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An accepting house specialises in guaranteeing bills of exchange.
An amount owed to a company or individual in respect of goods or services received.
An amount due from a company or individual in respect of goods or services provided.
An interest-rate cap on an increasing principal.
A swap in which the principal increase over time.
Accrual rate is the fraction used to express the rate of build-up of a final salary pension scheme fund. Sixtieths and eightieths are the most commonly found rates. Therefore, if you are a member of a sixtieth scheme, the accrual rate is 1/60th of your final salary per year. On this basis if you were a member of the scheme for forty years you would be entitled to 40/60ths or two-thirds of your final salary as a pension. Due to the prohibitive costs of final salary pension schemes, increasing numbers of employers are switching to money purchase schemes.
Accruals are expenses incurred in a period for which no invoice has been received at the period end. As the cost relates to the period, it must be charged to the profit and loss account for that period.
The benefits due from a pension scheme in respect of service up to a particular time.
Represents income earned in the year for which an invoice has not been received at the year end.
The purchase of shares or investments over a period of time on a gradual or steady basis.
Units in a unit trust where any income due from the underlying investments is reinvested in the fund, either by increasing the value of existing units or allocating additional units.
Active market describes a market that is liquid due to the supply and demand of shares and the number of market makers trading the shares. Due to the liquidity, the bid-offer spread is likely to be narrow on such shares.
Actuaries Share Indices
The FT-SE actuaries share index offers a benchmark to measure the performance of a portfolio or sector against the market, a particular index or another sector. The movement of each component is based on the movement of the underlying stocks on a weighted average basis. The value of each index is shown for the close of the previous day, the prior three days and a year ago, together with the days change. Other indicators are dividend yield, dividend cover, price/earnings ratio and the total return. There is also a quarterly valuation index which shows the market capitalisation for the same categories, as at the end of the quarter and the previous two quarter ends. The weighting of each index and sector is given as a percentage of the all-share index.
Predominantly working in the life insurance and pensions sector, an actuary determines the rates at which such products are priced. These are based on numerous factors including life expectancy.
Additional Voluntary Contribution
A member of an occupational pension scheme can choose to make extra payments to increase their pension at retirement known as an additional voluntary contribution (avc). These contributions are typically held within a low risk product such as a savings account. This additional pot forms part of the occupational pension scheme and is subject to the scheme rules. For independence and greater choice of investment funds, a free-standing additional voluntary contribution (fsavc), is an option.
Advance Decline Ratio
The advance decline ratio is the ratio of the number of companies whose share prices have risen against the number whose prices have fallen. This is for a specific period of time.
After Hours Trading
Transactions made on a market after its official closing time. These trades are recorded the following day.
After Tax Basis
The calculation of returns after any tax has been deducted.
A takeover bid that is supported by the majority of shareholders in the target company.
Is the amount of the investment (eg pension) that is actually used to purchase units. As charges are often higher in the earlier years of a policy to cover set up costs, not all monies will be invested. For example an allocation rate of 90% means only 90% of the investment value will actually be used for investment purposes.
When an issue of new shares are allotted to subscribers. If the shares have not been oversubscribed, an applicant will receive all the shares they applied for. Otherwise the shares will be allocated on a pro-rata basis in line with the level of oversubscription.
Alternative Investment Market
The alternative investment market (AIM) was established by the London Stock Exchange in 1995 as a replacement for the unlisted securities market. It is a junior market to the FTSE where smaller companies and companies with a few years trading history can get listed and raise capital for future growth and development. The regulations are less onerous than for companies with a full listing on the FTSE. For investors there are tax advantages to holding shares in AIM listed companies as they are classed as unquoted. This advantage needs to be weighed up against the fact that the shares are a more risky investment when compared to their FTSE counterparts. Also because there are fewer market makers, the shares are less liquid and the bid/offer spread is likely to be greater.
