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HSBC - glossary of banking
Category: Economy and Finance > Investing
Date & country: 30/09/2007, UK
Words: 267


Accrued interest
Interest that has been earned but not yet paid.

Accumulating Net Asset Value (ANAV)
A method of compensating money market fund investors through increasing the value of each fund unit rather than through paying a dividend.

Active management
An approach to investment management which aims to outperform rather than match a particular market index or benchmark through asset allocation and/or stock selection decisions. See also index tracking fund and passive management.

Active risk
The risk arising from active management in excess of the risk that would be incurred if the portfolio were passively managed.

Actuary
Adviser on financial issues relating to risk, probabilities and mortality, most frequently in relation to the financing of pension schemes and insurance companies.

Added value
Performance in excess of a stated benchmark or index.

Alternative investments
Investments that do not fit into the mainstream areas of equities, bonds, cash and property and which normally form a small proportion of a portfolio. Examples are private equity/venture capital and hedge funds.

American Stock Exchange (Amex)
An exchange covering stocks not large enough for inclusion in the New York Stock Exchange (NYSE).

Annual Percentage Rate (APR)
The full cost of debt that is paid by borrowers, expressed as an annual percentage.

Annuity
An annual allowance. Normally paid in the form of a pension.

Arbitrage
Profiting from differences in price when the same security, currency or commodity is traded on two or more markets. By taking advantage of disparities in prices between markets, arbitrageurs are making these markets trade more efficiently.

Asset allocation
The distribution of investments across categories of assets, such as equities, bonds and cash or across sectors in a single asset class. Asset allocation affects both risk and return and is a central concept in financial planning and investment management.

Asset class
Category of assets, for example, equities, bonds, property and cash.

Asset-backed Securities (ABS)
Bonds backed by a pool of assets, such as car loans or credit card receivables.

Authorisation
Required by the Financial Services Act 1986 (FSA86) for any firm that wants to conduct investment business in the UK. In November 2001, the FSA86 was replaced by the Financial Services and Markets Act (FSMA). The body regulating the UK market is the Financial Services Authority (FSA).

Back office
Administration and support functions including records, legal, accounting and compliance office.

Balanced management
An investment portfolio that has exposure to all of the main asset classes and which may include alternatives.

Bargain
Another word for transaction or deal. It does not necessarily imply that a particularly favourable price was obtained.

Basis point (bp)
1/100th of 1 percent, or 0.01 percent. Therefore 100bps = 1%.

Bear
Person who expects market prices to decline or stagnate. Such a person or view is often called bearish. See also bull.

Bear market
Sustained decline in market prices. See also bull market.

Benchmark
Measure against which a portfolio's performance is assessed. For total assets, the benchmark may be customised or be a peer group average or median.

Beneficial owner
The underlying owner, who enjoys the benefit of owning a security or property.

Best execution
Best execution is more than the achievement of the 'best price' and, while not insignificant, price alone cannot reflect all the requirements of a customer order and other relevant costs must also be considered. Factors that need to be taken into account in best execution are order type, size, settlement arrangements and timing, together with any other conditions set by the customer.

Beta
Statistical measure of how sensitive a security or portfolio is to movements in the market index. For example, a security with a beta of 1 is expected to give the same return as the index. Higher beta stocks or portfolios (beta greater than 1) are expected to outperform in rising markets and underperform in falling markets. Low beta stocks (beta less than 1) are considered to be defensive stocks.

Bid price
Price at which a security or a unit in a pooled fund can be sold. See also offer price.

Bid-offer spread
Percentage difference between the buying (offer) and selling (bid) price of a pooled fund unit or a security.

Bloomberg
Company which provides market and investment information including real-time share price information.

Blue chip company
Informal term for a large, well-known company with a long record of profit growth, strong branding and consistent record of paying dividends.

Bond-debt
A tradeable loan issued by a borrower for a fixed period of time paying interest, known as the coupon, which is fixed at the issue date and is paid regularly to the holder of the bond until it is redeemed at maturity when the initial loan (principal) is repaid.

Bonus issue
Also known as a capitalisation issue or scrip issue. This is when a company issues free shares to its existing shareholders in proportion to their holdings. No money changes hands and the price of each share falls to maintain the value of the holding. This is usually done to make the shares more tradeable.

Book value
Value at which a security is recorded on a balance sheet, usually the cost of buying it, less any depreciation. If securities have been acquired at different times and different periods, the book value will reflect the average buying cost. See also market value.

Book-entry system
An accounting system that allows the transfer of claims (e.g. securities) without the physical movement of paper documents or certificates.

Bottom up
Approach to investment management that gives priority to the identification and selection of companies to build an optimum investment portfolio. This approach places emphasis on stock selection within a portfolio. See also top down.

