Glossary of Financial Terms

The glossary provides plain English definitions of common finance and investment terms.

Accrued Interest- Adjustment made to bond prices to allow for the fact that interest is paid at set intervals but earned on a daily basis.

Accumulation Units- Units which do not pay income but roll the income into the value of the units.

AITC- The Association of Investment Trust Companies was founded in 1932 to represent the interests of the investment trust industry. It now has over 300 members and is the primary source for information and statistics on investment trusts.

The Association of Investment Trust Companies
9th Floor
24 Chiswell Street
London
EC1Y 4YY
www.aitc.co.uk

AIM- The Alternative Investment Market is the London Stock Exchange's market for young and growing companies. AIM, created in 1995, gives companies in the early stages of development the opportunity to raise funds without the restrictions of a full LSE listing.

Alternative Investments - This describes any investment other than equities and fixed income. Property, private equity and hedge funds are all examples of alternative investments.

Annual Charge- the annual fee, calculated on a daily basis which covers the cost of running the fund.

Annualised - An annualised return provides a geometric average annual return over a given period. For example, if a fund has produced a return of 75% over 5 years this means that on average the fund would have produced an annualised return of 11.8% each year.

(APR)- Annual Percentage Rate.  The true annual cost of borrowing which must be shown on all advertisements for loans.

Annuity- A regular stream of payments made to an individual for a specified time period. For example a policyholder will receive a stream of payments from an insurance company at retirement. The payment of interest to a bondholder is also an example of an annuity.

Appreciation- increase in the value of an asset.

Ask Price- Price at which a Market Maker will sell stock. Also known as the Offer price.

Asset Allocation- The proportion of investment or assets placed in various geographic regions, industry sectors or types of security.

Assets- Any possession that has a value. The investments within a fund are assets, these may include shares, bonds and/or cash.

Association of British Insurers- The ABI is the trade association to which most UK insurance companies belong. One of its main functions is to monitor quality in order that minimum standards of customer service can be maintained.

Authorisation- Required by the Financial Services and Markets Act 2000 for any firm that wants to conduct investment business in the UK. Authorisation is achieved through The FSA who maintains a Central Register which provides information on all authorised firms and registered representatives and is where you can check if your firm or adviser is authorised and for what type of business.

Authorised Unit Trust - UK-based unit trust that has applied to FSA for this status, enabling the units to be marketed to all types of customers. FSA rules regulate the assets in which an authorised unit trust is permitted to invest.

Average Maturity- A statistic relating to bond funds which provides the weighted-average maturity of all the bonds within a fund. The maturity of a bond is the time at which the principal of a bond is repayable and it ceases to exist.

Bargain- This is another word for a transaction or deal. It does not imply that a particularly favourable price was obtained.

Barbell Strategy- A fixed income strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes. Related to Bullet Strategy .

Basis Point (bp)- One hundredth of a percentage point. E.g. 2bp = 0.02%

Bears- These are pessimistic city dealers who think investments are going to fall. Therefore they sell their investments in the hope of buying them back at a lower price. A bear market is a period of falling stock prices, over a period of time. Related to Bull.

Benchmark- This is one target against which investment fund performance can be measured. A benchmark, usually stipulated at the outset of an investment process, can be a stockmarket index or a peer group. Many fund managers aim to beat their benchmark by one or two percentage points every year. To do so, they tend to construct a portfolio that is generally in line with their benchmark, i.e. stock or country weightings will reflect those of the chosen benchmark. To add value, fund managers will then over or underweight assets relative to the benchmark.

Beta- A statistic that indicates a fund's historic volatility relative to its benchmark index:

Bid/ Offer Spread- The difference between the buying and selling price of shares and units, largely attributable to the initial charge.

Bid price- The price at which units or shares may be bought or sold.

Blue Chip- A common stock of an established company that has a long record of stable growth and very substantial assets. Named after a high denomination gambling chip.

Bonds- A bond is a loan agreement with a company or a Government (i.e. the company or government issues bonds) whereby there is an arranged repayment to the investor when the loan matures and the investor receives interest throughout the life of the loan. See Gilt edged security.

Bonus issue- Also known as a scrip issue. This is when a company issues free shares to a company's existing shareholders. No money changes hands and the share price falls pro rata. This is usually used as an exercise to make the shares more marketable (i.e. cheaper per share and therefore more attractive to small investors).

Bottom-up Approach- A method of portfolio construction determined primarily by stock selection. Fund managers will assess the quality and future prospects of a stock, analysing factors such as the strength of management, market share, pricing power, which will all determine future earnings growth. Sector and country weightings will reflect the manager's individual stock selections and will not be driven by macroeconomic factors.

Box- Name given to the system that through which unit trust managers store units that have been redeemed by unit holders for subsequent onward sale.

Bulls- These are optimistic city dealers who believe prices will rise. They therefore buy securities in the hope of selling them at a higher price than they paid. A bull market is any market in which prices are in an upward trend. Related to Bear .

