Unsure of the jargon? Read on! This page is written from a UK standpoint - always take appropriate advice before investing
Accrued Benefits
Pension benefits to which a member is entitled for service up to a given point, whether the member continues in office or not.
Accrued Interest
Interest due but not yet received or paid.
Accumulation Units
Normally applied to unit trust or life assurance funds where interest is rolled up or automatically reinvested to increase the unit value. In the case of unit trusts, income tax may still be payable on the reinvested income.
Annuity
An income receivable either for a fixed period or the life of the annuitant in return for the payment of a capital sum. Annuities cannot strictly be encashed and normally cease on the death of the annuitant.
The income provided is deemed for income tax purposes to be split into two parts - one which is return of capital (the "capital element") and is therefore untaxable, the other being interest which is taxable.
Annuity rates depend on the prevailing rate at the time the annuity is purchased. Normally advisable only for older people and those without dependants or for use in conjunction with pension income.
See also Immediate Annuity.
Appropriate Personal Pension
A personal pension used to contract out of the State Earnings Related Pension Scheme after 1st July 1988.
APR
Annualised Percentage Rate. Used as a benchmark, mainly for borrowing rates. Shows total gross annual interest charges on capital outstanding over the period of the loan or investment.
Asset
A general term used to describe resources owned. These resources must always have a realisable value i.e. can be readily bought and sold.
Asset Allocation
The composition of a fund's or an investor's portfolio. This usually includes a breakdown by geographic and industry sector for equity funds. For bond funds, it shows net currency exposure and the split between government, corporate and other fixed-income securities.
Assign
Assignment of insurable interest is the assignment of either the proceeds of an insurance policy or the policy itself to another person.
Assurance
The business of providing for an event which will certainly occur, such as retirement and death, as opposed to Insurance which provides against events which may happen such as fire and accident.
Bearer Stocks/Bonds
Stocks or shares where possession is regarded as proof of ownership, represented by a certificate that has an intrinsic cash value. The investor or holder's name does not appear on the certificate, so anyone who presents the certificate has the right to receive the cash value. Dividends must normally be claimed by using coupons.
Bed and Breakfast
Selling a holding, often after trading hours, establishing a loss to set against other profits, then buying it back again shortly afterwards (usually when the market re-opens). Effected to minimise the effects of any Capital Gains Tax. Transactions are normally made at a discount to the commission that would be charged for normal transactions. Stamp duty must still be paid where applicable.
Benchmark Index
Fund performance is commonly measured against an index which is not managed but approximates the average performance of the type of securities in which the fund is allowed to invest.
Beneficial Owner
Person or persons who is the ultimate owner of an investment or property, as opposed to the registered owner who may be a Nominee.
Bid
The price or terms at which a person is willing to buy. It may be made in response to a seller's offer in which case it will be at a lower price than the offer or will demand more favourable terms. The seller may accept the bid, make a counter-offer, or withdraw. Once the bid has been made against an offer, the offer ceases to be valid.
Bid price - The price at which shares or units are sold by investors i.e. at which a market maker or institution will buy them back.
Black Economy
Areas of the economy where transactions go unrecorded - and therefore untaxed.
Blue Chip
An investment that is essentially solid and substantial - companies are normally household names with a record of consistent growth and dividends, stable management and substantial assets where pension funds and institutions invest a substantial proportion of their equity capital.
There is no official list of blue chips although they are sometimes regarded as the 30 companies constituting the Financial Times Industrial Ordinary Index. The term comes from the game of poker, blue being the chip of highest value.
Bonds
Fixed interest securities, long term debt securities or loans, issued by incorporated companies, governments and public organisations as a means of raising money. They generally have a fixed, stated interest rate ("coupon") which provides periodic interest payments, and repayment of the face value is guaranteed by the corporation or government on a set redemption date. They can be traded at any time until maturity in the organised exchanges or over-the-counter markets. Their value will depend on (a) the fixed rate of interest compared to rates of interest available at the time of sale and (b) the market's assessment of the likelihood of full repayment. Bonds offer relative security of capital and are generally considered to be a lower risk investment in comparison with shares.
See also Investment Bond.
Bottom up
A style of investment management concentrating primarily on individual stock selection. Managers usually begin their search with fundamental analysis in order to find companies whose current prices may fail to reflect their potential longer-term value.
Bourse
Name given to stock exchange in Europe.
Broker Fund
An Investment Bond Fund managed by an independent financial advisor and which can contain life funds, unit trusts and occasionally direct equities. Underwritten by a life assurance company and managed by the broker at his sole discretion for a fee of around 1% - payable in addition to the standard charges of the life assurance company.
Bucket Shop
Operation for "pushing" (over-promoting) particular shares to the public. The shares concerned are often of dubious quality.
Cancellation Price
Price determined by a Government-fixed formula indicating the maximum spread between bid and offer prices. This is the minimum permissible price at which the value of units can be quoted. Although the bid price for units in collective investments is normally higher, it can be used at the Manager's discretion to prevent wholesale redemptions.
Capital / Initial Units
Units allocated to unit linked life assurance contracts from which the insurance company derives its charges. This type of unit is normally allocated to plans over a period of up to 2 years at the beginning of the plan (the Initial Period) and a percentage is withdrawn by the insurance company as a prior charge on the unit price regardless of how the investment performs. Thus, the company reduces the amount initially invested by the client in order to cover administration and commission costs.
Capital Conversion Plan
A “back-to-back savings plan"; combining two separate plans. Investors' contributions go into a "funding" series of investment bonds. These are encashed successively, providing the regular premiums paid into a maximum investment plan. This allows short-term or lump sum savers to benefit from the tax advantages offered by a longer term regular premium life assurance plan - particularly useful for expatriates working on contract for a few years.
Capital Gain
The real gain (i.e. profit after inflation) in the value of an asset.
Capital Market
The market for long-term sources of capital. Demand is represented by industry, commerce, government etc, which require long-term funds for fixed investment; supply is from stock exchanges, savers and institutions such as insurance companies.
Capital Redemption Bond
A fixed term (often 99 years) specialised life assurance contract with no life assured, requiring a minimum lump sum investment.
