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


Exchange rate
Measure of the value of one country's currency compared to another.

Final salary
See Defined Benefit (DB).

Financial Services Authority (FSA)
The Financial Services Authority (FSA) is the designated agency taking on the responsibilities of the Financial Services Act. It was formed in 1985 and has a constitution like any other company. In order to gain a balanced view, the governing body of the FSA comprises a mixture of both practitioners and users of the market.

Fixed interest bond
A bond where the regular interest payment or coupon amounts are specified at the time of issue. See also index-linked bond and floating rate note.

Floating Rate Note (FRN)
A bond or loan instrument whose interest varies in line with short-term interest rates.

Flotation
First issue of shares by a company on a stock exchange. Also known as an initial public offering (IPO)

Forex
An abbreviation for foreign exchange, the market where currencies are traded.

Forward contract
Contract to buy or sell an asset at an agreed price in the future. See also futures contract.

Forward exchange rate
Exchange rate fixed today for the purchase or sale of a currency at some future date.

Forward interest rate
Interest rate fixed today on a loan to be made at some future date.

Front office
Dealing, research, client service and marketing activity of an investment management company. See also middle office and back office.

FTSE All-Share Index
The Financial Times Stock Exchange Index for the main UK stock exchange. It covers about 700 companies, across a wide range of market capitalisations. It was established with a base value of 100.00 on 10 April 1962.

Fundamental analysis
An attempt to determine the true value of a security by examining all the factors that impact on its price and the way that price moves. The aim is to decide whether the market price reflects future expectations. Also called qualitative analysis.

Futures contract
An agreement between two parties under which the seller promises to deliver a specific asset to the buyer on a specific future date for a predetermined price to be paid on the delivery date.

GDP-GNP
Gross Domestic Product/Gross National Product. Measures the amount of goods and services (product) created each year. GDP measures the product of the inhabitants of a particular country. GNP measures the product of the nationals of a particular country. GDP is GNP plus the foreign investment earnings of nationals.

Gearing
a. From an accounting point of view, the amount of a company's total borrowings divided by its share capital. High gearing means a proportionately large amount of debt that may be considered to be more risky. b. In investment analysis, a highly-geared company is one where small changes in underlying conditions produce big swings in profits. Gearing can be financial, or operational if, for example, a company has large fixed overheads. c. In terms of a portfolio of assets, gearing the portfolio means borrowing cash to purchase more assets so that the exposure to this asset is greater than the value of the original portfolio. Instead of borrowing, contracts are often used to gear a portfolio.

Gilt (-edged)
A bond issued by the UK Government. Given the nature of the issuer there is a very low probability of default.

Growth stock
Company that is expected to achieve above average earnings growth. Growth stocks normally have a high price/earnings ratio relative to the market as a whole, as investors anticipate that earnings will increase in the future.

Hedge fund
Fund which seeks to generate investment returns by using investment strategies and tools such as short selling, leverage, program trading, swaps, arbitrage and derivatives. Returns tend to be unrelated to equity markets.

Hedging
Action taken to protect the value of a portfolio against a change in market prices. It is usually used to reduce, minimise, or eliminate risk although similar techniques can also be used to speculate in a market.

High yield bond
A bond that has been given a relatively low rating by independent agencies. Investors are offered a higher rate of return for taking on the additional risks.

High yield stocks
Shares which have a higher than average dividend yield or those where a relatively high proportion of the total return is derived from dividend income. Typical examples of high yield stocks are utilities.

HOLT
Software used by some investment managers to calculate and assess, amongst other measures, Cashflow Return on Investment (CFROI).

Index
a. Measure updated regularly that gives a representation of the movement in value of a particular market or a specified group of securities. b. List of prices or other characteristics representing a particular group of goods or services which give an indication of movements over time, for example, the Retail Price Index (RPI), the average earnings index and the retail sales index.

Index linked bond
A bond where the future interest payments and the final redemption proceeds are linked to an index e.g. the Retail Price Index. Such stocks provide some protection against inflation where fixed interest bonds may not.

Index-tracking fund
Investment fund which aims to match the returns of a particular market index. The fund may hold all the stocks in the particular index or, more commonly, use a mathematical model to select a sample of stocks that should perform as closely as possible to the index. Sometimes referred to as passive management.

Industry sector
Companies listed on stock exchanges are usually categorised according to their principal area of activity, for example, banks, telecommunications, oils, pharmaceuticals and retailers.

Inflation
A measure of the rate of increase in either prices or earnings. In the UK, price inflation is usually measured by the movement over time in the Retail Price Index.

Information ratio
The number of units of excess return generated for each additional unit of risk taken

Initial public offering
The first sale of stocks when a company decides to go from private to public ownership.

Insider trading
Knowingly trading in shares when in possession of price-sensitive information that is not known to the market.

