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

Final Salary
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.

Foreign Exchange
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.

Free Reserves
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.

Gann Analysis
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.

Going Long
Taking a long position in a financial instrument.

Going Short
Taking a short position in a financial instrument.

Grey Market
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
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.

Growth Bond
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.

Hedge Ratio
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.

Immediate Annuity
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.

Income Bond
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.

Income Fund
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.

Index Linked
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.

Initial Charge
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
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
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.

Interim Dividend
A dividend paid part way through the year.

Investment Trust
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
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.

Listing Particulars
Details that must be provided to meet the London Stock Exchange listing requirements before a company can be traded on the market.

Lump Sum
An amount of money paid in one go as opposed to in instalments.

Management Charges
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
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.

Maxi ISA
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
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.

Money Market
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.

Money Purchase
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
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.

Net Position
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.

Nominal Value
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.

Offer Price
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.

Offering Memorandum
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.

Offsetting Transaction
A futures or options market transaction that closes out a previous position.

On Stream
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
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.

Paper Bid
A bid comprising of shares in the company that is trying to make the acquisition.

Par Bond
A bond that is bought and sold at face value.

Par 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.

Penny Shares
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.

Perpetual Bond
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.

Personal Pension
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
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
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.

Price Earnings Ratio
price-earnings ratio = current market price / earnings per share This is perhaps the most commonly used ratio to compare company's within the same sector as it is quoted daily in the financial press not only for individual stocks but also for sectors and indices. It shows whether stocks are expensive or cheap relative to each other and how many years of current earnings investors are prepared to pay for. Also how optimistic the market is about future trading prospects. A relatively high price-earnings ratio will indicate a stock is expensive in relation to its peers. This might be justified because the company is seen as a leader within its sector and has above average prospects. If based on projected price-earnings, the ratio will contain an element of sentiment by the analyst. Therefore there might be bargains to be had by looking at companies with a low ratio, if you believe they are out of favour with the market rather than having fundamental problems.