Bullet Strategy- A fixed income strategy in which a portfolio is constructed so that the maturity's of securities are highly concentrated at one point on the yield curve. Related to Barbell Strategy.

Calendar Year Returns- A term relating to performance that provides the return of a fund from 1st January to 31st December each year.

Call option- Option providing its holder with the right to buy an investment at a future date at a price agreed now.

Capital growth- A fund seeking capital growth aims to maximise the value of the capital sum invested rather than producing any income.

Cancellation Price- The lowest bid price allowed for authorised unit trusts under FSA's pricing rules.

Capital adequacy- Firms conducting investment business are required to have sufficient funds of their own. The European Union's Capital Adequacy Directive, which sets minimum levels of capital for UK's financial services companies, came into effect on 1st January 1996.

Capital Gain - Arises when an investment is sold at a higher price than originally paid.

Capital Gains Tax- The tax that is payable on the profits made on the disposal of most investment products.

Capitalisation- The value of a limited company.

Clean Price- Bond price excluding accrued interest.

Closed-end funds- see Funds.

Collective investment schemes- Are funds which take money from a number of private investors and pool it together in one fund. This enables investors to invest in a larger number of individual investments than would otherwise be the case and therefore to avoid the risk of investing only in a few companies' shares. See Unit trust and Open ended.

Commission- Charge made by a firm for their services.

Commission Disclosure by financial advisers- Since the beginning of 1995, independent financial advisers and tied agents have had to disclose the level of commission they will earn from selling financial products to their clients. The previous city regulator of retail financial services, the Personal Investment Authority (PIA) implemented the move. The FSA Central Register maintains a list of all authorised firms.

Commodity- A commodity is food, metal, or another fixed physical substance that investors buy or sell, usually via futures contracts.

Conduct of business rules- Rules which the watchdogs are required, under the Financial Services and Markets Act 2000, to have in place and which prescribe how firms must conduct their business.

Contract note- This is sent out to an investor by firms such as fund managers and stockbrokers when a transaction has been completed. It is a legal document which provides the client with all the details of the deal that was made on his behalf.

Convertible Bond- A bond issued by a company that can be exchanged for a set number of shares, usually of the issuing corporation, at a prestated conversion price.

Corporate Bond- Debt obligations issued by corporations as an alternative to offering equity ownership by issuing stock. Like most municipal bonds and Treasuries, most corporate bonds pay semi-annual interest and promise to return their principal when they mature. Maturities range from 1 to 30 years.

Correlation - Correlation shows the strength of a linear relationship between two instruments; whether they are stocks, indices or funds. 1 represents a perfectly positive correlation; i.e. the investments behave in exactly the same manner. -1 represents a perfectly negative correlation; i.e. the investments move in exactly opposite ways. 0 represents no linear correlation; i.e. the investments behave independently of one another.

Coupon - The periodic interest payment made to the bond holders during the life of the bond.

Coupon Rate - The percentage rate of interest payable on a bond/note or other fixed income security. The figure shown is always the pre-tax (gross) rate.

Creation Price- A term used in the UK to refer to the cost of creating a unit, based on buying the underlying securities within a unit trust. The actual buying (offer) price is usually the creation price plus the initial charge.

Credit Rating- A way of assessing the relative risk of default on repayment by an issuer of bonds as defined by credit rating: for example, the least risky Standard & Poor's rating is AAA for a top quality issuer/borrower, with the riskiest rated at C.

Credit Risk- The possibility that there may be default on payment of interest or capital by a borrower; or that a credit rating may be downgraded.

CREST- The electronic near-paperless settlement system. It was introduced to speed up the time it takes to settle purchases and sales of shares. Under the old settlement system, cheques must be paid or received five working days after the trade takes place.

Customer

Current Yield- The annual interest on an asset divided by the current market price

Currency Hedging- The use of currency futures and options transactions to protect the value of investments and cash against fluctuations in exchange rates relative to the currency in which the fund is denominated

Dealing - Buying and selling bonds, shares or units or switching shares or units between funds.

Dealing Currency- The currency in which shares or units are brought or sold (usually the currency of denomination of the shares or units).

Debentures- Any debt obligation backed solely by the borrower's integrity. E.g. an unsecured bond.

Defined Benefit Plan- A company retirement plan in which you expect to receive a fixed amount on a regular basis from your employer, i.e. a pension. The employer is responsible for investing.

Defined Contribution Plan- A company retirement plan in which the employee elects to direct contributions into the plan and selects the investments held.

Derivatives- A collective term for financial instruments which derive their value from an underlying security (commodities, indices, individual shares) or a notional amount. Examples of derivatives are futures and options.

Dilution- Effect on earnings per share and book value per share if all convertible securities were converted or all warrants or stock options were exercised.

Discount - The amount by which the purchase price of a security is less that its face value.

Distribution - The income or capital gain made by a mutual fund that is paid to the fund's investors.

