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Scandia - Glossary of economics
Category: Economy and Finance
Date & country: 20/09/2007, UK
Words: 626


Loan Stock
A security bearing a fixed rate of interest. The capital (the amount loaned) is repaid after a given period of time.

Long
In relation to foreign exchange and share trading, referring to an ownership position in which the trader has bought more of a particular security than he or she has sold.

Long Position
An excess of purchases over sales of the relevant investment instrument.

Long Term Care Bonds
An investment bond that is designed to cover the costs of care in old age. Can be used to cover residential home cost as well as expenses incurred when care takes place within the home.

Loss Adjuster
A person independent of the insurance company, but paid by it, who is responsible for checking that the claim is covered under the policy and negotiates the amount paid with the policy holder.

Lower Earnings Limit
The minimum amount which must be earned in any pay period before National Insurance becomes payable.

LPI (Limited Price Indexation)
See Limited Price Indexation

Macroeconomics
Economic analysis concerning broad trends and influences on the economy, such as the interaction of fiscal and monetary policies, GDP, balance of payments etc. As opposed to Microeconomics which focuses on individual units such as companies and markets to assess their influence on the economy.

Managed Fund
Managed funds are generally made up of a spread of other specialist funds so spreading the risk.

Mandate
The agreed objectives given by an investor to his or her investment manager, often including a benchmark, guidelines as to sector exposures and prohibited investments.

Marginal Tax Rate
The additional tax which someone pays on each £1 increase of their taxable income. In the UK the tax bands for 2004-2005 tax year are:
10 per cent on the first slice of taxable earnings.
22 per cent on next slice.
40 per cent on top slice.

Market Capitalisation
The sum of the total amount of various securities issued by a corporation, multiplied by the current market price of those securities.

Market Cycle
A business cycle concerned specifically with rises and falls in market activity, as measured by an index.

Market Level Indicator
An index comparing the values of fixed interest securities and Shares, used in determining State scheme premiums

Market Price
With reference to a security, the last reported price at which the security sold. Alternatively, the highest price which a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.

Market Risk
Risk that relates to the market as a whole and therefore cannot be diversified away simply by holding a greater variety of securities. See also Systematic Risk.

Market Timing
The purchase or sale of securities on the basis of shorter-term price patterns and temporary market opportunities as well as judgements of underlying value. An extremely difficult thing to get right consistently.

Market Value
The value of an asset to a third party on the open market.

Market Value Reduction (adjustment)
A reduction in the value of a claim on a Unitised With-Profits Bond in order to reflect fairly the movement of assets underlying the policy.

Matching
The arrangement of assets, and the return from those assets, to meet future liabilities and obligations.

Maturity
The date on which a loan, bond, mortgage, life policy, or other debt or security is due to be repaid.

Maxi ISA
A maxi ISA includes investments in stocks and shares and may also allow investments in cash and Life Assurance. An individual can invest up to £7000 in a maxi ISA. The entire ISA must be with one financial organisation. Contrast with Mini ISA.

Maximum Contributions
Pension contracts have maximum contribution levels. The levels are set by the Inland Revenue because tax relief is available on these contributions.

Maximum gain
The Maximum Gain represents the best possible return, over a minimum of three months within the performance period.

Maximum Loss
The Maximum Loss represents the worst possible return, over a minimum of three months within the performance period.

Median
The value (rate of return, market sensitivity, etc) that exceeds one-half of the values in the sample and is exceeded by the other half. The median is always the middle value, as distinct from the mean, which represents the average value. For example, if five items cost £20, £80, £100, £300 and £500 respectively, the median value would be £100, whereas the mean or average would be £200.

Member
A person who has been admitted to membership of a pension scheme and is entitled to benefits under the scheme.

Member Choice
A facility made available to the members of a defined contribution fund allowing them to decide the proportion of funds to be allocated between high and low risk investment strategies, sectors and/or managers. Typically, a fund with a member choice facility will allow members the opportunity to switch between investment options at certain intervals.

Microeconomics
Economic analysis dealing with individual companies or markets and their impact on the economy, as opposed to macroeconomics which focuses on broader influences and trends.