Cartel
An association of business formed for the purpose of regulating prices, outputs or market conditions in an industry. It may be national or international but the purpose is generally to exercise certain aspects of monopoly power in order to secure greater profits for its members e.g. IATA (International Air Transport Association), OPEC etc.
Chinese Walls
Barriers that are supposed to exist between different arms of securities house to prevent information from passing between them - sometimes they are invisible walls. Cynics claim they have "never seen a Chinese Wall that did not have a grapevine growing over it".
Closed economy
See open economy.
Collective Investment Fund
A fund which enables participants to pool their investments and to jointly benefit from profits or income arising from trading in the underlying assets. Similarly, losses are shared. The main benefit is to smaller investors who can spread their investment among many more shares or other marketable securities, reducing risk. The disadvantage is that they will not show the spectacular gains which result from investing directly in a company whose shares multiple in value many times.
Examples are unit trusts, investment trusts, managed funds, open ended investment companies and mutual funds.
Commission
Payment to an intermediary for services rendered. This is often paid at a predetermined percentage rate based on the value of the investment. The commission may be paid out of the standard initial fee charged by the Product Provider or may be an additional cost for the investor to bear.
Compulsory Purchase Annuity
An Annuity which is usually purchased by the Trustees of a Pension for the benefit of the annuitant. Such annuities can be purchased on a Joint Life basis which will provide the surviving partner with a reduced income for life if the main annuitant pre-deceases them. The resultant pension income is taxed as earned income and does not benefit from the "capital element" concession applied to Purchased Life Annuities.
Contract Note
Written confirmation of the purchase or sale of an investment, issued immediately the bargain is agreed.
Contribution
The premium(s) paid into a life assurance contract, or each sum invested in other investment vehicles.
Convertible Bond
Fixed interest stocks issued by corporations with a stock exchange listing that give their holders the option to convert into equity at a fixed price and exchange rate over a specified period. The bond has a fixed maturity date and carries a lower coupon than a straight bond.
The term is also used for gilt-edged issues convertible at redemption or earlier into one or more other issues.
Coupon
A warrant, detachable from a bond or share certificate, to be presented to the appointed agent of the issuing authority or company for the payment of interest or dividend.
The term is often used to describe the value of income from a Fixed Interest Security.
Debenture
Corporate fixed interest bonds secured against the assets of the company.
Debt security
A general term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, notes, bills and money market instruments are all debt securities but their maturity varies.
Deed of Covenant
A deed by which a person promises to pay to another a sum or sums of money. If such a deed requires payments over more than 6 years, the payer can claim back UK income tax paid on such sums.
Deferred Annuity
An annuity that requires the payment of a single premium or a series of annual premia some years before the annuity payments are due to start.
Derivative
A financial instrument whose characteristics and value depend upon those of an underlier, typically a commodity, bond, equity or currency. Examples of derivatives include futures and options. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying security, to protect against fluctuations in value, or to profit from periods of inactivity or decline. These techniques can be complicated and risky.
Discretionary Management
The term usually refers to a brokerage account in which the client has given the broker the authority to carry out transactions without checking with the client first.
Distributor Fund
This UK tax status can be applied for by a fund which distributes at least 85% of its profit. The fund is liable to UK Capital Gains Tax and to income tax on dividends - the investor gains the benefit of CGT allowance, indexation allowance etc.
Dividend
A share in the profits of a limited company paid to shareholders. It is expressed as a percentage of the nominal value of the shares. An income distribution to shareholders that generally comes from the net income of the fund. A change in the dividend rate or amount does not affect the fund's share price.
Domicile
The country that a person considers to be, and treats as, a permanent home and which forms the closest ties. An essential element when dealing with legal and taxation matters. Usually the country of residence, but not necessarily so, particularly for expatriates.
Emerging Markets
Generally considered to consist of countries of low to middle income as defined by the World Bank. This group currently includes more than 100 countries and nearly 85% of the world's population. These countries include much of South East Asia, the Indian sub-continent, all of Africa and Latin America, Eastern Europe and the former Soviet Union as well as parts of Southern Europe.
Endowment
A regular contribution life assurance contract with a specified term, either of a number of years or to a specified age of the life assured. There are various types of endowment policy:-
Pure Endowment - The policy provides a sum assured which is paid at the end of the term. Under most pure endowments, nothing is paid if the life assured dies within the term.
Non-Profit Endowment - The policy provides a sum assured which is paid either on the death of the life assured or the end of the term, whichever happens earlier.
With Profit Endowment - The policy provides a sum assured which is paid together with bonuses accrued either on the death of the life assured or the end of the term, whichever happens earlier.
Low Cost Endowment - The policy provides a higher level of life cover than with profit endowments for the same contribution. It combines a decreasing term assurance and with profit endowment. When used by house buyers, the guaranteed sum assured is normally set at an amount lower than the mortgage capital in the belief that bonuses added to the policy will be sufficient to make up the outstanding amount and leave a surplus to be paid to the policyholder.
Unit-linked Endowment - The policy guarantees a minimum sum assured which will be paid in the event of death within the policy term. If the value of the units in the plan is greater that this sum assured at the time of death, the larger value will be paid. On survival to the end of the term, the value of the units is paid.
Equity
Net assets, attributable to the ordinary shareholders of a company.
A term used for an investment, often called stocks or shares, in a Stock Exchange listed company as opposed to Fixed Interest investments and property. Company share prices fluctuate, reflecting the market anticipation of the company's operating results and future prospects. For this reason, equities are generally of higher risk than bonds but are able to provide attractive capital growth over the long term.
Generally, preferred stock and convertible stock are also types of equity securities, but debt securities are not since they do not represent ownership.
Eurobond
An interest bearing stock denominated in a Eurocurrency. Eurobonds are issued by governments, companies or international syndicate and are traded internationally. They are issued in bearer rather than registered form which gives them attractions for investors who do not intend being over-frank with the tax man.
Eurodollar
An international currency medium in the form of claims to US dollars held by institutions outside the USA.
