Glossary

Actively Managed investments utilise the skills of a Portfolio Manager whose task it is to select stocks that provide a return in excess of a benchmark, such as the FTSE100 Index.

The Annual Management Charge (AMC) is expressed as a percentage and is deducted from the net assets of the fund or portfolio during the course of its financial year. For a pooled fund, investors will not see a physical charge, the cost being accounted for by an adjustment in the unit price. This cost is different from the Total Expence Ratio (TER) or the Ongoing Charges Figure (OCF)

Averaging or ‘pound cost averaging’ is the term used when an investor wishes to invest smaller amounts of money on a regular basis. When prices are high your contribution may buy fewer assets but when prices are low your contribution buys more assets.

A basis point is one-hundredth of one per cent. It is often used to describe small increments of yield and price. For example, a quarter of 1% would be expressed as 25 basis points or bps.

It is used with reference to the price of an investment. For shares, this is the price that a market maker is prepared to buy at and the price at which an investor can sell. Unit Trusts or other open-ended pooled funds often have a Bid/Offer spread which refers to the buying and selling price of a fund.

A bond is issued by companies and governments to raise capital. Bonds pay a fixed rate of interest for a set period of time until maturity at which point the original capital, or principal, is repaid.

Credit agencies such as Fitch, Moody's and Standard and Poors, analyse the potential of the principal being repaid and whether the bond is likely to default. The rating ranges from AAA (the best) to D which is where a bond is in default. Those rated BBB or above are considered to be investment grade with those rated below termed as 'junk' bonds due to the higher risk of default.

The total purchase price for an investment, this includes all the costs of purchasing a share (stamp duty, brokerage commission, etc).

Included within this definition are 'hard' commodities, such as copper, iron ore and aluminium, and 'soft' commodities which include cocoa, coffee and tea. Commodities are tradable but can be extremely volatile in price. Extreme movements can be caused by natural disasters such as drought in respect of soft commodities or economic slowdown in respect of hard commodities where demand falls rapidly.

Charities should be wary of trading as this could be classed as a taxable activity, unlike the long-term ownership of a traditional asset.

These are types of bonds that can be converted to the issuing company's shares at an agreed price.

Issued by companies to raise capital for growth or to improve balance sheets. They usually offer a fixed coupon with the original investment (principal) being returned after a set period of time.

A coupon payment on a bond is a periodic interest payment that the bondholder receives between issue and maturity of the bond.

An electronic clearing system used to settle trades in the UK financial markets.

A deposit account is a current account, savings account, or other type of bank account, at a banking institution which allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank, and represent the amount owed by the bank to the customer. Some banks charge a fee for this service, while others may pay the customer interest on the funds deposited.

The practice of reducing the risk of investing by spreading investments across a range of sectors, markets and financial instruments.

A cash sum, based on the number of shares held, that is paid to shareholders. Dividends are variable and dependent upon the profitability of the company.

The ratio of company earnings (net income) over the dividend paid to shareholders, calculated as earnings per share divided by the dividends per share. For example, if a company has earnings per share of £10 and it pays a dividend of £2 the dividend cover is 5.0x.

A financial ratio which shows how much a company pays out in dividends each year relative to its share price. Dividend Yield = annual dividend per share / stock's price per share.

A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

The amount of profit generated (after tax) in a specific period. Earnings are typically the most studied part of  company accounts as they can give an indication as to its future prospects. Earnings are the main driver of the share price.

This is an investment sector which includes countries that are making rapid economic progress and which are likely to influence the world economy. Typically the working population in these countries earns significantly less than their counterparts in the developed economies.

A stock or any other security representing an ownership interest. In finance, equity denotes ownership of an asset after all debts associated with the asset have been settled. Shares are termed as equities as they represent ownership in a company.

The annual dividend income estimated to be paid based on the value of the holding of an investor. The estimate is calculated using the current dividend yield.

Ethical Funds have strict criteria on which companies they able to invest in. Generally these are companies that make a positive contribution to the environment and to the quality of life. For example, oil exploration companies often will make substantial investments to the local infrastructure of the country in which exploration is being undertaken and are therefore considered to be an acceptable investment.

Where a share is ex-dividend it entitles the seller of the share to a non-declared dividend rather than the buyer. Once the distribution has taken place future dividends will then be paid to the buyer.