Middle Band Earnings
Earnings between the lower earnings limit and upper earnings limit.

Mini ISA
There are currently three types of Mini ISA you can invest in, these being cash life assurance, and stocks and shares. You can buy up to three mini ISAs in any financial year: one for cash (up to £3,000), one for stocks and shares (up to £3,000) and one for life assurance (up to £1,000). Unlike a maxi ISA, each one of these can come from a different provider. The income earned will be free of tax.

Minimum Contributions
Contributions payable to an appropriate Personal Pension or Stakeholder Pension by the Inland Revenue in respect of a member who has contracted out of SERPS or the State Second Pension. This could also refer to minimum contribution levels that can be paid into a financial product.

Minimum Income Guarantee (MIG)
A means-tested benefit that helps individuals on low incomes at retirement. If you apply, the Department of Work and Pensions assesses your income and decides whether you get a top-up.

Modified Duration
The level of interest rate sensitivity resulting from small changes in the yield to maturity of a bond. Modified duration is measured as the interest rate sensitivity of the bond as a percentage of the bond`s price; in other words it is the present value of the duration.

Momentum
The tendency of an asset price to keep moving in the same direction, either upwards or downwards.

Money Market
The market for trade in short-term securities such as Bills of Exchange, Promissory Notes and Government and Semi-Government bonds. Participants in the money market include banks and other financial institutions, life offices, stockbrokers, pension funds and Government authorities. See also Capital Markets.

Money Purchase Schemes
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 Defined Contribution schemes

Moody`s
American credit rating organisation – operates in similar fashion to Standard & Poor ‘s.

Mortgage Indemnity Insurance
Insurance that covers the mortgage lender, in the event that the property is repossessed and its value when sold does not cover the remaining loan.

MSCI Index
Abbreviation for Morgan Stanley Capital International Index, a series of country indexes of equity prices. The MSCI World Index is one standard for comparisons of international equity performance, although there are others, including the Frank Russell and Financial Times indices.

Mutual Fund
An American term for certain forms of collective investments. Mutual funds are similar to unit trusts in that individual investors are entitled to an interest in a portfolio of securities, but different in the sense that they are offered through a corporate legal structure rather than through a trust arrangement.

National Insurance Contributions
A payment made by most employers, employees, self-employed (and some unemployed) people to the government to fund such things as national healthcare and education. For the employed it is deducted from income by the employer on a scale related to income levels. The employed pay part flat rate, part income-related. The self-employed and the unemployed may pay a flat-rate voluntary contribution to keep their benefits entitlement up to date.

National Savings
The total level of savings, defined as the income remaining after consumption, of a country`s households. This is also a brand name of savings products offered by the Post Office.

Negative Periods
The number of months over the last 12 months that a fund has reduced in value.

Negotiable Instrument
A piece of paper representing ownership of a financial asset or debt, and capable of being traded in the money market (e.g. Bill of Exchange, Promissory Notes).

Net
Interest received on a savings account after tax has been deducted. This term also applies to premiums paid net of tax relief.

Net Asset Value (NAV)
The valuation of a collective investment based on the market value of securities added to the cash element held in its portfolio. OEICs use this method for valuation purposes.

Net Interest
Interest received on a savings account after tax has been deducted.

Net Present Value (NPV)
The current value of a stream of income discounted by a factor (usually inflation) over the period of an investment.

Net Relevant Earnings
Net Relevant Earnings are used to determine the maximum contributions to a Retirement Annuity, Personal Pension or Stakeholder Pension.

New Issue
Any type of security issued to raise additional money. Offerings are made to existing shareholders, through rights issues or entitlements and/or to non-shareholders. Proceeds may be used for retiring debt, for acquisition or for working capital.

NICO
National Insurance Contributions Office.

Nil Rate Band
Refers to the ceiling on earnings for Income Tax purposes, under which no tax is payable.

No Claims Bonus
A reduction in an insurance premium because the customer has a claim free record.