Ex-dividend
Denoting the price of a share when it does not include the right to receive the next dividend due. Purchasers of an ex-dividend share will not have the right to the dividend following the date of purchase, but will qualify for dividends after that. Shares are ex-dividend in the period between the announcement and the payment of a dividend. A fund that has gone ex-dividend is normally indicated with an "x" in share price listings.
FCP (Fonds Commune de Placement)
Equivalent to a unit trust, an FCP is not a distinct legal entity and therefore does not have a board of directors. Instead it has a management company acting on its behalf.
Financial Advisor
Financial Advisors advise their clients on savings, investments, and pensions and supply financial products to their clients.
The best advisors collect detailed information about their clients´ financial circumstances and requirements, provide impartial advice on the products which will best meet these, and supply these from the full range available from all sources.
Advisors may need a license to practice, issued by the financial services regulator in their country. It may be a condition that prospective advisors show their regulator they are competent to advise, impartial in their advice, independent of Product Providers and covered by professional indemnity insurance.
It is important to check that your advisor is licensed to advise and supply financial products in the country where you are doing business - and to check whether he or she is an agent of just one Product Provider, a limited number of Providers or a wide range.
Advisors usually earn their living from the commission paid by Product Providers. The commission they receive from a case may range from hundreds to many thousands of dollars. Good advisors are not influenced by the amount of commission they receive. Some clients prefer to pay their advisor a fee for advice as a way of ensuring their impartiality. In this case the Advisor refunds to the client the commission paid by the Provider. This refund may be in cash or, more commonly, by increasing the invested proportion of any contributions paid by the client.
It is important to choose a good advisor - ask your friends if they would recommend theirs - and to ensure he is authorised to advise you.
Financial Centre
Countries or dependent territories whose governments have encouraged the development of a financial services industry - banking and investment management, for example - geared to the requirements of non-residents. Many of these countries are small, with few natural resources. Development of a finance industry creates jobs and boosts the economy.
One way of encouraging the development of the financial services industry is to authorise investment management and life assurance companies to offer products which are attractive to non-residents. This can be done by exempting the products from local income, capital gains or wealth taxes.
We live in an increasingly global economy, where goods and services are traded more freely. These tax-free products may be attractive to investors living in other countries. For example, if they pay high tax rates on domestic investment products or returns on financial products are reduced because of restrictions on the assets in which they can invest or their country restricts access to capital in their domestic investment products.
Financial Times Stock Exchange 100-Share Index
The FT-SE or FOOTSIE 100 share index is one of the most recent of UK equity indices which started with a base of 1000 at the end of December 1983. It reflects price movements of the 100 largest companies and because of the small number of companies it can be calculated rapidly and frequently. It was introduced mainly as a basis for dealing in equity index options and futures.
Fixed Interest Bond
A security which carries a fixed rate of interest, normally payable for a pre-determined period. Issuers of such investments may be governments, local authorities and corporations. The bonds may be traded and their value is related to the value of the fixed rate of interest (yield) it provides.
Fixed Interest Security
A security with a return fixed in absolute terms. Bonds, debentures, gilt-edged securities and preference shares are all fixed interest securities. Ordinary shares are not.
Flotation
The raising of capital through public subscription either by a new company or on behalf of a new company by a merchant bank.
Forward Pricing
Investors buy and sell shares at the prices calculated at the valuation point immediately following receipt of their order.
Fund
A collective investment vehicle which allows investors to pool their resources to invest in a portfolio of bonds, equities or money market instruments or a combination of all three. Through buying share or units of the funds, investors are effectively holding a portion of the investment portfolio.
Futures Contract
An exchange traded commitment with standardised terms (including quality, quantity, time and ) to make or accept delivery of a commodity at a price agreed uon at the time the contract was traded.
Gilt-edged Security
A fixed interest security issued by the UK government and traded on the London Stock Exchange. They may be irredeemable, such as consols, or redeemable, usually at part, at a specified date or dates. Short-dated gilts are those having less than five years to redemption; medium-dated gilts have between five and fifteen years to redemption; long-dated gilts have in excess of fifteen years to redemption. They are considered very save in the sense that it is unlikely that the government will renounce its debts. This does not mean that gilt edged securities are necessarily safe or good investments; indeed then are poor investments in times of rising interest rates (because their prices move inversely with the level of interest rates) and in times of inflation, as are all fixed interest securities. However, there are certain advantages to dealing in gilt-edged securities on the Stock Exchange - no stamp duty payable upon their purchase, stockbroker's commission is lower than in the case of equity dealings, and any capital gains resulting from sales made more than 12 months after purchase are exempt from capital gains tax.
Gold Standard
A monetary system in which the value of the basic unit of a country's currency is fixed in terms of gold. Currency is freely convertible into gold and the free import and export of gold is allowed.
Government Bonds
The UK government borrows from the investing institutions and public by the issue of bonds under a number of names: Consols, exchequer bonds, treasury bonds, victory bonds, war loans etc.
Government Securities
All borrowing by the government on which a fixed rate of interest is paid. These include funded debt and treasury bills.
Hedge
A position in two related securities, long and short, such that the risk in one position partially or fully offsets the risk in the other. Hedging is widely used in commodity markets, especially those offering the hedging facility of a futures market. The term is also used in the context of protecting one's capital against inflation (hedging against inflation). It may be thought that equities provide the best hedge against inflation, as a decline in the purchasing power of money should be balanced by a rise in the value of equities.
Highly Personalised Investment Bond
A Whole of Life contract requiring a minimum lump sum investment and providing at least the minimum level of death benefit to qualify as a life assurance contract. An individual portfolio of assets can be held within the bond, including equities, bonds, OEICs and many other types of investment as well as collective funds. These normally exclude commodities, coins and other assets which are not easily traded.
Historic / Forward Pricing
Historic pricing - the fund manager/operator will normally deal on the price set at the most recent valuation. The prices shown in financial publications are the latest available prior to going to press and may not be the current dealing levels in the event of an intervening portfolio revaluation or a switch to forward pricing. The manager/operator must deal at a forward price on request and may move to forward pricing at any time.
Forward pricing - the manager/operator will deal at the price to be set at the next valuation. Investors can be given no definite price in advance of the purchase or sale being effected.
