A - Z of Investment

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

ACCUMULATION UNIT
A single unit of a unit trust (or mutual fund) where the income from the underlying investments is rolled up and reflected in the unit price.

ADR
Certificates traded in United States stock markets which represent an interest in the shares of a foreign company. ADRs were created to make it possible for foreign issuers to meet United States security registration requirements and to enable dividend collection by dollar-based investors. Some ADRs sold in the United States under Section 144a exemptions are not readily resalable to all U.S. investors: but most ADRs are nearly as freely traded in the United States as a domestic issue.

Annualised Return
The average rate of return for a number of years is given as a yearly rate. For example, if a fund fell by 2% in year one and rose by 23.5% in year two, the annualised return would be 10%.

Annuity
An arrangement to pay a regular income bought with a lump sum, usually the final value of a personal pension fund. The regular payment rates for annuities are closely tied to the prices and yields of government bonds.

At a Premium
Frequently used in relation to an investment trust, when its share price is greater than the value of the underlying assets per share. In general, a description of an investment when its market price is greater than its underlying value.

BASIS POINT
A measurement of change equal to one hundredth of one per cent.

Bear Market
A market in which prices decline sharply against a background of widespread pessimism (as opposed to a Bull Market).

Benchmark
An index or other market measurement which is used by a fund manager as a yardstick to assess the risk and performance of a portfolio.

Bid Price
The price at which an investor in a unit trust can sell units back to the fund manager

Blue Chip
A major well-established listed company which investors assume has excellent management and strong finances. The term has become a generic one for any high quality securities.

Bond
A form of IOU issued by a company, a government or a major international financial body. Bonds normally pay a fixed rate of interest over several years when they are repaid at their original issue or initial price.

Bonus Issue
A distribution of additional shares to existing shareholders. The share price usually falls after a bonus issue.

Bottom-up Fund Management
A method used by some fund managers to build a portfolio by picking companies considered to be winners and ignoring broader economic issues or asset allocation guidelines.

Bull Market
An advancing market (as opposed to a Bear Market).

CAPITAL SHARES
Some investment trusts have more than one type of share, and they are called 'Split Capital' trusts, Capital Shares take all the gains made by the fund after the other share classes have been paid off. They are high risk but can deliver superior capital appreciation.

Certificate of Deposit
Certificate issued by a bank or financial institution stating that an amount has been deposited for a fixed period of time at a set rate of interest- CDs are used as a source of income by cash unit trusts and help to give a return better than an ordinary deposit account.

Closed End Fund
A fund which has a fixed number of shares, usually listed on a major stock exchange. Changes in demand are reflected in changes in the share price. An investment trust is a closed end fund.

Collective Investment
A general term for investments, such as unit trusts, which are managed by professional managers on behalf of investors.

Convertible Loan Stock
Fixed interest stock issued by a company that can be converted into ordinary shares at a future date. In the meantime, they pay interest.

Corporate Bond
A company IOU that pays interest and will be repaid at its issue price at a set date. Bond prices change when interest rates change. Their rate of interest is higher than cash. Companies have to repay bondholders before shareholders.

Coupon
The term used to describe the rate of interest on a bond. Yield is what investors actually receive.

Creation Price
The value of a unit in a unit trust before the initial charge is added. A creation price of a unit is equivalent to the cost of buying the trust's portfolio at current market levels, with all the expenses included. From the creation price, the buying price charged to investors is calculated.

Cyclical Stock
A share which is closely linked to economic conditions. Cyclical shares tend to rise when an economy is recovering, but fall markedly on any signs of an economic downturn.

DEFLATION
A general price decline during which consumer spending is substantially curtailed, bank loans contract and the amount of money in circulation is reduced.

Depression
A prolonged slump in economic activity, characterised by rising unemployment and serious falls in production and consumption of goods.

Derivatives
A collective name for futures, options and warrants.

Discount
Describes the situation when the share price of an investment trust is less than the net asset value at the share.

