We have provided this financial Investment Glossary for easy reference and research into Investments. This investments Terminology page is specifically aimed at the UK investments market but does include US terminology and European terminology where appropriate.
Use the arrows to expand each section to reveal Investment Terminolgy for that Alpahbetical letter, we have left A expanded to start your research.
Financial Investments Glossary & Terminology
The term absolute return refers to the amount of profit a given asset realizes over a certain amount of time. To figure out this number, a company must account for appreciation and depreciation for the asset. Unlike relative return, absolute return only looks at how much the asset is making instead of any other measure. Absolute return funds are intended to make positive returns in bear and bull markets. Index tracking funds will attempt to outperform the index they are tracking.
Actively Hedged Funds
Actively Hedged Funds can include money invested in fixed interest, money market or equities instruments. Managers of the fund can speculate using hedging techniques like open contracts or speculate within the derivatives market.
This refers to the selection risk, otherwise known as the residual risk, in a fund as related to a benchmark. If it is a positive alpha, the investor is gaining an additional return. An alpha of 0.5 would indicate the fund beat the benchmark by 0.3 percent. If the alpha is -0.6, it means that the fund’s return was ultimately 0.6 percent less than the benchmark.
Alternative Assets may include timber, private real estate, commodities, non-venture private equity, managed funds, oil and gas partnerships, hedge funds, event arbitrage, venture capital, distressed securities and general arbitrage.
American Stock Exchange
After the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) is the second largest in the rules. Since its listing rules are less strict than the New York Stock Exchange, the American Stock Exchange includes more stocks and bonds from smaller businesses. Originally, the AMEX was an alternative to the New York Stock Exchange. Brokers would meet outside of the NYSE on the street curb to trade companies that were too small to be listed on the NYSE. This location caused AMEX to be nicknamed “the Curb”. Over time, this market developed enough to have its own trading floor. On occasion, the Amex may trade in interest rate options and index options. Since 1998, it has been owned the by NASDAQ although the AMEX still operates separately.
Annual Percentage Rate (APR)
The APR was created as a way to stop lenders from advertising low rates while hiding fees. It is intended to show the entire cost of the loan. This figure will often include the origination fee, interest costs and any insurance costs.
An arbitrage is a financial strategy is that intends to profit off a price differential believed to exist between similar or correlated instruments in another market. Generally, an instrument in one market will be purchased while it will be sold in another market.
This term refers to how an investment fund is allocated among a variety of assets. These assets may include things like hedge funds, real estate, cash equivalents, fixed income investments, precious metals, stock, managed futures funds, and collectibles.
Average Monthly Gain
This number is created by adding all of the profitable months of the fund together and averaging them out.
Average Monthly Loss
The average monthly loss is the average of every month where the fund operated at a loss.
Average Monthly Return
To find the average monthly return, funds average out the money the fund made every month.
Often abbreviated to bps, a basis point is one one-hundredth of a percent and is the smallest a stock can gain or lose.
Bear/ Bear Market
A bear is a common label for an investor who believes that the financial markets will decline at any given time. If a market maker holds a short position, the term may also apply. A bear market refers to any market where overall prices are dropping during an extended period of time.
Sometime called a Barometer stock, a bellwether is an individual stock or bond that is thought to indicate the overall performance of the market.
Beta refers to a coefficient that calculates the relative volatility of a fund in any market index. A fund that has a beta of lower than 1.0 is considered less volatile while a fund higher than 1.0 is considered more volatile. If the beta is at 1.0, it shows that the stock is keeping pace with the underlying index.
A bid price is defined as the amount that an investor will choose to sell units of a fund back to the manager of the fund. The bid price is also the value when a market maker will purchase shares.
Considered to be one of the safest investments on the exchange, a blue chip stock is a stock that is larger and has managed to consistently outperform the average stock.
A bond is essentially a purchase of debt. For a set period of time, the investor loans a set of money to an entity. Often, a bond originates from a municipality, company or the government. The borrower grants the investor a certificate that shows the interest rate and the maturity date when the borrowed money will be returned. Generally, interest rates on the bonds will payout on a semi-annual basis.
This term is commonly used to reference the acronym made by the combination of the countries of Brazil, Russia, India and China. BRIC was originated by a Goldman Sachs paper in 2003. The article argued that the four BRIC nations would out develop and push past the present richest nations in the world by the year 2050. Currently, the term is also used to refer to any emerging market.
Bull refers to an investor who thinks that the market will most likely rise. The term bull market refers to an extended period where prices rise in a market.
A bulldog bond is a bond in sterling that is released by a company in London who is no British. The name bulldog is due to the status of the bulldog as the nation symbol of Great Britain.[/expand]
A call option is an option that grants a specific holder the right to purchase an asset at an agreed upon price. The call option is only held for a specific period of time and does not obligate the holder to purchase the asset.
A cap is given to a holder to protect them from any increase in interest rates.
A reference to the nations and economies of China and India. Geographically close, these countries are thought to be the fastest growing nations economically and include one-third of the human population. In the next 50 years, the BRIC report believes that these two nations will have the best potential for growth.
This type of fund has a fixed amount of shares. Contrary to open-ended mutual funds, a closed-end fund will not issue new shares on a continuous basis.
