Investment Management Glossary - Asset Management Glossary

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130/30 strategies: Long/short strategy using derivatives and/or stock lending to achieve Absolute Returns. NAV value is 100%, long positions can increase exposure by 30%, short exposures match off at 30%. Can also be called ARFs (see below), 140/40 etc.
401(k): US personal pension schemes. Investment choices much wider than UK personal pensions but usually including shares, bonds, money market funds, VCTs and other mutual funds.
ABI: Association of British Insurers. The trade body for insurance companies.
ABS: Asset-backed security. Traded security which are structured like a bond except the cash flows can come from a number of different sources/issuers such as credit card receivables, car loans, leases, etc.
ABSs normally carry some form of credit enhancement such as bond insurance to make them more attractive to investors. Alternatively, the investors can buy credit default swaps to protect against default.
Accounting reference date: The closing date for a fund’s annual accounting period. This date must be stated in the fund’s prospectus (or scheme particulars).
Accrued interest/income: Interest earned by investors (or their fund or portfolio) awaiting distribution. Fixed income interest is accrued daily, Dividends are accrued only when the security price goes ex-dividend (xd).
Accumulation shares/units: Income earned on investment remains accumulated within the price of the units/shares, increasing the value of the holding.
ACD: Authorised Corporate Director.
Firm authorised to operate a collective investment scheme. ACDs have the same role and responsibilities as their Authorised Unit Trust Managers.
Active funds: Funds that aim to out-perform a benchmark (usually an index) (e.g., the FTSE 100).
Active management: Active fund managers believe they can identify mis-priced securities which they buy/sell to out-perform their benchmark.
Active risk: The risk arising from active management in excess of the risk that would be incurred if the portfolio was passively managed (i.e., the weighting differential versus the benchmark/index).
Actuary: A professional person skilled in evaluating and assessing risks. Actuaries monitor and advise on the solvency of life assurance companies and pension funds.
Added value: Performance in excess of a stated benchmark or index (see Alpha).
Administrator: Firm employed to handle client monies (see Transfer Agent). In the case of offshore funds, the administrator instructs brokers on the recommendations of the fund adviser.
ADR: American Depository Receipt.
An ADR represents a share, or a defined number of shares, of a non-US company. A US depository bank holds the underlying shares and issues the Depository Receipt. ADRs may be listed in the US, UK and Luxembourg. Unlisted Level I ADRs are traded OTC on NASDAQ.
Advanced active management: An investment approach that uses quantitative tools (such as computer-driven models) to systematically control risk and cost and achieve above-benchmark returns.
AIFs: Authorised Investment Funds.
UCITS and other funds are authorised by the Home State regulator and can be freely marketed to retail investors in the EEA.
Agency broker: A broker who works on a commission basis to secure the best deal for the client on the market.
Aggregation: Multiple-client orders processed as a single order. Customers must be notified of this procedure and its advantages and disadvantages.
AGM: Annual General Meeting.
Regular shareholder meeting, legally required to be held annually to approve accounts and dividend, re-appoint auditors and directors, and transact any other business.
AIC: Association of Investment Companies.
Trade association for closed-ended investment trusts.
AIFs: Authorised Investment Funds.
UCITS and other UK-based AIFs must be authorised by the regulator in their EU Home State in order to be freely marketed to the public in the EU.
AIFMD: Alternative Investment Fund Managers Directive. EU legislation aimed at regulating non-UCITS vehicles. (covers Private Equity and institutional funds as well).
AIM: Alternative Investment Market.
UK stock market run by the London Stock Exchange for smaller company shares in the UK. AIM shares are not considered fully listed securities and are not eligible for ISAs.
All Share index: Properly, the FTSE-All Share Index that summarises the state of the UK equity markets. It covers some 900 of the major UK industrial, commercial and financial companies.
All-in price: Market price of a bond plus accrued interest. Also known as the ‘dirty price’.
Allocation: The division of a single aggregated order across two or more investors/funds/portfolios.
Allotment letter: Written confirmation from an issuing company to the subscriber of the allotment of new shares.
Alpha: The out-performance of a portfolio against the benchmark attributable to the manager’s strategy.
Alpha managers: A term widely used by hedge fund (and other active) managers seeking to out-perform their chosen benchmark by as much as possible.
Alternative investments: Investments outside the mainstream. Can include hedge funds, venture capital, art, wine, infrastructure funds, etc.
AMC: Annual Management Charge.
A charge imposed by the asset manager on a fund/portfolio. The charge on retail unit/share classes is usually 1.5% x NAV and is taken from the fund. Institutional unit/share classes pay less. Hedge funds usually charge 2% plus a performance fee.
AML: Anti-Money Laundering.
Annual report: Report on a fund/company sent to investors/shareholders.
Annuity: A fixed annual payment. Individuals will generally use their pension savings to purchase an annuity on retirement. The value of the annuity is greatly affected by current interest rates at the time of purchase. The real value of annuities decreases over time due to inflation.
Appointed representative: A self-employed individual or a firm that is contracted by an authorised firm to conduct regulated business. May include sales teams or administration firms (TPAs).
Approved Persons: Individuals who perform Controlled Functions and must be registered with the FSA. Must demonstrate that they are fit and proper, as well as competent, for their role. Governed by FSA Code of Practice.
APR: Annual Percentage Rate.
APT: Arbitrage Pricing Theory.
Complex mathematical theory to construct efficient portfolios maximising the client's risk and return profile.
Arbitrage: A strategy to buy a cheap asset and sell an over-priced asset to make a (small) risk-free return. May be used within same asset (e.g., shares/bonds) or across assets (e.g., gold price vs oil).
ARFs: Absolute Return Funds. Aim to deliver an absolute return (ie not a relative return compared with an index or other benchmark). In practice these funds will use derivatives to hedge against falling market conditions.
ARROW: Advanced Risk-Responsive Operating FrameWork devised by the FSA to assess the risk posed by authorised firms. Based in impact and probability of the firm failing.
ASP: Alternatively Secured Pension.
Available from age 75. A form of Pension Fund Withdrawal. An alternative to a Lifetime Annuity
Asset allocation: The distribution of investments in a portfolio (equities, bonds, cash, property, hedge funds) to maximise client returns.
Asset allocation model: A model based on forecasts of each asset class (return, risk and covariances) to optimise asset allocation and enhance returns.
Asset class: Category of assets (e.g., equities, bonds, property or cash).
Asset cover: Cover on an investment trust zero dividend preference share. The redemption price is covered by the current gross assets less the costs prior to charges.
Asset manager: See investment manager.
Assets: Usually stocks and shares, fixed interest securities or cash, these are the ‘building blocks’ of a fund/portfolio.
At Best: An instruction to deal at the best price ruling in the market at the time, i.e., the highest (selling) or lowest (buying) price.
ATS: Alternative Trading System.
Alternative market for trading securities, not on the main exchange. Also known as MTFs (under MiFID).
At-the-money: When the market price of the underlying instrument is the same as the exercise price of the option/warrant.
Attribution analysis: Calculation of the performance attributable to each investment decision (TAA, stock selection, sector selection, credit risk, timing, etc.).
Auction: The normal process of selling government securities. The Central Bank accepts bids down to the lowest acceptable price (i.e., highest yield).
AUM: Assets Under Management.
AUT: Authorised Unit Trust.
Authorisation: Formal process for the Home State regulator to approve a firm to undertake designated investment business.
AVCs: Additional Voluntary Contributions.
Employee contributions over and above any compulsory contributions to a tax-approved occupational pension scheme. Tax law limits the total value of contributions that can be made.
Back office: General term for fund administration, pricing, valuation, stock lending, custody, settlements and corporate actions, etc.
Backwardation: Situation that occurs occasionally in futures/forward markets, where spot prices are higher than the price of the future/forward.
Balanced funds: Funds invested in a range of asset classes (e.g., bonds, equities, cash and property) under the discretion of the portfolio manager.
Bank for International Settlements (BIS): Based in Basel, BIS is an international organisation that fosters international monetary and financial cooperation and serves as a bank for central banks. Website: www.BIS.org
Bank of England: The UK's central bank. The Bank is independent of government control and sets interest rates to keep CPI under the government's current target of 2%. Website: www.bankofengland.co.uk.
Bare trust: A trust set up for a child known by parents or others. It transfers an asset to a child to ensure he or she gets the benefit. The asset will automatically be transferred to the child when he or she reaches 18.
Base currency: The currency into which all assets of a fund/portfolio are translated for accounting purposes.
Base rate: The minimum rate at which banks will lend money to individuals. In the UK, this is set each month by the Monetary Policy Committee (MPC) at the Bank of England.
Bear: Investor who believes prices will fall in the future (see Bull).
Bearer securities: Although notionally no registration of ownership, these are usually held electronically in modern markets and physical paper is not exchanged between buyer and seller.
Benchmark: Target against which investment performance is measured. It might be an index (e.g., MSCI EAFE, FTSE 100), the peer group (sector average) of authorised funds (e.g., Micropal S&P, Lipper data) or similar pension schemes (e.g., CAPS, WM).
Beneficial owner: A party that is entitled to the rights of ownership of an asset. Usually distinguished from the registered (legal) owner (e.g., the nominee who holds securities for the beneficial owner).
Bermuda options: A type of option that can be exercised only on predetermined dates, usually every month.
Best execution: MiFID requirement for firms to provide Retail and Professional Customers with the best trade (including price, settlement, speed and liquidity). Applies to equity trades.
Beta: The relative move of a stock (or portfolio) against the market. A security with a Beta of 1 would be expected to move in line with the index. Higher Beta stocks (or portfolios) are expected to out-perform in rising markets and under-perform in falling markets. Lower Beta stocks (or portfolios) are defensive.
Bid price: The price at which securities (or units in Collective Investment Schemes) are repurchased from the investor.
Bid-offer spread: Difference between the bid (selling) and offer (buying) price.
Binary option: This type of option pays out a prescribed cash amount at expiry if the option expires in the money.
BIS: See Bank for International Settlements.
Bloomberg: Company that provides market and investment information, including real-time share prices.
Blue chip company: Informal term for a large, well-known company with a long-standing history of profit growth, strong branding and consistent dividend payouts.
Bond: Security issued by a corporate or government to back borrowing. The issuer guarantees to repay the principal sum on redemption date plus interest (coupons) during the life of the bond. Bonds may be secured over assets of the firm or unsecured.
Bond Market Association (BMA): A US-based industry organisation of market participants. Started in 1912 as the Investment Bankers Association of America. Sets non-binding standards of business conduct in the US fixed income markets. Website: www.bondmarkets.com
Bond repo: Transaction under which one counterparty sells securities (e.g., government bonds) to another, agreeing to repurchase (repo) them back at a future date at a pre-agreed price.
Bonus issue: Bonus, scrip or free issues are equivalent terms. Free shares are issued to existing shareholders out of company reserves.
Book: The stock (or line) of securities held by a firm on its own account.
Book building: In order to assess the price the market will bear for a new issue (IPO), the investment bank (underwriter) will seek bids from potential investors.
Book entry: Electronic settlement and record of ownership of a security.
Book value: Value at which a security is recorded on the capital account (fund) or balance sheet (company). Usually the purchase cost, less any depreciation.
Bottom up: Approach to investment management that gives priority to stock selection rather than asset classes. Bottom-up managers rely on identifying and selecting securities to build an optimum portfolio.
Bourse/Bolsa: Stock exchange of European (or Latin American) markets.
Box: The stock of shares/units in a Collective Investment Scheme that are held by the manager acting as principal.
B.P.: Basis Point.
One hundredth of one percent (i.e., there are 100 bp per 1%). Example 25bp = 0.25%.
BPV: Basis Point Value.
The profit/loss on a fixed income portfolio from a single basis point shift (down/up) in the yield curve. Directly related to the volatility (duration) of the portfolio.
Broker: An individual who trades shares/bonds on the markets with wholesale clients (asset managers) or retail clients (individuals). Also applies to fund brokers who trade units/shares in unit trusts/OEICs with IFAs.
Broker funds: See Fund of funds.
Broker-dealer firm: Firm offering both agency broking and market making.
Bull: Investor who believes prices will rise in the future (see Bear).
Buy Side: A common term for the asset management/investment industry. The term is used since fund managers tend to buy more securities than they sell since money flows into savings products on a regular basis. The investment banks are sometimes referred to as the "Sell Side" (see below).
C shares: Investment trusts can issue C shares that provide a method for raising funds without penalising existing shareholders. The new money raised is maintained in a discrete pool for a set period. The holders of C shares are then offered new ordinary shares at a combined NAV of the enlarged trust.
Call option: The right to buy the underlying asset at the pre-determined strike price.