A person who receives an annuity is called the annuitant. The annuitant pays a lump sum to the life insurance company in return for a regular income. If this money is from the annuitant's own funds, it is called a purchase life annuity. If the money is from a maturing pension fund, it is called a compulsory purchase annuity. There are numerous options to structure the regular payments. Each variable such as frequency of payment, guarantee period, escalation rate, together with gender, age and life expectancy will determine the level of payment made to the annuitant. For example over a twelve-month period you will receive a higher return from an annuity paid quarterly in arrears versus an annuity paid monthly in advance which is guaranteed for five years.
Arbitrage is the purchase and sale of the same stock, currency or commodity in two separate markets. Here the arbitrageur takes advantage of the price differential in the two markets to make a profit.
Where a company is acquired with the purpose of selling off all or a large percentage of the assets it owns. If all the assets are sold it means the value of individual assets are greater than the purchase price. If selling off only some of the assets, the aim will be to raise enough cash to cover the purchase price, meaning the remainder of the business has be acquired for nothing.
Dealers in shares have an obligation to trade at the best possible price when the deal is made. Therefore stock purchases must be done at the lowest possible price and stock sales must be made at the highest possible price.
Automatic Funds Transfer
The electronic transfer of funds from one account to another, or to an investment.
Back End Load
The final charge made by an investment trust for example, when an investor sells shares in the fund.
The part of a financial institution that deals with administration and compliance rather than trading.
The balance sheet is one of the fundamental statements in the annual report and accounts. The balance sheet shows a company's financial position at a particular point in time, that is at its year-end date. The top half of the balance sheet shows assets minus liabilities to give net assets. The bottom half shows shareholders funds, being share capital plus retained profit, that is the capital employed. For the balance sheet to balance, net assets must equal the capital employed.
A bill of exchange issued or guaranteed by a bank.
A stock that is seen as a good indicator of the state of a market as a whole.
A bear market describes a market that is falling. A bear is someone who believes the market will fall and will sell shares with a view to buying them back at some point in the future at a lower price.
A bond that is seen as a good indicator of market prospects.
The beta value allows analysts to compare the movement in price of equities against the market or a particular index. If a share has a beta value of less than one, it is lower risk than the market but the return it generates is also likely to be lower than the market. Conversely if a share has a beta value of greater than one, it is higher risk but has a greater chance of out-performing the market.
The bid price is the price at which investors will sell a stock. The buying price for investors is known as the offer price. The differential between the two, the bid-offer spread, is the margin that the market maker makes on trading the shares.
Bill of Exchange
An unconditional written order requiring the drawee to pay a specified sum of money to the bearer on a specified date. A bill of exchange is transferrable.
A block is a large quantity of shares or securities.
A bond is a security issued by a government, local authority or company. Variations include fixed interest, variable interest, short term, long term, secured, unsecured and there are many more.
A bonus issue is an issue of new shares to existing shareholders in proportion to their existing shareholding. For example a 1:3 issue will give the shareholder one new share for every three shares currently held. The aim of a bonus issue is to have more shares in issue so the market price will reduce. This in turn makes the shares more tradable.
The Building Society Act 1986 enabled building societies to offer the same products and services as banks. The difference between the two is that building societies are owned by their members where as banks are public limited companies. Supportes of mutuality have argued mutual organisations can offer higher returns to their customers because no money is returned to shareholders. Of course this doesn't always ring true and several building societies have demutualised and become listed companies.
A sterling denominated bond issued by a foreign owner.
A short term trading technique whereby a stock is bought early on day one and sold before the markey closes on the same day. Here the objective is look for early gainers in the 'biggest winners' list. Select a share that has started to rise, say around 5%, within an hour or so of the market opening. Again this is likely to be a smaller company or technology stock. Buying this early gives the opportunity of further gains when brokers and larger institutions begin to take note of the rising prices and decide to purchase the stock. Sell the stock before the end of trading on the same day so positions are not held overnight.
A short term trading technique whereby a stock is bought late on day one and sold early on day two. Study a 'biggest winers and losers' list for a period of time and it is likely the same names will appear and trends wil emerge. Wait for a stock that has fallen at least 10% - 20% in one day for no apparent reason. This will happen because of events outside the company's control, rather than issuing a profit warning for example. The biggest losses will probably be witnessed for technology stocks or smaller companies. Very often the prices of these stocks bounce back the following day once the market realises the stock has been oversold, and will represent a good buying opportunity. Therefore buy the stock with the required level of loss late in the trading session on day one and sell early the following day once the rest of the market has started to buy. Hopefully a nice profit has been made on the deal.