Distribution Units- Units of a UK unit trust which enable the unit holder to receive income distributions. Income distributions from these units are paid out to unit holders on set dates usually, monthly, quarterly, semi-annually or yearly.

Diversification- The allocation of assets among various types of investments.

Dividend - This is the income you receive as a shareholder from a company. It is a share of the profits made by a company that it has chosen to distribute to its shareholders. Returns vary from year to year depending on the company's profits or operational strategy.

Dividend Reinvestment- Dividends that are reinvested in the security that generated them.

Dividend Yield- This ratio represents the amount of income a company pays in dividends compared with its current share price. It is calculated by dividing the annual dividend per share of a company by its current share price. The ratio does not take into account capital gains or losses associated with the stock.

Domicile - The location of a fund for legal purposes.

Duration- A common gauge of the price sensitivity of a fixed income asset or portfolio to the change in interest rates. It is the weighted average maturity of the present value of all future cash flows of a security.

Earnings Per Share (EPS)- The net profits of a corporation divided by the average number of shares of its common stock outstanding during a period. A common method of expressing a corporation's profitability.

Equity- Another name given to shares. Shareholders are the owners of a company who can vote on important matters such as the appointment of directors. They also participate in the increased value of the company, and therefore its shares, if the company is successful.

Ethical Investments- "Ethical investment" is the term given to investment in companies which make a positive contribution to the world rather than to companies which harm the world, its people and wildlife. For example, someone may avoid investing in a company because it produces alcohol or is thought to exploit labour from poor countries.

Ex-Dividend- This literally means "without dividend". The buyer of ex-dividend shares is not entitled to receive a declared dividend. This occurs in the period between the record date (when a dividend has been declared) and the payment date (of the dividend). During this period the seller not the buyer of the shares is entitled to the dividend. The opposite of this is cum-dividend.

Execution-Only Customers- Customers who do not want the firm's advice but wish to be able to execute transactions by instructing the firm.

Face Value- The displayed value on a debt security/bond also called principal or par value.

Fact Find- The questionnaire created by most financial advisors and sellers of insurance products or packaged products to find out the details about a prospective client. Information from it provides the basis for structuring suitable advice.

Fixed Exchange Rate- System whereby the rate of a country's currency is established at a particular level and is not allowed to move from that level.

Fixed Income Securities- Debt securities or IOUs for borrowed money such as bonds. They obligate the borrower to pay the owner interest during the term of the loan and to return the principal or face value, when the loan matures. A variety of institutions issue debt obligations including the Government, publicly held companies, banks, and savings and loans.

Fixed Interest - Bond or Debt security also known as bonds. Securities that carry rights to a fixed rate of interest and eventual repayment of the capital sum.

Flat Yield- The most commonly used yield calculation, and divides the annual income paid by the market price.

Floating Exchange Rate- System whereby the rate of a country's currency is determined by market forces without any intervention from the Government.

Forward Contract- A contract that specifies the price and quantity of an asset to be delivered in the future. Forward contracts are not standardised and are not traded on organised exchanges.

Forward Pricing - System for pricing units where the manager buys or sells the assets underlying the units at the next price fix for units, after an instruction from an investor who pays that price.

FSA (Financial Services Authority)- The main financial services regulatory body in the United Kingdom, formerly known as the Securities and Investment Board (SIB). FSA is the designated agency under the Financial Services and Markets Act 2000 and the regulator of exchanges, clearing houses, recognised professional bodies, banks, wholesale money markets and certain investment businesses.

FSA (Financial Services Act) 1986 - The legislation that introduced a new regime of investor protection. Became operational in April 1988.

Financial Services Compensation Scheme (formerly known as Investors Protection Scheme/Investors Compensation Scheme)- single compensation scheme set up by The FSA to pay compensation in respect of investment and deposit business.

FSMA (Financial Services and Markets Act) 2000- Previously known as the Financial Services Act and became operational in April 1988. The legislation that introduced a new regime of investor protection.

FTSE 100 Index - Weighted arithmetic index of the UK's leading 100 shares. It is a real time index calculated by the London Stock Exchange.

FTSE Mid 250 Index- Index of the 250 shares below the top 100. Calculated in the same way as the FT-SE 100 by the London Stock Exchange.

Fund of Funds- A fund that simultaneously invests in several funds, thereby reducing the performance risk inherent in any one fund. The manager of the fund selects which funds to invest in, but not the individual stocks.

Funds: 

Fund Size- The total value of assets under management in a fund.

Future- This is a contract to buy or sell a commodity at a future date, at a fixed price which is agreed now. Whilst wealthy private individuals trade them, futures are normally traded by institutions as a substantial amount of risk can be involved. A future is a derivative.

Gearing- The use of debt financing. The debts of a company expressed as a percentage of its equity capital. If a fund is geared it means that it has the ability to borrow money and therefore take advantage of greater investment opportunities. Therefore it has the ability to benefit when another fund might not have the available cash to do so. When a market is rising this means that investors will be in a position to gain more than those not in a geared fund. Conversely, when a market is falling investors are likely to be at greater risk. Also known as leverage.

