example, avoid investing in alcohol or tobacco.

Ex gratia
A payment made that is not legally necessary under the terms of a contract. It is usually made because of a moral obligation and no legal liability is admitted by the payer when making an ex gratia payment.

A term meaning 'without dividend' which denotes a share price which is quoted on the basis that the seller, not the buyer, is entitled to the current dividend on the share. (As opposed to Cum Dividend).

Excess Return
The return achieved by a security over and above that obtained from a risk-free asset (such as a short-term government bond) held over the same period.

Exchange Rate
The price of the currency in terms of another currency.

Exchange Rate Risk
The risk that the value of an investment may be diminished by movements in the exchange rate on a foreign currency.

Individual(s) or Company(s)who are appointed in a will to deal with the wishes of the deceased, in administering their estate.

External Audit
The risk associated with investments in a particular industry sector, country, company etc. Assessments of exposure risk are routinely conducted by responsible investors, as some risk element is inherent in all forms of investment other than cash.

External Manager
An organisation (e.g. an investment management company) engaged to manage and invest funds on behalf of a client.

This is the extension of a company's intranet out onto the Internet, for example, to allow selected customers, suppliers and mobile workers to access the company's private data and applications via the World Wide Web. This is in contrast to, and usually in addition to, the company's public web site which is accessible to everyone. The difference can be somewhat blurred but generally an extranet implies real-time access through a firewall of some kind. Such facilities require very careful attention to security but are becoming an increasingly important means of delivering services and communicating efficiently.

Face Value
The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuer. Face value is ordinarily the amount that the issuer promises to pay at maturity and is not an indication of current market value.

A person or organisation entrusted with the responsibility of managing, holding or investing assets in the best interest of the owner of the assets. Trustees of pension funds are fiduciaries in respect of the members of their funds.

Final Salary Scheme
An occupational pension scheme where the final pension an employee receives is linked to the size of their final salary. They are also referred to as Defined Benefits schemes.

Financial Adviser
Individuals who give advice about all aspects of finance. Financial advisers can advise and sell products for a range of insurance companies and investment companies. Generally, the companies pay them commission when they sell a product although they may assign part of that commission to their client. There are also financial advisers who do not take commission but charge a fee to their clients instead.

Financial Ombudsman
The Financial Ombudsman was set up to provide a free and independent service to resolve disputes between consumers and financial firms. Consumers must complain to the firm involved first, but thereafter the Financial Ombudsman will aim to resolve the dispute within six months.

Fixed Income
American term for Fixed Interest. See Fixed Interest

Fixed Interest
Referring to income which remains constant and does not fluctuate, such as income derived from bonds, annuities etc. Any debt security which has a fixed flow of income is known as a fixed interest security.

Fixed Interest Rate
An interest rate, which does not change during an investment or borrowing period.

The trading area where securities are bought and sold on an exchange.

Forsyth-OBSR Ratings
Forsyth-OBSR Fund Ratings are determined on the premise that the fund selection process should, whilst taking past performance into consideration, ascribe greater weight to identifying the factors which will affect future performance. This process demands a much stronger emphasis on a qualitative examination of funds. Ratings awarded are AAA, AA or A.

Forward Contract
A cash market transaction in which two parties agree to the purchase and sale of a commodity (including exchange rates) at some future time under such conditions as the two agree. In contrast to futures contracts, the terms of forward contracts are not standardised, a forward contract is not transferable and there is no margin or collateral requirement to assure performance of the contract.

Forward Rate Agreement (FRA)
A contract for borrowing or lending at a stated interest rate over a stated period that begins at some time in the future. FRAs are used by parties wishing to protect themselves against future interest-rate movements.

Financial Ombudsman Service

Abbreviation for floating rate notes which are long-term (5 years or more) debt securities whose interest rates are adjusted periodically in line with a benchmark rate. FRNs appeal to investors who might otherwise be reluctant to commit funds to fixed interest investments for lengthy periods in times of fluctuating interest rates.

Front End Fee
A fee charge to a borrower at the commencement of a loan, or a commission levied on an investor to buy into a unit trust. Also known as a front end load.

FSA (Financial Services Authority)
The financial service industry`s regulator. One of the principal aims of the regulator is to protect the consumer.

Free Standing Additional Voluntary Contribution â€` Non compulsory payments made by a member of an occupational pension scheme who wants to boost their retirement benefits but keep it separate from their occupational fund.

Financial Services Compensation Scheme.

FTSE 100 Index
An index of the Share prices of the 100 largest companies (by market capitalisation) in the UK.

FTSE All-Share Index
An index of the Share prices of over 800 leading companies and Investment Trusts on the London Stock Exchange. See also FTSE 100 Index.

Fully Contracted Out
Pension policy where the only premium received is the Department of Work and Pensions rebate.