A demand to pay a specified amount of money on or before a specified day.
Amounts put into the money market that can be called at short notice.
The cancellation price is the price at which a unit trust will redeem units.
A measure of a financial services organisations' financial strength. Limits and risk weightings are applied to the balance sheet to derive a net assets figure from a regulatory perspective. This figure must be greater than the minimum capital required.
Capital employed is the amount of capital or funds used by the business. The components of capital employed differ depending on which definition you refer to. Some will only include shareholders funds, whilst others will include long-term borrowings and possibly even overdrafts, as they represent funds within the business used to generate profit.
The withdrawal of capital from a country due to a loss of confidence in its government.
The medium to long term, fixed and floating rate securities market.
A building society customer who opens an account in the hope the building society will demutualise and pay a windfall of cash or shares.
An analyst who uses technical analysis and charts to help predicts future share prices and movements.
A company which belongs to the clearing house in the futures market.
Closed End Fund
A closed end fund is a fund that has a limited number of shares in issue. An example being an investment trust.
Short term, unsecured bills issued by commercial organisations. As they are unsecured the organisation usually has a good credit rating. Commercial paper may be used to defer the use of long term finance.
Compound Reversionary Bonus
A bonus added to a with profits life assurance policy, normally on an annual basis. Such bonuses are not guaranteed to be paid but once declared by the life company they cannot be taken away. A compound reversionary bonus is where the bonus is not only based on the initial sum assured but also any attaching bonuses to date.
A bond that can be exchanged for another security e.g. equity after a set date. This benefits the issuer who can hold a relatively secure investment in a risky enterprise and convert it to equity if it becomes profitable.
Convexity measures the rate of change in a bond's sensitivity to interest rate moves.
Cost of Capital
The cost of capital is the return required by the providers of capital, be it debt or equity. Often the weighted average cost of capital (WACC) is analysed, whereby returns for all sources of capital are determined in proportion to the total amount capital of the business.
The coupon is the annual interest rate of a bond. This rate is fixed and payable until the bond matures.
Credit risk is the risk that a counterparty will default on a transaction, be it in whole or in part.
creditor days = (average creditors / credit purchases) * 365 Creditor days show the length of time the company takes to pay its suppliers. This should be in line with the company's policy whilst taking advantage of any early payment discounts.
A cross rate is the rate of exchange between two currencies not including the US Dollar.
current ratio = current assets / current liabilities The current ratio shows how easily a company could raise funds to satisfy its short-term creditors if they all required paying immediately. Ideally the ratio should be at leat 1:1 to ensure there are sufficient assets to meet liabilities. The ratio should not be too high, say 2:1, as this would indicate cash is not being used to full effect. As current assets include stock, the quick ratio (also known as the acid test ratio) is often preferred, as the stock may be slow moving and not readily realisable.
Cyclicals are stocks or bonds whose fortunes follow business or macro economic cycles. When the economy and hence demand is strong, the stock performs well. The opposite is true when the economy is struggling.
A security that has a fixed redemption date.
Day trading is buying and selling investments in a very short period of time. As the name suggests this is on the same day, however both trades might be carried out within minutes of each other. Tha day trader will base decisions on technical analysis or charting, the most common being Japanese candlestick charts.
Dead Cat Bounce
Dead cat bounce refers to the temporary rise in price of a stock or market following a substantial fall. It is said that even a dead cat will bounce if it falls from a great height.
Debt Equity Swap
Where the provider of debt finance accepts equity finance as a replacement. The means the company does not need to pay fixed interest on the capital. Consequently such a transaction normally takes place when the company is experiencing difficulties.
debtor days = (average debtors / credit sales) * 365 Debtor days show the length of time it takes customers to settle their accounts. If the credit control function is effective in chasing debt this figure will be in line with companies debtor policy. It should be lower if the company offers early payment discounts.
A deep market is one in which a large number of transactions do not impact the precie of security or stock.