A collar is a kind of interest intended to protect the holder of it from any change in interest rates. The collar is se a certain number of fixed points above or below its current level. This contract is intended to provide the investor with additional protection from unexpected changes in the interest rate.
Constant Proportion Portfolio Insurance (CPPI)
CPPI is a method for buying shares as they begin to rise and selling them as they lose value. To do this, the investor chooses a floor that the portfolio cannot drop below. If the investment drops in value, the share is sold off. During the trade, the CPPI design rule operates to keep shares with a consistent level of cushion.
Consumer Discretionary Sector
This sector is divided into five different industries that directly sell to the consumer. These industries include: Retailing; Consumer Durables and Apparel; Consumer Staples; Media; Automobiles and Components; and Restaurants and Leisure.
This refers to an investment strategy where the investor adopts a short position on converting stock while also adopting a long position on convertible security. Overall, convertible arbitrage is supposed to maximize profits if there is a pricing error.
A convertible bond can be exchanged by the holder for a certain number of shares in the business’s common stock or preferred stock. A bond’s convertibility can affect the bond by causing it to have lower interest rates. Convertible bonds can garner interest when the stock trades up, down or sideways. They offer protection against declining stock prices and are sold at a premium above the normal price of the stock.
A core fund is generally structured in one of two different ways. It may mix growth stocks and value stocks in order to diversify risk. Core funds may also be structured to include stocks and bonds. The second method seeks to achieve a steady return rate. A core fund is intended to generate returns for shareholders over the long-term and is occasionally called a blend fund.
A correlation is a standardized measure that seeks to track the movement of two variables relative to each other. Two variables that move together are considered positively correlated while they are called negatively correlated if the move in opposite directions. Correlation is tracked on a scale of -1 to +1.
This denotes how much interest a fixed interest security earns. A five percent coupon would pat out interest of five percent on the value of a stock.
Cyclical stock refers to a specific stock that changes during different business cycles. If the economy improves, the stock will advance. Cyclical businesses often make a product or service that is demanded less during an economic downturn and is demanded more when the economy advances. The housing and automobile industries are both considered cyclical in nature. Often, this sort of stock will see its price improve right before the economy advances. Investors who want to make a larger return on their investment should purchase a stock when it in a trough before the economy picks up.[/expand]
A debenture is a kind of loan that is raised by a business. It is secured by the company’s assets and pays out a fixed rate.
This stock is the opposite of a cyclical stock. It tends to stay stable under any economic condition. The food, tobacco and oil industries are all examples of defensive stocks. Although the economy may experience a downturn, the stock price remains relatively stable because demand cannot decrease dramatically. During an expansion, defensive stocks generally lag behind other stocks.
Delta compares the price of an option to the price of the underlying security. This is expressed in a numerical value of one or less. For example, if the option’s delta is 0.5, a $4 change in price will cause a $2 change in the option.
A delta hedge is a kind of hedging position that is intended to make a portfolio delta neutral.
A derivative is a kind of financial contract that value is linked to an underlying asset. A derivative can be a future or an option.
This is the opposite of a premium. A discount is a time when a security is fetching prices below their normal market value.
Securities that are owned by a company in financial problems, a default, a turnaround situation or a bankruptcy is considered a distressed security.
Investors will attempt to diversify their funds to reduce risk in the entirety of the portfolio. This investment strategy will use different kinds of investment instruments that are generally not correlated closely to each other.
The location where funds are registered at.
A dove refers to an investor who promotes or approves of continued low interest rates. Doves believe that inflation has a minimal effect on society so low interest rates can help to catalyze economic growth.
Due Diligence is the manner that an investment is evaluated to test for its soundness.
This is a term that means the decline in value of something over a given period of time.[/expand]
An efficient frontier is a line that is made from a risk-reward graph. This graph is made from optimal portfolios that are tracked along a curve. The portfolios should have the highest expected return for the amount of risk involved.
EFTA-European Fair Trade Organisation
A group of 11 Fair trade organizations in nine different European countries that import products from over 400 different economically disadvantaged producers. The producers are located in Latin America, Africa and Asia. Purchasing members of the EFTA include the United Kingdom, Belgium, the Netherlands, Austria, Switzerland, France, Spain, Italy and Germany.
Often abbreviated as EV, embedded value is a kind of accounting that is used by life insurance businesses. Embedded value is the total sum of net assets and the present value of the in-force business. The present value is based on an estimate of future cash flows as well as conservative forecasts for expenses, mortality and persistence.
A term used to describe markets in nations that are underdeveloped or are in the process of creating infrastructure. An emerging market must have a high potential for future growth and an increased level of participation in the capital markets by foreign investors. In general, these countries are non-members of the Organization of Economic Cooperation and Development and have a per capita GNP of less than $9,000. They also have debt ratings below investment grade, recent economic liberalization and a liberalized political system. Since these markets often disallow short selling or futures, investors must invest in geographic areas that have underdeveloped markets and a high rate of inflation. Emerging markets can be exceptionally volatile. They often feature high liquidity risk, currency risk and political risk. As a rule, emerging market investments should be a long term strategy.
Emerging Markets Debt
Emerging markets debt is the debt instrument for countries considered to be emerging markets. The majority of the bonds are denominated in United States dollars and most secondary market trading is conducted in Brady bonds.