Dividend
The amount a company pays to shareholders from after-tax earnings.

Dividend Yield
The return on a share calculated by dividing the dividend rate by the market price.

Duration
A measure of the sensitivity of bonds to changing interest rates. Duration takes into account not only the redemption date but also the dates on which interest (coupon payments) are paid and the amount at such interest. Duration is an important measure of the interest rate sensitivity of a fixed interest portfolio and a more sophisticated measure of the maturity of the holdings in that portfolio.

EQUITY
A share in the value of a company.

Equity Risk Premium
The difference between the rate of return available from risk-free assets (such as government bonds) and the return anticipated from taking on the risk inherent in more volatile investments, such as shares.

Ethical Investment
An investment approach which takes into account considerations other than solely the financial return potential of particular investments. An ethical portfolio might, for example, avoid investing in alcohol or tobacco.

Exchange Risk
The risk that the value of an investment may be reduced by movements in the exchange rate on a foreign currency.

FIXED INTEREST
Income from bonds. It remains constant and does not fluctuate, although the price of the bond does.

Floating Rate Notes
Floating rate notes are long-term debt securities for which the interest rates are adjusted periodically in line with a benchmark interest rate. FRN’s appeal to investors who might otherwise be reluctant to commit funds to fixed interest investments for lengthy periods in times of fluctuating interest rates. Typical investments for a cash unit trust.

FTSE Index
Abbreviation for Financial Times Stock Exchange Index. The FTSE 100 Index covers the movements of the 100 largest public companies traded on the London Stock Exchange. The FTSE All-Share Index is a broad index based on 98% of all UK listed companies, in terms of market capitalisation not number.

GEARING
a) Borrowing money to increase returns and increase assets. A method used by investment trusts to generate superior returns.
b) The ability to increase exposure by investing in futures contracts without making the underlying cash available.
For Investment Trusts the company has one or more classes of borrowing, or shares that rank in priority to the ordinary shares as to capital and/or income. These are known as 'prior charges'. The gearing figure published indicates the extra amount by which shareholders funds would rise or fail if the total assets were to rise or fall. A figure of 100 means that the company has no gearing. A figure of 115 means the company would be 15% geared if fully invested. If the total assets were to rise or fall, shareholders funds would rise or fail by 15% or more.

Gifts
Bonds issued in the UK by the UK Government.

Gross Domestic Product
A measurement of the aggregate goods produced and services provided within an economy over a year and excluding income earned outside the country. GDP is one of the main measures of the health of an economy.

Gross National Product
GNP is a measure of an economy's output of goods and services which includes ODF plus income earned by residents from their overseas investments, less income earned within the domestic economy by overseas residents.

Gross Redemption Yield
The total return for a share or bond that includes the expected income and the capital returned, which may include capital growth, over its life.

Growth Stock
A company that is expected to produce more and more profits and exceed the average returns of the market over time

HEADLINE INFLATION
The published overall inflation rate, unadjusted for non-economic factors, as opposed to underlying inflation.

Hedge Fund
A type of investment scheme in which the fund manager can use a number of specialist investment techniques, including the use of derivatives. Short selling and borrowing to generate a higher return or make gains despite a falling stock market.

Hurdle Rate
The rate of growth of an investment trusts assets needed to repay any preference shares.

Income Shares
A share of a split capital investment trust that receives the income received by the underlying investments. Nowadays income shares usually have some right to the capital growth of the fund over its life.

Index Fund
Another name for a tracker fund, its investments are designed to reflect the nature of a specified index, so for example, a fund may be designed to track the FTSE All-Share Index. The success is measured by the relative size of the tracking error of the fund.

Inflation
A situation where an economy shows increasing prices of goods and services. Increases in productivity offset the adverse effects of the rise in prices.

Interest Rate Risk
The risk for fixed interest securities and by borrowers with floating rate loans, when interest rates fluctuate. As interest rates rise, the market value of fixed interest securities declines.

