Glossary of Investment Terms

We have prepared this glossary to provide you with an explanation of some of the commonly used investment and technical terms you may find reference to throughout our website, literature and general correspondence with you.

The information contained within this glossary is not an exhaustive list and represents definitions of common investment terms. You should be aware that these definitions might not be the only way to define a particular term and cannot be relied upon to cover your specific circumstances or as financial advice. We recommend that you obtain professional advice before acting on or refraining from acting on any of the information contained within this glossary. 

Absolute Return Funds

Funds that are managed regardless of stock market movements with an absolute return investment strategy.

Absolute return strategy

Is an investment strategy which aims to produce positive returns regardless of what the market does rather than only aiming to outperform a benchmark index. Examples of the bench mark indices are the FTSE WMA Stock Market Growth Index and S&P 500.  

Accumulation units

A type of unit in a collective investment scheme (CIS) where all income is re-invested rather than paid out periodically, therefore adding to the capital value of the unit. 

Active management

An investment portfolio that is managed in a way that involves active trading. 

Active risk

One of the risks that a portfolio or fund assumes when it is actively managed.

Active Trading

Is the buying and selling of securities over a short period of time. Active trading aims to take advantage of short-term movements in price. 

Alpha

A measure of risk-adjusted performance that aids in determining if a portfolio has added value in relation to risk taken relative to a benchmark index. 

Alternative investments

Investments that are not traditional asset classes of equities, bonds and cash. These include investments such as property, commodities, hedge funds, infrastructure and private equity.  

Annual management fee

The charge annually for management of a portfolio or similar, typically this is a percentage of funds managed. 

Asset allocation

The breakdown between asset classes of a portfolio such as cash, equities, bonds, foreign equities, property etc. 

Asset Class

A group of investments classified under a generic heading. The main asset classes are equities, fixed income (bonds) and cash.

Basis Point

0.01% or a hundredth of one percent.

Benchmark

Is a standard index against which the performance of a security or portfolio can be measured such as the FTSE WMA Stock Market Growth Index.

Beta

Beta is measure of volatility of a security or a portfolio in comparison to the overall market. The beta of a market is 1. If the beta figure is above one, the security or portfolio moves on average more than the market. If the beta figure is less than 1, the security or portfolio moves on average less than the market. If beta is below zero, the security and the market are likely to move in contrary directions.

Bid price

The price a buyer is prepared to pay for a security or fund. 

Book Cost

The original cost of an investment. The market prices may go up and down however, the book cost remains the same. 

Closed End Fund (CEF)

CEFs are investment companies that are publicly listed and traded. A CEF raises a fixed amount of capital through an initial public offering (IPO), after which the fund is listed and traded similarly to an equity on a stock exchange.  

Collective Investment Scheme (CIS)

A managed fund where money from a broad range of investors is pooled into a single investment vehicle. This fund allows investors to collectively access a wider range of investment than they would be able to achieve individually. 

Commodities

Physical goods used in commerce that are exchangeable with other commodities of the same type. Commodities are often used as inputs in the production of other goods and services. 

Contract Note

A document issued by a counterparty or broker which confirms an investment transaction.

Corporate Action

An opportunity to participate in a decision relating to the investment, including rights issues, other offers of shares or securities, voting at meetings, takeovers and reorganisations.

Correlation

A measure of how two securities or asset classes move in relation to each other in either the same or opposite way. Highly correlated investments tend to move up and down together while, investments with low correlation tend to perform in different ways in different market conditions, highlighting the benefits to investors of diversification. 

Coupon Payment

The amount of interest that a bond issuer pays out to each bond holder at each agreed payment date. 

Credit Rating

An assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. 

CREST

Euroclear UK and Ireland’s real-time settlement system for UK and Irish shares.

CTV or Consolidated Tax Voucher

A document which replaces individual tax vouchers summarising income paid and any taxes withheld on one or more securities.

Custody Services

The provision of clearing and settlement, safe custody and ancillary services by a financial institution appointed by you or on your behalf.

Currency Risk

A risk that arises from the change in price of one currency against another. When investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Hedging a currency reduces the risk of adverse price movements of a currency. 