This term refers to an ownership position in a company that is traded on the public markets. Normally, equities will produce an income that is paid out in quarterly dividends. If the company goes bankrupts, an equity holder’s claims are considered after the claims of bondholders and preferred stockholders.
Sometimes referred to as long/short equity, an equity hedge involves short sales of stock or stock index options as well as long holdings of equities. Depending on the current market conditions, the portfolio may be net short or net long. In bull markets, equity hedge managers will normally increase long exposure. If the economy is in a bear market, they will decrease net long exposure.
Equity Market Neutral
This term describes a kind of investment method that seeks to exploit inefficiencies in the equity market. The equity market neutral portfolio will be simultaneously short and long on the same size portfolios in a nation. Investors will also attempt to control for market capitalization, industry and sector exposure.
Equity risk refers to the risk associated with owning stock or possessing some other type of ownership interest.
An investment strategy that seeks to invest in businesses that are environmentally friendly, operate ethically and provide some kind of social benefit. On occasion, ethical investing has also been referred to as socially conscious investing.
EU is an acronym for the European Union. The EU is an economic organization between more than a dozen different European nations. As a group, they seek to create a barrier-free marketplace across the continent of Europe. Most of the nations involved share a common currency and operate under a shared financial authority. Some European nations that chose to abstain from using the EU’s currency include Demark, Sweden, Norway and the United Kingdom.
A Eurobond is a bond that is issued and purchased outside of the nation that it is denominated in. Often, a Eurobond is issued by a nation outside of Europe and sold within Europe. Interest that is paid on Eurobonds is gross.
Eurozone or Euroland
Both of these terms refer to the nations that use the euro as their formal currency.
Event Driven Investing
This term refers to an investment method that looks to find and exploit pricing inefficiencies that are caused by events like recapitalization, mergers, distressed situations or spin-offs.
An exit fee is an amount of money charged to leave an investment.
Exposure refers to an investments subjection to risk.[/expand]
FCP stands for Fonds Commun de Placement. It refers to a fund structure in Luxembourg were the funds are co-ownerships that are operated by a fund management company.
This refers to a type of fund which only invests money in another fund. It may invest in another fund due to differences in currency or it might be used to channel cash into the main fund.
Fixed Income Arbitrage
Fixed income arbitrage is a type of investment method that tries to exploit inefficiencies between derivative instruments and fixed income securities. Normally, the investment is long on a security that is thought to be undervalued and short on related kind of fixed income security. This investment method is generally highly leveraged.
This term refers to any interest rate that can vary on a periodic basis. Often, a floating rate is tied to some outside indicator like a base rate. To make the rate safer, the movement is prevented from changing drastically by a set ceiling or floor. If interest rates are historically low, borrowers should take out loans at a fixed rate. When rates are higher than normal, a floating rate allows the borrower to receive the loan and the rate will drop once the prime rates fall. A floating rate is also referred to as an adjustable rate.
A floor is placed on prices or interest rates to prevent it from dropping too low. This generally protects the holder against rapid declines in the price.
A forward is an agreement between two parties to complete a transaction at a specific date in the future. On the foreign exchange market, a forward is a deal where an investor chooses to purchase or sell an agreed upon amount of currency at a date sometime in the future.
Forward Rate Agreement (FRA)
This term refers to a kind of forward contract that is connected to interest rates.
The FTSE 100 is a weighted index of stocks that are traded on the London Stock Exchange. FTSE 100 stands for the Financial Times Stock Exchange 100 stock index.
Fund of Funds
A fund of funds is an investment instrument that places investments in more than one fund. It is used to diversify a portfolio across a variety of categories, managers and investment strategies. This investment vehicle allows investors to have access to managers who have a higher minimum than the investor would otherwise be able to afford.
Funds under Management
This term is used for the entire amount of funds that are managed by an entity. The total value excludes leverage.
Futures Markets are a king of commodity exchange where future contracts are purchased and sold. Certain kinds of exchanges will specialize in a specific type of contract. Some famous futures markets include the Chicago Mercantile Exchange, the Commodity Exchange, the Chicago Board of Trade and the New York Mercantile Exchange.[/expand]
Gearing refers to the effect that borrowing has on the asset value of a fund. It can also refer to the effect of borrowing funds on the equity capital of a business. If the funds purchase assets that appreciate, any excess value over the amount borrowed will accrue to the shareholder. This process is called gearing up the value of the investment.
Geographic Spread is the term for how a portfolio is distributed over different regions of the world. The regions may be chosen due to nationality or geographic area.
GNMA (Ginne Mae)
GNMA stands for the Government National Mortgage Association. This association is an agency owned by the United States government that purchases mortgages from lenders. It then securitizes them and sells them. Since the United States government guarantees the investments, the return rate is lower than comparable mortgage-backed securities.
This refers to stock in a business that has revenue or earnings that are growing faster than the industry’s or market’s average. Often, these businesses will not pay dividends or pay very small amounts. Income is used instead to finance more economic expansion.
Growth Orientated Portfolios
A growth orientated portfolio is a kind of portfolio that is focused on growth in market share, revenue or earnings. These portfolios will normally be hedged to protect against declines in the market.
Global macro is a kind of investment strategy that is focused on changes in the global economy. The strategy uses derivatives to speculate on movements in currency and interest rates.[/expand]
The opposite of a dove, a hawk is a kind of investor who views inflation negatively and believes it to have a negative effect on the markets. A hawk would prefer to have higher interest rates in an effort to keep inflation down.