Defensive stocks are relatively low risk stocks. When the market is on a downward trend, prices of defensive share tend to remain stble. This is because there is a demand for their products irrespective of current economic conditions. Stocks in the utilities sector are examples of defensive stocks.
Is income received in advance of the period in which it is earned. It must be carried forward as a liability on the balance sheet until it has been earned, when it is credited to the profit and loss account.
Reducing the gearing ratio by lowering the percentage of debt finance.
The process where a mutual organisation such as a bulding society becomes a public listed company. Organisations that demutualise offer windfalls to members in the form of cash or shares in the newly listed company.
A charge made to the profit and loss in respect of the diminution in value of an asset. Depreciation aims to match the cost of the asset over the period in which it helps genrate income.
A financial instrument whose price and performance is linked to that of an underlying security.
Share dealings by directors in their own company can indicate what they think the future prospects of the company are. Generally a director who buys shares obviously sees the purchase as a good investment, which would suggest the possibility of a price increase. For a sale of shares, the opposite is true. This is particularly so if the amounts involved are significant, the deal is made by the chief executive or finance director, or there are several directors dealings within a short space of time. However, there are other valid reasons for the deals that do not reflect the company's performance. For example a newly appointed director might be expected to buy shares. Also a director can reduce their tax liability by selling shares on an annual basis and taking advantage of capital gains tax allowances. Directors cannot deal in the shares up to two months after any results have been announced. Directors can also not deal when they are in possession of information that would inpact on the share price. The latter point could be difficult to validate, as a director will always have a level of knowledge about the company that is not readily available in the market.
Regarding an investment trust, the discount is the amount by which the middle-market price per share is lower than the net asset value per share.
Discounted Cash Flow
Discounted cash flow calculates the present value of cash flows by considering the time value of money.
Diversification is to have a broad spread of investments. This might be investment types such as cash, bonds and equities. Also it could relate to an equity portfolio whereby stocks are held in several companies in different sectors.
A payment made by a company to its shareholders. Dividends are not guaranteed as they are paid out of retained earnings after all other expenses and interest. A company that constantly pays a growing dividend is usually well regarded by the market. New companies or growth stocks are likely to pay little or no dividends.
dividend cover = earnings per share / net dividend per share Dividend cover demonstrates how secure a company's dividend is. For example if an investor has purchased shares for income then a high level of dividend cover gives confidence that a dividend will continue to be paid in the future
When a shareholder waives their right to a dividend. This is usually by a done major shareholder when the company is experiencing difficulties.
dividend yield = net dividend per share / current market price Dividend yield measures the company's dividend policy rather than performance. For example growth stocks will choose to reinvest income in its business activities rather than return money to shareholders. However some businesses may traditionally pay high dividends but have insufficient profits to do so in the future. Investors can use this ratio to decide if the stock matches their investment criteria.
Earnings are usually expressed as profit after tax but before ordinary shareholders dividends.
Earnings Per Share
earnings per share = earnings / average number of ordinary shares A key ratio that shows an investors return per share. It is an easy ratio to use to compare different companies or holdings within a portfolio. However you must be consistent in determining what constitutes earnings. One option is to take profit after tax. Alternatively earnings could be adjusted for any exceptional gains and losses.
EBITDA stands for earnings before interest, tax, depreciation and amortisation. Taking out these amounts aids comparison between companies as profits can differ significantly depending on whether acquisitions have been made during the year or a company has significant fixed assets. EBITDA is also an approximate measure of operating cash flow as it strips out depreciation and amortisation which are non-cash items.
Effective Annual Rate
Calculated as the total interest earned in the year divided by the capital amount at the start of the year, expressed as a percentage.
A life insurance and savings policy taken out for a fixed term. The sum assured is payable at maturity or on death if earlier. Traditional endowment policies were on a with-profits basis. Each year a reversionary bonus is added to the sum assured and a terminal bonus is added at maturity. Neither bonus is guaranteed. Endowments were often sold in relation to interest only mortgages, whereby the policy would repay the capital at the end of the mortgage period. In recent years the sum assured plus bonuses has not been sufficient to repay the capital and so endowment mortgages are less popular.