Broker
An individual or firm that acts as an intermediary between buyers and sellers, usually for payment of a commission. It may also buy securities to sell for a profit while fulfilling its role as a dealer.

Bull
Someone who expects market prices to climb or rally. Such a person or view is often called bullish. See also bear.

Bull market
Period of sustained stock market growth. See also bear market.

Call option
The purchaser of a call option has the right, but not the obligation, to buy an asset at a specified price on or before an agreed date. See also put option.

Capital Asset Pricing Model (CAPM)
An economic model for valuing stocks. The simplest version states that the expected excess return of a security over a risk-free rate of return is a function of its beta.

Capital Gains Tax (CGT)
Tax that may be due following the sale of an asset at a profit.

Capital market
Any financial market upon which securities are traded. Examples are the London Stock Exchange, the New York Stock Exchange and the Paris Bourse.

Capitalisation
Total market value of securities issued by a company, industry, sector or market(s). It is calculated by multiplying the market price per security or share by the number of securities issued.

Capitalisation issue
Another term for a bonus issue or scrip issue.

Chartist
Individual who studies charts of movements in financial and economic indicators and stock market prices. The aim is to predict future changes in stock market prices and thereby identify cheap stocks.

Chinese wall
Separation of activities in a financial institution to prevent confidential and price sensitive information from passing from one area to another. For example, it is normal practice to separate corporate finance, stockbroking and fund management.

Clean accounting basis
Where the market value of an asset(s) excludes any income or dividends that are due to an investor but have not yet been paid.

Collar hedge
A means of stabilising portfolio returns by obtaining protection against a major decline in portfolio value in exchange for sacrificing part of the portfolio's appreciation in a major rally. A collar hedge can be achieved through a combination of put options and call options.

Commercial paper
Short-term debt issued by banks, corporations and other borrowers. The debt is unsecured and is backed only by the company's reputation. It is like an I.O.U. with interest.

Commission
Fee paid to a stockbroker for buying or selling a security, usually a percentage of the cost. Commission varies across markets and between brokers.

Commodity
Bulk goods traded on an exchange. Examples are gold, silver, platinum, coffee, grain and sugar. Anything mined is a hard commodity, anything grown is a soft commodity.

Compliance office
The team responsible for ensuring that a company acts within the rules and regulations established by Parliament and the regulator.

Concentrated portfolio
A portfolio having a relatively small number of securities. This relative lack of diversification is normally considered to be a more risky but potentially higher rewarding approach.

Consideration
Value of a securities transaction before dealing costs are taken into account.

Constraints
Limits or restrictions imposed on an investment manager in relation to particular securities, sectors or markets. Constraints may be imposed for various reasons, for example risk reduction or ethical considerations.

Continuous Linked Settlement (CLS)
A global real-time settlement system for foreign exchange transactions. It aims to eliminate the currency risk that arises when purchasing a security in one time zone that is traded and settled in a different time zone due to delays caused by the time difference.

Contract note
Written record of an agreement to buy or sell securities.

Convertible security
Any security such as a bond that, under certain conditions, the owner can opt to convert into another security, such as an ordinary share.

Core-satellite investment
The partitioning of a pension scheme's asset between a core portfolio of lower risk holdings and a more actively managed (satellite) portfolio.

Corporate bond
Security issued by a corporation (as opposed to a government) promising to pay interest to the holder of the bond until it is redeemed at maturity when the principal amount is repaid. Also referred to as credit.

Corporate governance
The means by which shareholders govern the management of a company through the use of voting powers.

Country allocation
Integral part of an asset allocation process that emphasises desired weightings in particular countries and geographic regions.

Coupon
The interest rate payable (usually six-monthly) on a bond based on the value of the amount loaned.

Credit
Non-government bonds, including corporate bonds.

Credit rating
Rating given to a company or institution by a credit rating agency as an indication of the likelihood of default on its bonds or other debt. The highest (most favourable) rating is AAA (triple A).

Credit risk
The risk of a company defaulting on its debt by missing capital (principal) or interest payments (coupon).

Credit spread
Difference in the yield available on a corporate bond compared to a Government bond of similar maturity. Credit spreads will generally be higher for companies with lower credit ratings to compensate investors for the additional risk undertaken.

Currency hedging-Currency overlay
Reduction or elimination of exchange rate risk using forward contracts, future contracts or options.

Currency option
A derivative giving its holder the right, but not the obligation, to buy or to sell a certain amount of a foreign currency at a predetermined price on a specified date.

Custodian
A company which is responsible for the safekeeping of assets, income collection and settlement of trades. Ideally the custodian is independent of the portfolio manager's company.