Cancellation: Shares/units in open-ended funds are cancelled when clients redeem their units (sell back to the fund operator).
Cancellation price: For dual-priced funds this is the lowest possible price at which an investor can sell units back to the manager under FSA regulations. It excludes exit charges. The cancellation price represents the proceeds the fund would receive if the fund’s assets were sold.
Cancellation rights: The right, under certain circumstances for a retail investor to cancel the purchase of an investment product.
Capital: The money injected into a business by the shareholders and bondholders.
Capital account: An account relating to the capital property of a fund/portfolio (i.e., excluding income).
Capital growth: The increase in the value of an investment, excluding any income received from it.
Capital manager: This term is widely used by hedge fund managers. See Investment manager.
Capital Requirements Directive (CRD): Implemented in the EU from 2007, the CRD replaced the Capital Adequacy Directive. Part of the EU FSAP, it sets capital limits for regulated financial services firms to ensure protection for their creditors in the event of default. Adopts a risk-based approach that requires each firm to implement an internal risk-based model to determine its own risk.
Capitalisation: Total market value of share capital issued by a company. Calculated by multiplying the number of ordinary shares in free float by the price.
CAPM: Capital Asset Pricing Model.
A mathematical model that enables investors to determine the expected return from a risky security. The model uses Beta as the main measure of risk.
CAPS: Now RussellMellonCAPS. Independent investment performance firm, employed by institutional trustees to validate investment performance. Also sets investment benchmarks.
CAR: Customer Agreed Remuneration.
Fee paid by an investor to their investment adviser, which may be added on to the purchase price of an investment fund/portfolio service.
Carry trade: Common investment strategy where investors borrow in cheap currencies to finance investment in other assets to make a higher return.
Cash: Usually a bank or building society deposit account in which the capital is secure. Funds may invest cash in other secure ways.
Cash call: A request for cash to be paid on partly paid securities.
Cash funds: Another name for ‘money market funds’ where investors' money is invested in wholesale money market instruments, eg CDs, CP etc to earn a higher rate than simple deposits.
Cautious Managed Fund: A type of fund which restricts its investment in equities to a maximum of 60% of the fund’s holdings in order to invest in other types of investments, such as cash and bonds. This type of fund is considered to be more ‘cautious’ than funds which invest more of their holdings in equities, as more of their portfolios are diversified across less risky investments in cash and bonds.
CCP: Central Counterparty.
Clearing house (eg LCH.Clearnet) that acts as counterparty to both sides of a trade. Takes margin to protect against default.
CD: Certificate of Deposit. Tradeable security backed by deposit of cash with a commercial bank. Traded at discount to the maturity value of the loan.
CDO: Collateralised Debt Obligation.
Bundles of bonds created and sold by the investment banks. The investment bank does not offer its own credit rating on the product (i.e., the investor takes the risk of the underlying securities). Offers investors a means of a diversified fixed income portfolio in markets or areas otherwise unavailable (e.g., emerging marker junk bonds).
CDS: Credit Default Swap.
Offer protection from default (or increasing credit risk). Heavily bought by funds to protect from fall in bond prices. Also used by High Yield Bond Funds as source of income (when sold) and way to trade credit risk.
CESR: Committee of European Securities Regulators.
Drafts EU wide regulations for investment firms and products.
CFA: Chartered Financial Analyst.
Main examination for fund mangers.
CFD: Contract For Difference.
An OTC derivative where each party agrees to pay the difference in price between two variables.
CFROI: Cash flow Return on Investment.
A measure of the cash generated by a company to allow a target share price to be set. Serves to exclude ‘noise’ from earnings (profits) figures.
CFTC: Commodities & Futures Trade Commission.
US regulatory body for the derivatives markets.
CGT: Capital Gains Tax.
Investment tax paid once investments are sold, after deducting allowable offsetting costs/expenses.
Chameleon bonds: These bonds are taxed like debt, reducing the cost of capital to issuers, but the coupons may be deferred, like equities. They are treated as long-term subordinated debt, with maturities of 50 years or more, and they rank behind all other creditors in a bankruptcy.
Chartist: Someone who studies charts of movements in financial and economic indicators to predict how security prices will move.
Chinese Wall: Separation of different activities in a regulated firm or group (e.g., investment management, corporate finance and broking). Aims to prevent confidential information passing from one area to another.
CIS: Collective Investment Scheme.
Open-ended funds which may or may not be authorised. Operating, running, establishing or winding up a CIS is a regulated activity under the Financial Services & Markets Act 2002.
Class: Shares in a company/portfolio that have the same voting and dividend rights.
Clean price: The price of a fixed income stock that excludes accrued interest.
Clear: To complete a trade (i.e., when the seller delivers securities and the buyers pays).
Clearing: Confirmation of trade completion with the counterparty or the exchange.
Clearstream: An International Securities Depository (ISD), holding bonds and equities.
CLNs: Credit Linked Notes.Type of fixed income investment which is structured as a security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. The underlying security is owned by an SPV which enters into a CDS with a counterparty. In the event of default, the issuer has no obligation to repay the debt. The investors receive a recovery rate, via the swap, which is backed by highly-rated collateral, such as US Treasuries. This allows investors to receive a higher yield at less risk than investing in the underlying.
Close out: An arrangement to settle all open contracts.
Closed ended: An investment vehicle with a limited share capital in place.
CMO: Collateralised Mortgage Obligation.
Type of ABS backed by mortgage payments. The purchaser of a CMO is at risk of mortgage defaults (a prime factor in the 2008 credit crisis). CMOs may be bundled into CDOs. Owners of CMOs and CDOs may use CDSs to protect from default.
CMS: Constant Maturity Swaps.
They allow the purchaser to fix the duration of received flows on a swap.
CMS sweetener: The payout (coupon) paid to investors depends on the slope of a yield curve, so will change over time.
COLL: FSA Collective Investment Schemes sourcebook. Includes guidance and rules on pricing, creating, cancellation, investment and borrowing powers, UCITS, NURS, QISs, etc.
Collateral: A form of security, guarantee or indemnity provided by way of security for the discharge of any liability arising from a transaction.
Collective investment: An investment vehicle (e.g., trust, CIS, LLP, SPV, SPE, etc). Allows several underlying investors to participate. Not necessarily open-ended or authorised.
Co-mingled fund: Portfolio containing the subscriptions of several investors. May be invested in a discretionary, segregate manner or using unit-linked funds.
Commission: Fee paid to a broker for buying or selling a security. Usually a percentage of the cost. Investors also pay commission to IFAs.
Commodity: Usually a physical item (e.g., gold, oil, meat, coffee, sugar). Can include weather (e.g., weather derivatives).
Compliance: Required function at an FSA-authorised firm. The compliance officer ensures the firm meets the FSA's principles for firms and follows the FSA rules and guidance in the FSA Handbook.
Compounding: Investment returns as the result of reinvesting income.
Concentration: The number of different shareholdings in a portfolio/fund. The fewer the securities held, the more concentrated the portfolio is said to be.
Consideration: The monetary value of a deal excluding commissions, Stamp Duty, VAT, etc. Total consideration will include the above.
Constraints: Limits or restrictions imposed on a portfolio manager in relation to stocks, sectors or markets.
Consultants: Actuarial and insurance firms that advise trustees (e.g., choosing investment managers, meeting managers, devising asset allocation strategies).
Contango: A relationship in which spot or cash prices are lower than futures (or forward) prices. It is the opposite of backwardation.
Contract note: A document sent to the investor on a purchase or sale being made, detailing the price at which the securities were bought or sold.
Contractual Settlement Date Accounting (CSDA): An investor receives cash on the standard settlement date, irrespective of settlement of the securities themselves.
Controlled Functions: Roles performed by individuals who have obtained approval from the FSA to carry out these activities (e.g., CEO, Compliance officer, investment manager, investment adviser).
Convertible loan stock: Unsecured Loan Stock (ULS) that usually converts into equity of the issuing company. The UK government also issues convertible gilts that convert into other government stock.
Convexity: Rate of price change for fixed income securities relative to shifts in the yield curve.
Cooling off: Where cancellation of an investment is allowed and the money is not invested until the cancellation period has elapsed.
Core/satellite portfolio: The partitioning of a pension scheme’s assets between a core portfolio (lower risk/tracking funds) and more actively managed satellite funds.
Corporate action: A corporate action is an event initiated by a public company that affects the shares issued by the company (e.g., dividend payment, stock split, new issue, scrip dividend).
Corporate bonds: Corporate bonds are debts issued by industrial, financial and service companies to finance capital investment and operating cash flow. In terms of total face value of bonds outstanding, the corporate bond market is bigger than each of the markets for government bonds. Investors in corporate bonds have a wide range of bond structures, coupon rates, credit quality and industry exposure.
Corporate governance: The means by which shareholders govern the management of a company through the use of voting powers (see Proxy votes).
Corporation Tax: The tax payable by UK companies and funds.
Correction: Term used to describe a downward movement in security prices.
Correlation: Correlation shows the strength of a linear relationship between two investments. A perfect correlation is when the investments behave in exactly the same manner.
Cost of carry: Cost of financing an investment (ie opportunity costs, less interest earned on the investment).
Coupon: The regular payment made on fixed income securities.
Covered bonds: These are secured against pools of mortgages (or other assets). Investors have a claim against the issuer's assets. Some jurisdictions offer solid investor protection, allowing the bonds to have AAA ratings, which may be stronger than the bank that issues them.
Covered warrants: Issued by a third party, usually a major securities house. Those issued on single stocks and share indices can be traded on the LSE trading service. Covered warrants may be issued on baskets of shares, debt securities, currencies, metals and oil.
CP: Commercial Paper.
Short-term corporate debt usually issued by large corporates for short-term financing. Rated by the CRAs like bonds.
CPD: Continuing Professional Development.
Regulatory requirement for Approved Persons to remain competence.
CPI: Consumer Prices Index.
Measure of the rate of increase in consumer goods. Used in the UK, US and EU as the formal measure of inflation. UK CPI excludes a number of items included in RPI (e.g., council tax and a range of owner-occupier housing costs such as mortgage interest payments, depreciation, insurance and purchase costs).
Creation: New shares/units in open-ended CISs are created (made) when new cash comes into the fund.
Creation price: Subject to FSA regulations in COLL. This is the price at which dual-priced open-ended CISs create (make) new shares/units in the fund. It is based on the cost of investing new cash in the underlying securities, including dealing costs. It does not include any initial charge (or dilution levy).
Credit rating: Rating given by the credit rating agency to an issuer. AAA to BBB are considered ‘investment grade.' Lower than BBB- (Baa) are sub-investment grade (or junk bonds). Although riskier, they can offer higher returns. Those rated D are the highest credit risk.
Credit rating agencies (CRAs): Fitch, S&P, Moodys. Independent firms that rate the debt of governments (not sovereign debt), companies and other institutions (e.g., the World Bank). Debt is assigned a credit rating to signify the risk of default on interest repayments and/or capital.
Credit spread: Difference between the yield on a corporate bond vs government bond in the same market of a similar maturity. Common arbitrage strategy for hedge funds.
CREST: UK part of Euroclear, a major settlement system for securities.
CSD: Central Securities Depositary.
Institution that clears and settle trades, acts as custodian and depositary for securities (e.g., Clearnet and Clearstream). CREST offers CSD facilities, settling trades in UK and overseas securities.
Currency hedge: Use of derivatives (swaps, forwards, options, etc.) to reduce exchange rate risk if the investor believes the currency of an overseas investment will weaken against the base currency of the fund/portfolio.
Currency overlay: Use of derivatives (swaps, forwards, options etc) to swap currency exposure from one currency (weakening) into another (strengthening) as a means of enhancing portfolio returns. Common pension scheme strategy.
Currency risk: Overseas investments will depreciate if their domestic currency weakens against the base currency of the fund/portfolio.
Current yield: See Running yield.
Custodian: Regulated entity that safeguards assets of the fund/portfolio. Usually a subsidiary of one of the large investment banking groups.
Custody: Regulated activity in the EU and US. Governs safeguarding of fund/portfolio assets. Firms are required to be able to identify client assets separately from those of the firm.
Customer Functions: FSA term used to define certain roles within an authorised firm (see Controlled Functions).
Cyclical stock: Security that is sensitive to fluctuations in the economic or business cycle (e.g., capital goods, banks).
DBV: Delivery by Value.
Settlement of a trade by delivery of an equal amount of collateral.
DCF: Discount Cash Flow.
Calculation of the fair (or present) value of an asset (or liability) by adding the present values of future cash flows.
Debenture: Loan stock secured against the assets of the borrower (corporation). Debentures are usually paid out first if the firm goes into liquidation.