An ETF is a collective investment that tracks an index but which can be actively traded on a stock exchange at net asset value.

Investment service that acts only on the instructions of the client and does not offer any financial advice.

A fact sheet is supplied on a monthly or quarterly basis by a fund manager and provides limited information on a fund. Past performance data and a review of how the fund has performed are commonly featured.

The body which regulates the financial services industry in the UK.

Provided by the Fund Management Group, the KFD provides information that investors need to be aware of. Included are the type of assets in which the fund invests as well as the aims and risk factors associated with investing in the fund. Not all Fund Management Groups provide this document.

The KIID is provided by the fund management group and provides essential information and key facts about the fund to help assess whether it meets your needs. These are in a standardised format and should be free of any jargon.

An obligation that legally binds an individual or company to settle a debt. For example, in the case of a company, a liability is recorded on the balance sheet and can include accounts payable, taxes, wages and accrued expenses. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

LIBOR is the world's most widely used benchmark for short-term interest rates and dictates the rate at which banks can raise funds from other banks on the interbank market. LIBOR is set daily by the British Bankers Association.

An order to buy or sell a set number of shares at a specified price or better. They typically cost more than market orders but are especially useful if trading when the volume of deals is low or the stock is particularly volatile.

Generally occurs during times of economic stability when there are a large number of both those willing to buy and those willing to sell.

The degree to which an asset or security can be bought or sold in the market without affecting the price. Examples of assets that are easily converted into cash include blue chip and money market securities.

When a company decides to go public its shares are listed on a stock exchange. Listing requirements vary by exchange but would include a minimum share price and a minimum number of shareholders.

Ordinary or preferred shares that are used as collateral to secure a loan from another party. The loan will earn a fixed rate of interest and can be secured or unsecured, it is not affected by the company's profitability. Should the company go into liquidation, loan stock holders will be paid before ordinary and preferred shareholders.

A fund managed for a number of independent investors by an fund manager. Each investor’s money is pooled with other investors. An investment manager then buys and sells shares or other assets on their behalf. Typical examples include a Unit Trust, OEIC, Common Investment Fund and Investment Trust.

The name of the company that manages a fund on behalf of investors.

The individual who is the lead manager of a fund. Levels of influence on the investment decisions taken vary from fund to fund. Some managers have complete control over the distribution of the assets of the fund while others will follow a company philosophy.

An estimation of the value of a company by multiplying the total number of outstanding shares by the current price of the stock.

A broker/dealer which accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer orders by displaying buy/sell prices for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order.

The current price for which a security can be bought or sold. With regard to shares, the market price of a stock is the most recent price at which the stock was traded. It does not guarantee that an investor will receive the same price upon buying the stock. With regard to funds, the price listed is the selling price - for the buying price consult the research section of the website.

The total value of the shares currently held. The value is calculated by the number of shares held multiplied by the bid-price.

Date on which a contractual agreement, financial instrument, guaranty, insurance policy, loan, or offer becomes due for settlement. Also called redemption date for investments, typically for bonds issued by governments, institutions and companies.

M&A are both aspects of corporate strategy dealing with the buying, selling, dividing and combining of different companies and similar entities. The key principal behind this activity is to create shareholder value over and above that of the sum of the two companies. This rationale is particularly attractive during tough economic conditions. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The larger conglomerate's aim is to gain a greater market share or achieve greater efficiency.

The average of the bid price (selling price) and the offer price (buying price) of a security. For example, if the closing prices of a share are 273p (bid) and 275p (offer), then the mid-price will be 274p.

The minimum investment is the amount that is required that an investor must allocate to invest into a fund. The figure will be quoted on the fund factsheet and is either an initial lump sum or a monthly amount

A mixed motive investment is one which trustees make on the basis that it has elements of both financial investment and social or programme related investment. The investment cannot be wholly justified as either one or the other.

Momentum is a rate that reflects the change of the price of a market or investment, as opposed to the actual levels themselves. It is calculated by taking price differences for a fixed time interval. This positive or negative value reflects investor sentiment and the general underlying demand for the investment.

The process of creating the appearance that amounts of money obtained from criminal activity, such as drug trafficking or terrorist activity, originated from a legitimate source.

An international agency which provides credit ratings and research.