Current Yield

Annual income (interest or dividends) divided by the current price of the security. 

Derivatives

The name for a broad class of financial instruments that derive their value from other underlying financial instruments. Futures, options and swaps are all forms of derivatives.

Developed markets

Stock market based upon economies that tend to be industrialised and have a high gross domestic product (GDP). Developed markets usually have a high standard of living and stable economies, and are considered safer for investment than less developed, emerging markets.

Distribution Yield

Another term for current yield, often in the context of collective investment schemes. This does not include any preliminary charge and investors may be subject to tax on the distribution.

Diversification

A risk management practice that seeks to reduce unsystematic/high specific risk by increasing the nominated holdings within a portfolio. 

Dividend

A dividend is a distribution of a portion of a company’s earnings decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares or other property.

Dividend yield

Another term for current yield, most often in the context of equity based investments.

Downside

The potential loss for a given investment.

Draw down

The ‘peak-to-trough’ decline during a specific record period of an investment. A draw down is usually quoted as the percentage between the peak and the trough.

Duration

A measure of a bond investment’s sensitivity to changes in interest rates. The longer the duration, the more sensitive it is. 

Dynamic Asset Allocation

A portfolio management strategy that rebalances a portfolio to bring the asset mix back to its long term target. This would generally involve reducing positions in the best-performing asset class, while adding to positions in underperforming assets. The general principle of dynamic asset allocation is to reduce the variation risks and achieve returns that surpass the target benchmark.

Earning growth

The percentage change in a company’s earnings per share, generally measured over one year.

Earnings per share

The profits of a company attributed to each share, this is calculated by dividing profits after tax by the number of shares. 

Earnings yield

The earnings per share for the most recent 12-month period divided by the current market price per share. The earning yield demonstrates the percentage of each unit of currency invested in the equity that was earned by the company.

Emerging markets

Stock markets associated with countries that have fast growing economies and may be going through the process of industrialisation. Emerging markets include economies such as Brazil, India and China.

Equities

A type of asset class, the underlying stocks/securities represent an ownership interest. 

Face Value

The value of a security which is set by the company that is issuing it. This is unrelated to market value.

Fixed income

An investment where real return rates or periodic income is received at regular intervals at reasonably predictable levels.

Flat yield

A term often associated to fixed interest investments describing the current yield, not to be confused with redemption yield which factors in the time value on a low interest security.

Frontier markets

The frontier, or pre-emerging markets are pursued by investors seeking potentially high returns. These investors are able to accept higher risk in the search for greater reward. Frontier markets include those of Argentina, Kenya, Vietnam and Croatia. 

Fund-of-funds

Funds that invest in other funds, rather than investing directly in financial instruments. 

Fund of hedge funds

A fund that invests in a collection of hedge funds, rather than investing directly in financial instruments. 

Futures

An agreement to buy or sell assets at an agreed price but delivered and paid for in the future.

Gearing

The level of a company’s debt related to its equity. This is usually expressed as a percentage. Gearing is a measure of a company’s financial leverage and shows the extent to which its operations are funded by lenders versus shareholders. 

Government bonds

A debt security issued by a government to support its spending.

Gross Redemption Yield

The Gross Redemption Yield (GRY) takes into account not only the flat yield but also any capital gain received by holding the bond to maturity.

Hedge fund

Hedge funds are alternative investments using pooled funds that may use a number of different strategies in order to earn an active return, or alpha, for the investors.

High yield bond

A high paying bond with a lower credit rating than investment-grade bonds. Due to the higher risk of default, these bonds pay a higher yield than investment grade bonds.

Income distribution

The distribution of wages earned across a company, industry, or country. Income distribution reveals what percentage of individuals are at various wage levels. 

Income units

Units in a collective investment scheme that give shareholders the right to receive cash dividends.

Index-linked bonds

A bond where payment of income on the principal investment is related to a specific price index – often the Consumer Price Index (CPI). This feature provides protection to investors by shielding them from charges in the underlying index. The bond’s cash flows are adjusted to ensure that the holder of the bond receives a known real rate of return.

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. The UK government currently targets an inflation rate of 2.0% inflation as at February 2016.

