Glossary of financial terms
A
Absolute Return - the measure of the gain or loss on an investment portfolio expressed as a percentage of invested capital net of fees.
Active Management - A strategy followed by an investment manager to achieve excess returns. Rather than trying to track a benchmark or the performance of a sector, the manager actively selects investments he believes will outperform.
Adviser Charges - Fees that are payable upfront or on an ongoing basis to a Financial Adviser for their advice. The fees can be as a % of a portfolio or a fixed cash amount.
Alternative Investments - Investments with risk and return characteristics that differ markedly from those of traditional stock and bond investments.
Annual Management Fee / Charge (“AMC”)- The annual fee paid for the investment management of your portfolio.
Asset Allocation - The process used by your investment manager to determine the types of assets that they wish to hold and the percentage of investments that will be allocated to each type or “Asset Class”.
Austerity - An economic policy aimed at reducing a government's debt. Austerity can be achieved through increases in government revenues, generally via tax rises and/or a reduction in government spending.
B
Bail In - A plan designed to assist a struggling borrower, which typically employs tactics such as deferring debt payments, freezing interest or writing off debt completely. As such, debt holders will incur losses before an external party, often the state, is asked to support the borrower.
Bail Out - A plan designed to assist a struggling borrower, where the aid is provided by an external party and often occurs through a direct loan, the provision of third party debt guarantees or the acquisition of outstanding debt at above market prices.
Basis Point - 0.01%, one hundredth of one percent.
Bear Market - A market in which share prices are falling and sentiment is negative thereby encouraging further selling.
Benchmark - A measurement, generally an index, against which the performance of a portfolio is compared. In this context, the terms “Out Performance” and “Under Performance” are used.
Best Execution - This term is employed by the FCA to describe the process by which firms are obliged to take all reasonable steps to obtain the best possible result when executing client orders or placing orders with other entities to execute.
Bid Price - The price at which a security can be sold, which is often less than the price at which it may be bought (the “Offer Price”). The “Mid Price” is the price in between the Offer and Bid and is typically used to value investments.
Bond - A fixed-income investment whereby an investor loans funds to a body (usually a government or corporation) for a certain period of time, with an applicable rate of interest.
BRIC - An acronym for Brazil, Russia, India and China.
Bull Market - An environment in which the value of investments is rising and confidence in the market is high.
C
Capital Gain - The value of the profit made when an investment is sold. This may be subject to tax by the Government (“Capital Gains Tax”). Although, investments held in certain ‘wrappers’, such as pensions and ISAs, are exempt. There is an annual capital gains tax-free allowance.
Client Money/CASS - A set of rules enforced by the FCA that dictate how regulated firms must deal with clients’ money. In summary, client money must be held separately from the firm’s own money and be clearly identifiable in their books and records. These measures are designed to protect clients in the event of the bankruptcy of a firm.
Capital Return - The increase in the value of your assets, excluding dividends and interest.
Closed Ended Fund - A fund that has a limited number of shares in issue, so that those interested in investing must purchase from a fixed pool.
Commodities - A raw material or primary agricultural product (e.g.: oil, gas, pork, corn). Commodities are homogenous, and as such markets for these assets are typically very liquid.
Consumer Price Index (“CPI”) - The consumer price index is the official measure of inflation of consumer prices in the UK.
Convertible Bond - A security representing a loan where the holder has the future option to convert the value of the loan into equity in the issuing company.
Coupon - The rate of interest which is paid to the holders of a bond. The higher the perceived risk of default by an issuer, the higher the rate of interest is likely to be.
Credit Rating - Three main rating agencies assess the issuers of debt, both government and corporate, to assess the strength of their ability to repay the debt. The very safest entities are rated AAA. Issuers rated below BBB- are considered speculative grade. In difficult economic times, many rating agencies may “downgrade” state issuers and companies.
Custody - A service provided to store and keep securities safe.
D
Deflation - This is when the general price of goods and services declines.
Derivative - A security with a value that is dependent upon, or derived from, one or more underlying assets. Types of derivative include put and call options, swaps and futures.
Developed Market - The market of a country which is perceived to have a solid regulatory and legal structure together with a long history of trading (eg: France, Germany, Japan). Such an environment is perceived to be less risky than an Emerging Market, where the infrastructure and trading history will be less mature (eg: Turkey, Mexico).