Gilt edged security- Gilts are bonds issued by the UK Government which pay a fixed rate of interest for a set period of time. Therefore, you know at the time of purchasing the bonds what income you are going to receive for the life of the bond.

Goldilocks Scenario- An economic trend where inflation and growth are considered neither too high nor too low. Refers to the porridge in the fairy-tale which is neither too hot nor too cold.

Growth Fund- A fund whose main objective is capital appreciation. Contrasts with an income fund where the main aim is to provide higher than average income in the form of a dividend payment.

Guaranteed Annuity- Annuity that is guaranteed to make payments for a minimum period even if the annuitant dies during that period. Payments continue after that period if the annuitant is still alive.

Hedge Fund - One of many different types of alternative investment funds, most of which pursue a total return strategy and usually charge a high performance fee in addition to annual management charges and initial fees. While some funds may pursue conservative or market-neutral strategies, many others take highly leveraged bets on directions of currency or stock movements that are not offset by a corresponding hedged position, making them more speculative and risky undertakings.

Hedging- Protecting an existing position or commitment by using one type of investment (e.g. a future or option) to cover adverse market movements. Therefore it is a transaction which will reduces the risk of an investment.

High Yield Bond - A non-investment grade bond issued by a company or sovereign borrower. Standard & Poor's investment grade starts at BBB-. With a low or non-existent rating, firms raising money in the bond markets will have to pay a far higher yield than investment grade paper. The so-called junk bond market is much more widely developed in the US than in Europe. Some corporates, especially emerging market corporates are constrained by the sovereign rating of that country, which may itself be non-investment grade.

Historic Pricing - System for pricing units where buyers and sellers trade on the basis of prices set at the last price fix before their dealing instruction was received.

Holding- This term can be used to describe the amount of units or shares an investor owns, or the amount a fund has invested in a particular company.

IMA- Investment Managers Association (previously known as AUTIF - Association of Unit Trusts and Investment Funds) is the trade body representing the UK unit trust and investment funds industry. Was formed in 1959 and its member companies are now responsible for more than 99% of the industry's funds under management.

The Investment Managers Association
65 Kingsway
London
WC2B 6TD
www.investmentfunds.org.uk

Income Allocation Date- Date by which income attributable to units in authorised trusts must have been computed and dispatched to the holder.

Income Bonds (National Savings)- National Savings product that pays regular income.

Income Yield- See Flat Yield .

Income shares- Some investment trusts issue more than one type of share. They are called split-capital investment trusts and they form about 10% of the whole investment trust market. The simplest 'split' is divided between capital and income shares. The capital shares receive no dividends over the life of the trust, but receive the benefit of the market growth of the shares at the end of the investment. Income shares receive all the income generated by the whole fund but do not benefit from any increase in the value of the shares. These two choices are valuable because they enable private investors to select precisely the sort of investment they need. Some investors want income alone so they can opt for 'income shares'. Other investors want growth so they can opt for 'capital shares'.

Independent Financial Advisers (IFA)- An Independent Financial Adviser (IFA) can be a single person or a small or large firm. These advisers can offer you a full range of products from all the financial services companies. IFAs are usually regulated by The FSA and there is a strict code of conduct they must follow. To find out more information on any particular IFAs authorisation you can contact the Financial Services Authority's Central Register on: 020 7929 3652.

Index- The indicator of the value of a sector of shares in a market. The most common index in the UK is the "Footsie" (the FTSE 100) which is an indication of the performance of the top 100 (by market capitalisation) UK companies' shares.

Index funds- Unit trusts which track the performance of an index. This is usually carried out by either investing in the shares computerising the index or by buying a sample of shares making up the index or a derivative based on the likely performance of the index. The value of the fund is linked to the chosen index so that if the index rises so will the value of the fund. Conversely, if the index falls so will the value of the fund.

Index Performance- A term used on performance charts. For ease of comparison, a fund's performance is shown against its benchmark index or indices starting on a particular date at 100.

Initial Charge- This is the sales charge payable by the investor on the purchase of units in a collective scheme (i.e. a unit trust or an offshore fund).

Insider dealing - Is dealing in the shares of a company on the basis of unpublished price sensitive information such as bad results, a change in management, new technology or a new product, or to advise or enable others to deal on this basis. An insider dealer will be privy to this sensitive information and use it to advantage to gain from the expected change in the share price once the information becomes known to the market. This is a criminal offence which can carry a penalty of seven years in jail and/or an unlimited fine.

Interest Rate Risk- The risk that the value of a bond will depreciate in response to an increase in interest rates. Bond prices and yield have an inverse relationship, when the price of a bond falls the yield rises.

Intervention Order- Notice from an SRO to one of its members where immediate action is required to prevent serious damage being done.