Investment Grade
Bonds issued by solid, well financed companies with a very small possibility of default. Good quality arid only slightly more risky than government bonds.

Investment Trust
A public company which invests shareholders' funds in the shares of other companies. They are collective Investment vehicles which pool investor’s money, but they have a fixed number of shares. Investment trusts can borrow money to enhance market gains or build that borrowing into their make-up, unlike unit trusts

LIQUID MARKET
Describes the condition of a stock market where selling and buying is easily accomplished because a large number or buyers arid sellers are keen to trade and invest.

Liquidity
The ease at which a share or other investment can be sold with little expense and minimum delay. An example of a highly liquid asset is a short term bank bill while property is a relatively illiquid investment. For many securities, the degree of liquidity depends on the interest of investors. The term is also used to mean the amount of cash and reserves held by financial institutions, either to fund withdrawals or available for investment in stock markets.

Long
Owning a share, or other asset to sell at a later date at a higher price. Any investment position that will benefit from a rising market.

MARKET CAPITALISATION
The value sum of the total amount of various securities issued by a corporation, multiplied by the current market price of those securities.

Market Capitulation
In the stock market, capitulation occurs during times of very high volumes and panic selling. With stocks, capitulation is seen as the true bottom of the stock price, as any investors who were interested in a particular stock have given up and sold out, sometimes due to margin calls.

NET ASSET VALUE
The total value of a company's assets less its liabilities divided by the number of ordinary shares in issue. Used to describe the underlying value of an investment trust’s share.

Nominee
An individual or company in whose name a security is registered although the real (or beneficial) ownership is actually held by another. Nominee companies are often used by share savings schemes to reduce costs and paperwork for private investors.

OFFER PRICE
The price at which a holder of an asset is willing to sell. (Also known as the asking price).

Open End Fund
Another name for a unit trust. An investment fund in which the number of units in issue varies according to demand and where the value of the unit closely reflects the underlying value of the total assets.

Open-Ended Investment Company
An OEIC is an investment fund which is listed at a single price but with the ability to issue or redeem shares to match demand, like a unit trust.

Options
A contract in which the holder has the option to buy or sell a fixed number of shares at a fixed price in a certain period.

Ordinary Shares
A share which represents an interest in a company. If the company has also issued preference shares, both have ownership rights. The preference shareholder normally is limited to a fixed dividend but has prior claim on dividends and, in the event of liquidation, assets. Ordinary shareholders assume the greater risk, but generally exercise greater control and may gain the greater reward in the form of dividends and capital appreciation.

Overweight
A term used by fund managers which describes the amount of shares of a company they hold. It represents a comparison between their position and an index or benchmark. Holding more shares than the relevant proportion in a benchmark is called being overweight. Having the same proportion is known as being neutral and less is being underweight.

PASSIVE MANAGEMENT
A style of investment management that seeks to return the same as an index. In other words another name for tracking. A more complex tracking method can tilt investment with the aim of producing improved returns.

Position
A word used to mean a commitment to an investment or assets or market In addition, a buyer of a futures contract has a long position while the seller of a futures contract has a short position.

Preference Shares
Shares which rank above ordinary shares and which usually receiving a fixed rate of return.

Price Earnings Ratio
P/E ratio means price-to-earnings ratio or simply the current price divided by the earnings per share. P/E is valuation shorthand that allows investors to quickly see how much the market is currently paying for $1 of annualized earnings. When a stock is selling for a value of 30 times its last four quarters of earnings, it is said to be selling at a "30 multiple." The higher the P/E ratio a company commands, the higher the expectations for future rates of growth.

Proxy
A written authorisation given by a shareholder for another person to vote at a shareholder’s meeting.

QUANTITATIVE MANAGEMENT
An approach to investment management which uses statistical or numerical methods to create portfolios which are considered to be efficient in maximising returns. Quantitative management attempts to produce extra value by exploiting pricing anomalies or by special measures to control risk.