Equity relates to the ordinary shares of a company. Dividends paid are not guaranteed but there is also the prospect of capital appreciation The holder of equity has an interest in the residual value of the entity should it cease to trade.
Equity finance is the capital raised from ordinary shares.
ERNIE stands for electronic random number indicator equipment. ERNIE is the machine that generates numbers that are matched against premium bond holders to determine who the monthly winners are.
A Eurobond is a bond underwritten by banks and investment firms from several different European countries. They are sold to investors outside the country whose currency pays the principal and interest.
Even Par Swap
A swap with two bonds that have the same par value.
A service offered by stockbrokers that does not include any advice or management. This service allows the investor to buy and sell shares only at a relatively low cost.
The par value or nominal value printed on the face of a security.
An institution whose creditworthiness has declined considerably.
Fat cat describes a very high earning director or executive of a company. The term is normally used when a director continues to take bonuses even when the company hasn't had the best of years.
A dividend is a payment made by a company to its shareholders. Dividends are not guaranteed as they are paid out of retained earnings after all other expenses and interest. The final dividend is the end of year dividend and is normally of higher value than the interim dividend.
The final salary calculation is used to dermine an employees pension entitlement from a defined benefit pension scheme. There are two methods to derive a member's final salary. The first takes the highest annual income from any of the five years prior to retirement. The second takes the average of three consecutive years from any of the ten years prior to retirement. Income is classed as total remuneration.
First Line Reserves
Reserves held by a central bank for intervention in the currency market should it be required.
Flotation is the process where a private limited company or nationalised industry becomes a public limited company and whose shares are subsequently traded on the Stock Exchange.
The footsie is the name for the Financial Times Share Index. The FTSE 100 contains the one hundred largest companies by market capitalisation. The shares are often referred to as Blue Chips.
A foreign exchange contract exchanges funds in one currency for funds in another currency at an agreed rate on an agreed date.
Foreign Exchange Risk
Foreign exchange risk arises when a financial institution holds assets and liabilities in a currency other than its base currency. The institution is therefore at risk to movements in either the spot or forward exchange rate.
A contract at an agreed price for a commodity which is delivered on a specified date. The forward guarantees supply and also the price to be paid.
Franked Investment Income
Dividend income that has had tax paid. UK dividends are paid net of basic rate tax, with no further tax to pay for the basic rate taxpayer. Non-taxpayers can no longer recover this tax credit.
Free Cash Flow
The cash flow that is available to the owners or potential providers of capital, after any reinvestment in the existing business. It is calculated by taking the operating cash flow and adjusting for taxation, capital expenditure, acquisitions and disposals. Free cash flow is the cash flow usually used in company valuations.
Reserves of a financial institution that are above those calculated to be required by the regulator.
A member of an occupational pension scheme can choose to make extra payments to increase their pension at retirement known as an additional voluntary contribution (avc). These contributions are typically held within a low risk product such as a savings account. For independence and greater choice of investment funds, a free-standing additional voluntary contribution (fsavc), is an option.
FTSE stands for Financial Times Stock Exchange.The term is used to describe the main equity market in the UK. The FTSE is actually several weighted average indices that are used to measure the performance of its component stocks. For example example the FTSE-100 includes the top 100 companies listed in the UK by market capitalisation.
An agreement to buy or sell a fixed amount of a commodity at a fixed price and on a fixed date.
A technique used in technical analysis to try and predict price cyles in financial markets.
gearing = debt / equity or gearing = debt / debt + equity Businesses will analyse their weighted average cost of capital to determine what is the optimum ratio of debt and equity. However shareholders will prefer the percentage of equity to be considerably greater than the percentage of debt. This is because any increase in profits will then be attributable to shareholders. Also interest on debt must be paid irrespective of profit levels where as dividends can be waived.
Gilt Edged Securities
Gilt edged securities are fixed interest securities issued by the government, making them a very safe, low risk investment. Gilts are classed as short dated (< 5 years), medium dated (5 - 15 years) or long dated (>15 years) depending on the timescale until redeemable.
Taking a long position in a financial instrument.