Discretionary Investment Management - The service whereby an investment manager takes responsibility for all investment decisions relating to your portfolio, on the basis of the information about your needs and circumstances that you have provided to us.
Disinflation - This is a slowdown in the rate of the increase of prices for goods and services.
Diversification - An approach to investment designed to reduce risk by spreading the assets held in a portfolio across different issuers, sectors and types of investment.
Dividend - The income received by holders of equities, representing a portion of the profits of the company who issued the shares.
E
EMEA - An abbreviation for Europe, the Middle East and Africa.
Equity - A security that provides the holder with the right to a share in the assets of a company on its winding up, to vote at meetings regarding its management and to ongoing income payments (Dividends). The terms “Stock” and “Share” have the same meaning.
European Central Bank (“ECB”) - The central bank responsible for the Euro and for setting monetary policy across the 19 Eurozone member countries.
Ex-Ante - Based on expected or forecasted rather than actual results.
Ex-Post - Based on actual results rather than expected or forecasted.
Exchange Traded Fund (“ETF”) - A fund traded on an Exchange, like a stock or bond, that typically tracks a basket of assets, an index or commodity.
Execution Only - An investment service whereby the investment decisions are made by the client but carried out by the investment firm on the client’s instruction.
F
Financial Conduct Authority (“FCA”) - The regulator responsible for supervising financial services firms in the UK. The FCA makes rules which regulated firms must adhere to and enforces action to address any failure.
Financial Ombudsman Service (“FOS”) - An independent body responsible for investigating complaints against financial services firms operating in the UK. All retail clients have the right to ask the FOS to investigate any situation which they feel has given them the right to complain.
Financial Services Compensation Scheme (“FSCS”) - The FSCS provides individuals and small businesses with the right to compensation up to a limit of £85,000 in circumstances where an investment firm cannot pay monies owed to them.
Fund/ Collective Investment Scheme - A collective investment scheme is an arrangement that enables a number of investors to pool their assets and have these professionally managed by an independent manager. Investments may typically include bonds and quoted equities, but depending on the type of scheme may go wider.
G - H
Gearing or Leverage - A measure of the amount of debt that a company has issued versus the value of its equity capital. A high level of gearing or leverage would suggest that the company has significant borrowings.
Gilt or Gilt-Edged Security - A bond issued by the UK Government. The sale of gilts is used to finance the shortfall between tax revenue and government spending.
Hedge Fund - An alternative investment typically used by sophisticated investors which can employ a wider range of investment strategies than traditional ‘long only’ funds.
Hedging - The strategy of taking an offsetting position to protect against a movement in the value of an asset. For example, an investor concerned about the price at which an equity might trade in the future could buy an option giving him the right to sell the shares at a predetermined price if the price falls below a certain level.
HMRC - An acronym for the UK tax authority, “Her Majesty’s Revenue and Customs”.
I - J
Index - A theoretical portfolio of securities, designed to be an indicator of the value of a sector of assets in a market. For example, the FTSE 100 represents the largest companies listed on the London Stock Exchange by market capitalisation.
Inflation - This is when the general price of goods and services increases.
In-specie - In-specie is Latin for ‘in the actual form’. Transferring an asset ‘in-specie’ means to transfer it in its current form without the need to convert it to cash.
Investment Savings Account (“ISA”) - A scheme created by the UK Government to allow investors to hold certain assets, such as cash, shares and unit trusts, largely free from tax on income and capital gains. Individuals must be resident in the UK and the maximum contribution to an ISA is capped on an annual basis.
Investment Trust - A closed ended investment scheme, issuing shares to raise funds and investing the proceeds in certain assets. The shares are listed and traded throughout the day, as opposed to at a fixed time only.
Junk Bond/High Yield Bond - A bond issued by an entity which has been rated below investment grade by the rating agencies. Such an asset typically represents a high risk to investors but may also present an opportunity to achieve a high reward.
K - M
Long Only - The strategy of buying investments believed to be undervalued in anticipation of them rising in the future.
London Inter-bank Bid Rate (“LIBID”) - The rate at which a bank is willing to borrow money from another bank.
London Inter-bank Offered Rate (“LIBOR”) - The rate at which a bank is prepared to lend money to another bank.
Market Capitalisation - A common method of valuing a company. It is calculated by multiplying the total number of issued shares in a company by the price at which those shares trade.
MiFID (“Markets in Financial Instruments Directive”) - A framework of EU legislation for investment firms providing services to clients around all investment asset classes.
