Glossary

A         

Abenomics        

Policies initiated by Japan’s Prime Minister Shinzo Abe in an attempt to stimulate the economy.

Absolute Return             

Used to describe investments which seek to achieve a positive return over an explicit timeframe.

Asset    

An item (which can include an individual investment instrument like shares) we own which has value.

Asset allocation              

The division of investments into specific markets, sectors or investment instruments like shares.

B            

Bear/bull market            

Bear market – when the prices in the stock market are typically falling or down for a prolonged period of time.

Bull market – when the prices in the stock market  are rising or up for a prolonged period of time.

Bearish/bullish  Describes the attitude of a person towards a market and its potential: bearish = pessimistic, bullish = optimistic.

Benchmark        

A baseline for comparison.

Bond    

A loan of money to a company or government for a stated period of time in exchange for a fixed interest rate and the repayment of the initial amount at its conclusion.

Bottom-up strategy       

Selecting shares based on the attractiveness of a company.

C            

Capital 

Wealth used or available for use in the production of more wealth.

Capital growth 

Occurs when the current value of an investment is greater than the initial amount invested.

Commodity       

A raw material or primary agricultural product that can be bought and sold (such as gold, coffee beans etc).

Compounding (interest)             

Reinvesting interest payments from an investment in order to add to total amount invested and in turn increase the amount of interest paid.

Comparative Index        

A baseline for comparison with respect to performance.

Contagion          

The likelihood something with spread from one country to another – either economic booms or crises.

Convertibles     

Investments that can be changed from one form to another, for example company debt into shares.

Corporate bonds             

A certificate issued by a company promising to repay borrowed money at a fixed rate of interest at a specified time

Correlation        

A measurement of how two assets move in relation to each other.

Coupon               

The interest rate paid on a bond.

Credit rating     

An evaluation of the credit worthiness of a borrower such as a particular company or government (For example, a AAA rated company is considered to be more credit worthy than one rated A).

Cyclical stocks  

Companies whose price is considered to be more sensitive to the ups and downs in the overall economy.

D            

Debt securities

Bonds (see bonds).

Default

When a borrower does not maintain interest payments or repay the amount borrowed when due.

Default risk       

The chances a lender will not receive interest and full repayment of a loan when due.

Defensive stocks            

Companies whose price is considered to be less sensitive to the ups and downs in the overall economy.

Deflationary     

An economic environment in which there is a general decline in prices.

Deleverage       

Lowering debt levels.

Derivatives        

A financial instrument that derives its value from something else. They can be used to gain exposure to, or help protect against, expected changes in the value of the underlying investments. They can be traded on a regulated exchange or over the counter.

Dilution (levy) 

Effectively a discretionary exit charge levied when exiting a fund.

Diversified/Diversification        

Investing in different regions, sectors and/or asset classes in order to spread out risks; investing in a variety so that poor performance from one thing can potentially be offset by positive performance in another…

Dividend            

A sum paid somewhat regularly by a company to its investors as a reward for holding their shares.

Duration             

How quickly a bond will repay its true cost – the longer it takes, the greater exposure it has to changes in the interest rate environment.

E             

Elect (to cancel)              

To take a decision to, to decide to.

Encashment      

Cashing in an investment.

Equities              

Shares issued by a company.

EURIBOR             

Euro Interbank Offer Rate: The rates offered to other banks, based on average paid by a panel of around 50 European banks that lend and borrow from each other.

Exercise (your right)      

Take an option available to you, to sell or vote on something.

F             

Fallen angels (referring to stocks)          

A company, which is still trading but where the share price has fallen substantially.

Fiscal cliff           

A situation in which a particular set of financial factors cause or threaten sudden and severe economic decline.

Fiscal policy      

Government spending and tax policies which influence the overall economy.

Fixed income   

A type of investment under which the borrower/issuer is obliged to make payments of a fixed amount on a fixed schedule; (also see bond).

Flattening yield curve  

A yield curve shows the difference between long-term and short-term interest rates for bonds of the same credit quality ie deemed equally likely to repay the lender.

If a yield curve is flattening, the difference between these rates is becoming less pronounced. If it is flat there is little to no difference between short-term and long-term rates for bonds of the same credit quality.

Floating rate notes        

A type of bond that pays a variable rate of interest, generally in line with a country’s interest rate.

Foreign Exchange/Exchange Rate

The value of a nation’s currency when measured against another currency.

Forward contract            

A type of derivative, it is a customised contract between two parties to buy or sell an asset at a specified price on a future date.

Fundamentals  

Basic underlying factors which can affect or influence the value of an investment or the share price of a company.

Futures

A financial contract obligating the buyer to purchase an asset, such as a commodity or financial instrument at a predetermined future date and price.

G            

Gilts     

Debt issued by the British government.

Government bonds       

Debt issued by a government.

Govvies              

A general term given to debt issued by governments (colloquial).

H            

Hedge/Hedging              

A method of reducing unnecessary or unintended risk. For example, ‘hedging your bets’.