Nominal Value
The face value of something e.g. a Share issue

Nominee
An individual or company in whose name a security is registered to be owned, although the real (or beneficial) ownership is actually held by another party. Nominee companies are often used by share investors who for some reason wish their identities to remain undisclosed or who simply require another party to manage (or hold as custodian) their investments.

Non Contributory Pension
An occupational pension where the employee does not make any type of contribution. It is entirely funded by the employer.

Normal Retirement Date
Refers to the date when benefits can normally be taken from a pension scheme, as defined in the rules of the plan.

Not Contracted Out
Someone who has not contracted out of State Second Pension.

Occupational Pension Scheme
A pension scheme provided by an employer for its employees. Occupational pension schemes are mainly 'defined benefit' or 'defined contribution'.

Off Balance Sheet
Referring to financial commitments or liabilities that do not generally appear in a company`s balance sheet (e.g. operating leases or derivative contracts).

Off Market
Relating to a transaction which occurs outside a formal market – e.g. transactions in unlisted securities or transactions involving listed shares which were not executed on a stock exchange. Off market transactions are conducted through negotiation rather than an 'auction' system.

Offer
The price at which a person or company is willing to sell (Also known as Ask). For example, a seller will present their stock for sale at the offer price. As a buyer, you will buy at the offer (or Ask) price.

Offer To Bid
Compares the original purchase cost or offer price –usually of a Unit Trust –with its bid price, the price you receive if you sell.

Offer To Offer
Compares the original purchase cost or offer price – usually of a Unit Trust – with its current offer price.

Offshore
Basically, anywhere out of the country not within the authority of the Inland Revenue.

Offshore Sector
The group of funds all registered outside the UK.

Ombudsman
See Financial Ombudsman

OPAs
The Pensions Advisory Service – an independent organisation which gives free advice to members of the public who have a problem with an occupational pension scheme or a personal pension scheme. It does not give financial advice or advice on state scheme benefits.

Open Market Option
An option to move the value of your pension fund at retirement to an insurance company to purchase a pension income known as an Annuity. Normally used to gain a higher annuity rate.

Opening Price
The price at which a security commences trading at the opening of a trading day.

OPRA
Occupational Pensions Regulatory Authority.

Optimisation
A mathematical process which creates a compromise between conflicting objectives (e.g. between maximising return and minimising risk). An optimisation program will identify the asset mix which is likely to give the highest return for a given risk level, or alternatively, the lowest risk portfolio to achieve a desired return. See also Portfolio Optimisation.

Optimised Portfolios
The various optimised portfolios have been designed to be appropriate for investors with a certain attitude to risk and for specified investment periods. These portfolios were derived using an adapted version of the standard efficient frontier methodology and Tillinghast Towers Perrin`s Global CAP:Link asset model. Certain marketing and reasonableness constraints were placed on the resulting portfolios, e.g. the extent of overseas holdings was limited to be in line with market practice and assets with very similar characteristics were combined. The portfolios will therefore not necessarily be on the theoretical efficient frontier. However, given the difficulty in predicting future experience, this is unlikely to be significant and is likely to be outweighed by the benefit of having a more stable and widely accepted asset allocation.

Option
An agreement which conveys the right to the holder to buy (receive) or sell (deliver) a specific security at a stipulated price and within a stated period of time. If the option is not exercised during that time, the money paid for it (but no more than that amount) is forfeited. See also Call Option.

Ordinary Residence
For the purposes of taxation an individual may be ordinarily resident in the UK although he or she is not physically resident in a particular tax year .The term ‘ordinary residence ‘is broadly equivalent to habitual residence. If an individual is a resident in the UK year after year, he or she is ordinarily resident here and liable for UK tax.

Ordinary Shares
Securities which represent an ownership interest in a company. If the company has also issued preference shares, both have ownership rights. The preference shareholder normally is limited to a fixed dividend, but has prior claim on dividends and, in the event of liquidation, assets. Ordinary shareholders assume the greater risk, but generally exercise the greater control and may gain the greater reward in the form of dividends and capital appreciation. If the company is wound up, the ordinary shareholders generally rank behind secured creditors, including debenture holders, in the liquidation process.

