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

A document giving all of the details of the agreement between the insured and the insurer.

Policy Conditions
The ‘small print ‘of a policy, which sets out the rights and responsibilities of the parties involved.

Policy Fee
Generally an administration fee usually charged monthly or annually.

Policy Holder
Generally taken to mean the owner of the policy.

Political Risk
The uncertainty in return on a foreign investment due to the possibility that the foreign government might take actions which are detrimental to the investor`s interests.

Pooled Investments
Any form of investment in which a number of individuals place their money with a professional manager to manage the total fund on their behalf and produce a return to them individually. Also known as Collective Investment.

The collection of investment holdings of a particular investor usually with reference to its composition – i.e. the mix of different classes of securities, such as bonds, property, shares and cash, or if in a single asset class, the mix of different sectors and stocks.

Portfolio Construction
The process of identifying which asset classes to invest in, and in what proportions.

Portfolio Manager
A person or organisation engaged to manage investment portfolios and make investment decisions on behalf of others. Also known as an Investment Manager.

Portfolio Optimisation
The process of selecting an investment portfolio that minimises risk for a given level of return, taking account of a) expected return; b) variances of expected return; and c) covariance of return with every other security under consideration.

The total of an option trader`s open contracts in a particular underlying security;A market commitment. For example, a purchaser of a futures contract has a long position, while a seller of a futures contract has a short position.

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

Potentially Exempt Transfer
Gifts on which Inheritance Tax will not be payable unless the donor dies within seven years.

Pound Cost Averaging
The term used to describe the effect of paying a fixed regular amount into a unitised investment fund where the value of units fluctuates. The amount will purchase more units when prices are low and vice versa. Over the longer-term, the average cost per unit is likely to be lower than the average unit price over the period.

Power of Attorney
A Power of Attorney is a legal document whereby one person (the 'Donor') gives another person or persons (the 'Attorney') the power to act on his or her behalf with regard to his or her property and financial affairs.

Preference Shares
Shares which rank before ordinary shares in the event of liquidation of the issuing company and usually receiving a fixed rate of return on the unfranked investment. See also Ordinary Shares.

The amount of money an individual pays into a saving or investment product, as either a lump sum or a regular payment.

Premium Frequency
How often the premium is paid, e.g. monthly or annually.

Present Value
The current value of an investment which matures in the future, after discounting the maturity at an assumed rate of interest and adjusting for the probability of its payment or receipt.

Preserved Benefits
When leaving employment after at least two years as a member of an Occupational Pension Scheme, pension benefits accrued to date must be preserved within the scheme or transferred to another pension scheme. If less than two years ‘service, members of the pension scheme can take a refund of any personal contributions, less certain deductions.

Price Series
A fund may have a number of price series assigned to it. Each one will generally have a different charging structure which will give rise to different prices over a period of time.

Price-Earnings Ratio (PR)
A stock`s market price divided by its current or estimated future earnings per share; a fundamental measure of the attractiveness of a particular security versus all other securities as determined by the investing public. The lower the ratio relative to the average of the stockmarket, the lower the (market`s) profit growth expectations. Also called Earnings Multiple.

Primary Market
The market in which securities are sold at the time they are first issued. (As opposed to Secondary Market).

Private Sector
The part of the economy owned/operated by corporations and individuals outside the public sector. Split by economists into households and business.

The alteration of the legal and management structure of a Government trading body (e.g. a statutory authority) to permit private equity or ownership.

Profit and Loss Account
A financial statement showing the earnings and expenses of a company over a given reporting period (as distinct from a balance sheet, which shows the company`s assets and liabilities at a set point in time).

Program Trading
A synonym for index arbitrage, or for package trading.

In the finance industry, the term refers to real estate including land and buildings that can be bought, sold or leased.