A hedge refers to any type of transaction that attempts to limit risk exposure from things like changes in pricing or exchange rates.
This is a type of vehicle where investments are pooled together. It is normally not available to the general public and it is run by an investment manager. Often, hedge funds will hold short and long positions, will target absolute returns and pay performance bonuses to the managers. Hedge funds normally use leverage to increase returns and require high minimum investments. Their investments and strategies are normally not limited by law.
A hedge fund manager who encourages others to take the same position is using a herding technique.
High Conviction Stock Picking
Often referred to as manager’s conviction, high conviction stock picking is when the manager is not limited by benchmarks. The manager chooses an approach where a smaller selection of stocks is chosen that may not represent the consensus view.
High Water mark
A high water mark is an assurance that a fund will only take fees if the investments are actually earning a profit.
High Yield Bond
Sometimes referred to as junk bonds, a high yield bond is a low-grade fixed income security. The bond must pay a higher yield because of a heightened credit risk.
A hurdle rate is the level of return a fund must make before an incentive fee can be taken. If the hurdle rate is five percent and the fund earned seven percent for the year, the fund will take an incentive fee on two percent.[/expand]
Indexes are organized and figured out arithmetically to show the behavior of the market at large or one specific part of it. The S&P 500 and the FTSE 100 are both examples of popular indexes.
An index fund is a kind of fund that is designed to represent the overall performance of the index. The fund is intended to make a return that is at least on par with the index.
In the Money
In the money refers to when an option contains a positive intrinsic value.
This term refers to the value of an option on the marketplace. If the call option is less than the normal market price, than the option has a positive intrinsic value. This is also called “in the money” by investors.
To be classed as investment grade, the investment vehicle must have a medium to high level of quality. If it is a fixed income investment, the bond must be rated a BBB or higher. For stocks, the firm must be a leader in its sector, have a good balance sheet and possess significant capitalization.[/expand]
The January Effect is a name for the strong tendency of stock markets in the United States to gain between the last day of the year and the end of the first week in January of the New Year. This occurs because a large number of investors sell their stocks at the end of the year in an attempt to claim a capital loss on their taxes. After the tax year starts again, the investors invest their money in the market again. The stocks rise accordingly. Although has happened throughout the history of the stock market, profiting off of it is notoriously difficult since investors expect this phenomenon to occur.
A term for a bond that has a high credit risk and a high yield.[/expand]
If an investor is borrowing money to invest more in a position, they are using a technique known as leverage. Managers will use this strategy to adopt new positions without removing funds from their current positions. Leverage magnifies the amount of risk and gives the lender more power over the investment portfolio. The lender may increase margin requirements or force liquidation of a portfolio. Leverage is normally written as a percentage of the fund.
Life Cycle Funds
This term is also called a target-date fund or age-based fund. It is effectively a maintenance-free retirement fund. Life cycle funds are structured with fixed income and equity so that the overall asset allocation adjusts to more conservative levels as a retirement date approaches. In recent years, life cycle funds have gained in popularity.
LIBOR stands for the London Inter-Bank Offered Rate.
Liquidity refers to the ability that an investment has to be changed quickly into cash. It also can reference how easy it is to convert a security or an asset without changing the asset’s current price. Illiquid assets are considered riskier because it is more difficult to remove funds if the market sours. Blue chips and money market assets are considered more liquid. If a fund has a good liquidity, it can withstand large transactions without a drastic change in price.
If an investment lacks liquidity, it is considered riskier.
A listed security is a bond or stock that has been accepted for trading by a securities exchange. If it is listed, the security can enjoy a higher level of liquidity, fairer price determination and an orderly marketplace. A listed security also benefits investors due to continuous reporting on quotations and stricter regulations that protect the shareholders.
Lock up/ Lock In
This term refers to a time period when an initial investment must remain in the investment. It cannot be redeemed by the investor.
A long position is when an investor holds a positive amount of an asset or derivative.
This is sometimes called the Jones Model. A manager will purchase securities that he thinks will advance in value and sells short securities that he thinks will drop in price. Depending on the net position, the manager will be net long or net short. If the manager is 80 percent long and 100 percent short, his net position is 40 percent net short. The idea behind this model is that it helps the manager select stocks and helps to protect investors.[/expand]
Macroeconomics is a field of study that looks at how the economy behaves as a whole. It looks at things like price levels, unemployment, gross domestic product and the inflation rate.
A managed account is run by an investment manager for individual investors. To start a managed account, investors normally need to meet a minimum balance of at least £3 million.
Managed futures are a type of approach to fund management. This approach used positions on foreign exchange, futures contracts and government securities. On occasion, a manager may specialize in physical commodity futures. Most managers will have to trade some financial and non-financial contracts if they have significant funds to manage.
A management fee is collected on the entire investment by the manager. An investment fee of 1.2 percent on an investment of $1 million would pay a fee of $12,000 to the investor.
The margin refers to assets placed in a margin account. This is used to a secure a party’s obligations under a contract. If someone wants to buy or sell futures contracts, they must post a specific amount according to the exchange. This is called the initial margin. When the futures contracts change in value, the party will also post a variation margin. A margin is often used for securities when the full price is not paid up front or if the securities are not actually owned by the seller.