MSCI stands for Morgan Stanley Capital International, the first global market indexes, created in 1968. MSCI Barra now manages the 160,000 indexes that represent many global stock and other asset indices.

A multi-manager fund is designed to increase diversification by outsourcing proportions of the fund to be invested by a number of different or third-party managers.

The value of the total assets of a company less its total liabilities.

Interest received from a bank account or an investment after tax is deducted.

The stated value of a security also known as 'face value' or 'par value'. The nominal value remains fixed for the duration of the security's life. What fluctuates is the market value which may be markedly different from its nominal value.

Means an individual who is not a dependant and who is nominated by an investor.

A nominee company is usually an entity that is independent of the fund management company and holds the investments registered by an investor for ease of administration and potentially to reduce costs. The customer remains the actual holder although it will be the nominee name that will be listed on the share register. Should the fund manager fail, the investments held by the nominee company are ring-fenced and will always be entitled to the underlying investor, thereby offering another layer of investor protection.

These provide a shareholder with very little or no vote on corporate matters. They are usually provided to those who want to invest in the company's profitability and success at the expense of voting rights on the direction of the company. Preference shares are typically non-voting

A type of pooled fund that invests in other companies and securities. OEICs have a single price directly linked to the value of the fund’s underlying investments. There is no bid/offer spread.

The price at which a market maker is prepared to sell a security. The opposite is bid price which is the price that is quoted for purchase.

The ongoing charges figure will include the cost of investment management and administration, plus other costs of running the fund, such as fees for custodians (organisations that hold the assets safely for the investment managers), regulators and auditors. It will not include stamp duty, which is payable when buying shares in investment trusts, nor any performance fees. However, these fees may be published separately on the Key Investor Information Document.

A type of fund that does not have restrictions on the amount of shares it will issue. These funds have a high liquidity ratio making them accessible to both buyers and sellers. However, if the Fund Manager feels that the inflows are beginning to restrict the investment strategy and performance of the fund the fund will be closed to new business.

A secondary market offering that is similar to a rights issue in which a shareholder is given the opportunity to purchase stock at a price that is lower than the current market price. The purpose of such an offer is to raise cash for the company.

A contract which offers the buyer the right, but not the obligation, to buy (call option) or sell (put option) a security or other financial asset at an agreed-upon price (the strike price) during a defined period of time or on a specific date (exercise date).

An ordinary share represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company. Ordinary shareholders are entitled to receive dividends if any are available after dividends on preferred shares are paid. They are also entitled to their share of the residual economic value of the company should the business be liquidated however, they are last in line after bondholders and preferred shareholders for receiving business proceeds. As such, ordinary shareholders are considered unsecured creditors.

A situation in which demand pushes the price of a security/market to a level that is not supported by the underlying fundamentals. A good example of this was the 'Dotcom' bubble of the early 21st century where companies were valued on sentiment by investors and markets.

A condition in which the price of an underlying asset has fallen sharply to a level below its true value. This condition is usually a result of market over-reaction or panic selling.

A fund that tracks a particular index or benchmark. It doesn’t rely on the intervention of an active fund manager as the fund automatically changes in line with the underlying index it is tracking. A passive fund is sometimes referred to as an index fund or exchange traded fund.

A 'Penny Share' is a term used to describe shares which have a speculative appeal because of their low value. There is no official rule to define when a stock becomes a Penny Share and different observers may use different criteria. Most brokers will stipulate that a penny share must have a value below some upper limit - which can be anything from 50p up to £1.

The increase or decrease in value of an investment expressed in percentage terms.

The change in the market value less book cost/tax cost expressed as a percentage.

The value of a holding in a portfolio expressed as a percentage of the portfolio as a whole. This is particularly useful in identifying investments that are more dominant in a portfolio and may require rebalancing to better meet objectives.

Shares issued by building societies that pay a fixed rate of interest. They cannot be sold back to the society but can be bought and sold on the stock exchange, which means the price varies.

The cumulative value of all the holdings in a portfolio.

The right of certain shareholders to maintain ownership of a constant percentage of a company's shares. Such shareholders have the first opportunity to purchase new shares in the company proportionate to the percentage of shares already held.

