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Investment glossary
Category: Economy and Finance > investment
Date & country: 13/10/2007, UK
Words: 269

Accepting House
An accepting house specialises in guaranteeing bills of exchange.

Accounts Payable
An amount owed to a company or individual in respect of goods or services received.

Accounts Receivable
An amount due from a company or individual in respect of goods or services provided.

Accreting Cap
An interest-rate cap on an increasing principal.

Accreting Swap
A swap in which the principal increase over time.

Accrual Rate
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.

Accrued Benefits
The benefits due from a pension scheme in respect of service up to a particular time.

Accrued Income
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.

Accumulation Units
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
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.

Agreed Bid
A takeover bid that is supported by the majority of shareholders in the target company.

Allocation Rate
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.

Asset Stripping
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.

At Best
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.

Back Office
The part of a financial institution that deals with administration and compliance rather than trading.

Balance Sheet
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.

Bank Bill
A bill of exchange issued or guaranteed by a bank.

Barometer Stock
A stock that is seen as a good indicator of the state of a market as a whole.

Bear Market
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.

Benchmark Bond
A bond that is seen as a good indicator of market prospects.

Beta Value
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.

Bid Price
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.

Bonus Issue
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.

Building Society
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.

Bulldog Bond
A sterling denominated bond issued by a foreign owner.

Buy Early
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.

Buy Late
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.

Call Money
Amounts put into the money market that can be called at short notice.

Cancellation Price
The cancellation price is the price at which a unit trust will redeem units.

Capital Adequacy
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
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.

Capital Flight
The withdrawal of capital from a country due to a loss of confidence in its government.

Capital Market
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.

Clearing Member
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.

Commercial Paper
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.

Convertible Bond
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
Credit risk is the risk that a counterparty will default on a transaction, be it in whole or in part.

Creditor Days
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.

Cross Rate
A cross rate is the rate of exchange between two currencies not including the US Dollar.

Current Ratio
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.

Dated Security
A security that has a fixed redemption date.

Day Trading
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
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.

Deep Market
A deep market is one in which a large number of transactions do not impact the precie of security or stock.

Defensive Stocks
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.

Deferred Income
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.

Directors Dealings
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
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

Dividend Waiver
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
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.

Endowment Policy
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
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.

Even Par Swap
A swap with two bonds that have the same par value.

Execution Only
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.

Face Value
The par value or nominal value printed on the face of a security.

Fallen Angel
An institution whose creditworthiness has declined considerably.

Fat Cat
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.

Final Dividend
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.