Debt securities: Securities created by the issuer as evidence of a loan made to it, such as bonds, certificates of deposit (CDs) and commercial paper.
Debt/equity ratio: A common term for company gearing. Calculated as the long- and short-tem debt divided by ordinary shareholders' funds (equity). Sometimes cash is deducted from the debt.
Default risk: The risk that a corporation may not be able to repay its creditors.
Defensive stock: Security that is less sensitive to movements in the economic or business cycle (e.g., utilities, tobacco).
Defined Benefit (DB) pension scheme: Final salary pension where the pension paid is a percentage of the employee’s final salary.
Defined Contribution (DC) pension scheme: Money purchase. Pension that depends on the contributions made and the investment return. Personal pensions and 401(k) programmes are DC schemes.
Defined future liabilities: Value of future expectations. May be an endowment policy (where the mortgage value is defined) or DB pension liability.
Deflation: The opposite of inflation, where the money a person has today will be worth more in the future.
Delta: Change in price of an option for a one-point move in the underlying asset.
Dematerialised: Dematerialised securities do not exist in physical form. They are traded and settled electronically.
Depositary: In the UK AIFs are required to have a custodian and separate depositary. The depositary ensures funds are properly priced and adhere to COLL. In the rest of the EU, AIFs use a single bank as depositary and custodian.
Derivative: A contract whose price depends on the price of an underlying variable (e.g., index, interest rate and weather). Includes forwards, futures, swaps, CFDs and options.
Designated investment exchange (DIE): Overseas exchange designated by the FSA as having sufficiently similar standards (efficiency, transparency, liquidity, etc.) to those of recognised investment exchanges.
Designated Nominee Account: Account holding the assets of the named underlying beneficiary (or beneficiaries) (see Custody).
Designated territories: Countries recognised by HM Treasury under the FSMA as being able to provide financial services in the UK because they provide equivalent investor protection to the UK. Includes Jersey, Guernsey, Isle of Man and Bermuda.
Devaluation: Fall in the value of a currency in the global markets.
Dilution: Effect on earnings per share and book value per share if all the convertible securities are converted and all warrants and stock options were exercised. Also means the impact of large cash flows on a pooled fund.
Dilution levy: Charge imposed on a large purchase or sale of share/units in a CIS (e.g., OEIC, SICAV). Less common for UK unit trusts, which tend to use dual bid and offer prices.
Dirty price: The market price of a bond plus accrued interest (see All-in price).
Discount: Discount securities (e.g., T-Bills, CDs) trade below their nominal (redemption) value. Some shares also trade below their NAV (e.g., investment trusts) and are said to be trading at a discount.
Discount broker: Firm that charges low commission rates for execution-only business. May deal in listed securities and/or shares/units of funds.
Discretionary portfolio manager: Portfolio manager who makes all the investment decisions on behalf of the client.
Distribution: Income paid out from an OEIC/unit trust in the form of interest or dividends. Income distribution may be paid gross. Dividend distribution is normally paid net of basic WHT.
Distribution dates: The date when interest or dividends are distributed to investors. Also called ‘payment date’.
Distributor status: Granted by the HM Revenue & Customs to offshore funds that satisfy certain qualifying rules. A UK resident investor is liable to Income Tax on distributed income and CGT on realised capital gains.
Diversification: Risk reduction by spreading investments across a range of asset classes.
Dividend: The distribution of profits by a company to its shareholders. The dividend may be passed or cut if profits fall. ‘Dividend’ is also the technical term for the coupon on gilts.
Dividend cover: Company’s total earnings (profits) divided by the total paid in dividends. Used as an indication of the company’s ability to maintain its dividend payout.
Dividend discount model: An asset pricing model in which the price of a stock is based on the discounted value of estimated value of estimated future dividends. The model can be used to identify undervalued stocks.
DMO: Debt Management Office.
Department of UK Treasury that issues and redeems UK Treasury bonds (gilts).
Dollar duration: Change in value of a fixed income stock/portfolio caused by a shift in the yield curve.
Domicile: Domicile of an investor for tax purposes. Not necessarily the same as residence or nationality. Fund domicile will determine its tax and regulatory status. Hedge funds normally domicile in the Cayman Islands and BVI to take advantage of lower tax and less stringent regulatory environment.
Double taxation treaty: An agreement between two countries allowing tax paid in one country to be offset against that due in the other on the same income.
Dow Jones Industrial Average (‘Dow’): Unweighted arithmetic index of 30 industrial stocks.
Dual pricing: Dual-priced funds (mainly UK unit trusts) use a (higher) offer/selling price and (lower) bid price. Set after the Valuation Point. Determines the price at which investors will deal for the previous day's trades.
Duration: A measure of the sensitivity of the price of a bond to changes in the yield curve. Dollar duration measures the change in price.
Duration to worst: Approximate percentage change in the price of a bond given a 1% shift in the yield to maturity, or yield to call, whichever is the worse.
DVP: Delivery versus Payment.
Electronic funds are transferred into the seller's custody account as the security is transferred electronically into the buyer's custody account, reducing settlement risk.
Earnings: Net profits of a company.
Earnings yield: Company’s EPS divided by its current share price. The inverse of the P/E ratio.
EBITDA: Earnings (i.e., profits) before interest, tax, depreciation and amortisation. A measure of the cash-generating ability of a company.
ECB: European Central Bank.
Economic indicator: Statistic that gives an indication of the current point of the economic cycle (e.g., price inflation, unemployment figures, wage rises).
EDSP: Exchange Delivery Settlement Price.
Final quoted price of an exchange-traded futures contract. Used to calculate final variation margin payment.
EEA: European Economic Area.
Encompasses the member states of the EU, as well as Iceland, Liechtenstein and Norway.
Efficient frontier: Graphical representation of best risk and return trade-off. Investors can select the most efficient portfolio for their risk tolerance.
Eligible Counterparties: Highest level client under MiFID Client Classification.
Eligible markets: UCITS III limits the extent to which AIFs can invest in non-eligible markets to 10% of the NAV. These markets may not trade regularly, or be illiquid, lack pricing transparency, etc. The asset manager and the depositary/trustee must approve markets as eligible for each fund.
ELNs: Equity Linked Notes. Debt instrument (eg a bond) where the final pay-out is based on the return of the underlying equity, (single stock, baskets of stocks or an equity index). Usually, the final pay-out is the amount invested, times the gain in the underlying stock or index times a note-specific participation rate, which can be more or less than 100%. ELNs are effectively a combination of a zero-coupon bond and an equity option. They are not actively traded on the secondary market and are designed to be kept to maturity.
Emerging market: A developing or newly industrialised country. Low GDP per head. Can deliver high returns due to rapid pace of industrialisation, but can be risky due to poor legal protection, currency, custody and settlement risk, government corruption, etc.
EMH: Efficient Market Hypothesis. An economic hypothesis stating that market prices reflect all publicly available information.
EMX: On-line dealing system developed by the IMA to allow financial advisers to deal in shares/units of AIFs.
Endowment: A fund set up by an institution (usually a university) to finance programmes of study or professorships.
Endowment policy: A life assurance policy that pays out a sum assured on the death of the life assured, or at the end of an agreed term, whichever is the earlier. The money is traditionally invested in a range of securities, including equities. A traditional with-profits policy may provide a higher payout by the addition of bonuses.
EPS: Earnings per share.
The net (after tax) profits of a company divided by the number of ordinary shares in issue. This is the ‘E’ term in the P/E ratio to value shares.
Equalisation: The part of the distribution from an AIF that represents the return of initial capital to new investors.
Equities: Ordinary shares (i.e., the risk-taking part of a company’s capital). Equity holders rank last in the event of the winding up of a company and for income distribution.
Equity exposure: Percentage of a fund/portfolio invested in equities.
Equity risk premium: The extra return expected from investing in equities rather than a risk-free asset.
ETC: Electronic Trade Confirmation.
ETFs: Exchange-traded funds.
Open-ended funds that track an index (which may be a proprietary index). They are bought and sold on the exchange throughout the day.
Ethical funds: Sometimes known as "green funds". Funds/portfolios avoid certain sectors, eg tobacco, defence, alcohol, gambling etc. Institutional pension schemes have an SRI policy statement which the portfolio manager must follow.
Euribor: Euro Interbank Offered Rate. A daily reference rate based on the averaged interest rates at which banks offer to lend unsecured funds to other banks in the EUR wholesale money market (or interbank market).
Eurobond: International negotiable, bearer loan stock (bonds) issued outside the country of the issuer, traded OTC. Coupons are paid gross. Accrued income is calculated on a 30/360-day basis.
Euroclear: Euroclear is the alternative European settlement house with Clearstream. Euroclear settles international bonds, gilts and shares. It is an International Securities Depository (ISD).
EV: Enterprise Value.
Total value of a company’s capital (i.e., debt plus shares).
Ex dividend: Also abbreviated as 'XD', this is a share sold without the right to receive the declared dividend payment that is marked as due to those shareholders who are on the share register at a pre-announced date. The stock market authorities usually specify the date on which a share will begin trading 'XD'. The share price invariably drops when the share goes 'XD', taking the known income of the dividend out of the share price.
Exceptions report: Daily report automatically generated showing queries in a fund/portfolio valuation.
Execution only: Client deals in securities (or units in a fund) without advice from broker or financial adviser.
Exempt fund: Institutional fund that is exempt from WHT on derived income (see Exempt share class).
Exempt share/unit class: Share/unit class in an OEIC/unit trust that is exempt from WHT and/or Corporation Tax on income. Can be sold only to qualifying (exempt) investors, such as pension schemes and charities.
Exercise price: Also known as the "Strike price." The price at which the holder of an option or warrant can buy/sell the underlying asset.
Exit charges: Managers can levy a charge on sale of shares/units in a fund, rather than an initial charge.
Expected income yield: An estimate of the income generated from a fund/portfolio or other investment (e.g., property).
Expenses charged to capital: Authorised investment funds can elect to deduct expenses from either the revenue or capital account.
Expiry: The date on which a derivative contract legally ceases to exist.
FAIFs: Funds of Alternative Investment Funds.
Retail funds of hedge funds - eligible for ISA investments.
Fair value: Estimate of the intrinsic value of a forward/futures contract, taking into account the spot price and net cost of capital until expiry. Other factors will determine whether the market price is above or below fair value.
Fair value pricing: Methodology used by funds to estimate the value of holdings at the valuation point.
FATF: Financial Action Task Force.
Global body that makes recommendations for AML procedures and identifies countries where AML procedures are inadequate (the so-called FATF blacklist).
FDSP: Forward Delivery Settlement Price.
Pre-agreed settlement price for delivery of the underlying asset. Based upon current (spot) price and the net cost of carry.
Feeder fund: The feeder fund channels client monies into another fund (Master Fund). Eligible under UCITS IV.
Fiduciary: A person or entity holding assets on behalf of a third party (beneficiary). The fiduciary may have legal authority to make investment decisions for the beneficiary.
Financial Ombudsman Service (FOS): Facility established to hear complaints by eligible complainants and make awards where appropriate. Compensation limited to £100,000 plus costs.
Financial promotion: Part of the FSA TCF initiative to ensure products are suitable for the end-customer. Firms can make a financial promotion only if the product is within the scope of the Financial Promotions Order.
Financial Services Compensation Scheme (FSCS): This scheme exists for claims against an authorised financial services company when it is unable to pay claims against it because it is insolvent or no longer trading. For companies still in business, claims must be taken to the FOS.
Fitch IBCA: Credit Rating Agency.
Fixed income securities: Bonds and preference shares. Holder receives a regular fixed income. This may be waived in the case of preference shares.
Fixed interest: The term generally refers to bonds on which the holder receives a pre-determined rate of interest. What this offers the potential investor is a known return from holding the investment.
Flotation: First issue of shares by a company of a stock exchange. It is an example of an IPO.
FoF: Fund of funds.
A single over-arching fund investing in other funds (authorised and/or non-authorised). These are often created and distributed by investment advisers to capture 'best of breed' asset managers. A retail term for the multi-manager institutional approach.
Forward pricing: This is the most common method of pricing authorised funds. Once the manager has received an instruction to buy or sell units, the price of those units will be determined at the next valuation point of the fund.
Forwards: Contracts that create an obligation to buy (or sell) the underlying asset on a future date for the pre-set price.
Foundation: A non-profit organisation with the objective of providing funding for specific purposes and programs.
FRA: Forward Rate Agreement.
An agreement to pay or receive, on an agreed future date, the difference between a fixed interest rate agreed at the outset and a reference interest rate actually prevailing on a given future date for a given period.