Institutional funds
Assets managed by investment banks, life assurance companies and fund management companies on a collective basis for corporate clients rather than private individuals. Includes pension schemes, insurance funds, unit trusts and investment trusts.

Interest rate
Rate of interest. Usually linked to movements in the Bank of England base rate in the UK.

Interest rate swap
An agreement between two parties where one party exchanges a fixed regular payment in return for a variable payment linked to an interest rate.

Internal Rate of Return (IRR)
An accounting method for calculating the return achieved on a (potential) investment. The higher the IRR the more attractive the proposal.

Investment analyst
Individual who specialises in the analysis of companies and their performance. An analyst normally gathers information by reading company annual reports, researching the product markets in which a particular company operates, visiting manufacturing sites and meeting with key company personnel.

Investment committee
An appointed sub-group of a pension scheme's trustee board responsible for various aspects of the scheme's investment strategy.

Investment consultant
Organisation or individual that advises on investment matters, such as the appointment of investment managers, performance measurement and asset allocation strategy but is not normally involved in the management or trading of securities.

Investment grade bond
Corporate bond that has been given a relatively high rating by the credit agencies. Offers higher expected returns than government bonds/gilts as a reward for taking on additional risk. Also known as credit, the rating rank from AAA (highest) to BBB (lowest).

Investment management firm
Organisation that invests assets for third parties.

Investment objective
The result desired by an investor or fund. It may be expressed as a specific performance target relative to the benchmark over a specified time period (e.g. to outperform the benchmark by 1% pa over particular time periods) or as a general statement of intent.

Investment performance
Total return earned on a portfolio of assets over a particular period.

Investment performance measurement
Calculation and analysis of investment performance usually including a review of asset allocation and stock selection. Returns may be compared with a benchmark or index or with the actual returns achieved by other managers or portfolios.

Investment risk
a. Chance that a loss will be sustained on an investment through company failure, default on loans, fraud or other factors. b. The volatility of movements in the value of a security or market usually measured by the standard deviation of returns over a given period.

Investment strategy
An investor's long-term distribution of assets among various asset classes taking into consideration, for example, the goals of a pension scheme's trustees, their attitude to risk and time-scale.

Investment trust
A closed-end vehicle that buys and sells stocks and shares in selected companies including other investment trusts with the aim of making a profit for its own shareholders. Changes in the price of units are driven by supply and demand owing to the limited supply of units.

Junk bond
Corporate bond that has been given a low rating by credit rating agencies. Junk bonds offer higher expected returns to compensate for the increased risk and are graded below BBB.

Leverage
Use of borrowed money to increase returns. See also gearing.

Liabilities
Payments due to be made (e.g. future pension payments).

LIBID (London Interbank Bid Rate)
An interest rate at which banks borrow from each other for periods ranging from overnight to five years. Set at one eighth of a percent (0.125% or 12.5bps) below LIBOR.

Lifestyle
The adjustment of a member's defined contribution (DC) scheme asset allocation in line with a predetermined strategy, linked to the member's term to retirement. The aim is to manage risk for each individual member and at the same time maximise the potential for growth over a member's working life. Typically, as retirement approaches, the money in individual accounts is gradually switched automatically into investments which reduce the various investment risks to which members are exposed.

Limited Price Indexation (LPI)
A measure of retail price inflation (RPI) with a cap of 5%pa and floor of 0% pa. Often used to limit future pensions increases following retirement.

Liquid asset
Asset that can be readily and inexpensively turned into cash.

Liquidity
a. The ability to convert an asset to cash quickly. The degree to which this can be done without affecting the price of that security. b. Cash management.

Listing particulars
When a company applies to be listed as a member of the Stock Exchange and have its share price quoted, it has to give detailed information about itself which is published in the form of a prospectus.

Long bond
Bond that usually has at least ten years to run to maturity.

Long-long position
The buying of a security with the expectation that it will rise in value. Also, the act of holding proportionately more of a stock in a portfolio than its level in an index. See also short.

Long-short strategy
Buying stocks you have a positive view on and selling stocks you have a negative view on, generally through the use of deriviatives.

Macro economics
The study of how the 'bigger picture' economic factors behave and how this affects stock markets.

Management charges
Fees levied by investment managers, usually in the form of a percentage of assets under management.

Manager structure
The combination of one or more managers to invest a specified pool of assets.

Mandate
Description of the type of service that an investor requires of a manager. For example, high-risk global equity management.

Mark-to-market
The act of recording the price or value of a security, portfolio or account to calculate profits and losses. Usually carried out daily.

Market capitalisation
The market value of an entire company, calculated by multiplying the number of shares outstanding by the price per share.

Market maker
Organisation that deals in securities. Market makers quote buying and selling prices for the shares in which they wish to deal.

Market risk
Level of risk in the market that cannot be eliminated by diversification. The risk that a market (or index) will fall in value.