Protected Rights
If you're employed you can normally contract out of State Second Pension. One option is to contract out using a Personal Pension, Stakeholder Pension or a Money Purchase Occupational Scheme. This means that you give up your right to benefit from State Second Pension for the period you are contracted out. As a result, your State Second Pension benefit will be reduced. In return, the Inland Revenue sends your selected pension provider a rebate of part of your own and your employer's National Insurance contributions. These are invested in your plan and the fund that this produces is called Protected Rights. There are special rules about the benefits you can get from Protected Rights and when they can be taken e.g. you cannot usually take your Protected Rights benefits before age 60.

Protection Overlay
A portfolio management technique by which an investment manager aims to protect the capital value of a portfolio through risk management techniques, such as dynamic hedging.

A written authorisation given by a shareholder to someone else to vote his or her shares at a shareholder`s meeting. Fund management agreements often delegate the authority to the investment manager to exercise proxy votes on behalf of the client. See also Corporate Governance.

Public Sector
The part of the economy which is made up of Government enterprises and activities. The public sector includes public service departments, essential services such as health, education, transport and defence. See also Private Sector.

Purchased Life Annuity
An Annuity bought with private savings (not pension savings). Part of the Annuity is deemed to be interest paid on the capital and is taxed. The other part is considered to be a return of capital and so escapes tax.

Put Option
An option giving its purchaser the right, without the obligation, to sell an asset at a specified price (the exercise price) at any time between the purchase of the option and its expiry date. See also Call Option.

Qualifying Policy
A Qualifying policy is a policy which pays out its proceeds free from personal taxation. In order to qualify it needs to adhere to the following Qualifying rules.

Quantitative Management
An approach to investment management which seeks to use statistical or numerical methods to create efficient portfolios, with the optimum risk/return trade-off. Quantitative managers generally attempt to add value by exploiting pricing anomalies, or by providing particular levels of risk control, rather than by subjective forecasting of market behaviour.

The division of a spread of values divided into four. A statistical division generally used in financial services to denote performance of, say, a particular type of fund. Comparisons of similar funds are shown in a league table, which is divided into four quarters or quartiles.

The percentage of a portfolio`s total return explained by market movements.

A brisk rise following a decline in the general price level of the market or an individual share.

The difference between the highest and lowest prices recorded during a given trading session, week, month, year etc.

Rate of Return
The yield earned in relation to a capital amount invested.

Real Estate
Property in land, building or housing, as distinct from personal property (e.g. cars); also known as physical property to distinguish itself from Property Trusts.

Real Interest Rate
The nominal interest rate less the prevailing rate of inflation.

Real Return
An inflation-adjusted return.

To sell an asset (usually when it appears to have appreciated to the maximum extent that can be reasonably expected).

The return of a proportion of a payment which effectively reduces the total outlay or obligation.

Rebate-only Personal Pension
A Personal Pension which is made up solely of the National Insurance rebates, payable by the Inland Revenue, where the member has elected to contract out of SERPS or the State Second Pension.

Redemption Fee
A fee charged for the redemption (i.e. withdrawal/cashing in) of units in a unit trust. Also known as Back-end Load.

Redemption Penalties
A penalty that has to be paid when a customer decides to move lender. Usually they apply within the term of a fixed rate, capped or discounted mortgage.

Redemption Yield
The Redemption Yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures.

Reduced Allocation
Method of recouping initial expenses when setting up a unit-linked policy, whereby only a proportion of the investment is allocated to the policy for the first few years.

Reduction In Yield
The amount by which an insurance company ‘s charges can be expected to reduce the investment return on a policy.

Restoration of deflated prices to a desirable level. When Governments reflate, additional money is printed, adding to the supply of money in circulation.

Repurchase Agreement (Repo)
An agreement under which authorised dealers in the short-term money market transfer securities to the Reserve Bank in exchange for cash, on the basis that the transaction will be reversed at a later date on the agreed terms. The transaction can also occur in the opposite fashion (reverse repo). The main purpose of these arrangements is to allow the Reserve Bank to manage liquidity in the money market.

The proportion of a company`s profit not distributed to shareholders as dividends; An account kept aside by the trustees of a pension fund to cover declines in asset values or investment returns.