Immediate Annuity
An annuity that gives the investor immediate payments as soon as their investment is received by the insurance company.
Income tax
A tax on all emoluments received by an individual from any source.
Inheritance Tax
If a person is domiciled in the UK, their worldwide assets are liable for Inheritance Tax (although see "Sealing"). The Inheritance Tax spouse exemption is applicable only when both spouses are UK domiciled - if the survivor is not domiciled in the UK a limited exemption is available.
Initial Charge
Charges normally associated with collective investments and made by the fund manager or operator to the buyer. Used to defray marketing and administrative costs including commissions paid to intermediaries or introducers.
The charge is represented by the difference between the bid and offer price of unit trusts and is included in the buying price of units.
For OEICs the charges are shown separately as the buying and selling price for shares are the same.
Insider
A person, such as a director, who has foreknowledge of information likely to affect the share price of a particular company prior to the publication or general dissemination to the public of such information. The use of the information to gain from buying or selling shares prior to publication is known as insider dealing and was made illegal in the UK under the Companies Act (1980).
Institutional Investors
Organisations whose business causes them to receive funds that need to be invested. Such organisations include insurance companies, banks, pension funds, investment trusts, unit trusts and commercial/industrial concerns that administer their own pension schemes (or have other available funds). The share of the stock market owned by institutional investors has increased rapidly since the war in both London and New York, and sentiment in both markets is now dependent on the investment policies of the institutions. Institutions can also build up a shareholding in a particular company that gives them an important voice at shareholders' meetings, especially during takeovers.
Insurance
The business of providing for an event which may happen such as fire and accident. This is as opposed to assurance which provides against events which will certainly occur, such as retirement and death.
Interim Dividend
Any distribution of profits declared by a company in respect of a particular trading period, usually one year, other than the final dividend.
Investment
An item of value purchased for income or capital appreciation.
Investment Bond
A Whole of Life contract requiring a minimum lump sum investment and providing at least the minimum level of death benefit to qualify as a life assurance contract. This amount varies by country. Collective investments and with profits arrangements can normally be held within the bond. The investor can generally vary his investments within the bond by switching between funds at minimal cost.
Investment Management
The day to day management of a portfolio of assets.
Launder
The act of taking "dirty" money (i.e. that obtained from criminal sources or activities) and turning it into "clean" money by putting it through some process that hides or disguises its origin. Investment managers tend to be suspicious of potential investors who wish to fund their investment with a suitcase of paper money.
Letter of Indemnity
A letter requesting a company's registrar to issue a replacement share certificate for one that has been lost, the holder indemnifying the company for any loss that might result. It must usually be countersigned by a bank or insurance company.
Letter of Renunciation
A letter in which a shareholder renounces his right to stocks or shares allotted to him.
Leverage
The magnification of the potential (both risk and reward) or an investment when a given amount of money controls assets of substantially greater value.
Life Assurance
A contract between an individual and a life assurance company wherein the former commits to the payment of a premium or premiums and the latter undertakes to pay out a lump sum or income in the event of death. Originating in the provision of funeral expenses by the prepayment of regular amounts, life assurance has grown into a sophisticated industry concerned as much with the mitigation of tax and provision of savings as with protection. A life assurance contract will pay out a sum on the death of the "life assured", which may be the same person as the holder of the policy or, in certain cases, may be a third party. Some contracts will pay a sum at the end of a specified period of the life assured is not deceased before this date.
Limited liability company
A company where the shareholders' liability is limited to the sum originally subscribed for the shares only if this sum has been fully paid. For this privilege a company accepts obligations such as publishing audited accounts.
A plc is a public limited company, a limited company is a private limited company. Private limited companies are much more common than public limited companies. A plc may be listed on the Stock Exchange or the Unlisted Securities Market but does not have to be. Before it can start to trade a plc must have a minimum value of shares issued, a minimum amount of the value must have been paid and it must have at least two directors and a secretary. A private limited company cannot be listed on the Stock Exchange, it can have just one share issued of nominal value and may have just one director and a secretary.
Liquid Assets
Assets (capital) that have a fixed monetary value and can easily be converted into money at that value e.g. bank current account deposits. Liquid assets are thought to be a possible determinant of consumption.
London Inter-Bank Offered Rate (LIBOR)
The rate at which banks will lend on the inter-bank market, adopted as the benchmark rate of interest. The interest on floating rate notes is usually set by reference to the average rte of LIBOR and expressed as "so many basis point" above LIBOR.
Managed Currency
A currency whose exchange rate is influenced by government action in the foreign exchange markets. This is inevitable for a currency with a fixed exchange rate, but can also apply when the exchange rate is floating.
Managed Portfolio
A portfolio, often offered by life assurance companies, linked to a series of funds with the manager of the portfolio determining the day to day management of the assets. The manager, usually the company offering the portfolio, determines the emphasis given to different categories of assets as a matter of investment policy. Products offering managed portfolios typically offer a range with names such as "Cautious", "Balanced" and "Aggressive" portfolios and are often aimed at the less experienced investor who nevertheless wishes to participate in the potential gains available from stockmarket investment.
Maturity
The date on which a contract ends, normally used to indicate that a sum is payable at this date to the policyholder.
Middle Price
The midway level between a share's bid and offer prices on a stock exchange. Thus is a share is quoted 250p-260p (meaning that it can be sold at 250p and bought at 260p), the middle price is 255p. Most newspapers publish only middle prices.
Money Deposit
Account for cash where interest is paid, sometimes with stipulated conditions of withdrawal. Capital is generally guaranteed and rates of interest, dependent on general rates prevailing in the market place, is credited on a regular basis during the term of the deposit.
Money Market Instruments
Short term investments of high liquidity and with minimum fluctuation of capital. Examples are short term treasury bills, certificates of deposit and short term negotiable securities issue by corporations. Usually they offer a return which is comparable to or slightly higher than normal bank deposits. Money market instruments are considered to be of low risk by comparison with shares and bonds.
MSCI World Index
An index weighted by market size that approximates the performance of the world's stock markets. The index is unmanaged and is used as the benchmark for a number of funds because it represents the universe of securities amongst which the fund analysts can choose to invest.