Taking a short position in a financial instrument.
Trades occur on the grey market before stocks are officially listed on the stock market. An example of this is when a company is going through the privatisation process.
Gross profit is turnover less cost of sales. Cost of sales includes costs associated with making or buying the goods and services the company trades.
Gross Profit Margin
gross profit margin = (gross profit / turnover) * 100 The gross profit margin shows how much profit the company makes on it's cost of sales, that is the goods it makes or purchases for sale.
Growth and Income Fund
A type of investment e.g. a unit trust, that aims for capital growth whilst also paying an income. Such a fund is likely to pay less income than a true income fund and also generate less growth than a growth fund.
An investment bond that aims for capital growth rather than income generation.
Guaranteed Income Bond
A bond that offers a guaranteed income until maturity in return for a lump sum investment.
Guaranteed Sum Assured
The minimum amount payable from an endowment policy on maturity or death if earlier. Bonuses may be added throughout the term but they are not guaranteed until they have been declared.
A strategy that offsets or reduces investment risk. Options can be used to adopt opposite positions to that of the main holding.
The level of hedge required to cover one unit of the current position.
High Yield Security
Shares that offer a high yield in relation to their share price. A high yield suggests that the share price is too low and possibly out of favour with the market.
An asset or investment that cannot readily be converted into cash.
An annuity that pays income as soon as the investment has been made.
In The Money
Being in the money refers to an unrealised gain on an option or warrant.
An income bond provides a regular income in return for a lump sum investment. The income is not guaranteed but the investment is returned at the maturity date.
An income fund looks to pay a high and rising dividend by investing in income stocks. Higher yielding funds will also invest in bonds, gilts and fixed income securities. Income funds are available from unit trust or investment trust providers.
Independent Financial Advisor
An independent financial advisor can recommend financial products such as pensions, endowments and investment bonds from a range of providers. Being independent should allow the advisor to offer the customer greater choice and therefore obtain competitive deals.
Where investment returns are linked to the rate of inflation or retail price index.
Index Linked Bond
A bond whose nominal value and/or interest payments are linked to an agreed index.
A variable or benchmark that provides information on the performance or current position of the economy .
An index measures the performance of the stocks listed within that index. For example the FTSE All Share shows the weighted average movement of all shares. Tracker funds will base their portfolio and performance on a particular indices such as the FTSE 100 or FTSE 250.
The amount charged by a fund manager e.g. a unit trust, when an investment is first made and units first purchased. The initial charge can be around 5% for an equity fund, but is lower for a bond, managed or cash fund. Buying through a Fund Supermarket usually works out cheaper as they are able to negotiate discounted initial charges.
Intangible assets are assets that are not tangible, that is they are not physical in nature. Examples include licenses, patents, brands and goodwill. Due to their nature, it is often difficult to put a value on intangible assets and it may come down to what someone is prepared to pay for them.
interest cover = profit before interest / interest Interest cover shows how many times interest on debt could be paid by the generated profits. If the interest cover were low then a rise in interest rates would leave little or no profits for shareholders.
A dividend paid part way through the year.
A company that invests in other companies rather than making a product or providing a service of its own. Profits are generated from dividends and capital gains from investments. Each trust will have a set of rules outlining its investment criteria, ie what type or size of companies it will invest in and in what region.
Japanes Candlestick Charts
Japanese candlestick charts are a form of technical analysis or charting. The charts are used to establish trends that will help determine whether a stock should be bought or sold. Such charts are used for short-term decisions and day trading.
Joint Life Annuity
A person who receives an annuity is called the annuitant. The annuitant pays a lump sum to the life insurance company in return for a regular income. If this money is from the annuitant's own funds, it is called a purchase life annuity. If the money is from a maturing pension fund, it is called a compulsory purchase annuity. A joint life annuity continues to be paid until both parties have died. This may be at the full rate, or more likely at a rate of 50% after the fist party has died.
Junk bonds are so called because they are seen as a higher risk investment. This is because they have a low credit rating, BB or lower, and may not have a long or successful trading history. Junk bonds are also known as high yield bonds due to the returns on offer.