Retail Price Index (known as RPI)
A monthly indication of the average price changes to a particular ‘basket` of consumer goods, and used as a general indicator of price inflation.

Retained Benefits
Pension benefits earned in previous employment that are taken into account when determining Inland Revenue limits for a member of an Occupational Pension Scheme.

Retirement Annuity
An annuity contract offered by insurance companies for individuals not in pensionable employment or the self employed which is approved under Chapter II part XIV of ICTA 88.

Retirement Date
This is the date that you choose to retire at.

The amount of money in income and capital growth received annually from an investment, usually expressed as a percentage.

In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must provide higher expected yields if investors are to be attracted to them. Risk can take any forms, but a major one is valuation risk – paying too much for an asset. See also Currency Risk, Exchange Rate Risk, Market Risk, Political Risk, Volatility.

Risk Evaluator
The Risk Evaluator is a tool provided by Skandia which compares the volatility of fund sectors. The sectors have been arranged in ascending order according to their volatility numbers which have been calculated over 5 years and the entire range has been divided into ten segments, each representing 10% of the range with 1 being least volatile and 10 being most volatile. The sectors have been placed into the relevant segment, depending on where their volatility numbers fall. Each segment has been colour coded to represent the risk associated with each sector.

Risk Management
The monitoring and controlling of various risk factors in an investment portfolio with the aim of minimising volatility of investment returns.

Risk Premium
The extra yield over the risk free rate demanded by investors to compensate them for holding a riskier asset. This is an extremely important concept in relation to setting a long-term asset mix. See Equity Risk Premium.

Risk Return
Risk is a measure of the variability of return. Return, in financial terms, represents the profit - in the form of income and capital appreciation on an investment. The Risk / Return trade off is where an investor is willing to accept greater risk in order to pursue greater returns. The optimum position is the top left hand corner of the matrix, which represents the highest return and the lowest risk.

Risk-Free Asset
An investment with no chance of default, and a known or certain rate of return.

Roll-over Relief
A tax concession, which allows investors and businesses to defer the payment of Capital Gains Tax. For example, if proceeds from the sale of a fixed asset are reinvested, Capital Gains Taxis not payable until the new asset is sold.

Roll-up Funds
An Offshore Investment fund that does not distribute its dividends. An important definition for classification and taxation purposes.

Running Yield
Equal to the annual income payable on a bond as a percentage of its current market price.

S & P 500
A United States stockmarket index, maintained by Standard & Poors.

State Second Pension

Salary Sacrifice
A tax-efficient method of increasing the money paid into a pension scheme by giving up existing salary or proposed salary increases, so that the sum foregone can be used as an additional company contribution into a pension scheme.

Satellite Funds
These funds are often used to complement the Core Funds in an investor`s portfolio. They tend to be more specialised and have a higher risk/return profile.

A graph illustrating the annualised risk and return performance of a fund or investment manager for a specific period (greater than one year). Risk is measured by standard deviation on the horizontal axis with return on the vertical axis. A point of risk and return for each fund or investment manager is plotted, creating a number of scattered points.

Examination of various securities, usually through computer models, to identify certain predetermined factors such as valuations, earnings, liquidity, etc, with a view to the inclusion of those securities in an investment portfolio.

Secondary Market
Any market in which existing securities are traded (as distinct from the primary market, in which securities are first issued). The Stock Exchange is the secondary market for share trading.

Section 226 (Retirement Annuity)
Prior to 1 July 1988, people not in pensionable employment (employment where no pension scheme exists) or people who were self-employed were able to qualify for tax relief for contributions made to a pension scheme known as a Retirement Annuity under Section 226 of the Income and Corporation Taxes Act 1970. This was the forerunner to the Personal Pension Scheme.

Section 32
Used widely to describe a buy out bond issued under Section 591 (2) (g) of ICTA 88.

A sector is a grouping of funds with a similar investment objective and make up.