Cycle
Economies go through periods of expansion and contraction called cycles. A typical market cycle would start with a period of low economic activity and low confidence, causing inflation and interest rates to fall. These low interest rates stimulate economic activity. As the economy improves, company earnings rise, giving an impetus to share prices. This expanding economy puts upward pressure on inflation; company earnings are hit and share prices slump. This then leads to the start of another cycle. Cycles vary in intensity and duration.

Cyclical stock
Security that is sensitive to movements in the business cycle, for example, financial stocks (that are generally interest rate sensitive) and capital goods (commerical machinery, vehicles, building materials). See also defensive stock.

Debenture
Loan made to a company secured against assets of the company.

Debt-Equity ratio
A company's debt divided by its issued share capital. A high ratio can pull the share price down, as the company will probably have to seek additional funds from shareholders. See also gearing.

Defensive stock
Security that is less sensitive to movements in the business cycle. An example could be utility stocks that usually show steady performance and income, irrespective of the stage of the business cycle. See also cyclical stock.

Defined Benefit (DB)
Pension arrangement where the benefits payable to members at retirement are clearly specified, usually as a percentage of salary at or near retirement. The employer contributions that are required to ensure that this commitment can be met will vary depending on the scheme's experience (investments, mortality and leavers) and the benefits to be provided. Final salary is the main type of Defined Benefit.

Defined Contribution (DC)
Pension arrangement where the rate of contribution paid by the employer and/or the employee is defined (usually as a percentage of salary). The benefits paid to members will depend on the contributions paid into the scheme on behalf of the member, the investment return earned on those contributions and the terms available for converting the fund into a pension at retirement. Also known as money purchase. The resultant pension benefit is dependent on the investment return achieved by the member's assets.

Derivatives
Derivatives are the collective term applied to certain types of financial instruments such as future contracts, swaps and options. They represent contracts between two parties and their value depends on the price of some other assets.

Devaluation
Formal reduction in the value of a currency against other currencies.

Dilution
Effects on earnings per share and book value per share if all convertible bonds were converted into shares and all warrants or stock options were exercised.

Dilution recovery-levy
Amount levied on a transaction (sale or purchase) of units in a pooled fund to ensure that existing unit holders do not have their investment performance reduced due to transaction costs resulting from significant cashflow in to or out of the fund.

Dirty accounting basis
An accounting methodology that includes any coupon income and dividends that are due to the investor, but have yet to be paid.

Discount broker
Stockbroker who charges low commission rates and usually gives very little advice.

Discount note
A short-term bond (with a maximum maturity of 360 days) issued at a discount to its par value. It pays out no interest but investors receive par value upon maturity. Also called a zero coupon bond.

Discount rate
Rate of interest used to express a future value or stream of income in today's money values.

Diversification
Risk reduction achieved by spreading investment across a range of assets or a range of securities in the same asset class.

Dividend cover
Company's total earnings divided by the total amount it has paid in dividends for a particular period. This is an indication of a company's ability to meet its dividend payments.

Dividends
Regular payments from earnings by companies to their shareholders. The level of dividend payment is decided upon periodically by company management.

Duration
Average time-weighted life of the payment streams from a bond taking into account the present value of each payment. Duration is a measure of interest rate sensitivity, the longer the duration, the more sensitive the price of the bond to changes in interest rates. Closely matching durations of assets to the liabilities of a pension fund aims to minimise the risks inherent in changes of interest rates.

Earnings
Net profits of a company available for distribution to shareholders.

Earnings Per Share (EPS)
Company's annual earnings divided by the number of shares it has issued.

Earnings yield
Company's earnings per share divided by its current share price. This is the inverse of the price/earnings (P/E) ratio.

Economic indicator
Statistic which gives an indication of the performance or trends in a certain element of an economy. A commonly used indicator in investment analysis is price inflation.

Economist
Person who analyses trends in economic data and forecasts factors such as economic growth, likely trends in interest rates and inflation, to determine the impact of such factors on financial markets.

Emerging market
Stock market in a developing or newly industrialising country. Such markets can deliver high returns due to the rapid pace of industrialisation, but can be risky due to low liquidity and political instability.

Equities
Commonly used term for ordinary shares.

Equity risk premium
The extra return required to invest in equities rather than a risk free asset to compensate for the additional risk/volatility associated with equities.

Ethical investment
Ethical investment is the term given to investments in companies making a positive contribution to an ethical issue or avoiding a negative contribution. Such issues could include the environment, arms or cigarette manufacturing.

Euroland-eurozone
There are 12 countries which have so far entered the European Monetary Union (EMU). They are Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.

European Monetary Union (EMU)
See Euroland/Eurozone.

Excess return
The return in excess of a benchmark return.