FRAG 21 reports: Standard reporting format for Third Party Administrator to send to pension scheme trustees to ensure the scheme is administered and managed in accordance with the scheme rules, pensions legislation and any other relevant legislation, and to have “systems and arrangements in place for monitoring administration and management”.
Franked income: Income that has already had WHT deducted at source. Higher-rate taxpayers may have a further liability. Non-taxpayers may be able to reclaim the deduction.
FRNs: Floating Rate Notes.
Bonds with variable coupon. The coupon is re-negotiated at the date of each payment.
Front office: The investment management area of an investment institution. Includes portfolio managers, analysts, economists, strategists and risk management.
FSA: Financial Services Authority.
The UK financial services regulator. Website: www.fsa.org.uk
FSMA: Financial Services & Markets Act. There have been two FSMAs in the UK.
FTSE 100 index: The main UK index used to represent the price movements of the 100 (approximately) largest companies. The index is a market capitalisation, free-float adjusted, weighted index of price relatives. It is a price index and excludes reinvestment of dividends.
FTSE 250 index: British index on the LSE of the 250 largest companies by market capitalisation after those listed on the FTSE 100.
FTSE All-share index: Index of about 750 companies complied by FTSE International Ltd.
FTSE International: UK index provider.
FTSE Small Cap Index: British index of the smallest companies listed by market capitalisation.
Fund: Pooled investment vehicle, usually invests in a single type of security (eg shares/bonds) often with a regional or sector bias (e.g., technology).
Fund manager: See investment manager.
Fund operator: Authorised firm. May carry out the investment management or sub-contract to another firm. Known as the ACD for OEICs/ICVCs.
Fund promoter: Regulated firm permitted to make a financial promotion to the public of shares/units in the fund. Includes investment advisers, banks and fund operators.
Fund sector: AIFs are allocated a category (or sector) by the IMA in order to compare fund performance. Similarly, shares are allocated an industry sector for valuation and performance calculations.
Fund supermarket (FSM): Internet-based retail fund dealing system. Usually offers access to funds from a wide range of operators
Fundamental style: Investment managers who rely heavily on company analysis via meeting the management, analysing the reports and accounts, etc. to make profit forecasts.
Fungible: Fungibility is different from liquidity. Shares in the same company are considered fungible. Some derivative contracts can be opened in one market and closed out in another market/country/time zone if they are considered fungible.
Futures: A contract where a person agrees to buy or sell assets at a set price on a fixed date in the future.
FX: Foreign exchange.
G30: Private, non-profit, international body from private and public sectors and academia. It aims to deepen understanding of international economic and financial issues.
G8: Members of the eight largest economies (Canada, France, Germany, Italy, Japan, Russia, UK, US). They meet regularly to agree global policies. The European Commission is also represented.
GARP: Growth At A Reasonable Price. Equity valuation tool mixing value and growth driven investment approaches.
GARP: Generally accepted risk principles.
A set of principles, developed by Coopers & Lybrand, that provides guidelines for integrated risk management.
GDP: Gross Domestic Product.
Measures the amount of goods and services produced in a country.
GDR: Global Depository Receipt.
Negotiable OTC securities, usually priced in US dollars, issued by foreign companies. Listed on London and Luxembourg stock exchanges. Settled on Clearnet or Clearstream.
Gearing: The amount of borrowing versus debt on a company’s balance sheet (net debt/ordinary shareholders’ funds). Warrants and options also exhibit gearing (i.e., a small move in the price of the underlying asset can be magnified in the move in the price of the option). Hedge funds and investment trusts can also issue debt securities to gear the fund.
Gilts: UK government securities. They may be undated (e.g., War Loan).
Global custody: A global custodian is responsible for safeguarding fund/portfolio assets worldwide. May appoint local custodians (depots or sub-custodians) in certain countries.
GIPS: Global Investment Performance Standards.
Set of minimum performance presentation standards for investment managers. Sponsored by CFA Institute and intended for global comparison of investment performance.
Global Master Repurchase Agreement (GMRA): Issued by PSA/ISMA. The standard market documentation for a 'Repurchase Agreement' transaction.
GNP: Gross National Product.
Measures products made by a country’s companies worldwide.
Gross: Gross income ignores investment taxes (WHT and/or income tax).
Growth fund: A type of fund designed to provide capital appreciation by investing primarily in growth assets. Often categorised as a balanced fund, it is similar in concept, but is a more aggressive fund than a Capital Stable fund which would invest in a larger percentage of lower risk assets (with correspondingly lower expected levels of return).
Growth stock: Company that is expected to achieve higher than average earnings growth. Growth stocks usually have a high P/E ratio relative to the market as a whole.
Growth style: Growth investors buy shares in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earning or price-to-book ratios. This style contrasts with the value investing although this is disputed by Warren Buffett, who believes that styles are “joined at the hip”. Investors who stick to a single style are likely to experience sustained losses.
GRY: Gross Redemption Yield.
The total return earned from a fixed income security (or property) assuming it will be held until maturity (redemption). Includes coupon and the capital gain/loss on redemption. Calculated by using Discounted Cash flow (DCF). Also known as Yield to Maturity (YTM).
Guaranteed bonds: Sold on a limited basis by life funds as single-premium products. Income is guaranteed over the selected term and the capital is returned on maturity.
Guaranteed funds: These funds provide limited downside for the investor, usually by the purchase of derivatives. Capital may be guaranteed.
Half-yearly report: Also known as the ‘interim report’. Includes details of the fund's investments, how it has performed and more general financial information about the fund (see also Annual report). The fund manager sends it to the client during the financial year for the fund(s) that that the client holds.
Hedge: The sale of futures contracts or purchase of put options, to prevent a loss in the event of a market decline.
Hedge fund: Offshore funds with few/no investment restrictions. They usually use derivatives and/or gearing to enhance returns. Returns are not benchmarked against an index, but measured on an absolute, total-return basis. Managers usually charge performance fees.
High yield debt: See Sub-investment grade.
High yield stocks: Shares that have a higher than average dividend yield or those where a high proportion of the total return is derived from dividend income (e.g., utilities).
Historic pricing: Retail (mutual) funds are sold to the investor (or redeemed) at a price set at the previous valuation point (i.e., the investor deals 'blind').
HM Revenue & Customs (HMRC): Combined UK government tax collection agency (formerly HM Inland Revenue and Customs & Excise).
HM Treasury (HMT): The UK government department for appointing the chairperson of the Bank of England and setting the UK inflation target. Responsible for general oversight of the UK financial markets and the FSA.
HNWIs: High net worth individuals.
Minimum net worth required for discretionary portfolio management (usually USD 10m).
HOLT: Software used by some investment managers to calculate and assess, among other things, CFROI.
Home State: A term for the EU country that a financial services firm is based in. When taking advantage of the 'passport' the Home State regulator is responsible for capital adequacy and client assets. The Host State is responsible for the conduct of business rules and local supervision.
Host State: The term for the EU country in which a financial services firm is doing business. The Host State regulator is responsible for the local conduct of business rules and supervision of the firm's local activities.
Hurdle rate: Target growth rate of the NAV of a hedge fund before performance fees apply, or the required growth rate of an investment trust to repay redemption price of zero coupon shares.
ICVC: Investment Company with a Variable Capital.
Same as an OEIC. open-ended fund selling shares (units) to the public.
IFA: Independent Financial Adviser.
A person qualified to give financial advice to clients on life insurance, pensions, funds and other financial products, who is not tied to any one financial institution. An IFA’s recommendations are based on which company and products best suit the needs of the client. Charging structures changed following RDR.
IHT: Inheritance Tax.
Tax payable on death on an individual based on the size of the estate.
IMA: Investment Management Association.
The professional trade body for UK authorised investment funds and asset managers.
In specie transfer: Some AIFs and investment trusts allow investors to hand over shares in lieu of cash payment for new units/shares in the fund.
Income: Receipts from investments owned.
Income account: Account relating to the income (actual and accrued) of a fund/portfolio. Income received may be franked or unfranked and liable to corporation tax (funds) or income tax (investors).
Income funds: Funds that invest mainly in either fixed income securities (e.g., bonds) or shares with high dividend payouts.
Income shares: Some investment trusts issue more than one type of share. They are called Split Capital Investment Trusts. The simplest 'Split' is divided between capital and income shares. The capital shares receive no dividends over the life of the trust, whereas the income shares receive all the income generated by the whole fund.
Income tax: Tax paid on all income over the tax-free allowance by UK investors.
Income units: Units in AIFs that make a dividend or interest distribution. This may be paid gross where the fund invests mainly in fixed income securities.
Index: A basket of securities (or other investments. such as property) used as a performance benchmark. May be single sector/country, regional or global.
Index-linked bonds: Some governments (and a few companies) issue debt securities where the coupon and redemption value increase in line with inflation.
Index-tracking: Manager aims to match returns on a particular index. Tracker funds are associated with lower charges than active funds.
Inflation: A measure of the rate of change in prices or earnings (see Consumer Price Index).
Inflation risk: Rising inflation causes the real value of savings to fall unless the return is greater.
Information ratio: The extra return from a portfolio versus the benchmark relative to the extra risk.
Infrastructure funds: Funds that invest in infrastructure projects. The certainty of cash flows provides long-dated assets that match liabilities for pension schemes (e.g., LDI approach).
Initial charge: Charge imposed on buyers of new shares/units in a CIS. Part of the initial charge may be used as commission payment for the financial advisers. Discount brokers and fund supermarkets normally waive all or part of the initial charge.
Initial margin: Collateral deposited with the clearing house for derivatives trades. Calculated to cover the expected daily move in the value of the derivatives contract.
Inside information: Information relating to a security that is not publicly known and would affect the price of the security if made public.
Insider dealing: Dealing in securities in regulated markets when in possession of price-sensitive information that is deemed to be in the public domain. Maximum punishment in the UK is an unlimited fine and/or up to 2 years imprisonment.
Institutional funds: Assets managed by investment banks, life assurance and fund management companies. Includes pension schemes, insurance funds, unit trusts and investment trusts.
Institutional investor: An entity such as a foundation, endowment or retirement plan that invests a portfolio on behalf of a group of individuals (e.g., employees) to achieve specific objectives.
Institutional share/unit class: Share/unit class in an OEIC/unit trust with lower charges than retail share/unit classes. Can be sold only to qualifying (professional) investors.
Instrument of Incorporation: This document forms the legal constitution for funds (OEIC/ICVC and investment trusts) that determine how the scheme will operate. The unit trust equivalent is known as the Trust Deed.
Integration: The third stage of money laundering – provision of apparent legitimacy to criminally derived wealth (see Layering and Placement).
Interest distributions: Income paid to investors from the fund, derived predominantly from fixed income securities in the fund. May be paid gross by the fund.
Interest income: The income paid to investors on their savings (typically deposit accounts). Usually expressed as an APR. Used to calculate the opportunity cost of an investment.
Interest rate: The cost of borrowing money. Wholesale rates are quoted against LIBOR. Retail rates are quoted against base rates.
Intermediary: A person (or firm) between two counterparties to a deal. In the funds industry the intermediary is a financial adviser. In asset management this term may mean a broker.
In-the-money: When the exercise price of a call option or warrant is less than the underlying asset price.
Intrinsic value: The amount by which the exercise price of an option or warrant is in the money.
Invest: To employ (money) in the purchase of anything from which interest or profit is expected.
Investment advice: EU regulations require an individual to be suitably qualified and authorised before they provide investment advice to retail investors.
Investment bank: Investment banks issue and sell securities in the primary market for public and private corporations (both equity and debt). They provide corporate advice on mergers and acquisitions (M&A) and other types of financial transactions. Investment banks also act as intermediaries in securities and derivatives trading for clients.
Investment funds: A general term for unit trusts, OEICs, investment trusts, etc.
Investment grade bond: Companies whose bonds are rated as 'investment grade' have a lower chance of defaulting on their debt than those rated as 'non-investment grade'. Generally, these bonds are issued by long-established companies with strong balance sheets. Bonds rated BBB or above are known as 'investment grade bonds'.
Investment manager: The person (or firm) employed to make investment decisions. They will invest for funds, HNW clients, institutional portfolios and charities. They may sub-contract some of the management to a third party or be used by other investment firms as a specialist manager (see multi-manager).
Investment objective: States the aims of a given fund and the type of assets in which it invests to achieve those aims.
Investment trust: A company whose shares are quoted on the LSE with a fixed number of shares. The company invests in shares of other companies. The value of the shares in the fund is set by supply and demand as well as the value of the fund (NAV). Closed-ended funds. Not regulated by the FSA.
Investment universe: The scope of investment possibilities afforded by a fund's stated investment objective (or the mandate for an institutional portfolio).
IOSCO: International Organisation of Securities Commissions.