Investment Services Directive (ISD)- European Union Directive implemented in the UK in January 1996, the objective of which is to harmonise standards of regulation and therefore allow firms established in any EU member state to conduct investment business in any other EU state.

Investment Trust- A company whose sole function is to invest in the shares of other companies.

ISA (Individual Savings Account)- Tax Efficient Investing. A good way to minimise the amount of tax you pay is to invest in to an Individual Savings Account (ISA) or a Personal Equity Plan (PEP – these were replaced by ISAs in 1999 and are no longer available for subscription). These are tax-efficient wrappers which you can use with certain investments. All UK tax payers are eligible to invest within ISAs but because of their tax advantages, the Government limits how much you can pay into ISAs in each tax year. The current ISA limit is £7,000 for each tax year and you have two options on how you can use this allowance. A maxi ISA allows you to invest your full allowance with one company and get the full benefit of a stockmarket based investment. A mini ISA allows you to split your £7,000 allowance between two different investment companies in the following ways: Mini ISA = £4,000 Mini Stocks and Shares ISA, £3,000 Mini Cash ISA Please be aware that you can only have one maxi ISA or currently up to two mini ISAs (comprising the separate components) in any one tax year. If you do open a mini ISA in any of the resident components in one tax year it does mean that you cannot invest in a maxi ISA in that same tax year. You can invest in the majority of our funds through an ISA. You can also transfer existing PEPs and ISAs which are currently held with other fund providers into the majority of these funds. means that this fund is eligible for both new ISA investments and ISA & PEP transfers. The favourable tax treatment of ISAs and PEPs is subject to Government legislation and as such may not be maintained. The Government has stated that ISAs will be available until at least 2010. Merrill Lynch Investment Managers commitment is to maintain free switching between funds within an ISA for as long as they exist. Although Merrill Lynch Investment Managers will waive its normal initial charge, you will still be liable to the market spread between the buying and selling price. This varies from fund to fund but it is usually between 0.5% and 2%. Please speak to your Financial Adviser or call us for further details.

IPO (Initial Public Offering)- A company's first sale of stock to the public.

Issue - To issue is to create securities and exchange them for cash or other assets. Alternatively, an issue is the securities created from a particular act of issuance.

Junk Bond- see High Yield Bond .

Know your customer- The duty to ascertain sufficient information about a customer to enable suitable advice to be given.

Last Trade - The price at which the last trade was executed; after market close, this is the closing price.

Launch date- The start of a unit trust, investment trust or mutual fund.

LIBOR (London Interbank Offered Rate)- An interest rate charged among banks in London for short-term loans denominated in a specific currency which, unless otherwise specified, is assumed to be U.S. dollars.

LIFFE- In January 2002 Euronext expanded by acquiring LIFFE (London International Financial Futures and Options Exchange).
www.euronext.com

Liquidity - Refers to the ability to readily convert an asset or investment to cash by sale at a fair price. Also used to describe the amount of cash held in a portfolio.

Liquidity Risk- The possibility that an investor may not be able to find a buyer within a reasonable time at a price that reasonably reflects the theoretical value of the asset.

Listed Firm - A company whose stock trades on a stock exchange.

Listing particulars- When a company applies to be listed as a member of the Stock Exchange it has to give detailed information about itself which is published in the form of a prospectus.

Load - A purchase or redemption fee charged by a unit trust or mutual fund.

Leverage - See Gearing

Macroeconomics- Analysis of a country's economy as a whole.

Management Group- The name of either the fund management house or fund promoter/sponsor.

Margin - Proportion of the value of futures contracts that must be supplied by both buyers and sellers. It is recalculated daily.

Market Capitalisation- The total value of a company's stock. Capitalisation is a measure of corporate size.

Market Indicators - A variety of indices that give an indication of the overall direction and strength of the market.

Market Maker- A Market Maker deals as principal in the shares of companies which appoint him. He must offer the shares and is obliged to quote two-way prices (i.e. buy and sell prices) in them, and must deal in them at those prices throughout the mandatory quote period.

Maturity- Expiry of the term of a contract.

Mid price of shares- The value mid way between the selling (bid) price and the buying (offer) price of shares.

Money Laundering- In the United Kingdom, financial institutions are required to be able to proof the identity of their clients and the source of the money used to pay for investments. This is to prevent organised criminals investing the proceeds of their illegal activities with legitimate companies and so obscuring the origin of the funds.

Money Market- Short-term security or investment, such as a Gilt, Treasury Bill or Cash Deposit, with a maturity of 365 days or less.

Mutual Fund- US term for a collective investment scheme. They are open ended funds and the equivalent to UK unit trusts and OEICs. Like unit trusts, mutual funds come in a variety of shapes and sizes, with differing objectives. All are pooled schemes with a diversified portfolio of shares or bonds.

Names- Individuals of Lloyds of London who join together in syndicates to underwrite insurance business. Their liability is usually unlimited and therefore all their personal wealth is at risk however, there are now schemes for limiting this.