Sector Averages
Sector Averages denote the average performance of all funds within a particular sector. Sectors are governed by the Association of British Insurers for Life and Pension funds and by the Investment Management Association (IMA) for MultISA, MultiPEP and MultiFUND investments.

Sector Index
The sector performance shown on fund factsheets and U-Skan reports takes into account the contributions of all existing funds the sector comprises of and is therefore referred to as the 'sector index'. This is a more accurate way of representing the sector performance over time. As a result, the sector index performance may not match the straight average of the existing sector members, as the latter will not take into account the performance of new funds which have entered the sector during the nominated performance period and which would have affected the sector index performance. Over a long period these differences will be cumulative, resulting in wider divergence between the sector index and the straight sector average. Occasionally, the sector index figures may fall outside of the maximum and minimum performances of the current inhabitants of the sector.

Sector Risk Number
These numbers are used to compare the volatility of fund sectors. The sectors have been arranged in ascending order according to their volatility numbers which have been calculated over 5 years and the entire range has been divided into ten segments, each representing 10% of the range with 1 being least volatile and 10 being most volatile. The sectors have been placed into the relevant segment, depending on where their volatility numbers fall. Each segment has been colour coded to represent the risk associated with each sector.

A term used to describe stocks and shares.

In relation to financial markets, the paper right to a (generally tradeable) asset. In this context the term includes Bills of Exchange, bonds, share certificates or any other interest-bearing paper traded on financial markets; An asset pledged to ensure the repayment of a financial obligation (e.g. loan), and forfeited in the event of a default on that obligation.

Segregated Fund
Pension scheme investments managed along side, but separately from, other investments under control of a particular manager

Seller`s Market
A condition of the market in which there is a scarcity of goods available, and hence, sellers can obtain better conditions for sale or higher prices. (As opposed to Buyer`s Market).

Selling (Bid) Price
The price at which you can sell Shares or units in a Unit Trust or units in a life policy.

Part of an employee`s National Insurance contributions goes into SERPS (State Earnings-Related Pension Scheme), which is paid on top of the Basic State Pension on retirement. The SERPS pension, payable when you reach State pension age, depends on your earnings while you were in employment and the National Insurance contributions paid. SERPS is paid in addition to the Basic State Pension. This was replaced by the State Second Pension in April 2002

In relation to share trading, an arrangement between brokerage houses for the payment or receipt of cash or securities. It represents the final consummation of a securities transaction and is handled through a clearing house.

Settlement Date
The date on which the final consummation of a securities transaction takes place and payment is made.

Settlement Risk
In relation to foreign exchange transactions, the exposure of one party to another on the value date of the contract. It is the risk that one party, having received settlement of one currency amount from the counterparty, is unable to effect settlement of the other currency amount.

SFC Recognised
Indicates that a fund is regulated by the Securities and Futures Commission of Hong Kong.

The ownership of part of a company; a contract between the issuing company and the owner of the share which gives the latter an interest in the management of the corporation, the right to participate in profits and, if the company is dissolved, a claim upon assets remaining when all debts have been paid. See also Equity.

Share Capital
The money paid (subscribed) for ordinary and preference Shares in a limited company. Authorised share capital means the total amount of Shares available to be issued. Issued share capital relates to the total amount of Shares actually subscribed for.

Share Certificate
A piece of paper representing legal evidence of ownership of a stipulated number of shares in a company. Also known as Scrip.

Share Exchange
Owners of Unit Trusts may use Shares they already own to make an investment without having to sell them first. This saves dealing charges.

Share Holder
The owner of one or more issued shares of a company who is normally entitled to: a proportionate share of the issuing company`s undivided assets; dividends when declared by the directors; and the right of proportionate voting power.

Share Option
An offer by a company, usually to its employees and directors, to buy its Shares at a given price, before a specified date. A number of approved share option schemes offer tax-free capital growth.

Share Price Index
An index measuring movements in the price of shares, but not of their dividends (as opposed to an Accumulation Index, which measures movements in both price and dividend income).

Share Register
A register recording all of a company`s shareholders and the number of shares they each hold.