The member agencies provide surveillance, assistance and recommendations to establish and promote high standards of regulation and sound markets.
IPA: Individual Pension Account.
Designed like an ISA to allow savings in retail funds within a personal pension wrapper.
IPE: See International Petroleum Exchange.
IPMA: See International Primary Market Association.
IPO: Initial Public Offering.
The first issue of any class of listed security.
ISA: Tax-efficient wrapper around investment products. Maximum limits set each tax year.
ISDA: International Securities Dealing Association.
Trade body that agrees market standards for documentation and securities trading. Transactions traded under ISDA are exempt from UCITS counterparty risk measures.
i-Shares: BGI brand name for ETFs. BGI funds are domiciled in Dublin for tax reasons, but trade on the LSE.
ISIN Code: International Securities Identification Number.
An internationally recognised unique securities code.
ISMA: International Securities Markets Association.
Trade association of secondary market dealing with securities trading mechanics and regulation.
Jelly roll: A 'long call' and 'short put' in one expiration month with a 'short call' and a 'long put' in a different expiration month. All four options must have the same underlying and typically also have the same exercise price. (This is essentially a 'long synthetic position' in one month offset by a 'short synthetic position' in a different month).
JIBAR: Generally known as the ZAR-JIBAR-SAFEX. The 91-day rate is used as a reference rate for ZAR swaps.
JMLSG: Joint Money Laundering Steering Group.
Fourteen trade bodies that publish anti-money laundering guidance notes on the expected standards of compliance with the Money Laundering Regulations. Website: www.jmlsg.org.
Journal: Daily record of trades undertaken (debts and credits).
Junk bond: See Sub-investment grade.
Kappa: Another name for ‘Vega’.
KID: Key Information Document.
Regulatory information which must be sent to potential investors before dealing in authorised funds.
Kiwis: A foreign bond issued in the New Zealand domestic market, payable in NZD and registered in New Zealand.
Knock-in: A barrier option that exhibits path dependence. A ‘knock-in’ option becomes a plain vanilla option when the price barrier is hit.
Knock-out: A barrier option that exhibits path dependence. A ‘knock-out’ option is a plain vanilla option until the price barrier is hit when it becomes worthless.
Lambda: The measure of gearing between the option position and the change in the value of the ‘underlying’.
Large caps: The shares of big companies, the ‘blue chips’. Large market capitalisation.
LCH. Clearnet: LCH.Clearnet is the leading independent clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets.
LDI: Liability-Driven Investment.
Means of matching the present value of a pension scheme’s future liabilities with the value of the scheme’s assets. Relies on heavy investment in fixed income securities, coupled with interest rate and inflation swaps to manage the duration risk (see Infrastructure funds)
Ledger: Account showing assets and liabilities for a fund/portfolio.
Leverage: See Gearing.
Liabilities: Money owed. Pension schemes have defined future liabilities (i.e., know future payments out of the scheme).
LIBOR: London Inter-Bank Offered Rate.
Wholesale, inter-bank interest rate charged for lending money overnight. LIBOR is quoted daily. Corporate loans are quoted relative to LIBOR.
Life Insurance: Life insurance (assurance) is a contract under which the policy owner pays a premium and the insurer agrees to pay a sum of money to the designated beneficiary (or beneficiaries) on the death of the named insured.
Lifecycle funds: Funds that seek to achieve an investor’s objectives according to a particular timeframe. Generally, the investor’s portfolio will be shifted into less risky assets as he or she grows older or closer to the time when he or she wants to withdraw the investment.
LIFFE: London International Financial Futures and Options Exchange. Now owned by NYSE Euronext.
Limit order: An order to be filled at a specified price or better.
Limited redemption funds: Funds which restrict when the investor can redeem units/shares.
Liquidity: The part of a portfolio that is held in cash or cash-like securities. Or the ability to buy or sell an asset quickly or to convert it to cash quickly.
Liquidity fund: See Cash fund.
Listed securities: Securities that are listed and traded on regulated markets. Also known as ‘quoted investments’ and ‘transferable securities’ (UCITS).
Loan notes/Loan stock: Unsecured corporate bonds. May be convertible or have a warrant attached.
Long: Used to indicate a holding of a security or purchase of futures contracts.
Long call: A position in ‘call options’ that gives the holder the right to buy the underlying.
Long put: A position in ‘put options’ that gives the holder the right to sell the underlying.
Long put spread: Buy a ‘put option’ at strike B and sell a ‘put option’ at lower strike A. The expectation is of a ‘bearish’ market, but with a neutral view on volatility.
Long/short: A type of investment strategy that controls its exposure to a particular asset class by taking both positive and negative security positions.
Long-dated gilts: Gilts with a remaining time to maturity of > 15 years.
Lookback options: A lookback call option gives the holder the right to buy the underlying asset at the lowest price observed during the life of the option. A lookback put gives the holder the right to sell the underlying asset at the highest price observed during the life of the option (see ‘fixed strike lookback option’).
Look-barrier options: This option has a barrier-monitoring period that starts at the options start and ends at an arbitrary date before expiration. If the option is not ‘knocked-out’ during the first period, a fixed strike lookback option will start from the end of the first period and run until option expiry. This option will be cheaper than a standard ‘partial-time fixed strike lookback option’.
LYONS: See Zero coupon convertibles.
MACD: See Moving Average Convergence and Divergence.
Maintenance margin: Payment made to the counterparty of a derivatives trade to cover initial and future variation margin payments. A buffer limit is set. Once the maintenance account falls below that level, further funds are deposited.
MAMA: Month after month of arrival, a term used in the delivery of commodities.
Managed funds: See Pooled funds.
Management company: A company employed by one or more funds to provide investment management and services such as administration and secretarial services, registration, accountancy and research.
Management fee: A charge against investor assets for managing an investment fund, as well as for such services as client relations or administration.
Manager of managers (MoM): Investment firm (or consultant) that selects the managers in a multi-manager approach.
Mandate: Contractual description of the service that a client will receive from the institution (e.g., investment management, custody).
Maples: A foreign bond issued in the Canadian domestic market, payable in CAD and registered in Canada.
Marathons: A foreign bond issued in the Greek domestic market, payable in EUR and registered in Greece.
Margin: Payments on account relating to derivatives trade (see Initial margin, Variation margin and Maintenance margin).
Mark to market: Valuation of the price of a stock or portfolio on a daily basis to record profits/losses. Also used to determine variation margin payments for derivatives trades.
Market abuse: An offence introduced by FSMA 2000, judged on what a ‘regular user’ would view as a failure to observe the required standards. The offence includes abuse of information, misleading the market and distortion of the market.
Market capitalisation: Total market value of a company's shares. Calculated by multiplying the number of securities in issue by the current market price.
Market maker: A market professional who buys and sells securities on behalf of the firm. They may take proprietary risk (i.e., try to make money for the firm). In London, market makers are obliged to post firm two-way prices throughout the trading day. Market makers are exempt from Stamp Duty and are able to sell stock ‘short’( i.e., sell more than they own).
Market order: An order to be filled immediately at the current market price.
Market risk: Risk that the price of investments fluctuates with the market (the degree of variance will depend on the correlation with the market).
Market timing: An investment strategy in which investors switch in and out of securities or between types of funds in the hope of benefiting from economic and technical indicators.
Master fund: Investment vehicle that enables individual investors to invest money into one or more underlying investments operated by professional managers. Master funds can be discretionary, fund of funds, or feeder funds. With this last type, shares would be sold to the public only by the feeder fund, but invested through the corresponding master fund.
Matadors: A Eurobond issued in the Spanish domestic market, payable in EUR and registered in Spain.
Maturity date: See Redemption date.
MBSs: Mortgage-backed securities.
Investors purchase an interest in a pool of loans that are usually first mortgages on residential properties. As the borrowers repay their mortgage the investors in the MBS receive payments of interest and principal. MBSs are mainly ‘agency’ securities issued by government agencies such as Ginnie Mae (in the US) or a government-sponsored agency such as Fannie Mae or Freddie Mac. These agencies normally guarantee the payments on their securities and are themselves able to access government funds at favourable rates. MBSs are also issued by other financial institutions and carry more credit risk to the investor.
Mean reversion: A situation where the recent trend reverts back to the norm. This can apply to equity returns, yield spreads in fixed income markets, commodity prices, etc.
Median: One form of the average. The middle item in a ranked order.
Medium-dated gilts: UK Treasury stock with a remaining maturity of 5–15 years.
Mid cap: Companies below the very largest in the main index.
Mid price: Mid price is half way between the bid or offer (ask) price for listed securities.
Middle office: A loose definition that covers the area of securities trading between trading and settlement. May include risk management, systems, control, compliance and inspectors.
MiFID: Markets In Financial Instruments Directive.
Aims to provide a single, regulated market for listed equities in the EU. Includes rules on best execution, financial promotions and regulated activities. Implemented 1 November 2007. Currently under review to cover bond markets and derivatives.
MMIs: Money Market Instruments.
Includes CDs, CP and short-dated bonds, close to redemption. These assets carry some risks.
MOC: Market On Close.
An order to be filled at the market price as close as possible to the close of the market.
Modified duration: The approximate percentage change in the price of a fixed income security for a 1% change in its yield to maturity (or Gross Redemption Yield).
MoM: See Manager of Managers.
Momentum: Extent to which prices are influenced by strong investor buying/selling.
Momentum indicators: The term used to describe the mathematical functions using price data from securities to understand the trend in the security. The momentum of the trend can be an indicator to buying/selling.
Money laundering: Using the proceeds from a criminal offence (or aiding and abetting someone else to do so).
Money markets: Short-dated securities (e.g., Treasury Bills and CDs). They compete with liquid funds (e.g., cash deposits).
Moody’s: Credit rating agency.
Moving Average Convergence and Divergence (MACD): A momentum indicator developed by Gerald Appel. The standard ‘ma’ used are the 12- and 26-day exponential averages.
Moving averages: Technical analytical tool used to gauge the long-term price moves of a security. Prices are averaged out over a period of time (using a proprietary model) to assess long-term trends and remove short-term impact.
Moving strike option: See Ratchet options.
MPC: Monetary Policy Committee.
Part of the Bank of England which meets monthly to set Base Rates.
MPT: Modern Portfolio Theory.
An investment approach used by quantitative investors. It holds that investors seek higher returns in exchange for taking on more risk.
MSCI: Morgan Stanley Capital International.
Major index provider. Main index used in the UK is EAFE (Europe, America and Far East).
MTFs: Multilateral Trading Facilities.
Securities markets recognised under MiFID, operated by investment banks.
MTNs: Medium Term Notes.
Medium-dated loan stock with a maturity of 5–10 years. Traded OTC. Often FRN with variable coupons.
Multi-manager: Institutional term for fund of funds approach. An over-arching asset manager (or the consultant) outsources discrete parts of the portfolio to appointed managers.
Mutual fund: The name used in the USA market for unit trusts. They are pooled investments that are also open-ended.
Naked: Typically used to describe an uncovered derivatives trade (e.g., naked call options written over stock not held by the fund).
NAPF: See National Association of Pension Funds.
NAPM: See National Association of Purchasing Managers.
NASDAQ: See National Association of Securities Dealers Automatic Quote.
NAPF: National Association of Pension Funds.
UK trade body for occupational pension schemes.
NASDAQ: US stock market-making basis specialising in high technology and biotechnology shares.
National Savings and Investment (NS&I) Products: This range of products is available from the Post Office and was created to provide a secure means of saving backed by the government, whilst providing the Exchequer with a source of funding. Products available through NS&I include premium bonds and cash ISAs.
National Statistics: Formerly Office For National Statistics (ONS). Provides economic data to UK government and Bank of England for use by the MPC when setting UK base rates. Website: www.statistics.gov.uk
NAV: Net Asset Value.
This is the aggregate value of the securities in a fund, net of liabilities (e.g., charges, tax, manager’s fee). This value is used as the basis for valuing the share/units in an AIF. Also applies to a company's underlying value (break up, or book, value).
NDF: See Non-deliverable forward.
Negative carry: Net cost incurred when financing cost exceeds yield on securities being financed.
Net: Usually used to indicate the return from an investment after tax.
Net cost of carry: Net financing costs (ie opportunity cost less income from underlying (spot) asset. Used to calculate the fair price of a derivative, eg future or forward contract.
Net delta: Amount of underlying security required to offset price movements in the options contract or options position.
Neutral position: The same investment in a stock/sector/region than the relevant benchmark weighting.
Nil paid: A new issue of shares on which no payment to the company has yet been made.
Nominal return: Return on an investment not adjusted for inflation (i.e., headline return).
Nominal value: Par value of a security (e.g.. redemption value on a bond).