Mutual Fund
A collective investment vehicle that pools the money of many investors to invest in a variety of different securities. Each investor holds a pro rata share of the mutual fund portfolio and is entitled to any profits when the securities are sold. Equally, they are subject to a pro rata share of any losses in value. Mutual funds generally focus on a particular type of investment (stocks, bonds) and/or geographic location or sector. They offer professional management of a complex investment at low cost and help smaller investors to spread investment risk.
There are a number of different fund structures available in different countries (see separate entries for details):-
Unit Trust
OEIC (Open Ended Investment Company)
SICAV (Societe d'Investissement a Capital Variable)
FCP (Fonds Commune de Placement)
Umbrella Fund
Mutual society
A company without shareholders whose ownership and profits are distributed among members and/or clients of the company. Some life assurance companies and certain charities and clubs are fund as mutual companies where the executives, investors, employees, policyholders and clients participate in the profits and income from the company.
Net Asset Value (NAV)
The share price at which a fund is bought and sold after deducting any sales or redemption charges. NAV is calculated by adding the closing market value of all securities owned by the fund, plus all other assets, and deducting the fund's liabilities. This sum is then divided by the fund's total number of shares outstanding.
Nominee shareholding
A shareholding purchased by an investor through a third party such as a merchant bank, stockbroking firm or some other nominee so that it is the name of the nominee and not that of the real investor (or beneficial owner) that appears on the shareholders' register. It is possible for a company that desires to take over a smaller company to build up a substantial and individual interest in shares that is concealed by being bought through nominees. Disclosure becomes necessary by law when one company's direct shareholding in another exceeds 10% of the other's issued share capital.
OEIC (Open-ended Investment Company)
A pooled investment fund of variable size in corporate form. An OEIC is an incorporated company with a single buying and selling price and which owns investment assets, such as stocks and shares, gilts, bonds and certain other financial instruments. The size of an OEIC varies to reflect the market value of its underlying investments. It will also fluctuate as investors buy and sell shares as the OEIC has more or less property to invest. It is in this sense of fluctuating size that it is open-ended.
An OEIC's investors own shares in the company rather than owning units as in a unit trust. The shareholders have the right to sell their shares back to the OEIC on any dealing day when trading has not been suspended. Unlike a unit trust, an OEIC's shareholders have no rights to the underlying assets. However, they do have rights to participate in income (which can be paid as dividends or reinvested) and/or profits arising from the management of and transactions in the scheme property. Every OEIC must be authorised by the Securities and Investments Board. An OEIC can have multi-classes of shares denominated in different currencies and with different charging structures, similar to a SICAV.
Offer
Offer price - The price at which units in a unit trust are bought by investors -includes manager's initial charge.
The price or terms under which a person is willing to sell. In commodities, an offer will include the quantity, quality and price of the goods as well as the delivery or shipment and payment terms. An offer may be firm for a stated period or may not be firm. Once a bid has been made against a firm offer it ceases to be valid.
Offshore
The term "offshore" is rather a loose one and can be misleading. Historically, offshore centres were mostly islands such as Guernsey, Jersey, the Isle of Man, Hong Kong and Bermuda with an advantageous tax environment which attracted expatriate investors whose principal concern was to minimise their tax obligations. However, in the 1980s, Luxembourg developed its low tax status from within the European Union and since then a number of countries have developed low tax areas. There are now over 40 low tax status countries. There are two main reasons nowadays to choose offshore investment - a) you are seeking to manage your tax position by investing in tax efficient products or b) you are looking for a wider choice of investments and dealing currencies.
Offshore funds offer greater freedom to invest in different financial instruments (domestic funds may not be sophisticated enough to meet your needs); different legal structure are available from those of domestic fund ranges that may offer tax savings; a choice of dealing currencies means you can avoid incurring foreign exchange liabilities.
Open Economy
An economy that includes a large foreign sector, which plays an important part in the operation of the economy. The US can be considered a closed economy as its foreign sector is small relative to the economy as a whole, whereas the UK is an open economy. An open economy is highly susceptible to trade cycles, as the effects of crises in other countries are transmitted to their trading partners.
Open-end trust
A form of unit trust in the US in which the operators of the trust may very the investments without notifying shareholders.
Option
The right to buy or sell something at its current price, especially a line of shares on a stock exchange, a commodity on a futures market or property, if one decides to do so within a specified and limited period. In general, the option to buy or sell costs a specified sum of money which is forfeited if the option to buy is not taken up. An option is a form of speculation: if a dealer believes that the price of a certain share or commodity is likely to rise he may purchase a call option. If the price of the share or commodity does indeed rise in the specified period by more than the cost of the option plus broker's commission etc., he can call his option and make a profit by simultaneously selling at a higher level.
Ordinary Residence
The term Ordinary Residence as opposed to Residence relates to a person's normal pattern of life and denotes residence in a place with some degree of continuity.
Ordinary Shares
Sometimes specified as voting or non-voting, these shares entitle the holder to the company's earnings and its assets after all prior charges and claims have been met. "A" shares are Ordinary Shares normally without voting rights.
Risk capital in the sense that holders of ordinary shares are not entitled to dividends as of right but will be the chief beneficiaries in terms of rising dividends if the company is successful. Ordinary shares carry a variable nominal yield: once they have been granted a quotation they can be traded on a stock exchange where, if the company is successful, their market value will tend to rise ahead of inflation over a long period of time.
Overseas income taxation
Taxation that occurs when personal or corporate income is entitled to be taxed by more than one nation. For instance, an individual who earns part of his income abroad may be taxed by both the foreign and domestic governments. This could be a substantial barrier to the movement of capital and labout and for this reason many countries have attempted to avoid the problem by signing double-taxation agreements.
Packaged Product
A Product in which the assets held are "wrapped". Unlike direct investments such as unit trusts and shares, the majority of such products have the characteristic that, while the product itself is owned by the investor, the underlying assets are owned and managed by the product Provider. This applies to Managed Portfolios, Investment Bonds and all other Life Assurance based contracts. The exception is the Regular Investment Plan in which the investor contributes to directly-held funds within a framework of regular contributions.