A market maker is an exchange member firm that must give a two-way price to buy and sell securities. This occurs during the mandatory quote period that it is registered.
Market Neutral Investing
This refers to a kind of investment strategy that intends to create the same profit in every market circumstance. To do this, the fund will adopt a mix of long and short positions. The manager must make money using relative valuation analysis to eliminate market risk.
Market risk is the amount of risk caused by changes in prices on the marketplace.
Market timing can refer to two different concepts:
1) An accepted practice of changing assets among investments. Investors will try to switch assets at the beginning of an uptrend and remove funds when the asset starts to drop in value.
2) An illegal and often unacceptable practice of making large transactions in mutual funds. These frequent transactions will often occur when the fund’s relevant market is closed for the day. For example, a mutual fund in Asia undertaking large transactions during a trading session in the United Kingdom.
Market value is a term for how much an asset trades at or could trade at on the marketplace.
Mark to Market
Mark to market is the term for when the value of securities within a portfolio are changed. This update is made to reflect any changes that occurred due to the market. After it is changed, the security will be valued at its actual market price.
Maximum Draw Down
Maximum draw down refers to a significant loss sustained by a fund or security. This is reflected from its peak to trough over a set period. Often, this period of time is one month.
Also known as risk arbitrage, merger arbitrage is when an investment is involved in a situation driven by events like hostile takeovers, leveraged buy-outs and mergers. Generally, the stock of the acquiring company will see its value decrease while stock in the acquisition will advance in value.
This refers to the time when a company is about to go public. Venture capitalists can enter the market at this time and face a lower loss and quicker capital appreciation. When the initial public offering is released, the stock will normally gain in value.
Unlike macroeconomics, microeconomics looks at the economy on a smaller scale. This field of economics looks at purchasing decisions and the behavior of businesses and individuals.
Money Market Funds
A money market fund is a kind of mutual find that is extremely liquid and often short term. They are often used to park or store money between investments. Investors use money market funds to preserve capital during periods of market uncertainty.
Mortgage Backed Security
This term refers to a pass-through security that often has government guaranteed principal amounts. It aggregates a pool of mortgage-backed debts. Homeowners pay principal and interest payments to the originating bank. This payment is then sent to investors after a servicing fee is subtracted by the loan originator.
A multi-manager product is an investment pool that uses different managers and different investment styles. The intent of this strategy is to diversify the approach and spread out risk. Hedge funds will often use this strategy. Since many investments require a minimum amount, a multi-manager product allows individual investors more diversification options than they would normally have. One common example of a multi-manager product is funds of funds.
Municipal Bond (USA)
A municipal bond is a kind of debt security that is issued by a county, state or city. It is used to finance expenditures by the city and is generally exempt from federal taxes. Most states and localities will also exclude taxes, especially when the purchaser lives in the state. The issuer will use the bond to fund the construction of bridges, highways or public schools. Municipal bonds are popular with higher income individuals due to their favorable tax status.
Mutual funds are a type of security that allows smaller investors to purchase a diversified portfolio. The mutual fund will often invest in securities, equities and bonds. Overall profit or loss is shared by each shareholder and the shares can be redeemed as needed. Every day, the fund’s net asset value is calculated.[/expand]
NAREIT stands for the National Association of Real Estate Investment Trusts.
The Nasdaq is one of the major stock markets in the United States. The market is completely computerized and does not have a physical trading floor. Brokers and dealers can access the current ask and bid price for listed and over-the-counter stocks. The Nasdaq initially started when brokers began to trade informally using telephones. By the 1970s, the system was formalized and began using computers. Orders are sent out via computers and the market makers list their prices. After the price is agreed upon, the transaction is completed electronically.
Net Asset Value (NAV)
The net asset value is the amount of all assets at the close of the market after liabilities, expenses and fees are subtracted. To calculate the NAV per share, the NAV is divided by the total number of shares. This number is used to calculate the value of a fund. Sometimes a fee of one to seven percent is added as a purchase fee.
The net exposure is figured out by taking the long percentage and subtracting the short percentage. If a fund is 100 percent long and 20 percent short, then the net exposure is 80 percent long. This term is used when talking about the level of exposure a fund has in comparison to the marketplace.
The nominee name is the name which a security is registered with. It is held in trust for the beneficial owner.[/expand]
The offer price is the amount that a market maker or manager will sell shares. This price is higher than the bid price and is used to help the market maker earn a profit. The market maker or fund manager will use any additional funds earned to cover administration costs.
Offshore refers to something that is outside of the individual’s national boundaries. Normally, these locations are chosen due to better taxes or fund legislation.
Open architecture is the opposite of guided architecture. Policy holders or investors can purchase any security rather than just the ones chosen by the fund.
An open-ended fund is a kind of fund where units can be purchased or sold on a daily bases. The number of units issued can also change on a daily basis.
This term is used to describe any kind of fund that is opportunistic. These funds are often aggressive and try to make money as efficiently as possible. Investment choices are made by events that are unique situations or short term opportunities. Investors who practice opportunistic investing will take advantage of initial public offerings, price fluctuations and imbalances.