Nominee: Legal owner of securities held for the underlying beneficiary (or beneficiaries). May be pooled or designated. Custody is a regulated activity under MiFID and FSMA 2000.
Non-deliverable forward: A short-term forward contract, usually fx, whereby the difference in the agreed rate and the ultimate spot rate is settled by cash (rather than actual delivery). This transaction is favoured for non-convertible or thinly traded currencies.
Non-investment grade bonds: Bonds below BBB-/Baa which represent higher risk than investment grade bonds to investors. Sometimes referred to as High Yield Bonds or Junk Bonds.
Normal Market Size (NMS): The average size of bargains transacted in a particular share. A market maker’s prices are firm for NMS. Prices are negotiable for deals outside NMS. NMS is 2.5% of the average daily volume, calculated on an annual basis.
Nostro: Account with an overseas to facilitate currency trades.
NURS: Non UCITS Retail Scheme.
Includes property unit trusts (PUTs). Collective Investment Schemes that do not invest in transferable securities, as defined in UCITS III. Can be financial promotion restricted in EU Member States outside the UK.
OECD: See Organisation For Economic Co-Operation & Development.
OEIC: See Open-Ended Investment Company.
Off Shore Bond (OSB): Offshore investment in a wrapper in which you can hold a variety of investment funds such as unit trusts and open-ended investment companies (OEICs).
Offer price: The price at which securities (or units in a collective investment fund) are sold to the investor.
Offshore funds: Collective investment funds run outside the UK. Usually minimal regulatory oversight (and investor protection) and lower tax regime than the EU, UK or US.
OIS: See Overnight index swap.
OM London Exchange (OMLX): Managed by the Swedish group, OM Group, to deal in specialist derivatives and run in parallel with the Stockholm Stock Exchange.
Omega: Another name for Vega.
One Cancels the Other (OCO): Two orders submitted simultaneously, either of which can be filled. If one order is filled, the other is considered cancelled.
Open architecture: Fund platforms and supermarkets. Allow multiple product providers to offer their funds through a common platform.
Open interest: The net (i.e., either long or short) opens positions in a particular futures contract that needs to be traded out before expiry or delivered at expiry.
Open repo: A repurchase agreement with no termination date, but will terminate at the request of one counterparty.
Open-ended funds: OEICs, unit trusts, SICAVs, US open-ended mutual funds and some hedge funds are open-ended. New cash into the fund increases the NAV. New share/units are created. Redemptions (outflows) from the fund reduce the NAV and securities may need to be sold to repay the investor. Shares/units are usually cancelled on redemption.
Open-Ended Investment Company (OEIC): Same as an ICVC. Open-ended fund selling shares (units) to the public.
Optimisation: Optimisation refers to a quantitative process that seeks the best investment solution among all the options an investor can consider. Firms such as BGI and State Street use advanced mathematical models that incorporate factors such as expected returns, expected risks and expected transaction costs to derive the optimal portfolio.
Option: A security that confers the right to buy or sell an underlying asset at a pre-determined strike (or exercise) price on or by a certain date. Options can be bought and sold to profit from the move in price of the option itself.
Ordinary shares: ‘A’ shares which confer full voting and dividend rights to the owner.
Out performance: Investment return is higher than the benchmark.
Out-of-the-money: An option or warrant where the strike (exercise) price is above the price of the underlying asset (i.e., not worth exercising).
Outright forward: The forward transaction in a currency that locks the rate at which the currencies will be exchanged at the time of dealing.
OTC: Over The Counter.
Unregulated trading in securities (and other assets) that are not listed and traded on regulated markets. Associated with higher counterparty and settlement risk.
Overnight index swap: A short-term swap where one side has the average of the overnight rates traded and the other side has a fixed rate, with data supplied by the WMBA.
Overweight: A larger investment in a stock/sector/region than the relevant benchmark weighting.
P/E ratio: Share price divided by earnings per share (EPS). A measure of the relative value of a company’s shares in the market.
Par: The nominal (or face) value of a security. Fixed income securities are usually redeemed at par. It is generally illegal for a company to issue its shares at a discount to par.
Partial time fixed strike lookback option: This option has a limited time for the lookback period. The effective time for the lookback is less than or equal to the life of the option and starts after the option is in place. Hence it is cheaper than a 'fixed strike lookback option'.
Partial time floating strike lookback option: A 'lookback option' that has the lookback period at the start of the option's life and is shorter than the option's life. It is cheaper than a 'floating strike lookback option’.
Partial time single-asset barrier options: This option has a limited time during which the underlying price is monitored for hitting the barrier. The time represents only part of the options life. The monitoring period can be either from the start to an arbitrary date (partial time-start barrier options) or from an arbitrary date to the options expiry (partial time-end barrier options).
Partial time two-asset barrier options: This is very similar to the 'two-asset barrier options' except that the barrier hits are monitored for only part of the options’ life. The option is 'knocked-in' or 'knocked-out' if the second asset hits the barrier during the monitoring period. The payoff depends on the first asset and the 'strike price' (see two-asset barrier options).
Partly paid: Investors in a new issue may be requested to pay the full purchase price in instalments and the shares will trade in partly paid form until they are fully paid.
Passive: See Index tracking.
Passporting: MiFID allows firms to offer certain services on a pan-EU basis under a passporting arrangement.
UCITS funds have a passport to be sold to retail investors across the EEA.
Patriot Act 2001: US legislation passed after 9/11 which dramatically expanded the authority of US law enforcement agencies to fight terrorism in the US and abroad. Among its many provisions, the Act increased the ability of law enforcement agencies to search telephone and e-mail communications and medical, financial and other records; it eased restrictions on foreign intelligence gathering within the US.
Pension Protection Fund (PPF): A fund set up by the UK government to protect employees in companies which go broke when their pension fund has a deficit. The PPF is being financed by a levy on pension funds and part is risk-based.
Performance attribution: Calculation of the performance attributable to each investment decision (TAA, stock selection, sector selection, credit risk, timing, etc.).
Physical delivery: Delivery of securities, certificates or the underlying asset to the buyer (or their agent).
Placing: A new issue may be placed with a small number of institutions, thus reducing the costs.
Plain vanilla bond: A simple bond that has a fixed coupon and a fixed maturity date.
Political risk insurance: The process of protecting against political events happening that are detrimental to certain securities or assets. Used to manage risk in emerging markets; a problem occurs in defining the 'event' that generates the loss, can lead to extensive definitions.
Pooled funds: Large funds in which several investors have an interest. Called managed funds by life companies. May have direct investments or unitised approach (see Unit-linked policy).
Pooled Nominee Account: Assets are held in the same account for a number of underlying (and non-related) clients. The nominees must be able to identify those belonging to each account and are not allowed to loan out stock in their permission.
Portable alpha: The strategy involves the use of active investment management (securities and/or derivatives) to create market exposures in securities or financial instruments in markets that are uncorrelated to the market beta. The active return (or alpha) generated is therefore portable because it has been ‘ported’ from a market unrelated to the beta.
Portfolio: Multi-asset class investment strategy, involving bonds, equities, cash, property etc. Usually designed to meet specific risk/return criteria of the client.
Portfolio managers: See investment managers
Portfolio Turnover Rate (PTR): A measure of how frequently assets are traded by the asset manager. It is calculated by taking either the total amount of new securities purchased or the amount of securities sold –whichever is less – over a particular period, divided by the total NAV of the fund. The measurement is usually reported for a 12-month period.
Positive carry: When the interest accrued on the investment is greater than the cost of financing (borrowing the funds) the investment.
Posting: Administration term used to describe the transfer of an entry from the journal to the ledger.
Pound cost averaging: The practice of allocating a fixed sum for the purchase of a particular investment on a monthly or other periodic basis. When prices fall, the fixed amount will buy more shares/units and, conversely, when prices rise, fewer shares/units are bought.
PPF: See Pension Protection Fund.
Preference shares: Fixed income shares which pay a fixed dividend (which is quoted as a net percentage of par). Preference dividends must be paid before ordinary dividends but the dividend may be passed. Preference shareholders rank above ordinary shareholders if the company is wound up.
Premium: Refers to the excess price an investment trust over its NAV, or to a fixed income stock priced above its nominal price, or to the price of an option (or insurance policy).
Prepayment risk: The risk to the holder of an MBS (or CMO) that interest rates fall and the mortgagees repay their loans early, or re-mortgage.
Present value: Sum of the present values of future cash flows from an investment, applying DCF calculations.
Prime broker: Investment banks commonly support their customers' prop trading, investment and hedging activities. Common clients of this service include hedge funds.
PRIPS: Packaged Retail Investment Products Directive.
Aimed at merging retail fund disclosure regulations currently covered by various EU Directives.
Private banking: See Wealth management.
Private equity: Unquoted shares in a company. May never have been listed on the Stock Exchange or may have been issued to raise capital in a buy-out (e.g., MBO).
Private placement: The process of issuing bonds or equities to a limited number of investors rather than to all investors.
Proceeds of Crime Act 2002 (POCA 2000): Section 5 contains the bulk of the UK's primary AML legislation.
Professional Customer: MiFID term to refer to investors not treated as Retail Customers.
Programme trade: Large-scale computer-driven trades that are generated automatically when securities hit a price target.
Prohibition order: Implemented by the FSA under Section 56 of FSMA 2000. This order prohibits an individual from carrying out particular controlled functions because he/she is not ‘fit and proper’.
Property Unit Trusts (PUTs): Can be authorised (i.e., qualify as NURS) or unauthorised (UUTs). Property is not deemed a Transferable Security under UCITS III.
Proprietary: Also referred to as ‘prop trading’. The ‘prop desk’ at an investment bank takes in-house positions (long and/or short) to make money for the firm. A proprietary model or trading tool is developed (or paid for) by the firm (investment bank or asset manager).
Prospectus: Legal document accompanying the issue of shares by a company (or authorised investment fund). Contains details of investment objectives, charges, etc.
Protected funds: Funds other than money market (cash) funds that aim to provide a return of a minimum amount of capital back to the investor, with the potential for some growth. Unlike guaranteed funds, they do not back their promise with a guarantee.
Proxy votes: The means by which beneficial owners instruct their representative to vote at a shareholder meeting.
Put option: The right to sell the underlying asset at the strike price.
Put spreads: The process of buying and selling 'put options' at different strikes to create a position (see Short put spread and Long put spread).
PUTS: See Property Unit Trusts.
Qualifying Investor Scheme (QIS): Non-UCITS and non-NURS collective vehicle (see COLL sourcebook).
Qualitative analysis: Determining the value of an investment by examining non-numeric characteristics (e.g., management, products, SWOT).
Quantitative management ('Quant'): Also known as ‘Quant’, a style of asset management that employs complex models to predict and analyse risk and return to select investments
Quartile: Relative ranking of a fund against its peer group in a league table that is divided into four quartiles.
R squared: A measure of the level of performance in a fund resulting from the market.
Range Binary Options: Binary Options are used in volatile trading conditions. They pay out a lump some of cash if no barrier event has occurred.
RaR: Return At Risk.
Measure of the possible range of returns calculated using standard deviation and other volatility risk measures.
Ratchet options: A series of forward starting options where the 'strike price' for the next exercise is set equal to positive constant times the asset price as of the previous exercise date (e.g., a 6-month ratchet option with monthly payments will have 6 payment or exercise dates). The first strike price is usually set to the current asset price.
Rate of return: The compound rate of return on a bond comprising of capital profit/loss, interest income and interest on interest received.
Ratio vertical spread: A spread where more contracts are sold than purchased and where all contracts have the same 'underlying' and 'expiration date'. Ratio Vertical Spreads are usually ‘delta neutral’.
RCH: Recognised Clearing House. Regulated firm able to clear and settle UK trades. LCH.Clearnet and CREST are the two organisations currently granted this status.
RDR: Retail Distribution Review.
FSA initiative aimed at improving market efficiency in retail investment products. Includes new requirements for commission payments to IFAs and fund charging.
Real assets: Tangible investments (e.g., property, commodities, art, vintage cars, fine wines jewellery, movie posters).
Real rate of return: Nominal return adjusted for inflation.
Redemption: Process by which an investor sells (redeems) share/units in an open-ended fund in exchange for cash. May crystallise capital gain and result in CGT payment.
Redemption date (maturity): The end of a fixed period when the nominal (par) value of a redeemable security will be repaid to the investor.
Redemption yield: An estimate of the total long-term returns, including income and capital on fixed income investments such as corporate bonds and gilts.
Registered stock: Stock is registered in the name of the owner (or the nominee). This is the most common form of issue in the UK and US.