Investment

A security or financial instrument or stock which includes:

Shares in British or foreign companies

Debenture stock, loan stock, bonds, notes, certificates of deposit, commercial paper or other debt instruments including government, public agency, municipal and corporate issues

Warrants to subscribe for investments falling within (1) above (Note – we will only purchase warrants if we are in receipt of a Risk Warning Notice duly signed by you.)

Depository receipts or other similar types of instrument relating to investments falling within (1), (2) or (3)).

Authorised unit trusts, investment companies with variable capital, exchange traded funds, similar recognised schemes in the EEA states and other overseas jurisdiction

Unregulated Collective Investment Schemes.

Investments which are similar or related to any of the foregoing.

Qualifying Individual Savings Accounts.

Options and Futures.

Covered warrants.

Contracts for differences and spread bets.

Investment trust

An investment trust is a type of collective investment. Investment trusts are closed-end funds and are constituted as public limited companies. 

ISA (Individual Savings Account)

An ISA is an investment scheme allowing individuals to hold cash, shares, and unit trusts free of tax on dividends, interest and capital gains. This is now known as a NISA.

Large Cap

Used to describe a company or its shares, when the total number of shares has a high value.

Leverage

The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.

LIFFE

The London International Financial Futures and Options Exchange based in London and owned and operated by Intercontinental Exchange, Inc (an American network of exchanges and clearing houses for financial and commodity markets).

Liquidity

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting its price. 

Long/short strategy

A strategy of taking long positions in equities that are expected to appreciate and short positions in equities that are expected to decline. A long/short strategy aims to minimise market exposure, while profiting from equity gains in the long positions and price declines in the short positions. 

Market capitalisation

The total market value of all of a company’s outstanding shares. Market capitalisation is calculated by multiplying a company’s shares outstanding by the current market price. The investment community uses this figure to determine a company’s size.

Market risk

Risk which is common to an entire class of assets or liabilities. The value of investments may decline over a given period of time period simply because of economic changes or other events that impact large portions of the market. 

Market value

The price an asset is trading at and could presumably be bought or sold for. Market value is also frequently used to refer to the market capitalisation of a publicly traded company.

Maturity

The period of time which a financial investment instrument remains outstanding. Maturity refers to a finite time period at the end of which the financial instrument will cease to exist and the principal is repaid with interest. 

Mid-cap

A mid-cap company is one that has a market capitalisation that is too small for it to be a large cap, but which is bigger than a small cap. There are no strict rules for identifying a company as a mid-cap. In the UK, companies in the FTSE 250 index are considered mid-cap.

MiFID

Markets in Financial Instruments Directive 2004/39/EC is a European Law that provides harmonised regulation for investment services across the European Economic Area. 

Momentum investing

An investment strategy that attempts to capitalise on the continuation of existing trends in the market. A momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values. 

Mortgage-backed security (MBS)

An asset backed security that is secured by a mortgage or collection of mortgages. The mortgages are paid to a group of individuals (a government agency or an institutional bank) that securitises, or packages the loan into a security that investors can buy.

OEIC (Open-ended investment company)

A type of company or fund that invests in other companies with the ability to adjust constantly its investment criteria and fund size. The company’s shares are listed on the London Stock Exchange, and the price of the shares are based largely on the underlying assets within the fund. There are no bid and ask prices on the OEIC shares, buyers and sellers receive the same price.

Offer price

The price a buyer is requested to pay for a security or fund.

Overweight

A situation in which a portfolio holds an excess amount of a particular security or group of similar securities.

Par value

The face value of a bond or the stock value stated in the corporate agreement. Par value is significant for a bond or fixed-income instrument because it determines its maturity value as well as the value of any coupon payments.  

Passive management

A style of management associated with unit trusts and exchange-traded funds (ETFs) where a fund’s portfolio reflects a market index. Passive management is the opposite of active management in which a fund’s manager(s) aim to outperform the market with a variety of investment strategies.

Preferred Stock

A stock that provides a given dividend that is paid out before any dividends are paid out to common stock holders. In the event of liquidation preferred stock takes priority over common stock. Preferred stock does not carry any voting rights. 

