Copy of `HSBC - glossary of banking`

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


Qualitative analysis
Determining the value of an investment, by examining its intrinsic quality. Can be more subjective than quantitative analysis.

Quantitative analysis
Use of mathematical techniques to make investment decisions based on current price relationships rather than national future values.

Quartile
Relative ranking (in one of four quarters) of a particular portfolio (or a manager) in a league table of returns. So for example, a quartile ranking of 2 indicates that the portfolio's/manager's return was ranked in the second highest quarter of the range of results of the stated league table. Similarly, a quartile ranking of 4 indicates that the portfolio's/manager's return was ranked in the lowest 25% of the range of results. Pension schemes sometimes set an investment objective of upper quartile, which is a ranking of 1, making the portfolio's/manager's return in the top 25%.

Rally
A sustained period of rising prices. Usually a rapid rise over a short period of time.

Real assets
Investments that are expected to appreciate by an amount correlated to the rate of price inflation. They are normally assets whose performance is linked to the level of economic growth. For example, equities, index-linked bonds and property are often considered to be real assets.

Redemption
The date at which a bond issuer pays back the sum borrowed (principal) to the bond holders.

Retail Price Index (RPI), (RPIX)
The most common measure of inflation in the UK. A basket of representative goods in the market is priced on a regular basis to monitor the rate of price growth.

Retained earnings
Company earnings that are reinvested rather than paid out as dividends.

Return
Usually a percentage which takes account of the income generated and the increase in value of a security over a given period, such as a year. Often confused with yields, which only takes account of the income received.

Return On Equity (ROE)
Company earnings divided by net asset value.

Reuters
Provides, amongst other things, market and investment information including continuous share price information.

Rights issue
New shares issued by a company and offered to existing shareholders in proportion to their holdings. For example a one-for-three rights issue allows each shareholder to buy one new share for every three held. Rights issues are a means of raising additional funds to finance acquisitions, for capital investment or to reduce debt.

Risk premium (premia)
The expected rate of return above the risk free interest rate.

Risk tolerance-appetite
Extent to which an investor is prepared to accept volatility or short-term risk in a portfolio to achieve higher returns.

Risk-free rate of return
Yield on a risk-less investment (generally one that has a government backed guarantee). The average three month interest rate is usually taken as a measure of the risk-free return against which other riskier assets are measured.

Scrip dividend
Payment of dividends in the form of additional shares rather than cash.

Scrip issue
Issue of free shares to existing shareholders in proportion to their holdings. Also known as a bonus issue or capitalisation issue.

Secondary market
Where investors buy and sell from each other rather than from the issuing company.

Security or securities
A tradable instrument representing ownership (stocks, shares), a debt agreement (bonds) or rights to ownership.

Segregated portfolio
Investment portfolio which is managed on behalf of a single client where each asset can be identified as being owned by that client.

Sensitivity analysis
Analysis using mathematical tools to test the impact of change in a particular variable that may impact on a portfolio's return or risk profile. Also used in security analysis.

Settlement
The exchange of securities between buyer and seller and the corresponding transfer of money between the two contractual parties. Settlement is usually preceded by confirmations on, among other things, the date and method of exchange and payment.

Settlement date
The date on which a security transaction is settled, i.e. payment is made and securities are physically received and delivered or beneficial ownership records are changed in Central Security Depositaries.

Sharpe ratio
Measure of the total risk/reward trade-off calculated as the excess return over a risk free rate of return divided by the variability/volatility of the asset or security. The higher the number the greater the reward relative to risk.

Short selling
Selling stock not owned. The investor usually expects the stock value to fall, making a profit by buying shares back at a lower price. Can also refer to holding proportionately less of a security in a portfolio than its level in an index. See also Long.

Small cap stock
A relatively small company in terms of the value placed on it by the stock market. See market capitalisation. In the UK, a company outside the FTSE 350 Index.

Soft commission
The practice of brokers providing services and software in lieu of cash. Currently under scrutiny following the Myners Review.

Specialist management
Where an investment manager's mandate is restricted to a specific asset class or sector, for example UK equities, only.

Spot exchange rate
Exchange rate for immediate delivery.

Spot interest rate
Interest rate quoted on any one day for loans made that day.

Spreadlock
An agreement that fixes the spread between the forward price of an interest rate swap and the underlying bond yield.

Stakeholder
A type of UK Government-endorsed pension arrangement introduced in 2001. Stakeholder schemes must meet certain standards covering charges, employee access and terms. Generally, employers must make a stakeholder scheme available to their employees (if numbered greater than five) unless they are covered by another employer-sponsored scheme.

Stamp duty
Tax paid by the purchaser on the transfer of certain types of asset, for example, UK equities and property.

Standard deviation
Measure of variability of returns and therefore a guide to risk. A measure of the degree to which an asset's return deviates over a specific period. Typically, investors can expect a bond's standard deviation of returns to be lower than that of an equity.