Money Laundering - The process by which ownership of illegally obtained funds is disguised. The financial services industry is required to adopt specific measures to help prevent the 3 stages of Money Laundering: placement, layering and integration. Generally, this will involve checking the identity of clients and validating the source of funds.
N - O
Net Asset Value (“NAV”) - A simple and commonly used measure of the value of a fund, calculated by deducting liabilities from assets.
Nominee - A legal device used by companies to hold assets on behalf of multiple beneficial owners. This is typically employed by companies who hold assets in safe custody on behalf of clients.
Offshore Bond - An offshore bond is a wrapper set up by a life insurance company based outside of the UK in a country with a favourable tax regime, for example: The Isle of Man.
Open Ended Fund - A fund that creates new units whenever money is invested to meet demand. Conversely, it cancels units when redemptions are made. This device provides liquidity for investors.
Open Ended Investment Company (“OEIC”) - A legal wrapper that can be used to create an Open Ended Fund.
Over Allocation - When an order to buy or sell shares is over subscribed, Over Allocation rules will be used to determine how the order which has been filled will be distributed across the various clients concerned.
P - Q
Performance Fee - A variable fee that may be charged by a portfolio or fund manager. It is a generally calculated as a % of the excess return in relation to the performance against an agreed benchmark.
P/E Ratio - A measure of the value of a company based on the relationship between the share price of a company and the level of earnings that it achieves.
PIIGS - An acronym for Portugal, Ireland, Italy, Greece and Spain.
Preference Shares - Holders are entitled to a fixed dividend, a guarantee of payment that is more like the feature of a bond than an ordinary share. Preference Shares do not, generally, confer voting rights but holders will rank above ordinary shareholders in order of priority in the event of a liquidation.
Prudential Regulatory Authority (“PRA”) - The regulator responsible for promoting the stability of the UK financial system and regulating the prudential affairs of banks, building societies, insurers and very large investment firms.
Panel of Takeover and Mergers Levy (“PTM”) - £1 is charged on all sales and purchases of equities with an aggregate value over £10,000.
Quantative Easing - A policy employed by Central Banks, whereby money is electronically created to purchase financial assets, such as government bonds. The desired impact is an increase in lending to businesses and individuals, which can be then invested or spent and therefore spur economic growth.
R
Real Estate Investment Trust (“REIT”) - A form of closed ended fund which invests in real estate and meets certain criteria specified by HMRC entitling holders to tax advantages.
Retail Client - A classification used by the FCA to denote individuals who require the most regulatory protection. More sophisticated investors may be classified as Professional Clients or Eligible Counterparties.
Risk Profile - An evaluation of a client’s willingness or ability to accept changes in the value of your capital. This will take into consideration the time horizon for your investment, any external assets that you may have, your financial knowledge and experience and your financial commitments.
S
Self-Invested Personal Pension (“SIPP”) - An HMRC approved personal pension scheme allowing members autonomy on many aspects of the investment.
Small Self-Administered Schemes (“SSAS”) - A company pension scheme approved by HMRC with 12 or fewer members.
Stamp Duty / Stamp Duty Reserve Tax - Stamp Duty of 0.5% is paid on nearly all UK equity purchases over £1,000 excluding AIM stocks
Structured Product - Structured products are designed to facilitate highly customized risk-return objectives. This is accomplished by taking a traditional security such as a conventional investment-grade bond, and replacing the usual payment features (e.g. periodic coupons and final principal) with non-traditional payoffs derived not from the issuer’s own cash flow, but from the performance of one or more underlying assets. The payoffs from these performance outcomes are contingent on the underlying asset.
Suitability - The ongoing duty we owe to you to determine that your portfolio is appropriate to your circumstances.
T - U
Total Expense Ratio (“TER”) - The running costs of a fund including any annual management charge and administration fee, expressed as a percentage.
Total Return - The combined capital and income return on your portfolio.
Treating Customers Fairly (“TCF”) - An FCA initiative intended to ensure that financial firms establish standards of best practice in dealing with all of their customers.
Unit Trust - A type of open ended collective investment scheme established in the form of a trust. Funds are managed in accordance with strict investment guidelines.
V - Z
Value Added Tax (“VAT”) - Currently at 20% and applies to certain services.
Volatility - The movement in the price of the security.
Yield - The income generated by an asset, divided by the price.