Paid-up policies
With endowment and whole life assurances it is normally possible for the life assured to terminate his policy but, instead of accepting a surrender value, to have it fully paid up. No further premiums will be payable and the policy will continue on the same conditions except that the sum assured will be reduced to a figure that depends on the premiums already paid up to that point.
Pension
An income paid to an individual having reached a specified retirement age. The term is often used incorrectly to denote the savings plan in which funds are built up ready for the later provision of a pension. A pension is a specific type of annuity and, typically, savings plans that meet certain criteria for the later provision of a pension are given favourable tax treatment by governments as an incentive for the general populace to provide for themselves in later years rather than relying on the state.
Policyholder
A life assurance policy is a contract between two parties - the life assurance company and an individual known as the policyholder. The policy holder contracts to pay certain premium(s) to the company and the company undertakes to pay out a lump sum or income in a specified event. This event may be the death of the life assured (who may be either the policyholder or a third party, subject to restrictions) or the maturity of the policy at a certain date if the life assured is still living at that date.
Portfolio
A list of securities in which a person or institutional investor has interests. Portfolios will generally be adjusted according to changing circumstances in the hope of maintaining maximum growth or income or whatever combination is required.
Pound or dollar cost averaging
An investment strategy based on investing equal amounts in a fund at regular intervals. The theory is that, because more shares are bought when prices are low and fewer when prices are high, the average cost of shares should be lower than the average price over the period of investment. This cannot guarantee a profit or protect against loss in declining markets.
Preference Shares
Preference capital is part of the share capital of a company ranking after creditors in the event of liquidation whilst bearing additional risk. It consists principally of two types:
a. Holders of Preference shares have certain preferential rights as to the rate of entitlement to dividends, distribution of surplus and voting. The dividend is payable at a fixed rate and may be cumulative (i.e. a dividend unpaid one year will be payable out of profits for succeeding years) or non-cumulative.
b. Participating Preference shares confer a further participation in profits often relating to the dividends payable on ordinary capital.
Preference shares are fixed interest securities, the holders of which have a prior claim over ordinary shareholders to any profit distribution. Their market value will move inversely with interest rates and will not benefit shareholders from the company's successful trading.
Premium
-A payment, usually regular, made to an insurance company for an insurance policy. Often the insurers require that the premium should be paid before the insurance takes effect but they sometimes grant cover pending payment. The renewal notice often offers the insured a period of grace after the renewal date during which the insured must pay the premium if the insurance is to remain in force.
- The term can also mean the amount by which the price of a security stands above its par or paid up value or the amount by which the price of a recently issued share stands above its issue price.
- On the London Stock Exchange a share is said to be at a premium to the market when its P/E ratio is above that of the market average. In this sense, the shares of a company may stand at a premium to those of other companies in the same industry, or a sector of the market as a whole may stand at a premium to the rest. Premiums reflect market sentiment regarding the outlook for the profits of the company or sector concerned.
- The amount by which a particular currently stands above par on the foreign exchange markets.
Price/Earnings (P/E) Ratio
One of the benchmarks used by portfolio managers to help them value companies. The ratio is calculated by dividing a company's share price by its earnings per share. The P/E ratio is the fundamental statistic used by investment analysts when examining any particular share with a view to purchase or sale. A company's P/E ratio is sometimes called its multiple.
Product
The generic term used on our site to encompass all the various investment vehicles offered by different companies, whether these be life assurance contracts or direct investments. SEE ALSO Tax Free Products below.
Product Provider
The company offering a product for sale to investors - or, in the case of certain products that are companies in their own right, the manager of the product.
Life assurance companies may be mutual societies which operate for the benefit of their policyholders, or limited liability companies operating for the benefit of their shareholders.
Today many investment management and life assurance companies are part of global financial services groups.
Product Providers are usually regulated by a government agency in the Country in which they are based.
Profit taking
The selling of securities or commodities that have recently increased in price, by short-term bull speculators.
Progressive Tax
A tax in which the average amount payable increases with the size of the tax base. This means that the marginal rate of tax also increases. The purpose of such taxation is usually to redistribute income from higher earners to lower earners. To this end the tax system must be integrated with the transfer system.
Provider Group
The name by which a group of providers - or a single provider if not part of a wider group - is known throughout the investment world. For example, the Provider Group name of Allied Dunbar Assurance plc, Allied Dunbar International Assurance Ltd, Allied Dunbar International Fund Managers Ltd and Allied Dunbar International Life Assurance Ltd is simply "Allied Dunbar".
Quid Pro Quo
Latin for "something for something" i.e. something given in return for something received. This principle must underlie every contract or there would be unilateral decisions to undertake something without compensation.
Quoted price
The official price of a share or commodity. The quoted prices of stocks and shares on the London Stock Exchange are given in the Official List. The quoted prices of commodities are published daily in the press.
Rally
A firm rise following a decline in share prices or commodity prices. The term is also used in respect of an individual security or commodity. The cause of a rally is usually favourable sentiment, although of course an excess of buyers over sellers would also bring one about.
A technical rally is one on a financial market brought about by an excess of buyers over sellers (and not by sentiment). A technical rally usually takes place on a stock exchange when shares in general (or a particular share) are "oversold" i.e. when unfavourable sentiment has brought about such a fall that insufficient sellers appear. In commodity markets it usually occurs when the commodity in question is in short supply at its origin.
Record Date
The date on which a shareholder must officially own shares in order to qualify to receive a dividend. (See also ex-dividend.)
Redemption or Exit Charge
Some funds levy a charge when an investor sells or redeems their holding of units.
Regular Investment Plan
A regular contribution plan offering a range of funds in unitised collective investments. These investments are held directly by the investor.
Regulator
The official body responsible for supervising and regulating the behaviour of the companies it regulates.
Residence
An individual is normally regarded as being resident in a country during any particular fiscal year if he or she has spent a specified number of days in that country within the relevant year.
Return
The total change in value of an investment including appreciation and yield (dividends or interest). The return on an investment is described as the change in value of an asset (including dividends or interest) usually expressed as a percentage of the initial investment.