Regulated activities: A two-stage process which defines, first, the specified investment and, second, the specified activity. A firm performing one or more specified activities in relation to one or more specified investments is performing a regulated activity and must be either authorised or exempt.
REITS: Real Estate Investment Trusts.
Launched in the UK in January 2007, REITS are closed-ended listed property funds. They are exempt from Corporation Tax on income and capital gains earned on the ring-fenced proportion of the property portfolio.
Relative return: A fund's performance relative to the rest of its sector, or an index.
Relative strength: A charting tool used by technical analysts (chartists) to measure the strength of a share price move relative to the index/sector/another stock.
Renounce able documents: Negotiable Bearer Securities Allotment Letter: issued to successful applications in a new issue. Provisional Allotment Letter: sent to the existing shareholders in the case of a rights issue. Renounce able Certificate: sent to shareholder in the case of a capitalisation. Split Receipt: replaces the above during the initial dealing period. Each document includes instructions to register the securities in the holder’s name or sell the rights.
Repo: A repurchase agreement. An agreement to sell securities and buy back (repurchase) at a later date at a pre-agreed price. Equity repos may also be called stock lending.
Repo to maturity: A ‘repurchase agreement’ where the securities are held to maturity rather than returned to the original holder.
Repricing: The process of marking a financial transaction to its current market price or valuation. Used in swaps or repos.
Residence: There is no statutory definition of residence; it is where a person lives. A person may have more than one residence or no residence at all. In the UK, a person is generally deemed resident if he or she is physically present in the UK for 6 months within a 1-year period or makes habitual and substantial visits to the UK.
Retail Customer: MiFID term used to refer to an individual (or small trust, charity, pension scheme) who has assets below EUR 500,000 and is not a market professional.
Retail share/unit class: Share/unit class in an OEIC/unit trust with initial and AMC sold to retail investors. Usually UCITS or NURS funds which offer full customer protection to retail clients.
Retained earnings: The part of a company’s profit that is not paid away as a dividend. Used to produce future earnings.
Return: The change in value of investment over a period of time, it is usually expressed as an annual percentage.
Revenue account: See Income account.
Reverse book-build: The process of finding selling levels from investors in order for a company to buy (back) shares (for 'de-listing' or 'stake building').
Reverse extreme spread options: The life of the reverse extreme spread option is split. One period starts at the start of the option (T0) and ends at T1. The second period starts at T1 and ends at option maturity, T2. The payoff for the call is the positive part of the difference between the minimum price of the underlying asset in T2 and the minimum price of the underlying in T1.
Reverse repos: A reverse repo is a repo agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it as a "reverse repo". Fund managers use reverse repos as a tool in Liquidity (ie Cash) Funds.
Rho: The sensitivity of an options 'theoretical value' to a change in 'risk-free interest rates'.
RIE: Recognised Investment Exchange.
FSA Approved UK-based exchanges which provide a market for investments to the standard required by the FSA.
Rights issue: A new issue of shares offered to existing shareholders in proportion to their existing holdings. Usually offered at a discount to entice take-up that causes the existing shares to fall in value to the theoretical ex-rights price.
Risk: The uncertainty of a future event (either positive or negative). May be measured as standard deviation, Beta, duration and is due to several factors (e.g., interest rate fluctuations, political instability geopolitical issues).
Risk premium: The incremental return that an investor expects in exchange for assuming an additional amount of risk.
Risk profile: This relates to how much risk the investor is prepared to accept. Generally, the more risk, the higher the potential return.
Risk reward trade-off: The balance that all investors must strike between the desire for higher returns and the possibility of lower returns.
Risk tolerance, risk acceptance parameter: The extent to which an investor will accept risk in the pursuit of financial reward. The greater the investors' tolerance, the more risk they will accept in order to reach their goal, and the more willing they will be to invest in higher-risk assets with correspondingly higher returns.
Risk-free return: The return on an investment believed to be risk free, such as a 90-day bank bill.
ROE: Return on Equity. Company earnings (profits) divided by net asset value.
ROIE: Recognised Overseas Investment Exchange.
An overseas exchange that offers membership and access to UK firms that has been granted recognised investment exchange status. These exchanges are often referred to as a recognised overseas investment exchanges.
Roll period: In order to maintain an open position, contracts close to expiry are closed out and new ones with a longer expiry dated are opened. The roll period is the period in which this 'rolling' takes place.
Roll up fund: Also known as a ‘non-distributor fund’. Income is not distributed, but is accumulated, tax-free, apart from WHT.
RPI: Retail Prices Index.
Measure of the cost of living (inflation) in the UK. The most commonly quoted version is RPIx which excludes mortgage interest rates. The RPI is a weighted average measure of change in the prices of goods and services bought by most households in the UK. It is compiled and published monthly (e.g., food and drink, tobacco, housing, household goods and services, personal goods and services, transport fares, motoring costs, clothing and leisure goods and services). Random sampling of retail outlets is used to collect data.
Running yield: The annual income payable on a bond, or income funds, as a percentage of the price.
S&P 500: The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American.
SAFEX: South African Futures Exchange.
Samurai: A foreign bond issued in the Japanese domestic market, payable in JPY and registered in Japan.
SSAS: Small Self-administered Scheme. Company pensions for up to 12 members.
Savings Directive 2003: EU Directive that aims to counter cross-border tax evasion by collecting and exchanging information about foreign resident individuals receiving savings income outside their resident state.
Scrip issue: Issue of free shares to current shareholders. Often used instead of a cash dividend (scrip dividend alternative).
SDRT: Stamp Duty Reserve Tax.
Purchase tax levied at 0.5% (50 basis points) on purchases of UK ordinary shares and units in a CIS.
SEC: Securities and Exchange Commission. The US financial services regulator
Securities: Investments with rights to payment of regular income and/#or a share in the profits of a corporation. Negotiable (i.e., may be market-traded or OTC).
Securitisation: This is a structured financing strategy where an entity pools its cash receipts and sells them to investors to achieve purpose off balance sheet financing. Technically, this is not financing because the entity securitising its assets is not borrowing money, but selling a stream of cash flows. Securitisation is a blend of structured finance and capital markets because it is typically accompanied by the setting up of Special Purpose Vehicles (SPVs) or Special Purpose Entities (SPEs).
SEDOL: Stock Exchange Daily Official List.
Details of daily trading, price moves, corporate actions and entitlements on the LSE.
Segregated portfolios: Separate portfolios with ownership of securities separately identified.
Sell side: Expression commonly used to represent investment banks. Buy side research is sent by brokers to their clients (including fund managers) to encourage them to deal in securities (shares and bonds). Asset managers are referred to as the "buy side".
Sell/buy backs: Similar in economic benefit to a repo/reverse, but without the documentation (GMRA).
Serial contract: Futures contracts that fill in between the regular March, June, September and December contract months (e.g., January, February).
Serious Organised Crime and Police Act 2005 (SOCPA): Replaced part of the Police & Organised Crimes Act to remove the requirement to make a report where the whereabouts of the proceeds are unknown. Website: www.soca.gov.uk.
Serious Organised Crimes Agency (SOCA): The UK agency to whom a firm's nominated office will make a Suspicious Transaction Report (STR) under the Money Laundering Regulations.
SETS: See Stock Exchange Electronic Trading System.
Settlement: The delivery or receipt of securities in exchange for payment.
Settlement date: The date on which a securities transaction must be settled. Buy orders must be paid for in cash and sell orders must have securities in legal (good) delivery form presented to the new owner. In Australia, settlement of stocks occurs 5 days after the transactions and bonds settle 3 business days after the trade was executed.
Share exchange: Investment trust term by which equities can be converted into investment trust shares.
Shares: Form of security that represents a shareholder’s stake in a company (see Equities and preference shares).
Sharpe ratio: A measure of the excess return earned on a portfolio (versus cash) per unit of absolute risk (standard deviation).
Short position (short selling): Sale of securities (or derivatives) that are greater than the value of the holding in the underlying security. Short sellers expect the price to fall and profit by buying back at a lower price. This is a common hedge fund strategy. The 'short' may use stock borrowing to cover the open position.
Short put spread: Sell a 'put option' at strike B and buy a 'put option' at lower strike A. The expectation is of a 'bullish' market, but with a neutral view on volatility.
Short synthetic position: A short 'call option' position together with a long 'put option' where both options have the same 'underlying', 'exercise price' and 'expiration'.
Short-dated gilts: Gilts with a time to maturity of less than 5 years (Financial Times) or 7 years (Bank of England).
Short-term debt: Debt issued by government or corporate with less than 2 years to maturity. US Treasury bills (T-bills) and Commercial Paper are common examples.
Short-term interest rate futures (STIR): An exchange-traded interest rate futures contract that sets the future interest rate at the time of trading and is settled by cash difference. Contracts are usually 3-month periods, but 1 month and 6 months are traded on some exchanges.
SICAV: Societé investissement à capital variable.
An open-ended collective investment fund. Usually operated under the UCITS Directive. Sells units in the fund to the public. Operates on a single (mid) pricing basis.
Sigma: Another name for 'volatility'.
Significant Influence functions: Managerial functions carried out by directors and other senior personnel. In the approved persons regime they embrace the governing functions, the required controlled functions, the systems and control functions and the significant management functions.
SIMEX: Singapore International Monetary Exchange (derivatives market).
Single pricing: OEICs and SICAVs quote a single mid price, usually the NAV. The initial charge is added separately along with the dilution levy. Some funds quote the swung price, at which all investors deal for that day. Most unit trusts use dual pricing.
SIP: Mandatory requirement under the Pensions Act 2004. Used by the portfolio manager to set TAA and stock selection.
SIPP: S Self-Invested Pension Plan.
Offers investors more freedom over underlying investments than a personal pension. Offered by wrap providers and private client investment managers.
Skew: An expression for the differences in volatility seen across different strike prices.
Small cap: Very small companies that, it is hoped, will grow to become the future giants of the stock market.
SONIA: Sterling Over Night Index Average.
Weighted average of overnight deposits of £25 million and above, taken between 00.00hrs and 16.15hrs and announced at 17.00.hrs.
Sovereign debt: Debt issued by a government in its domestic market. Considered to be the most creditworthy securities in the relevant market although there will be cross-market credit risk.
Special: Term for bonds in short supply (i.e., illiquid) and the repo rate is lower it should be.
Speculate: To engage in the buying or selling of an asset in order to profit by a change in the market price.
Split: Some companies split their share capital to improve liquidity in the shares. The price adjusts itself on a pro rata basis.
Split capital investment trusts: An investment company with more than one class of share, each class having different rights to participate in income or capital returns.
Spot: Spot price or spot rate is the current prevailing price/rate. This would apply to deals for standard settlement (i.e., not a forward).
Spread: The difference between the bid and offer prices.
SPV: Special Purpose Vehicle.
Also referred to as Special Purpose Entities (SPEs). Companies created to take over the debt of the parent company (e.g., widely used by Enron to take debt off its own balance sheet).
SRI: Socially Responsible Investment (see Ethical funds).
Stabilisation: A price-supporting process used on new issues of securities or bonds in order to maintain the price at a level that may otherwise not prevail.
Stack hedge: A hedge whereby the traders buy only the front months (liquid) futures contracts to hedge the exposure, rolling forward as they get closer to the front month's expiry (see strip hedge).
Stag: A person who buys shares (in an IPO) and immediately sells shares at a profit (a 1980s expression).
Stakeholder pension: Launched in 2001 to encourage long-term savings. Anyone can contribute to the stakeholder scheme (e.g., grandparents can contribute for their grandchildren). Contributions attract tax relief. Contributions limited to £3,600 per year (per scheme). Annual charges limited to 1% per year.
Standard deviation: A measure of absolute volatility. It is the measure of the square root of the variance of each return from the mean. The higher the figure, the greater the volatility (i.e., risk).
STIR contracts: Short term interest rate derivatives (eg options/futures etc).
Stock: Shares (e.g., Common Stock in the US). However, UK gilts may also be described as stock.
Stock lending: An agreement to ‘lend’ securities. Title of ownership is transferred to the counterparty and the borrower of the stock pays a fee to the lender. Voting rights transfer to the borrower, but any income is usually repaid to the lender.
Stop loss order: An instruction to buy securities to close out loss-making short position or to sell securities to close out loss-making long position, at a specified price.
STOXX: Range of indices produced by Dow Jones.
STR: See Suspicious Transaction Report.
Straddle: A position consisting of a 'long' ('short') call and a 'long' ('short') 'put'. All options have the same 'underlying', same 'expiration date' and same 'exercise price'. The difference between a straddle and a strangle is that the strangle has two strike prices, but a straddle has one common strike price (see Strangle).
STP: Straight Through Processing.
Electronic messages to generate deal tickets confirm trade details and send settlement instructions to a clearing house and custodian.