Stock lending
Lending of stock from one investor to another that entitles the lender to continue to receive income generated by the stock plus an additional payment by the borrower. It is used as a means of increasing returns from assets, but adds to risks as the lender may be exposed if the borrower defaults.

Stock selection
Selection by investment managers of a portfolio of stocks in a particular market or sector, usually based on technical or fundamental analysis. It is designed to achieve a return superior to the overall market or sector.

Stock specific risk
The risk arising from the stock positions in a portfolio relative to a benchmark or index.

Strategic asset allocation
Development of a long-term asset mix that is expected to meet the investor's return objectives at an acceptable level of risk. See also tactical asset allocation.

Strip
Bond that does not pay any income. This increases the bond's duration (risk) relative to a bond with similar term that does pay income. See also zero coupon bond.

Style
Approach followed by an active investment manager in selecting stocks, e.g. value or growth.

Sub-custodian
Any company/institution providing custody administration services on behalf of other custodians who may not have an operation in the country concerned.

Swap
An instrument designed to permit investors to exchange interest rate and/or currency risk on a notional loan for their mutual benefit.

Tactical asset allocation
Short-term deviation from a long-term strategic asset allocation to exploit expected short-term relative movements in markets.

Technical analysis
Attempts to predict share price movements on the basis of past patterns. See chartist.

Time weighted rate of return
Rate of return on an asset or a portfolio that adjusts for the effect of cash flows. The time-weighted return can be used to compare portfolios' performance against each other and against market indices, since it is unaffected by the size and incidence of external cashflows (which are outside the manager's controls). See also money weighted rate of return.

Top down
Approach to investment management that gives priority to the identification of the macro-economic impact on a portfolio or stock. See also bottom up.

Total return
Overall return on a stock or portfolio taking into account changes in capital values and income earned.

Tracking error
Measure of the variability of investment returns relative to a benchmark or index. It is calculated as the standard deviation of the monthly or quarterly relative returns.

Trustee
Individual or organisation responsible for the management and administration of a trust, for example a pension scheme, on behalf of the beneficiaries of that trust.

Turnover
Measure of the level of trading in a market or portfolio.

Underweight
Exposure of a specific asset (or asset class ) which is lower than the proportion it represents in the market index or benchmark against which the portfolio is measured. Investment managers may take underweight positions in shares or sectors they expect to underperform in order to add value to the portfolio.

Unit linked fund
Usually a pooled fund operated by a life assurance company or provider of investment products where the value of an investor's holding in the fund is represented by the number of units held multiplied by the unit price. See also with profits.

Unit trust
Pooled fund that is established under trust. If there is a demand for units, the manager creates more units for sale to investors. If investors wish to redeem their units, the manager buys them back and cancels them. The change in price is driven by changes to the value of the portfolio rather than supply and demand.

Value investment
Approach to investment, that places emphasis on identifying shares which are believed to be under priced (on the basis of indicators such as price/earnings ratio and dividend yield) by the market.

Venture Capital (VC)
Investment in a new or start up company that is at a relatively early stage of development and is not listed on a stock exchange.

Volatility
Variability of the price of a security, market or asset class. The greater the extent of price movements the greater the volatility. It is used as a measure of investment risk as it aims to quantify the likelihood of an asset or portfolio falling in price just prior to liquidation.

Voting rights
The entitlement of an ordinary shareholder to participate in the running of a company by voting on resolutions.

Warrant
A call option issued by a company whose stock serves as the underlying security.

Weighted Average Maturity (WAM)
The average maturity of securities held in a fixed income or money market fund.

Withholding profits
A type of pooled investment where the investor shares in the profits of a life company in the form of bonuses. Growth in the portfolio is not linked directly to the growth of units held. In recent years bonuses have been very low or nil and this is not currently a popular way of investing.

Withholding tax
Tax retained at source, generally on dividend and interest income.

Working capital
The short-term assets a company has at its disposal to produce further assets. These include items such as cash, accounts receivable, inventory and marketable securities. The amount by which these exceed the company's short-term liabilities is the net working capital or net current capital.

Yield
Usually refers to the income yield which is the income obtained on the asset divided by the price or market value of that asset. Income yield does not take into account any capital change whereas the redemption yield of a bond does.

Yield curve
Redemption yield plotted by maturity date. Shows the relationship between yields and terms to maturity for a set of bonds.

Yield spread
The difference in yields available on different types of bond, for example government and corporate bonds.

Zero balancing-Zero balance account
A cash management technique whereby small balances are transferred from a high-yielding account into a low-interest-bearing cheque account safely to meet the needs of presented cheques.

Zero coupon bond
A bond that pays no coupons. It is sold at a discount to its face value and matures at its face value. See also Strip.