Quartile
A common statistical term used to define the performance of a fund. All the funds are divided into four equal groups and arranged in order of performance, from best to worst. So, 'top quartile' means the fund is in the top 25% of the whole group.

RALLY
A brisk rise in a stock market following a fall in share prices.

Real Return
The inflation-adjusted return.

Redemption Yield
The estimated total long-term return of income and capital on fixed interest investments like corporate bonds or gilts.

SCRIP DIVIDEND
Payment of a dividend as shares instead of cash by increasing the number of shares. A scrip dividend can reduce earnings (profits per share).

Scrip Issue
A free issue of shares to existing shareholders also called a bonus issue.

Secondary Market
The marketplace wherein issued shares circulate. The state of the secondary market, like the level of demand and appetite for shares, sets the tone for the new issue, or primary, market.

Sector
The grouping together of companies, or assets, with common features. For shares, the term is used to mean the listed companies within an industry. A stock market is broken down into sectors.

Sell Stop
A sell stop is a protective measure, which will automatically trigger the sale of stock once its price dips below a certain pre-determined level. A sell stop is also called a stop loss order. In more detail, a sell stop limit order means that when a stock falls to the level you have indicated as the point to sell, the stock will be sold at the EXACT price you have specified. (However, remember that a falling stock may not always hit the exact price you have specified. It may jump down and miss your sell stop level altogether.) On the other hand, a sell stop market order means that once the stock falls to that price, the stock will sell at whatever the going market price of the stock is at the time.

Share buy-back
The repurchase of issued shares by a company, either through the stock market or by tenders to shareholders. Shareholders have to approve the measures, and repurchases are restricted to 15% in a year. It is a way of returning capital to shareholders.

Shell Company
A quoted company with no assets, almost worthless, often used as a means for reverse takeovers.

Short covering
Buying shares, previously sold short, in order to deliver them to the new owner.

Short/Shorting
Selling a share, or other security, not owned in the anticipation of being able to buy identical shares at a lower price.

Soft market
The condition of a stock market when prices are falling, i.e. softening.

Split capital investment trust
An investment company with a fixed life, which issues several classes of share with different objectives to satisfy differing individual financial needs. The different rights of the share classes provide gearing, the potential of extra rewards.

Stamp duty
A tax on buying shares, and other assets like houses, which is proved by the exchange of documents.

Stock
A general term for shares in a company but specifically refers to bonds. It is also used to mean the fixed assets of a business.

Stock selection
A way-of investing that concentrates on choosing shares in a company solely on its intrinsic worth.

TOTAL RETURN
The increase or decrease in the value of a portfolio taking into account any gain and income earned.

Trailing sell stop
A trailing sell stop is designed to protect an investor's profits. A standard sell stop is a price below a stock's current price that an investor sets as the sell point for the stock, identifying a bail-out point if the price drops too low. However, with a trailing sell stop, the sell stop price is manually adjusted upward as the stock price increases, to guarantee that profits are retained if and when the stock price declines.

UNDERVALUED
A term which describes an investment that a fund manager believes is trading at a price lower than its true market value.

Unit Trust
A fund which pools investors' money and gives them a ready-made portfolio of investments. A unit trust creates new units in response to increasing demand and prices units close to their underlying asset value. A unit trust may also redeem units when unit holders cash-in their holding.

Universe
A term used by fund managers to describe the total number of available stocks from which a portfolio is selected.

VALUE INVESTING
An investor whose way of investing is to buy shares when they are considered to be under priced and to take profits when they appear overvalued.

WARRANTS
A certificate that gives the holder the right to buy a set number of shares at a given price in the future. Like options, warrants do not receive interest or dividends.

Weighting
The proportion of a share or asset class in a portfolio of a fund compared with the proportion in an index.

YIELD
The annual return from a bond, share or fund given as a percentage of its price.

Zero Dividend Preference Shares
A type of share in a Split Capital investment trust which receives a fixed sum on repayment. Usually the price rises steadily over the share’s life. These shares are not entitled to any dividends.