An option is a privilege sold by one party to someone else. It gives the buyer the right—or option—to purchase or sell a security at a specific price during a set period of time. The buyer of the option is not required to use the option, but has the right to buy under the agreed upon terms. Options are extremely versatile and can be used to speculate. Hedgers will use options to reduce the risks normally associated with holding an asset.
Over-the-counter is a term for is a security that is traded outside of a formal exchange market like the New York Stock Exchange or the AMEX. These stocks are normally traded over the counter because the business is not large enough to be listed on the exchange. Over-the-counter stocks are sometimes known as unlisted stocks. They are traded by brokers over the computer or by the phone. Nasdaq is considered an OTC market. Bonds are also considered OTC since they are not traded on a formal exchange.
Out of the Money
Out of the money refers to an option that would be valueless if it expired. For a call, it is when the option’s strike price is higher than the current market price. For a put, out of the money refers to when the strike price is below the current market value.
Over-hedging is the term for when a price is locked in for more commodities or securities than necessary. Hedging is used to protect a position, but if it is overdone it can cause missed opportunities. For example, if an investor enters into a February futures contract for 10,000 shares at $5.00 a share, they would not be able to take advantage of the spot price rising to $6.00.
This is a type of derivatives strategy that is used to protect against movements in currency or interest rates.
Overweight is a position that is larger than the benchmark.[/expand]
Pair trading is a strategy that is used to match a long and short position of two different stocks that are within the same sector. It hedges against the sector and overall market. Pair trading is essentially a bet placed on two stocks. This is the ultimate strategy for stock pickers. If the stock selection is correct, what the actual market does will not matter. Any gains that are made with the long stock are offset by losses that occur with the short stock.
Percent long refers to the percentage amount that a fund is invested in long positions.
Percent short is a term for the percentage of a given fund that is sold short.
A performance fee is an amount paid out to the fund advisor if the fund earns new profits over a given period.
Portfolio turnover is normally calculated on a yearly basis. It refers to the number of times that the portfolio security is replaced within a given accounting period.
Premium can refer to two different things. It can be the total cost of an option. This is calculated by figuring out the sum of the option’s time value and intrinsic value. Volatility can affect the premium. Premium can also refer to the amount paid when a security is issued and the higher price paid for a fixed-income security. When a bond is purchased at a premium, the current interest rates are less than the coupon rate. Investors in the marketplace will pay a premium in order to purchase a bond that pays a higher amount than current interest rates.
Price Earnings Ratio (P/E Ratio)
Price earnings ratio is the valuation ratio for a business’s existing share price. This ratio is compared to its earnings per share. The earnings per share is based off of the last four quarters and sometimes will include estimates for the future for quarters. For past earnings per share (EPS), it is called trailing P/E. For future quarters, it is referred to as projected or forward P/E. On occasion, it may be calculated using the sum of the last two quarters and the projections for the following two quarters. If a P/E ratio is higher, it means more earnings are expected in the future. Since the P/E ratio can be industry specific, it is better to compare the P/E ratios of two companies or look at one company’s past and current P/E ratios.
A prime broker is someone who prepares daily account statements for clients or acts as a settlement agent. They may also provide custody for assets, work as a money manager or provide financing for leverage. Prime brokers may be professional investors, market makers, specialists or arbitrageurs.
Private Placement/Private Equity
Private placement is when equity capital is opened up to investors, but is not actually quoted on the stock market. Capital raised through private placement may be used to develop technology, strengthen a business’ balance sheet, increase working capital or make acquisitions. To use this investment vehicle, investors must have significant funds. The amount of capital required to invest normally places individual investors out of the marketplace for private placement. Private placements are not required to be registered or regulated by the SEC and FSA because there is not a public offering involved.
Proprietary trading is when an investment firm trades for direct gain rather than commission. A firm who chooses to profit from the market believes that they have a competitive edge that will help them reap excess profits.
A prospectus is written to show a fund’s objectives, financial statements, history and the background of its managers. This process is intended to educate investors about risk and is normally required by law.
Protected Cell Company
A protected cell company is a kind of limited company that has been separated into distinct cells according to legal rules. All liabilities, revenue and assets are kept apart from each sell. Every cell owner shares a portion of the protected cell company’s overall capital. In effect, it places each shareholder as the owner of their own cell and allows the entire protected cell company to run more cheaply.
Purification refers to when Muslims give money to a charity. This money comes from any interest they earned on funds or stocks.
The holder of a put option is granted the right to sell a certain amount of an asset during a fixed period of time. This person is not obligated to sell.[/expand]
Qualitative Analysis is a kind of subjective analysis that is used to evaluate a security. It may be based off of non-financial data like labor relations, cyclicality of the industry, the quality of management or the quality of research and development.
Unlike qualitative analysis, quantitative analysis used hard data to make an investment decision. The security analysis may be based off information like income statements and annual reports. Some common types of quantitative analysis include earning trends, capital costs and asset valuation.
Quasi Sovereign Bond
This term refers to a debt that is issued from a public sector entity. It is guaranteed by a sovereign. It is slightly different than regular sovereign bonds because the timing of a repayment may be different if a default happens.[/expand]
[expand]Real Estate Investment Trust (REIT)
REITs are a kind of security that is traded on major exchanges like a stock. It invests directly in real estate properties or mortgages. REITs normally offer higher yields and are granted special tax considerations. Equity REITs either own or invest in a property. This form of REITs receives its income from the rent paid on property. Mortgage REITs invest in property mortgages. They loan money for mortgages or purchase mortgage-backed securities. For mortgage REITs, revenue is created through interest paid on the mortgage loans. A hybrid REIT combines both strategies. Overall, REITs are a highly liquid way to invest in real estate.