Shares in a company which give their holders an entitlement to a fixed dividend but which do not usually carry voting rights. In the event of a winding up, preference shares are usually repayable at par value, and rank above the claims of ordinary shareholders (but behind bank and trade creditors). Preference shares may be issued with the right of conversion into ordinary shares. These are called convertibles.

The gross profit of a company after deducting expenses and interest payments. Used to calculate liability to Corporation Tax.

Also called a P/B ratio, it is the ratio between the market price of an ordinary share and the book value of the share. The higher the ratio, the higher the premium the market is willing to pay for the company. A low ratio may signal a good investment opportunity, but the ratio is less meaningful for some types of companies, such as those in technology sectors. This is because such companies have hidden assets such as intellectual property which are of great value, but not reflected in the book value.

A valuation ratio of a company's current share price compared to its per-share earnings. Calculated as market price per share divided by earnings per share. For example a company with a share price of 100 pence and an earnings per share of 10 pence has a price-earnings ratio of 10 (100/10).

A method of analysis which investigates the non-quantifiable aspects of a company. This would include brand image, morale of staff and the reputation of the company.

A method of analysis that refers to economic, business or financial analysis which aims to understand or predict behaviour or events through the use of mathematical measurements and calculations, statistical modelling and research. Quantitative analysts aim to represent a given reality in terms of a numerical value.

A company whose shares can be bought or sold on the Stock Exchange.

Repayment of bonds or other debt securities on or before their maturity date.

The real return is the rate of return on an investment after adjustment for inflation. This return shows the increase (or the decline) in the value of an investment in terms of its spending power.

In the United Kingdom, the retail prices index or retail price index (RPI) is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail goods and services. Fund managers may use RPI as a benchmark for a mixed asset fund as it reflects the real return (fund return after the effects of inflation).

A return from an investment that is not considered income. The return of capital is when some or all of the money an investor has in an investment is paid back to him or her, thus decreasing the value of the investment.

A ratio used in the assessment of the performance of a company and quantifies how well a company generates cash flow relative to the capital it has invested in its business.

A measure of the returns that a company is realising from its capital. Calculated as profit before interest and tax divided by the difference between total assets and current liabilities. The resulting ratio represents the efficiency with which capital is being utilised to generate revenue.

An offer made by a quoted company to its shareholders to enable them to buy new shares in the company at a discount to the market price. Existing shareholders are usually offered shares in proportion to their existing holding. For example, in a one for five rights issue, a shareholder would be invited to buy one new share for every five shares already owned. The new shares are offered at a discount to the current market price.

A ratio used to compare the expected returns of an investment with the amount of risk undertaken to capture these returns. This ratio is calculated mathematically by dividing the amount of profit the investor expects to have made when the position is closed (i.e. the reward) by the amount they could lose if the price moves in an unexpected direction (i.e. the risk).

The issue of additional shares by a company to shareholders in lieu of a dividend. The shares have an equivalent cash value to the dividend. No dealing charges or stamp duty is payable on the issue of the new shares.

An issue of shares made by a company free of charge to existing shareholders. Also called a bonus issue.

The industrial sector in which the stock is listed on the London Stock Exchange, for example mining, software and computer services.

A financial instrument which represents an ownership position in a publicly traded corporation (stock), a creditor relationship with a governmental body or corporation (bond) or rights to ownership as represented by an option.

Payment of cash for securities bought and delivery of securities against payment.

The date by which the buyer of a security must pay the seller. The settlement date depends upon the type of security traded. For example, stocks usually have a settlement date three days after the trade date but government bonds must be settled on the next trading day.

A certificate which confirms ownership of a shareholding. If shares are held in certificated form, the certificate must be delivered to the market upon sale.

A right to buy or sell shares at an agreed price at a time in the future.

The capital employed in a company, calculated by deducting the book value of the liabilities from the book value of the assets. Also called net assets, net worth and shareholders' equity.

A unit of ownership in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle them to an equal distribution in any profits, if any are declared in the form of dividends. A share can be quoted or unquoted and ordinary or preference shares.

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

A small-cap stock has a low market capitalisation when compared to those listed on the FTSE100. Investors may perceive a small-cap stock as having greater growth potential than a large-cap stock. A small-cap stock may be more likely than a large company to adopt or create innovative new technologies or services. A small-cap stock often has a lower level of institutional interest, as many funds have limits on the percentage of a company they may own. This in turn increases the trading volatility of a small-cap stock price, potentially allowing for more extreme (more profitable) entries and exits.