Market value
a. The price at which a security is trading and could presumably be purchased or sold. b. What investors believe a firm is worth calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.

Maturity
Length of time until the last interest payment and the principal of a bond is redeemed.

Median
That which lies in the middle. For example, a median performance among a universe of five managers would be the third ranked manager. A median return is not the same as the mean and may be above or below it depending on the distribution of returns in the sample.

Mid market price (Mid price)
The average value of the bid price and offer price of a security or fund unit.

Middle office
The teams responsible for managing risk, information technology and calculating performance, profits and losses.

Momentum
Extent to which stock market values are supported by a strong level of investor interest and changing prices.

Money market
Market for short-term loans and cash deposits.

Money purchase
Alternative term for Defined Contribution (DC).

Mutual fund
A pool of capital provided by small as well as institutional investors and invested in a portfolio of securities. There are two types of mutual funds: open-ended and close-ended mutual funds. While close-ended mutual funds have a predetermined amount of capital to be invested, open-ended mutual funds do not. See also investment trust and open-ended investment company.

Myners Report-Review
Report on Institutional Investment produced by Paul Myners in Spring 2001.

Net Asset Value (NAV)
Company assets less all liabilities also known as shareholders' funds.

Net Present Value (NPV)
Refers to the present value of an investment based on the calculation of its future cash flows minus the costs. See internal rate of return (IRR).

Netting
An agreed offsetting of positions or obligations by trading partners or participants. The netting reduces a large number of individual positions or obligations to a smaller number of obligations or positions, thereby reducing the overall credit, liquidity and settlement risk. Netting may take several forms that have varying degrees of legal enforceability in the event of default of one of the parties.

Nominal
The face value of a bond, usually expressed in single or hundred currency units (e.g. ?G1.00, $100.00). It is the value that the coupon is based on and is not necessarily the same as the price at which a bond is purchased. Also called the par value.

Offer price
Price at which a security or a unit in a pooled fund can be purchased. See also bid price.

Option
Right, but not obligation, to buy or sell a security at an agreed price within an agreed time period. The right to buy a security is known as a call option; the right to sell a security is known as a put option.

Ordinary share
Share in the ownership of a company that gives the holder the right to receive distributed profits and to vote at general meetings of the company. An ordinary shareholder ranks behind all other creditors/investors if the company is wound up.

Overweight
Exposure to a specific asset (or asset class) which is higher than the proportion it represents in the market index or benchmark against which the portfolio is measured. Investment managers generally may take overweight positions in shares or sectors they expect to outperform in order to add relative value to the portfolio.

Par value
The face value of a bond and the amount that will be paid back to the investor on maturity. Prices of bonds rise and fall in line with supply/demand factors and should not be confused.

Passive management
Investment approach which aims to match the returns on a particular market index. See index tracking fund.

Performance attribution
Process which aims to weight the sources of over or under performance to the different steps taken in the investment management process, such as asset allocation, stock selection, currency

Performance measurement
The calculation of a fund/scheme's historic return on its investments. This can be performed on total assets or on individual asset classes. For the purposes of analysing a manager's performance relative to benchmark, performance is calculated on a time-weighed rate of return basis which is unaffected by the size and incidence of external cashflow (which are outside the manager's control).

Performance related fee
Management fee determined by the degree of over or under performance relative to an agreed benchmark.

Pooled fund
Vehicle in which a number of investors (including pension schemes) pool their assets so that they can be managed on a collective basis. This usually suits investors with limited resources wishing to invest in a broad spread of investments. Holdings in a pooled fund are denominated in units that are repriced regularly to reflect changes in the value of underlying assets. This allows investors to value their holdings and provides a basis upon which transactions in units can take place.

Portfolio
A collection of financial assets.

Portfolio manager
Usually a member of an investment management team who is responsible for ensuring that client portfolios are invested in accordance with agreed mandates and are kept in line with the asset mix specified by the investment team. The portfolio manager may also be responsible for client reporting and relationship management.

Preference share
Type of share which gives the holder a potential entitlement to a fixed rate of dividend and, in the event of a company wind up, ranks the holder ahead of ordinary shareholders as a creditor. The dividend, although guaranteed, is generally less than that paid to ordinary shareholders.

Price earnings (P-E) ratio
Indicator of the value of a stock calculated as a company!

Primary market
The main market for the purchase and sale of an investment.

Principal
The amount borrowed or still owed on a bond.

Private equity
Investment in unquoted companies, often at an early stage of development, with a view to making a profit by a subsequent flotation or sale to a trade buyer of the business.

Program trading
Computer driven, automatically created securities trades that are triggered when the market price reaches a pre-determined level.

Property
Investment in land and buildings. Usually let out for a rental income to retail and industrial/office tenants.

Put option
The purchaser of a put option has the right, but not the obligation, to sell an asset at an agreed price within an agreed time limit. See also call option.