Strangle: A position consisting of a 'long' ('short') call and a 'long' ('short') 'put'. All options have the same ‘underlying’, same ‘expiration date’ but different ‘exercise prices’ see Straddle).
Strategic asset allocation: The choice of assets to be held in a client portfolio and the limits set on the weightings by the client.
Strike price: Also referred to as ‘exercise price’. The price at which the holder of an option or warrant can buy/sell the underlying asset.
STRIPs: Separate Trading in Registered Interest & Principal Securities.
Created when a bond is stripped into its component parts (coupons + principal). Each part is sold as a separate zero coupon security
Style: An investor profile or style defines an individual’s preferences in investment decisions (e.g., value or growth stocks, big cap or small cap stocks, defensive or cyclical stocks, use or not of derivatives). Investors who stick to a single style are likely to experience sustained losses.
Sub-advisory: See White labelling.
Sub-investment grade: Non-investment grade (or 'junk') bonds with credit rating below BBB- (Baa). Usually not considered invest able for charities and pension schemes.
Supershares: A portfolio of shares where the payoff is defined by an upper and lower limit. If the portfolio closes within the lower and upper boundaries the supershares have value, if outside the supershares are worthless. These securities trade on the American Stock Exchange as SuperUnits and on the CBOE as Supershares.
Support/resistance: The area of price action where the market has no more sellers (support) or no more buyers (resistance).
Suspicious Activity Report (SAR): Report made to the firm's MLRO or the authorities.
Swap: Generally, an exchange of payments between two parties (sometimes called counterparties), directly or through an intermediary: currency, interest rate or stock.
Swinging mid price: AIFs in the UK can swing the mid price (NAV) to allow for large cash inflows and outflows. This method is used instead of applying a dilution levy. The fund may use either full or partial swinging, depending on the size of the cash flows.
Synthetic: Position achieved via derivates, rather than actual securities, eg hold index futures rather than a basket of shares. Synthetic positions can be either long or short.
SYSC: FSA Handbook governing senior management arrangements, systems and controls.
T&C: Training and Competence.
T+1: A settlement convention whereby the transaction is settled 1 business day after trade date. Also T+2,T+3, T+10, etc.
Tactical Asset Allocation (TAA): Over- and under-weighting of each asset class relative to the fund/portfolio benchmark. The investment manager will adjust these weightings to enhance performance.
Tail: The amount of government stock sold in an auction below the average price. The larger the tail, the wider the spread of accepted bids.
Tap stocks: Government stock that may be issued in small amounts after the initial issue.
Tax wrapper: An extra layer that surrounds an investment product, sheltering it from paying certain taxes. Such wrappers include pensions, ISAs, PEPs and TESSAs.
T-Bill: Treasury Bills. Short-term government debt. Maturity less than 1 year. Issued at discount to par. Zero coupon securities.
TCF: Treating Customers Fairly.
Technical analysis: The analysis of investments by using price charts.
Total Expense Ratio (TER): Total expenses incurred by funds during an accounting year, including the Annual Management Charge (AMC), fees to the auditor, registrar, depositary/trustee, etc.
Termination date: Generally, the 'end date' for a 'repurchase agreement'.
Theoretical value: An option value generated by a mathematical model given specific assumptions about the 'underlying security', 'time to expiry', 'strike price', 'volatility' and 'interest rates'.
Theta: The sensitivity of an options 'theoretical value' to a change in amount of time to expiration.
TIBOR: Tokyo Interbank Offered Rate.
Tick: Usually used to refer to one basis point.
Tilt: An active strategy that attempts to out-perform a given benchmark by making strategic bets, or tilts, towards characteristics that research has shown to increase the probability of success (e.g., a portfolio may be tilted towards value or growth, meaning that the portfolio holds stocks that are better value and have better growth opportunities than the benchmark).
Time premium: Another name for 'extrinsic value'.
Time spread: A 'spread' consisting of one 'long' and one 'short' option of the same type and having the same 'exercise price', but with different expiry dates.
Time switch options: An option whereby the holder receives an amount at maturity for each time interval the underlying asset price has exceeded the strike price. The ‘put’ variant gives the holder an amount for each time interval below the strike price. Accrual swaps are similar.
Time to expiry: Remaining life of an open contract
Time value: Another name for 'extrinsic value'.
TNA: Total Net Assets.
Value of fund/portfolio including deductions for accrued income and expenses.
Top-down investment strategy: Investment strategy relying on macro factors (asset classes, countries, regions) rather than stock selection.
Top-slice: Sell part of a holding to reduce its weight in a portfolio.
Total return: Investment return allowing for capital gain/loss and income.
Total return swap: A swap where the payment on one side represents the income/return from a basket of assets, indices or loans against a reference rate on the other side.
Total risk: Active risk plus benchmark risk.
Touch options: A swap where the payment on one side represents the income/return from a basket of assets, indices or loans against a reference rate on the other side.
TPA: Third Party Administrator.
Tracker funds: See Index-tracking.
Tracking error: The volatility of returns of a fund relative to its benchmark.
Tranches: Another issue of existing stock (usually a fixed income term).
Transaction costs: The costs incurred when buying or selling shares of securities or funds for a portfolio. Also referred to as ‘explicit costs’.
Transfer Agent (TA): Firm employed to receive monies from investors and pay distributions. This term is more commonly used in fund locations other than the UK such as Luxembourg and Dublin.
Transferable securities: Securities Denotes securities which are listed and traded on regulated (eligible) markets. Includes shares, fixed income, cash MMIs, certain derivatives. Excludes property, real assets, alternatives and commodities.
Transition management: Buying and selling securities to restructure a portfolio as efficiently as possible. The objective is to complete the transaction as quickly as possible (minimising tracking error) and as cost effectively as possible.
Treasury stock: Treasuries. Government fixed income securities.
Treynor ratio: A measure of the extra return earned by a portfolio relative to the risk taken versus other portfolios.
Trial balance: List of all ledger accounts. Credits and debits equal each other out.
Triparty repo: Repo used for funding/investment purposes in which bonds and cash are delivered by each counterparty to an independent custodian (Triparty Custodian) that is responsible for ensuring the maintenance of adequate collateral to cover both legs of the trade. The Triparty Custodian marks the collateral to market daily and makes margin calls on either side, as required.
Trust: Assets held by trustees on behalf of underlying beneficial owners. The portfolio may be professionally managed (e.g., charitable trust, unit trust). Governed by Trustee Investments Act 2000.
Trust deed: This document establishes the legal constitution, structure and organisation of a unit trust or family trust. The OEIC equivalent is known as an ‘instrument of incorporation’.
Trustee: An individual or a group of people or independent institution responsible for the management of the trust as defined by the trust deed. The trustees have the power to veto any investment they feel does not adhere to the trust deed.
Two-asset barrier options: In this type of option, one of the underlying assets determines how much the option is in- or out-the-money, the other asset is linked to the barrier hits.
Two-asset cash-or-nothing options: There are four types of two-asset cash-or-nothing options. Type 1 pays a fixed amount if both assets are above their respective strike prices. Type 2 pays a fixed amount if both assets are below their respective strike prices. Type 3 pays out a fixed amount if asset 1 is above its strike price and asset 2 is below its strike price. Type 4 pays out a fixed amount if asset 1 is below its strike price and asset 2 is above its strike price.
Two-asset correlation options: One asset decides if the option is in- or out-the-money, the second asset with its own strike decides on the payoff.
UCITS: Undertakings for the Collective Investments In Transferable Securities.
EU Directives aiming to provide a single market for retail funds. Includes Investment & Borrowing rules covering, among other things, the use of derivatives.
UKLA: UK Listing Authority. Under EU regulations each member-state must appoint a competent authority for the purpose of listing securities. The competent authority for listing in the UK is the FSA. In this capacity, the FSA is called the UK Listing Authority.
UKSIP: UK Society of Investment Professionals. Professional institute representing investment managers and analysts.
Umbrella fund: A single authorised scheme with any number of sub-funds. Investors (shareholders) may switch (transfer) from one share class to another.
Undated gilts: Gilts without any redemption date or yield (e.g., War Loan).
Underlying: The price of the security (or other deliverable asset) that affects derivative prices.
Underweight: A lower investment in a stock/sector/region than the relevant benchmark weighting.
Underwriter: Investment banks usually agree to underwrite new share and bond issues, in exchange for a fee. This process ensures the issuer received their capital. The lead underwriter usually forms a syndicate of other banks who sub-underwrite the issue (i.e., take some of the risk).
Unfranked income: Income from which no WHT has been deducted.
Unit: Part of a unit trust or other CIS purchased by the investor.
Unit trust: An open-ended fund, diversifying investments to spread the risk to the investors. Investors buy units directly from the fund manager. Authorised unit trusts are subject to FSA investment regulations. Unauthorised funds are not so restricted, but cannot make a financial promotion to retail customers.
Unit-linked policy: A portfolio that invests in units/shares of other funds. This is a common policy adopted by life funds and some pension schemes.
Unlisted/Unquoted securities: A security that is not listed on a stock exchange and is traded OTC (e.g., Eurobonds, ADRs, and Private Equity).
UT: Unit trust.
UUT: Unauthorised Unit Trust.
Valuation point: Time of the business day (commonly 12.00) when AIFs are valued to set the share/unit price.
Value style: Value investors, buy companies whose shares appear under-priced by some forms of fundamental analysis. These may include shares that are trading at, for example, high dividend yields or low price-to-earning or price-to-book ratios. Buffet argues that the essence of value investing is buying stocks at less than their intrinsic value. Investors who stick to a single style are likely to experience sustained losses.
VAR: Value At Risk.
An estimate of the maximum expected loss over a specified period within a given degree of confidence.
Variance: Measure of volatility (standard deviation squared)
Variation margin: Payment made/received to cover change in value over the day on a derivatives position.
VCTs: See Venture Capital Trusts.
Vega: The sensitivity of an option's 'theoretical value' to a change in 'volatility'.
Venture capital: New capital injected into a company to pay for further research, development or to improve the balance sheet.
Venture Capital Trusts (VCTs): A collective investment portfolio made up of holdings in the shares of unlisted companies or AIM stocks. Tax benefits include initial income tax relief of up to 40% on subscriptions.
Volatility: Measure of the dispersion of returns, usually measured by Standard Deviation.
Warrants: Long-dated options warrants giving the holder the right to buy/sell a specified quantity of a particular stock, or any other asset, at a fixed price on or before a specified date.
Wealth management: Private banking, etc. Investment for an individual or group (e.g., family trust to meet specific risk/return criteria agreed with the client). May use a wrap account to include banking, investment, insurance, wills and estate planning, etc.
Weighting: Percentage holding of a security in a portfolio relative to the percentage (weight) in the underlying benchmark. Underweight means the portfolio holds a smaller percentage than that in the benchmark. Overweight portfolios hold a higher percentage.
White labelling: Some asset managers and advisers outsource the investment management process, but use their own name to brand and market the investment product. A common strategy for broker funds, private pension schemes, etc.
WHT: Withholding tax.
Tax deducted from income paid to non-residents (usually 10–15%). This may be offset against the investor’s individual income tax liability if double taxation treaties between the country of the payee and the investor’s country of residence exist.
Winding up: The process of terminating a company (or fund) by realising its assets, paying off creditors and distributing the remaining assets among shareholders (or investors).
With-profits policy: A policy in which the policyholder has the right to amounts above the basic sum assured or death benefit, principally as the result of profits made on the investment of a fund.
WM: Independent performance measurement service. Offers pension funds and private client services.
Wrap accounts: An administration platform that allows advisers to deal and hold their clients’ assets on a single platform. May be tax-efficient (e.g., pensions, SIPPs, ISAs).
Yankees: A foreign bond issued in the US domestic market, payable in USD and registered in the US (SEC).
Yield: The interest earned on holding a security. Derived from coupons or dividends (see also Gross Redemption Yield).
Yield gap: The spread (difference) between gilt and equity yields.
Yield spread: The difference between government and corporate bonds of similar maturities in the same market. May also apply to the spread between government bonds in different markets. A common arbitrage strategy for hedge funds.
Zero coupon convertibles (LYONS): Zero coupon convertibles are known as LYONS in the US (liquid yield option notes).
YTM: Yield To Maturity.
See Gross Redemption Yield
Zero coupon security: A security issued at a discount to par (face value) and usually redeemed for full face value. May offer significant tax advantages for higher-rate taxpayers.
Zero dividend preference share: A class of share making up a Split Capital Investment Trust. It is a share with no right to receive a dividend, but it is entitled to a fixed sum on repayment. This figure is usually expressed as an annual percentage and accrues annually.

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