Reversionary Bonus
The general term for the annual valuation and distribution of surplus to with-profits policyholders.
Roll-up Fund
A fund which does not distribute its income. Subject to UK income tax i.e. any gain is treated as income in the year in which the investment is encashed. Bed and breakfasting of this type of fund is often undertaken by UK expatriates prior to their return to the UK in order to establish a new base for calculation of this gain.
Savings
The term used to indicate a commitment to paying a regular contribution into an investment with the purpose of building up a capital sum in the future.
Sealing
Unique to UK law, this is a policy under which a debt is deemed to arise in the country where a policy is held, not where it is issued e.g. if a man in Holland takes out a UK policy, an unsealed policy would become a UK asset for Inheritance Tax; a sealed policy would be treated as a Dutch asset.
Sector
Most commonly used to describe an industry or sector of the economy when detailing a fund's portfolio composition. Examples include banking, metals and mining, health care, technology. Sector funds generally focus investments on only one segment of the economy.
Segmentation
For UK tax planning reasons it is often advantageous to divide an insurance based contract into a series of smaller policies rather than to keep it as one large policy. This is known as segmentation, each individual policy representing a segment of the entire contract.
Settlement
The process by which all transactions made during an account on the Stock Exchange are terminated. The settlement process includes provisions for contangoes and backwardinations, ticket day and gilt-edged securities or new issues are settled immediately for cash.
Settlor
A person who sets up a trust or makes a settlement by means of money or property.
Share
The ownership of a company is divided between its shareholders - people who have subscribed a sum of money to the company's capital in return for a share of the profits. Shares in public companies are freely transferable on a Stock Exchange. There are several types of shares, such as "A" Ordinary, Ordinary, Preference and Deferred.
One of a large number of titles of ownership of a company. Possession of shares entitles the holder to participate in the distribution of profits and (usually) to vote at company meetings. If a company goes into liquidation with any positive assets remaining, the shareholders will be entitled to these assets in proportion to their holdings. Shares represent the mechanism by which owners of companies can have limited liability: if a public company becomes bankrupt the shareholders, assuming their holdings are fully paid up in respect of the par value (or issue price) of the shares, will not be liable for any net debt -although their holdings will of course become worthless. Shares can be denominated as preference shares or ordinary shares.
Share Classes
Separate classes of shares within umbrella funds are denoted by a letter or number after the name of the fund and are issued to reflect different currencies, different charging structures and/or different types of permissible shareholders.
Share Index
An index number constructed to represent the prices of shares on a stock exchange. The percentage movements of such share indices are thus designed to mirror the average percentage movement of their constituent shares. Share indices are published by various daily newspapers and weekly journals.
SICAV
Acronym for "Societe d'investissement à capital variable" - an open-ended incorporated investment company with a variable capital that is always equal to the net assets of the fund. It is a legal entity with a Board of Directors who are responsible for the management of the fund in accordance with the Prospectus and is similar to an OEIC. SICAVs generally hold a range of sub-funds and are often referred to as umbrella funds.
Speculation
The purchase of a security, currency or commodity in the hope that its price will rise and that profitable resale will therefore be possible, usually in the short run. Speculative selling, when a price fall is considered likely, takes the form of short selling. Speculation is different from arbitrage in that it involves an essential element of gambling (because future prices are never certainly known) and also in that the speculator is concerned with only one security or commodity; there is no switching element. Speculation is an essential element of stock market trading in that it usually has a beneficial effect of smoothing out price fluctuations and ensuring a ready supply of stock.
Speculator
An investor willing to assume very high levels of risk in search of disproportionate capital gain.
Spread
An option hedge consisting of a long position in one or more options and an offsetting short position in options on the same security but of a different series, a different strike price, or a different expiration date.
Unit trusts spread their investments over a very wide range of stocks and shares and so offer the ordinary investor an increased level of security over individual stocks and shares.
Bid/Offer Spread - The difference between the buying and selling price of many investments including front end load funds such as unit trusts and unit linked life assurance funds. The spread may include the total cost of purchasing the holding, commission and stamp duty. Normally there is no additional charge for selling unit trusts and life funds (redemption or exit charge) as this is immediately reflected in the bid price.
Stamp Duty
A form of UK tax dating from 1694 and imposed on the completion of certain documents e.g. deeds. It is either of a fixed amount or ad valorem. Transfer stamp duty is payable on all transfers of ownership of stock exchange securities except government securities and those bought and sold within an account. It is charged at an ad valorem rate of 1% of the price paid and is payable by the purchaser. Contract stamp duty is payable on all contract notes between broker and client.
Stock
A fixed-interest security issued and quoted in units of £100. The term "financial stocks" generally indicates fixed-interest loans raised either by governments or by incorporated companies.
The term is sometimes used synonymously with ordinary shares, such as in the term "growth stocks". In the USA, where ordinary shares are called common stock, the term is used generally in reference to ordinary shares.
Stock Exchange
A market in which securities can be purchased and sold. The three largest national stock exchanges are to be found in Japan, USA and the UK and it is in these three countries that the stock exchanges have most relative importance.
Surrender Value
A monetary value acquired by certain types of life assurance policies (endowment and whole life) on their surrender by the assured after they have been in force for a minimum period. Prior to this all the premiums paid and bonuses accrued are judged to be totally absorbed by the risk run and the administration charges. Normally the size of the surrender value will be less than the premiums paid and bonuses accrued.
Switching
The transfer of investment funds between different classes of securities on a stock exchange. This may take the form of straight arbitrage operations, as when a small anomaly emerges in the price of comparable gilt-edged securities; in such cases very large funds are needed to produce a profit on the tiny margins available. In the context of equity holding, especially those of institutional investors, switching is the term used when funds are transferred from one share to another in the same sector of the market. Equity switchings are made when it is considered that the share price of one company looks dear while that of another in the same industry looks cheap in the light of the different circumstances and prospects characterising the two companies.
Term
The period, usually a whole number of years, that a contract will remain in force.
Term Assurance
The oldest type of life assurance policy. Payment is only made by the assurer if the life assured dies within the stipulated period. It is often used by businessmen on a journey or as temporary cover to secure an outstanding debt. This is generally the cheapest form of life cover available although its scope is very limited.