Price-to-book value

Price-to-book value is a ratio used to compare a stock’s market value against its book value. It is calculated by dividing the current closing price of the stock by the latest financial quarter’s book value per share. 

Price to earnings ratio

The price to earnings ratio is a ratio for valuing a company that measures its current share price relative to its per-share earnings. 

Quartile

A statistical term describing the division of observations into four defined intervals based upon the values of the data and how they compare to the full set of observations. 

Real Return

The return obtained on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which retains the purchasing power of a given level of capital constant over time.

Redemption

The return of an investor’s principal investment amount on a fixed income security, such as a preferred stock or bond; or the sale of units in a unit trust. 

Restricted Advice

The type of investment advice a firm is able to deliver to retail clients in respect of a Retail Investment Product. Providing Restricted Advice simply means that we will not provide advice on the whole range of Retail Investment Products as we do not advise on pensions or life assurance based products. However, we will select from a wide range of suitable investments.

Retail Distribution Review (RDR)

The retail distribution review is a set of rules that were enforced in the UK from the beginning of 2013 by the UK Financial Conduct Authority (FCA). The rules aimed to promote more transparency and fairness within the investment industry. 

Retail Investment Product

Means products offering investment exposure to a range of Financial Instruments in packaged form, such as regulated collective investment schemes, investment trusts, exchange traded funds, structured investment products, unregulated collective investment schemes.

Return on equity

The total of net income returned as a percentage of shareholders equity. Return on equity measures a company’s profitability by showing how much profit a company generates on shareholder’s funds.

Rights Issue

A means by which a company raises more money from shareholders. An issue of rights to a company’s existing shareholders that permits them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased is generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them on the open market.

Risk

The possibility that an investment’s actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. There are a variety of measures dependent upon the underlying risk. 

Risk Adjusted Basis

A risk based profitability measure, used for examining risk adjusted performance and giving an overview of the profitability between businesses.  

SETS

The London Stock Exchange’s electronic trading service.

Security

A security is a financial instrument that represents an ownership position in a publically-traded company (stock), a creditor relationship with a governmental body or company (bond), or rights to ownership as represented by an option. 

Sharpe ratio

The Sharpe ratio is a measure used to calculate risk-adjusted return, and this ratio has become the industry standard for such calculations. The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. 

Small cap

Refers to equities with a relatively small market capitalisation. The definition of small cap tends to vary across the investment industry. 

Stamp Duty/ Stamp Duty Reserve Tax

A tax levied in respect of all paper stock purchases made in the UK.

Standard Deviation

Standard deviation is a statistical measure which, when applied to the annual rate of return of an investment gives a measure of the investment’s volatility. Historical volatility is used by investors as a gauge for the amount of expected volatility.

Total Expense Ratio (TER)

A measure of the total costs associated with managing and operating an investment fund. These costs consist of management and additional expenses. Additional expenses include trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund’s total assets to arrive at a percentage amount, which represents the TER. 

Total return

Total return is useful in measuring performance, being the actual rate of return of an investment or a pool of investments over a given period. Total return includes interest, capital gains, dividends and distributions realised over a given period of time. 

UCITS (Undertaking for Collective Investments in Transferable Securities)

A public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union. 

Unit trust

A collective investment scheme constituted under a trust deed. The investor is effectively the beneficiary of the trust. 

Volatility

A measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index.

Warrant

A warrant is a derivative that confers the right, but not the obligation to buy or sell a security at a certain price before expiration. 

Yield

The return on an investment. This refers to the interest or dividends received from an investment and is usually expressed annually as a percentage based on the investments cost, its current market value or its face value. 

Yield spread

The difference between yields on contrary debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. 

Yield to maturity

The total return expected on a bond if the bond is held until the end of its lifetime. Yield to maturity is considered a long-term bond yield, but is expressed as an annual rate. 

Capital reorganisation

This is a process designed to revive a financially troubled or bankrupt firm.

A reorganisation involves the restatement of assets and liabilities, as well as holding talks with creditors to make arrangements for making repayments.

Capital reorganisation is an attempt to extend the life of a company facing bankruptcy.

What this means for you.