NASDAQ- National Association of Securities Dealer Automated Quotations system, designed to facilitate over-the-counter stock trading.

Net Asset Value (NAV)- The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV.

New Issue - securities that are publicly offered for the first time, whether an IPO (initial public offering) or as an additional issue of stocks or bonds by a company that is already public.

Nikkei 225- The leading, largest 225 stocks of the Tokyo Stock Exchange. The index is a simple average, unweighted. A leading benchmark used by the majority of Japan investment and unit trusts in the UK, despite its relatively crude nature.

No Load Fund - No initial charge on a collective investment scheme. Costs which would normally form part of the initial charge are often covered by a back end charge or a higher than normal annual charge. Very popular in the US and becoming more common in the UK.

Nominal Rate of Interest- The interest rate unadjusted for inflation. i.e. nominal interest rate = real interest rate + inflation.

Non-Contributory Pension Scheme- Occupational scheme funded entirely by the employer.

Nominee Company- A company that acts as the registered owner of securities, but looks after them on trust for a beneficial owner e.g. a private individual who wishes to remain anonymous might buy or sell shares using a nominee company.

Notice of Cancellation- In circumstances where the right to cancel exists, this document that explains those rights must be sent within 14 days of the agreement or receipt of the cancellation notice by the client.

NYSE- New York Stock Exchange

Occupational Pension Scheme- Pension scheme run by an individual employer for the benefit of its employees. Could be contributory or non-contributory. Maximum pension payable is limited by Inland Revenue rules.

OEICS- Open Ended Investment Companies. A UK open-ended fund (see Funds open-ended) which is structured as a company rather than as a unit trust. They were launched in the UK in 1997.

Offer Basis- Circumstances where the trust manager has set the offer price of an authorised unit trust at the highest level allowed by FSA rules.

Offer price - The price at which units may be bought.

Open ended- See Funds .

Open Outcry- A form of trading where traders shout and signal their trades in the pit. The trade is later recorded on a trading card.

Options- An option gives the right but not the obligation to buy or sell an underlying commodity or financial instrument at a certain date in the future. Options are often favoured by smaller investors as the risk is limited to the purchase price of the option. An option is a derivative.

Ordinary Shares- Shares that carry full voting rights and dividend entitlements.

Par Value- This is the face value of a security as opposed to its market value. Bonds will always be redeemed at par value, although they may be priced on the market above this price (at a premium) or below this price (at a discount). Par values for shares represent their original value when the company was constituted; they often have no investment significance.

Pay date- The date when dividends, or shares from a split, are sent to shareholders.

Pension Fund- Provider of pensions. Status requires Inland Revenue approval and means that the organisation does not pay any tax.

Personal Allowance- The amount of income that each person is allowed to earn which is not liable to income tax. The amount differs according to whether a person is married or single and according to their age.

Personal Equity Plan (PEP)- Introduced in 1987 to encourage wider share ownership, PEPs are investment schemes whereby investors buy shares, unit trusts, bonds or investment trusts through a PEP manager. ISAs replaced PEPs in April 1999.

Placing- This is when a merchant bank or broker advising a company arranges for other institutions or individuals to buy that company's shares at a fixed price. The advantage of this is that placing the shares for the company then cuts out the broker (i.e. the middle man). It is often used when there are a small amount of shares available in a new issue or alternatively if a large stake in a company is for sale. A placing is often used by institutions prior to a public offer. A placing helps ensure that a minimum sum is raised and therefore, that the launch will be a success.

Polarisation - FSA requirement whereby firms selling long term products must act either as a company representative and sell only that one company's products or act as an independent financial advisor and recommend from all companies' products.

Portfolio - The combination or spread of investments held by an investor or by a fund.

Pound cost averaging- By investing relatively small amounts of cash on a regular basis, investors essentially minimise the risk of purchasing all their shares or units at the top of the market (highest price). By putting money into the Stockmarket gradually, they will benefit from the smoothing effect of having purchased some shares or units cheaply (when the price is low) whilst others are purchased at an expensive price in another month. If the unit or share price falls the investor will benefit because the regular monthly investment will purchase more shares over the long term and avoids the investor from having to try to guess when it is a good time to buy. A sample of pound cost averaging is benefiting from regularly investing, eg. monthly saving, smoothing out the peaks and the troughs of share prices.

Preference shares- preference shares are shares issued by companies but are different to ordinary shares because:

One of the disadvantages of preference shares is that because they pay a fixed dividend their value does not rise as the company prospers.

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Price/earnings (P/E) ratio- The share price of a company divided by its earnings per share, i.e. if Tim Brown Co has earnings per share of 45.5p and the market price is 400p , the shares have a P/E ratio of 8.8 (400 / 45.5p). Another common way of expressing the P/E ratio is: 'the shares sell at 8.8 times earning' or 'the shares are on a multiple of 8.8'. The price earning ratio is usually used for comparing companies investment potential.