Leverage is another term for gearing. Debt financing is used to invest in the company or asset to fund growth. The higher the ratio of debt to equity, the higher the leverage.
LIFFE is the London International Financial Futures and Options Exchange and incorporates the London Traded Options Market. LIFFE trades FTSE index, currency, bonds and gilts futures.
Details that must be provided to meet the London Stock Exchange listing requirements before a company can be traded on the market.
An amount of money paid in one go as opposed to in instalments.
The charges made by an investment fund provider e.g. a unit trust to cover management and administration costs. The management fee is usually calculated as a percentage of the fund and allocated across all unit holders.
Mark to Market
Mark to market is where holdings in shares are revalued each day to reflect the closing market price. The resulting balance sheet offers a more accurate picture of the financial position of the business than if the shares were shown at cost.
Where buyers and sellers come together, not necessarily in a physical location, to trade shares, bonds and other financial instruments.
Market capitalisation is calculated by multiplying the number of shares in issue by the current share price. Indices such as the FTSE 100 rank companies by market capitalisation and so this is an important metric.
A maxi ISA (Individual Savings Account) is a tax efficient investment plan where all the funds are placed with a single provider in any one tax year. The total amount invested must currently not exceed £7,000. The fund can be split between cash (£3,000), shares (£7,000) and insurance (£1,000).
Mid cap refers to the middle tier of quoted shares by market capitalisation. Large cap refers to the largest companies and small cap to the smallest. As market values are constantly changing there are no specific limits to define the size of companies that fall into the mid cap range.
The money market is the short term market for loans and other forms of borrowing. The market enables investors to lend money and receive a higher rate of interest than from a bank deposit.
A defined contribution pension scheme whereby the investor knows how much they are putting into the fund. The pot of money available at retirement age to purchase a pension is dependant upon investment performance.
NASDAQ is a computerised trading system that enables dealers to trade in both listed and over the counter shares. All trading through the system is done online or over the telephone. NASDAQ is now one of the fastest growing markets in the world, containing a significant number of technology stocks.
National Savings offer numerous savings and investment products that are backed by the government. Products are genrally low risk, focusing on steady or guaranteed returns.
Net Asset Value
Net assets are calculated as total assets less total liabilities. In the balance sheet net assets must equal shareholders funds. When looking at shares, the net asset value is quoted on a per share basis to determine the underlying value of the share.
Net Book Value
The net book value of a fixed asset is determined by taking the cost price less accumulated depreciation. For assets such as plant and machinery the net book value will be used to establish the balance sheet value in the financial statements. By charging depreciation the cost of the asset is matched against the revenue it generates in the profit and loss account.
Net Cash Flow
Net cash flow show's the company's ability to generate cash as well as profits. It is calculated as operating cash flow adjusted for interest, tax and dividends received and paid.
The difference between an investor's long and short position in a particular market or stock.
Net Present Value
Net present value calculates the discounted future cash flows of a project or investment. In deriving the net present value, the cost of investment is deducted from discounted future, project specific cash flows. If the result is positive the investment is worthwhile and should be pursued.
Net Profit Margin
net profit margin = (net profit / turnover) * 100 The net profit figure to use will either be called net profit or profit before interest and tax. The net profit margin shows how profitable the company is after taking into account all costs including administration and distribution costs and how much of a return it is generating for shareholders.
Also known as par value, the nominal value is the face value of a share or security. It is typically the value at which the shares where originally issued, although this is unlikely to reflect the current value or share price.
Normal Market Size
The normal market size indicates the level at which shares can be bought or sold at the bid / offer prices quoted. For orders higher than the normal market size, the market maker need not trade at these prices.
Occupational Pension Scheme
An occupational pension scheme is a scheme established by the employer for the benefit of the employee. The amount paid by the employer and/or employees are outlined in the scheme details. The scheme may either be on a defined benefit, or now more commonly, on a defined contribution basis.
OEIC stands for Open Ended Investment Company. They are similar to a unit trust in that they issue more shares as the fund grows and they invest the money in other companies. However only one price is quoted rather than a bid / offer spread. The big difference is they issue shares, which is more akin to an investment trust.