If the company emerges successfully from the reorganisation, it may issue new shares which may make previous shares worthless. If the reorganisation is unsuccessful, the company will liquidate and sell off any remaining assets. In this case shareholders will be last in line to receive any proceeds.

If capital reorganisation is expected to improve the company’s performance, this is likely to be good news for investors. In order to be successful, the reorganisation must improve a company’s outlook for the future. 

Compulsory acquisition

Compulsory acquisition is a situation where the bidding company has acquired over 90% of the target company’s shares and will compulsory acquire the remaining shares, regardless of whether shareholders have accepted the offer or not. At this point it become a non-elective event. 

Dividend in Specie

Dividend in specie is the distribution of an asset in its present form, rather than selling it and distributing the cash. In specie distribution is made when cash is not readily available, or allocating the physical asset is the better alternative. 

DRIP revocation

Dividend Reinvestment Plans (DRIP) are a convenient, easy and cost effective way to build your shareholding by using cash dividends to buy additional shares.

What this means for you.

It allows you to use cash dividends to buy more shares in a company, rather than receiving a dividend cheque through the post or having your bank account credited with the dividend payment. 

Exchange offer

An exchange offer is an offer by a company to trade equities or bonds for other equities or bonds. For example, a firm may redeem equities with other equities of the equivalent value. This often occurs when a firm has poor cash flow.

An exchange offer of equities is common following a merger or acquisition. 

Exercise of subscription

The right of existing shareholders in a company to retain an equal percentage ownership over time by subscribing to new stock issuances at or below market prices. 

Loan notes conversion

Convertible Loan Notes (CLNs) are evidence of a loan which is convertible into equity at a later date, at specific rates or in response to particular events. They will generally be redeemable as well as convertible. They can be secured, although often are not.

CLNs are a good way for issuers to raise money because they are attractive to potential investors, allowing them to achieve a healthy yield and obtain the right to buy shares in the issuer at a fixed price.  

Open offer

A secondary market offering that is similar to a rights issue in which a shareholder is given the option to purchase stock at a price that is lower than the current market price.

A open offer differs from a rights issue in that investors are unable to sell the equities that they purchase under the open offer to other parties. Some investors see secondary market offering as bad news because it causes stock dilution and may signal that the stock is overvalued. 

Return of capital

A return from an investment that is not considered income. The return of capital is when some or all of the money an investor has in the investment is paid back to him or her, thus decreasing the value of the investment.

Important – This is not considered an investment gain of any type because it is not in excess of the original investment. You are not taxed on this return until it begins to exceed your original investment value. 

Reverse stock split

A reverse stock split reduces a company’s total number of outstanding shares. It involves a company dividing its current shares by a number. A reverse stock split does not add any real value to the company.

Reverse stock splits are a tactic used by companies to keep their share price up. They do this to avoid the risk of being delisted from stock exchanges that have minimum share price rules.

For you this means that you will now own less shares but, the share price will be higher, implying no overall change in value.

Rights Issue

A rights issue is an invitation to existing shareholders to purchase additional new shares in a company. It gives shareholders the right to purchase new shares at a discount to market price on a stated future date. 

As a shareholder you have three options regarding how you respond:

Subscribe to the rights in full – to take full advantage of the rights issue, you would need to buy all shares that you are entitled to under the issue.

Ignore your rights – this is normally not recommended. If you choose to do nothing, your shareholding will be diluted due to the extra shares issued.

Sell the rights to someone else – In some cases rights are non-transferable. But in the majority of cases, your rights allow you to decide whether you want to take up the option to buy the shares or sell your rights to other investors. 

Share buy back

The purchase of outstanding shares by a company in order to reduce the number of shares in the market.

Companies will buy back shares either to increase the value of the shares still available, or to remove any threats by shareholders who may be looking for a controlling stake.

What this means for you.

You may be presented with a tender offer where you will have the option to submit a portion or all of your shares within a certain time period and at a premium to the current market price. 

Takeover

When an acquiring company makes a bid for a target company. If the takeover goes ahead the acquiring company becomes responsible for all of the target companies operations, holdings and debt. When the target company is a publicly traded company, the acquiring company will make an offer for the target’s outstanding shares. 

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