High watermark (HWM)

The highest peak in value an investment has reached. Sometimes used to ensure a fund manager does not get paid large sums for poor performance. So, their bonus remuneration is calculated with reference to a previous high water mark.

High yield bonds (also sub-investment grade) 

Fixed income securities that have a low rating from a recognised credit rating agency. They are considered to be at higher risk of default than higher-rated bonds and as such pay a higher level of interest. (Also known as ‘junk bonds’).

I              

Index/Indices   

An imaginary portfolio of securities representing a particular market or a portion of it; For example: The FTSE 100 is an index designed to follow large-cap stocks; its basket includes the shares of the 100 largest companies on the London Stock Exchange.

Inflationary       

An economic environment in which prices are generally going up.

Inflation-linked bonds or index-linked

Fixed income securities where both the value of the loan and the interest payments are adjusted in line with inflation over the lifetime of the bond.

Investment grade           

A rating given by a recognised credit rating agency to indicate the company or government behind a bond has relatively less risk of defaulting compared to lower rated investments.

IPO        

The first sale of shares by a private company to the public.

J

K                            

L                             

Leverage            

The use of various financial instruments or borrowed capital to increase the potential return of an investment. Or this can be the amount of debt on a firm’s balance sheet used to finance its assets. A firm with significantly more debt than equity is considered to be highly leveraged.

LIBOR   

The London Interbank Offered Rate is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It serves as the first step to calculating interest rates on various loans throughout the world.

Liquidate            

To convert assets into cash or cash equivalents by selling them.

Liquidity

The degree to which an asset or investment can be bought or sold in the market without affecting its price. A company’s shares are considered highly liquid if they can be easily bought or sold.

Long position   

Buying of an investment such as a stock, commodity or currency with the expectation it will rise in value.

M                           

Macro, Macroeconomic               

Conditions that exist in the economy as a whole. In general this takes into account GDP, inflation, employment, spending and monetary and fiscal policies.

Maturity date   

The date on which the original investment in a note or debt instrument becomes due and is repaid to the investor. Interest payments stop.

Monetary easing            

A form of monetary policy from central banks in which they purchase government bonds or other investments in order to lower interest rates and increase the flow of money in the market.

Multi-Asset       

A portfolio or investment which is invested in a combination of different asset classes, such as cash, shares and bonds.

N                            

Net Asset Value (NAV) (in reference to funds) 

A fund’s price per share calculated by taking the current value of its assets and subtracting its liabilities.

Net exposure   

A measure of the extent to which a fund’s trading book is exposed to market movements.

O                            

Over-the-counter (OTC)

Trading done directly between two parties, without any supervision of a stock exchange.

Overweight       

Having more invested in a company/region/sector, than a comparative index.

P                            

Par value            

The face value of a bond – the amount of money a holder will get back once it matures.

Pound cost averaging   

The practice of drip-feeding money into an investment or market to avoid hitting a peak or a trough in prices. The idea is that over time the effects of market volatility will be smoothed out. The opposite of trying to time the market by aiming to buy on the lows and sell on the peaks.

Primary issuance            

The first financing of a debt issuer (I.O.U., bond or debt issue) for money raising purposes.

Q                            

Quantitative easing       

An unconventional monetary policy used by central banks to stimulate their economies when standard monetary policy has become ineffective.

R                            

Redeem              

The act of selling.

Redemption     

The sale of an investment or when it matures or is cancelled by the issuer.

S                             

Senior secured loans    

These loans are typically senior to other debt in the issuer’s capital structure, which helps maintain relatively high recovery rates in the event the issuer defaults. These loans also receive interest payments before any other creditors can.

Short position  

A way for a fund manager to express his or her view that the market/company/sector might fall in value.

Sovereign bonds/debt 

Debt issued by governments (See bonds).

Stocks  

Shares or equities.

Subscribe           

An agreement of intent to buy a newly issued investment prior to its launch date.

Subscription     

See above.

Supranational  

An international, quasi-government organisation, such as the World Bank.

T                             

Tier 1 bonds      

These are lower-rated bank bonds, which means if the issuer defaults all other creditors must be paid back before tier one investors are.

Top-down strategy/investing   

An investment approach that involves looking at the ‘big picture’ in the economy and financial world. (see macro).

Treasuries          

Debt issued by the US government.

U                            

Unconstrained 

A fund that adopts an investment strategy/process without sector/instrument/asset/regional limitations.

Underweight    

Having less invested in a company/region/sector, than a comparative index.

V                            

Volatility            

The degree to which a given security, fund or index rapidly changes.  Fluctuations in price or value.

W                          

X                            

Y                            

Yield    

The income return on an investment.

Yield (bond)     

The interest received from a fixed income investment, usually expressed annually as a percentage based on its cost and its current market value.

Yield (equity)   

Refers to the dividends received by a holder of company shares or from a fund.

Yield to maturity            

The rate of return expected of a bond if held until the date when it matures.

Z