Ofex facilitates over-the-counter trades that are off-exchange. The exchange is unregulated and contains relatively small, new companies. As such it presents a higher risk proposition than investing in AIM or FTSE listed companies.
The offer price is the price at which investors will buy a stock or investment. The selling price is known as the bid price. The differential between the two, the bid-offer spread, is the margin that the market maker makes on trading the stock.
A document providing details of the term of the offer to sell securities privately.
Offers for Sale
Shares that are offered for sale to the public. The most popular offers with small, private investors are privatisation issues.
A futures or options market transaction that closes out a previous position.
An investment that is delivering the expected level of returns.
Open Ended Funds
Open-ended funds, such as unit trusts, are investments where the number of units in issue varies depending on the supply and demand for the fund.
An option gives the owner the right to buy or sell a specific number of shares at a specific price on or before a given date. An option giving the right to buy is called a call option. An option giving the right to sell is called a put option.
Ordinary shares are the shares authorised and issued when a company is incorporated. These shares usualy carry voting rights and will have an entitlement to any declared dividend, although this is not guaranteed. In the event of the company being wound up, ordinary shareholders rank below creditors and preference shareholders.
Over The Counter
A market whereby buyers and sellers (via an agent) negotiate terms and conditions between themselves. It offers flexibility at a relatively low cost. However as there is no centralised location, it is not an easily accessible market.
Overbought refers to a situation where a stock is trading at artificially high levels due to the volume of stocks traded. As a result the analyst or market will expect a downward correction in this particular stock.
Oversold refers to a situation where a stock is trading at artificially low levels due to the number of shares sold following a downward trend in the market. These shares are seen to represent a good buying opportunity as the price is expected to rise.
Overweight refers to a position when an investment in a particular stock, as part of a larger portfolio, is too high in relation to the rest of the holdings. This is with reference to a particular index or the market as a whole.
A bid comprising of shares in the company that is trying to make the acquisition.
A bond that is bought and sold at face value.
The nominal value or face value of a share or security.
A convertible bonds theoretical value if it were a straight bond without the conversion option.
Shares are usually classed as penny shares if the share price is less than £1. However focus also tends to be on smaller companies, recovery stocks and technology companies.
A regular payment made to a person who has retired or has passed retirement age.
A perpetual bond is issued by a government or public body. A perpetual bond has no fixed maturity date, although it may have an earliest date after which it may be redeemed.
A personal pension plan is a pension plan that allows individuals to build a pension pot for retirement. It is aimed at the self employed and also employees who do not have the opportunity to join a company pension scheme. Also the pension pot is independent of the employer and so the individual can continue to invest even if they move jobs.
PIBS stands for permanent interest bearing shares. PIBS are issued by building societies as a way of generating funds. PIBS pay a guaranteed, regular income, based on the rate prevailing at the time of purchase. Whilst the interest is fixed, the capital value of the shares can rise and fall. As the number of building societies have reduced over the past few years, so to has the number of PIBS available.
Shares are placed with a broker who sells them on behalf of the company to investors who have registered with the broker. If there is not full take up, the shares may subsequently be made available to a wider audience.
A number of stocks held by an individual or company.
Pound Cost Averaging
Where investments are bought on a monthly basis rather than with a lump sum. Each month the purchase price of the investment will change. If the share price has fallen during the pruchase period, the investor will own more shares than if they had purchased them with a lump sum on day one. However if the purchase price has constantly risen then the lump sum investment would be more profitable.
Pre Emption Rights
Where any news shares issued by a company must first be offered to existing shareholders.
Preference shares pay a fixed return that is determined at issue. They have the right to this dividend before the ordinary shareholders receive a return. Also, in the event of a winding up, preference shareholders have priority above ordinary shareholders.
Regarding an investment trust, the amount by which the middle-market price per share exceeds the net asset value per share.
Premium Bonds are in the National Savings and Investments range of products that are backed by HM Treasury. There is a minimum investment of £100 and a maximum of £30,000. After an initial period, the investment is entered into a monthly draw, with two top prizes of £1 million. There is no risk to capital and the investment can be cashed in at any time.
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