Outperformance
Achievement of a higher investment return than a benchmark or other measure against which that return is being compared. For example an equity fund would be said to have outperformed the index if the fund achieved a 5% return against a 3% return by the index over the same period (As opposed to Underperformance).

Overfunding
Where a pension arrangement has assets which exceed those required to meet its liabilities.

Overweight
Having a greater exposure to a particular sector or stock in an investment portfolio compared with a neutral or benchmark position (As opposed to Underweight).

Package Trade
A transaction involving the purchase and/or sale of an entire portfolio or basket of securities rather than individual securities alone. Often used to manage index funds, and occasionally to arbitrage between physical and derivative securities.

Paid-up Benefits
A preserved benefit which is secured for an individual member of a pension scheme or the policyholder of a life assurance policy where premiums have ceased to be payable in respect of that member.

Passive Management
An investment approach which aims to mirror or ‘track` the performance of a financial index. This is normally done by either investing in the exact constituents of an index or by taking a representative ‘sample` of that index. The managers of the fund have lower expenses than active fund managers, and the charges to investors are therefore lower.

Penny Shares
Term used to describe Shares with a low value, usually under £1 per Share; very often high-risk Shares.

Pension
A regular income paid to a person after they have retired. Also used to describe a plan or scheme that is set up to provide a pension or other retirement benefits.

Pension Annuity
An insurance policy that pays out an income during retirement. The Annuity is bought with savings made before retirement e.g, from a Personal Pension or Occupational Pension Scheme. This can also be known as a Compulsory Purchase Annuity.

Pension Fund
General term used to describe the investment fund built up in a pension plan and used at retirement to purchase an Annuity to provide a continuing income.

Pension Transfers
Refers to the current value of a pension plan that can be transferred from one approved scheme to another approved scheme. The value is transferred direct from one employer or pension provider to another.

Pensionable Earnings
Earnings on which benefits and contributions in a pension scheme are calculated.

Pensionable Service
Period of service with a company that is used in the calculation of pension benefits

Pensioneer Trustee
An independent professionally recognised trustee. It is a mandatory requirement for a small self-administered pension scheme to have one.

Pensions Ombudsman
The Pensions Ombudsman deals with disputes about entitlement and complaints about maladministration from members of occupational pension schemes and personal pension schemes. The Ombudsman`s role also includes investigating complaints between trustees of occupational pension schemes and employers, and between trustees of different occupational pension schemes, or between trustees of the same scheme.

Percentile
A statistical measure representing the ranking of a particular figure or outcome on a scale comprising 100 equal groups. See also Quartile.

Performance Management
A form of analysis that attempts to compare investment manager performance. It can be critically affected by the time period selected and while some attempts have been made to look at risk adjusted returns, generally it is very difficult to assess the quality of those returns. Good performance measurement should include: analysis of performance over a business cycle (typically 3-5 years) and assessment of returns on a quarterly basis, ideally by sectors as well as total returns; ensuring that like is being compared with like – the best way to do this is to look at each manager`s benchmark, or risk profile, and compare performance against the benchmark, preferably on a sector basis; and analysis of the reason for any extreme out-or-under performance in a given period (e.g. whether a large overweight position exists in one or a few securities or a sector).

Performance Since Launch
The performance of an investment or fund since inception to the given date.

Performance to date
The performance of an investment over a given period of time calculated to the most recent update date.

Persistency
A measure of how long a policy holder keeps their policy with an insurer.

Personal Allowance
The level of income above which income tax starts to be levied.

Personal Equity Plan (PEP)
Introduced in 1987 and designed to promote saving by UK investors who are 18 or over. A limited amount could be invested each year. Personal Equity Plans (PEPs) are simple, flexible investment plans which invest in the stockmarket and benefit from special tax advantages. There is no minimum or maximum period for which investments must be held. These plans were replaced by ISAs from April 1999, but existing PEPs can remain in force.

Personal Pension Plan
An arrangement, often in the form of a policy from a life insurance company, under which individuals can make contributions without the need for employer contribution.