R-Squared is a kind of statistical measure that is used to show the amount of movement in a security or fund that can be attributed to the benchmark index. Values for R-squared can range from 0 to 100. If the value is 100, it means that all of the changes in the movement are perfectly correlated and can be explained by changes in the index.
Repurchase Agreement (Repo)
This is a type of short term borrowing for brokers of government securities. The dealer sells securities on an overnight basis with the intent to purchase them again on the next day. For the seller, it is a repo. For the other party buying the security, it is considered a reverse repurchase agreement. Repos are used to raise short term capital.
Risk Adjusted Rate of Return
Often represented by a Sharpe Ratio, the risk adjusted rate of return measures the amount of risk a fund takes compared to its returns. Ideally, it will have a higher return for each additional unit of risk.
Risk arbitrage refers to three forms of arbitrage that include some element of risk.
1) Pairs Trading- Pairs trading is when a fund purchases shares of two companies within an industry. Historically, these shares have been highly correlated. When the values diverge, the company takes a long and short position on either stock.
2) Merger and Acquisition Arbitrage- This term refers to when an investor purchases stock in a business being acquired and sells stock in the acquiring company.
3) Liquidation Arbitrage- Investors who use this form of arbitrage are attempting to exploit the difference between a stock’s present value and its estimated liquidation value.
According to theory, arbitrage is riskless. Since the world seldom follows theories or expectations, there is always some risk associated with any investment. These strategies are still comparatively low risk methods for investors to use.
The risk-free rate is the quoted rate for a given asset that is believed to have very little risk. US treasury bills are an example of an investment quoted with a risk-free rate.
Risk Reward Ratio
This ratio is calculated using the annualized rate of return divided by the annualized standard deviation. Ideally, an investment will have a higher risk reward ratio.[/expand]
[expand]Santa Claus Rally
This rally occurs within United States-based stock markets in the week after Christmas. It is normally driven by an expectation of the January effect.
A satellite fund is a kind of mandate fund that offers more proposition than a core fund.
This term is used for a market where an asset is bought from another investor instead of an issuing corporation. Stock exchanges are secondary markets because the securities are purchased from other investors.
A sector fund is a type of mutual fund that intends to invest in a specific sector or industry. The fund either performs extremely well or terribly depending on the state of the sector. Sector funds lack in diversification and are used to capitalize on returns.
A security is a term for any kind of share or stock.
This refers to when a brokerage lends out securities owned by its investors to short sellers. By doing this, the broker earns extra revenue from short sales.
SICAV is an acronym for the Societe D’Investissement a Capital Variable. Based in Luxembourg, it is manages securities and a mutual fund. The share capital is the same as all of the net assets and is delivered as shares to the shareholders. This is a typical structure for funds in Luxembourg.
Created by Bill Sharpe, the Sharpe Ratio is a means of measured risk-adjusted performance. To calculate it, investors use the rate of return minus the risk free rate. This number is divided by the standard deviation of the portfolio’s returns. By using the Sharpe Ratio, investors can figure out if the returns from a portfolio were caused by excess risk or good investments.
Short selling refers to the sale of a security that is not owned by the investor. Short sellers make the sale in the belief that they will be able to buy back the stock at a lower price than when they sold it. An investor who completes a short sale only earns money if the stock drops in value.
Small caps are securities that have smaller capitalization. They boast of higher returns than blue chips, but are often less liquid.
Soft commission is a way to pay a brokerage through commission revenue instead of a normal payment.
Sovereign debt is any kind of debt instrument that is guaranteed by the government.
Special Situations Investing
This is a strategy that intends to profit from price discrepancies caused by events.
Specific risk refers to a kind of risk that is caused by a small amount of assets. This could include news about a specific stock or a strike at a certain company.
A spin off is when a new company is started by selling or distributing shares for a part of another company. It can also be carried out through a rights offering.
A sponsor is an investor who provides the seed money.
Spread can refer to the difference between the buy and sell prices of a security. It may also be used to refer to an options position where one option is purchased and another sold of the same class.
The standard deviation shows how much a fund’s returns deviate from expected normal returns.
A stop-loss order is placed with a broker to sell a security if it hits a specific price. It is intended to limit losses and is occasionally called a stop market order.
Strategic Bond Funds
Strategic Bond Funds are an investment in higher yielding assets. Often, the funds strategically place investments between credit ratings, countries and asset classes.
The strike price is that stated price per share that a security can be bought or sold at by the holder of the option.
A swap is when one security is exchanged for another because of quality issues or a change in objectives. In modern times, firms often perform a swap to take advantage of differences in the currency or interest rates.
Swaption (Swap Option)
A Swaption is an option that allows an investor to use an interest rate stock. The buyer has the right, but not the obligation to complete the option by a specific date.
Swing trading is a kind of trading that is used by day traders or at-home trader. It attempts to exploit gains made by a stock during a period of one to four days. Larger institutions cannot use this trading style because their investments are too large to move expediently. Swing traders are interested in price trends rather than fundamental or intrinsic value.