Primary Market- Initial launch of a company's shares when they first become available for a trading on the Stock Market.

Principal- The amount of money that is financed, borrowed, or invested.

Principles- FSA's 10 principles that underpin the regulatory structure in the UK.

Privatisation- Process where the government puts state owned industries into the private sector, e.g., water, electricity. Usually involves an offer for sale to the general public of its shares.

Prospectus- See Listing particulars .

Put option - Option providing its holder with the right to sell an investment at a future date but at a price agreed now.

Quartile Ranking- Fund rankings broken down into four sections, each of 25%. For example, in a sector of 12 funds, the top three performing funds would be classed as first quartile, the bottom three as fourth quartile, etc.

Real Rate of Interest- Nominal interest rate minus inflation rate.

Redemption Yield- The total annualised return on owning a fixed interest security, made up of income plus any gain or minus any loss to redemption.

Regulated Unit Trusts- Those trusts that can be marketed freely in the UK. Any trusts based in the UK would be authorised by FSA and overseas trusts would have to be recognised by them.

Registrar - The person responsible for maintaining a company's share register which involves keeping the list of shareholders accurate. Unit trusts can also use a registrar to issue trust certificates and send out distributions of income earned on the unit trusts. 

Re-investment of income- income from a fund that is used to increase the value of the holding rather than being paid out.

Reinvestment Risk - The risk that proceeds received in the future may have to be reinvested at a lower interest rate.

Repo (Repurchase Agreement)- An agreement between a seller of securities and a buyer, whereby the seller agrees to repurchase the securities at an agreed upon price and at a stated time.

Retail Price Index (RPI)- Main measure of inflation. Used for calculating indexation for capital gains tax and on index-linked gilts and National Savings products.

Return - The amount by which an investment may change due to a combination of capital growth and/ or interest dividend income. This is normally expressed as a percentage.

RIE- Recognised Investment Exchange. An investment exchange which meets the requirements for recognition under the Financial Services and Markets Act 2000 and approved by the Financial Services Authority (FSA).

Rights Issues- Further issue of shares by an existing company to raise funds. Shares are offered to existing shareholders who can sell the right on to other people.

Risk- Degree of uncertainty of return on an asset. The risk level of a portfolio is always stated in the prospectus.

Risk/Return Factor- The relationship between an investment's growth potential and its exposure to loss.

Rolling settlement - System for settling share transactions under which bargains are settled a set number of days after being transacted.

Script issue- This is when a company issues free new shares to current shareholders. These are normally in direct proportion to their existing holdings (shares) and can be used when a company's shares have become so expensive they are not easy to sell. (See also Bonus issue).

Secondary Market -The market in which existing securities are bought and sold subsequent to a new issue.

Sector- The category in which funds or companies are grouped.

Sector Weighting- The relative proportions of a fund held in industry sectors (for example, engineering or property).

SERPS- S2P (formerly known as SERPS) - The State Earnings Related Pension Scheme that pays a pension according to the level of a person's earnings. Many companies contract out.

Securities- Another name for stocks and shares, but also applies to any approved or registered financial instrument, such as unit trusts.

Shares- Securities carrying ownership rights in a company. Could be ordinary, 'A', or preference.

Short selling- Selling a stock not actually owned. If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market. If the price has fallen the investor will make a profit. If the price has risen the investor will still have to buy the stock on the open market to return to the broker; this will result in a loss.

SICAV- Société d'investissement à capital variable (SICAV) is the French term to describe an open-ended investment company.

Split - Sometimes, companies split their outstanding shares into more shares. If a company with 1 million shares executes a two-for-one split, the company would have 2 million shares. An investor with 100 shares before the split would hold 200 shares after the split. Correspondingly the value of each share would halve.

Spread- This is the difference between the offer price at which units or shares are sold and the bid price at which they are bought back from the public. i.e. - the Market Maker or unit trust manager's bid price is the price at which the investor can sell to him and the Market Maker's offer price is the price that the investor can buy from him and so is the higher of the two. The difference between the two prices is the spread and includes the market makers profit and his costs.

Spot exchange rates- Exchange rate on currency for immediate delivery.

Spot interest rate - Interest rate fixed today on a loan that is made today.

Stag - Someone who applies for a new issue of shares intending to sell them (for a quick profit) as soon as market dealings commence.

Stamp duty- A tax that is deducted when purchasing ordinary shares, and preference shares (equities). At present this is at 1/2% of the value of the Stock purchased and applies to all equities.

Standard & Poors Fund Management - An independent company, which rates unit trusts on performance and the quality of the fund management process.

Switch/Swap- This type of order is used only for unit trusts to move money from unit trusts to another. Switch instructions may be placed over the telephone and the buy and sell operations executed on the same day.