A socially responsible investment is where the choice of investments is influenced by one or more social, environmental or other ethical criterion.

A social investment is where a charity can expect to generate a return that has a social gain or impact in addition to a financial gain. The motive of a social investment is not to generate a financial return but it is hoped that the investment will benefit a group of beneficiaries that the investment is focused on. Any financial return can be re-invested into other social investments. A social investment may also referred to as “impact” or “mission related” investment.

The difference between which the price of a stock is bought and sold. Some collective investments, such as Unit Trusts, also operate bid/offer spreads.

Stamp duty is payable on purchases of shares using a stock transfer form, on some transfers of interest in partnerships and on land or property transactions entered into before 1 Dec 2003.

SDRT is a tax on shares and securities when you buy through the stock market or a stock broker.

S&P is an international agency which provides credit ratings and research.

A corporate action where one company makes a bid for another. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.

An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price.

The Total Expense Ratio accounts for all the costs in running an investment fund. As well as the Annual Management Charge, the TER would include trading fees, legal fees, auditor fees and other operational expenses. The TER is expressed as a percentage and is calculated by dividing the monetary cost of running the fund by the fund's total assets. The TER is generally being replaced by the Ongoing Charge Figure (OCF) as it is deemed to be a more realistic overall cost figure for the management of an investment fund.

A combination of all the income received and all the capital gain on an investment.

An index fund that tracks a broad market index or a segment of it. Such a fund invests in all, or a representative number, of the securities within the index. Also known as an "index fund" or can be an “exchange traded fund”.

The last known trading price.

The quantity of the security traded at the last known price.

The monetary amount available which can be moved to another financial product. For example, the proceeds of a managed portfolio can be transferred to a Common Investment Fund.

An underlying asset may mean many things, such as a physical commodity, a security, a piece of land, or part of a collective fund. In a derivative or warrant, the security, property, or other asset that gives value to the derivative or warrant. For example, in an option giving the right to buy stock in a share, the underlying asset is the share. An underlying asset, which could be a security or property, when collectively added to other assets, represents the assets of a fund or portfolio.

Latest price of fund holdings of a collective investment scheme, such as an Unit Trust or Common Investment Fund.

Unit trusts are collective funds that allow private investors to pool their money in a single fund, thus spreading their risk across a range of investments, getting the benefit of professional fund management, and reducing their dealing costs. Unit trusts are open-ended in contrast to investment trusts, which are closed funds. Different trusts have different investment objectives: for example; investing for income or growth, in small companies or large, and in different geographical regions.

Unquoted shares are shares which are not traded on stock exchanges or other regulated financial markets. As there is generally no secondary market in unquoted shares, they can be illiquid and deemed to be higher risk.

The current value of the total number of shares listed for the security.

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

The extent to which the price of a security or commodity, or the level of a market, interest rate or currency, changes over time. High volatility implies rapid and large upward and downward movements over a relatively short period of time; low volatility implies much smaller and less frequent changes in value.

The amount of trading sustained in a security or in the entire market during a given period. Especially heavy volume may indicate that important news has just been announced or is expected.

A certificate, usually issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price at some point in the future. The set price is usually higher than the price of the security at the time the warrant is issued. In the case that the price of the security rises to above that of the warrant's exercise price, then the investor can buy the security at the warrant's exercise price and resell it for a profit. Otherwise, the warrant will simply expire or remain unused. Warrants are listed on options exchanges and trade independently of the security with which they are issued.

The percentage or size of an investment which is applied in relation to the total portfolio, fund, market, index or benchmark. Fund managers often refer to being “underweight” or “overweight”, which relates to the specific size of an investment in relation to the measure they are comparing the investment to. For example, being underweight UK equities usually refers to holding fewer UK shares in a portfolio when compared to the benchmark that the fund is compared to.

The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

A zero-coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments, or have so-called "coupons," hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par (or face) value.

A preference share that does not pay a dividend. Instead, the shareholder receives an agreed-upon, fixed amount when the share is redeemed. As with all preference shares, in the event of liquidation, holders are entitled to receive proceeds from liquidation before any common shareholders.