A systematic risk is inherent to an entire market segment or market. Diversification cannot protect investors against it. Types of systemic risk include war, interest rate fluctuations and recessions. The only way to mitigate systemic risk is through hedges.
This acronym stands for the Standard & Poor’s 500 Index. The S&P 500 is a basket of 500 different stocks. It is weighted by market value and is considered to be a good representation of the overall market.[/expand]
A treasury bill is a debt obligation issued by the United States government. It has a maturity of a year or less and is backed by the United States government’s full faith and credit. Treasury bills are exempt from state and local taxes.
Time value is often referred to as a time premium. It is the amount that the option’s premium is greater than its present intrinsic value.
Top Down Investing
This is an investment strategy that first looks for the best sector or industry for investing. After the sector is found, the investor looks for the top companies in that sector.
Traded Endowment Policy (TEP)
The traded endowment policy is a kind of life insurance that issues a payment if the insured individual is still alive when the policy matures. If the insured person does not want to wait for the policy to mature, they can return it to the insurance company or sell it on the open market. Once it is sold, it is considered a traded endowment policy.
A traded option refers to a transferable option that is sold. The buyer of the option can then purchase or sell a specific amount of security at a specified price on a set date.
Traditional investments include cash, high yield bonds, equities and emerging markets debt.[/expand]
An umbrella fund is a king of investment fund that has sub-funds that own their own investment portfolio. This structure is intended to increase options for the investor and provide a heightened level of flexibility.
Underlier or Underlying Security
An underlying security is a kind of commodity or security that must be delivered after a convertible security or option contract is exercised.
Underweight refers to when a portfolio lacks enough securities to meet the accepted level for the portfolio’s asset allocation method. If it normally holds 20 percent stock and presently contains 10 percent, the position in stock would be underweight.
A unit trust is a kind of collective investment. Investor pool together their money and place it in a diverse variety of bonds and shares. It is intended to reduce risk and contains an open-ended structure. In the United States, this term is used differently.[/expand]
[expand]Value of New Business (VNB)
The value of new business is the sum of all income from new policies. To get the VNB, the cost of setting up is subtracted from new policy revenue.
A value stock is a kind of stock that is thought to be selling at a lower price than its intrinsic worth. Often, value stocks are not currently in favor with the market or are not followed by analysts. Many investors believe that a value stock will see its price rise as the market recognizes its worth.
Value-Added Monthly Index (VAMI)
A VAMI is a kind of index that tracks how a theoretical $1,000 investment would perform over a month.
Venture capital is any funds or resources that are given to start-up firms. To receive the investment money, a company has to exhibit a high potential for growth. Wealthy investors often place money in new businesses to gain higher returns. Since the risk is higher, the entrepreneur normally has to listen to what the venture capitalist says in major decisions.
Volatility refers to the relative rate that a security advances or drops in price. To find a fund’s volatility, investors figure out the annualized standard deviation of daily change in price. If the stock changes drastically in a short period of time, it has high volatility.[/expand]
This is a term for a certificate that is issued with the purchase of a preferred stock or bond. It gives the holder of the warrant a set number of securities at an agreed upon price. This specific price is normally higher than the current market price and can be redeemed at any time before the end date. If the value of the security rises, the investor can buy it at the warrant price and sell it for a profit. A warrant is like an option that is issued by a company rather than an investor.
A withholding tax is deducted from dividends and paid out to investors who are not residents of the country. This tax can be claimed and returned if the investor’s country has a double taxation deal.
WRAP is a kind of service that enables clients to look at their portfolio online. WRAP platforms let investors access financial planning tools, sell funds and make purchases. These planning tools help the advisor to maintain the customer’s investment.[/expand]
1) Yield is the annual rate of a return for an investment. This number is expressed as a percentage.
2) To calculate yield for bonds and notes, the coupon rate must be divided by the current market price. To calculate the total return, an investor must factor in capital gains.
3) To figure out the yield on securities, investors should divide annual dividends by the purchase price. Like bonds, this number is not completely accurate because it does not include capital gains.
A yield curve compares the maturity dates and yield for a set of similar bonds at a specific point in time.[/expand]
[expand]Zero Coupon Bond
This term refers to a bond that pays no coupons. It is normally sold at a significant discount to its face value. Once it matures, it can be redeemed for its face value. It is thought to be free of reinvestment risk and can be extremely sensitive to any change in interest rates. Markets for zero coupon bonds tend to be illiquid.[/expand]
We will conduct an initial enquiry with you over the telephone to establish what kind of policies and investments you have and
to obtain some background information. This will enable us to decide immediately whether the case is one we wish to investigate in more detail.
Having obtained an authority from you, we will then approach the product provider and any other relevant party for the information we need in order to review the case thoroughly. Once this has been received, we will decide whether we believe there are adequate grounds to raise a claim for compensation.
Where a claim is raised, we will determine the most appropriate grounds for claiming and then deal with the case until completion, challenging and contesting any findings we do not agree with. The claim will be escalated to the relevant authorities as appropriate and we will negotiate the best settlement we can achieve. We will carefully scrutinise loss calculations and settlement terms for accuracy and fairness.
Although we often use arguments based on our knowledge of legal duties and requirements, we do not enter into legal proceedings. However, our work does not prevent you from taking legal action after we have finished, should you wish to do so.
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