Tax Exempt Special Savings Account (TESSA)- A government backed scheme introduced in 1991, where a special savings plan held by an approved institution (usually a bank or building society) will generate interest, free of income tax. TESSAs were designed to provide some tax shelter for relatively modest savings. There are a number of conditions relating to TESSAs which include a maximum annual investment and minimum holding period. 

Tied Agent- An individual or business which only sells one company's (or group's) products (such as life assurance) making no pretence of offering independent advice on all the products available in the market place. It is important to check whether the individual or business is tied or an Independent Financial Advisor (IFA) before making a purchase because an IFA is free to recommend any company's products and therefore offer a wider choice.

Time value of money- The idea that money today is worth more than money in the future, because the money received today can earn interest up until the time the future money is received.

Top-down Approach - Investment management technique that bases portfolio construction on macroeconomic views rather than stock specific views. Top-down factors will apply to both country and sector allocation. Specific stock decisions in a top-down portfolio will most likely be made according to the index weighting of that stock, rather than its own particular characteristics.

Tracker Fund- See Index Fund .

Tradepoint- An electronic, order-driven Stock Exchange which began trading in September 1995. Tradepoint is a Registered Investment Exchange and provides a rival service to the London Stock Exchange.

Treasury- Government department responsible for all the government's financial decisions and for regulation of the financial services sector. The minister responsible for the treasury is the Chancellor of the Exchequer.

Trustee- Person or organisation who is responsible assets held in trust. Duties include safeguarding the assets, monitoring compliance with the trust deed and the activities of the trust manager.  

UCITS- Undertakings for Collective Investments in Transferable Securities. The UCITS legislation governs how a fund can be marketed with the European Union and is designed to allow cross border fund sales to investors of different nationalities. To obtain UCITS status a fund must invest within defined but wide parameters. The fund may then be sold in any EU country, subject only to the marketing rules of that country. The funds are often umbrella funds based in recognised European offshore centres such as Luxembourg or Dublin. A non-UCITS fund, such as a hedge fund, is not allowed to be actively marketed within the EU.

Umbrella Funds- Unitised collective investment funds, usually domiciled offshore but increasingly adopted as a structure for UK OEICs. Offer investors a choice of sub funds and share classes within one vehicle. Often offer free switching between each sub fund.

Unauthorised Unit Trust- A Unit Trust that does not comply with FSA's criteria to make it authorised and that can only be marketed to sophisticated investors.

Underwriters- These are usually institutions such as merchant banks, who agree to purchase a company's new issue shares if they are under- subscribed during a placing, although they charge an underwriting fee for doing this. Their advantage is that the issuing companies are effectively guaranteed the issue monies.

Units- Portions of a collective investment vehicle, such as a unit trust.

Unit trust- A system where money from a number of investors is pooled together and invested collectively in investments such as shares and bonds. Each investor owns a unit, (or a number of them) the value of which depends on the value of those items owned by the fund. A unit trust allows modest investment to be diversified away from a holding in a single or small number of companies. See Collective Investments and Open Ended.

Value Investing- An investment technique that searches for firms that have not been, to the investor's mind, fully valued by the market and might be due for a re-rating. The manager of a portfolio will not want to pay too highly for stocks, unlike a growth manager, who will pay more for guaranteed growth prospects of a firm. The lines between the two camps, value and growth are more blurred than these definitions would suggest. Growth managers dislike paying too much for growth, and value managers are unlikely to buy at any price a stock that is not growing.

Venture Capital Trusts - VCTs are investment trusts, whose shares are often traded on the stock market, which are set up as a way to help new enterprising schemes and companies to get started or established ones to expand (these are known as unquoted companies). Due to the uncertainty involved when investing in unquoted companies the returns can be substantial but so can the losses.

Volatility- A measurement of how much variability there may be in the prices of an underlying security over a specified period of time.

Volume- The daily number of shares traded in a security.

Voting stock- The shares in a corporation that entitle the shareholder to vote.

Warning- Instruction from The FSA to one of its members identifying a breach and the action that should be taken to correct it.

Warrant- This type of security gives the owner the right, but not the obligation, to buy new company shares at an agreed price at a future date. The warrants are then traded on the Stock Exchange and tend to have a more volatile price than company shares. Until warrants are exercised into shares they do not entitle the holder to receive dividends, or attend or vote at the company's general meetings.

Xd - see Ex-dividend .

Yield- The amount of income generated by a fund's investments in relation to the price. It is usually quoted gross i.e. before tax and after charges.

Yield Curve- The relationship between individual yields and maturities for a given issuer's securities, depicted graphically.

Yield to Maturity - The internal rate of return of a series of cash flows from a given time until maturity.

Zero Coupon Bond- Zeros are securities that do not pay interest during their terms but are sold at a discount from their face value. A zero coupon bond generally increases in value as it approaches maturity, and the return comes solely from its appreciation. The difference between the purchase price and the maturity value represents the yield or accretion value. Maturities range from 1 to 30 years.

Zero Dividend Preference Share- Share in a split capital trust that pre-determines the rate of growth and pays no dividend.