Terminal Bonus
Top down
A style of investment management placing primary importance on a country or region. Managers generally focus on global economic and political trends in selecting the countries or regions where they expect to find investment opportunities and then employ a more fundamental analysis of individual stocks in order to make their final selections.
Traded Endowment Policy
Any policyholder who wishes to surrender their ebdowment policy before maturity runs the risk of receiving a surrender value that does not reflect the full value built up in the policy. Generally, such policies produce a significant proportion of their final value via a terminal bonus paid only on maturity, so policyholders who surrender early will also lose the benefit of this bonus. The aim of traders in endowment policies is to purchase such policies from the policyholder by offering a higher value than that available from the insurance company by surrendering the policy. The market makers then sell on the policies at a profit to investors who will continue to pay the contributions until maturity of the policy at which point they will realise the full value of the policy.
Trust
A sum of money or property held and administered by trustees on behalf of some individual, group or organisation.
In the USA this is a term used for a cartel, coming from the use of trustees or leading industrialist to administer the affairs of the cartel in the interests of its members as a whole. US legislation on monopolies and restrictive trade practices are called anti-trust laws.
Trust deed
A deed transferring property to trustees and setting out the trusts on which they are to hold it. It is often used to describe the deed that transfers a company's property to a trustee for the debenture holders.
Trustee
A person who holds money or property for the benefit of another person or persons. Even though the trustee is, in law, the owner of the property held on trust, the rules of equity and certain statutes strictly regulate his conduct. He must not make any kind of profit from the trust property; any profit must go to the beneficiaries of the trust. This extends to any profit made from knowledge acquired whilst acting as a trustee. The trust document may allow the trustees to invest in securities not authorised by the Trustee Investment Act or it may direct the trustees to hold the trust property not for any particular person, but for whoever they think best out of a class of nominated persons (known as a discretionary trust).
UCITS
Acronym for undertaking for collective investment in transferable securities - an open-ended investment company with a structure governed by Article 1(2) of Council Directive 85/611/EEC of 20 December 1985. These are legalised for cross-border sale throughout the EEC.
Umbrella Fund
A collective investment fund which offers a number of sub-funds as part of a single overall fund, each sub-fund having its own portfolio. The overall fund can be set up as a unit trust or can have an OEIC/SICAV structure. Some umbrella funds focus on a particular asset class e.g. money-market sub-funds in different denominations. Others could contain sub-funds covering the full spectrum of equity, bond and currency classes. These funds generally provide the opportunity for easy and low cost exchange or switching between the sub-funds.
Underwriter
It is customary for insurance companies to appoint certain officials with the authority to decide whether or not to accept the insurance risks proposed. These officials are called underwriters.
A finance company, issuing house or individual who, in return for a commission, agrees to buy a proportion of the issue of a company's share should they be under subscribed by the public.
Unit Trust
An investment trust that purchases stock exchange securities etc., the total holding being divided into units which are sold to the public at a price based on the market value of the whole portfolio. The managers will repurchase units from the public at any time at a price slightly below the current offer price. Unless otherwise stated, the dividends on the securities held are pooled and distributed to unit-holders at stated intervals, usually half-yearly. They are intended to appeal to small investors because the units are usually in small denominations and may be spread over a hundred or more companies, thus minimising risk. The investor also benefits from the expertise of the managers in choice of investments. Unit trusts originated in the USA after the Depression; the earliest to be formed in the UK was in 1931. Unit trusts are constituted under a trust deed between a manager and a separate and independent trustee. Investors hold units in the trust which is independent of the manager. The manager has responsibility for the administration of the fund and management of the investment portfolio, while the trustee has responsibility for custody of the fund's assets and supervision.
Unlisted securities
The stocks and shares of a public company that are not listed on a recognised stock exchange. Sometimes a company's ordinary shares may be listed but not its loan stock; usually, however, the company itself is not quoted on the stock exchange.
Volatility
A measure of a stock's propensity to change in price over a period of time, generally computed from historical data. More precisely, it is a statistical calculation of the annualised standard deviation of security price changes.
Warrant
An option to buy stock (generally that of the warrant issuer) at a specified price in a particular period of time. Warrants are similar to call options.
Wealth Tax
A Tax levied on the net wealth of an individual. Net wealth is the total value of a person's assets - including property, cash, shares etc. - less any loans owed in relation to the assets.
Whole of Life Assurance
A regular contribution life assurance contract which lasts until the death of the life assured and provides a specified death benefit paid on death whenever it occurs. There are various forms of policy:-
Non-Profit Whole of Life - The policy provides a lump sum payable on death. The amount does not change as no bonuses are added.
With Profit Whole of Life - The policy provides a sum assured which is paid together with bonuses accrued on the death of the life assured.
Unit-linked Flexible Whole of Life - The policy includes life cover and investment elements which can both be varied during the life of the policy. Contributions are usually payable for life, but some forms of the policy allow larger premiums to be paid for a fixed period after which the policy continues without premiums being payable.
With Profits
A with profits investment provides a basic guaranteed sum to which annual bonuses are added. These bonuses are declared each year and are irreversible once allocated to the policy. Investments are made into stocks, gilts and other marketable securities. Profits made in years of high investment returns are partly held back and used to raise the bonuses that can be allocated in poorer years. There are two types of bonus - reversionary bonuses and terminal bonuses.
With profits plans have less potential for high investment gains than a unit-linked investment but have higher levels of security.
Yield
Funds mainly comprising equities quote a yield representing the estimated annual payout. No allowance is made for any tax credit. Calculated by dividing a fund's annualised dividend amount by its current net asset value.
The income received from a security expressed as a percentage of its current market value. In the case of fixed-interest securities the yield is the major determinant of the price; i.e. if the general level of interest rates rises it will be natural for fixed-interest yields to rise in line, but the only way this can be done is for the price of the stock to fall. In the case of equities, this relationship is much less exact.
Zero Coupon Bond
Bonds that do not pay interest and are consequently issued at a deep discount. The investor can hold the bond to maturity and roll up the projected annual return in the form of capital.
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