A to Z of Investment Glossary
Absolute Return
Acquisition
The takeover of one company by another.
Acquisition accounting
Accounting treatment designed to compliment the accounts of the acquiring company.
Active Portfolio Management
Professional asset allocation. On the other hand, Passive management simply follows an index.
Alpha
The outperformance of an investment or fund, relative to the benchmark, adjusted for risk.
Alternative Investment
Asset Class outside of mainstream categories of shares, bonds and derivatives. Traditionally, alternative assets were painting and commodities. More recently the term used to refer to private equities and hedge funds.
AIM (Alternative Investment Market)
ADRs (American Depository Receipts)
Shares tradeable in the US but not listed in the US.
Anomalies
Deviation from the Efficient Market Hypothesis.
Arbitrage
A strategy to profit from differences in the prices of similar or related securities (i.e. Stocks, Shares, Bonds, ETFs etc.).
Arbitrageurs (Merger)
Traders using arbitrage strategies, especially those that trade between an acquirer’s stock and that of the prespective acquisition.
Asset Value
Total value of the company’s tangible and intangible assets. This is not the market value of the shares.
Basis Points
Each percentage point is equal to 100 basis points.
Behavioural Finance
Analysis based on empirical studies of human behaviour, especially towards a risk.
Benchmark
The index specified to evaluate the performance of an investment manager’s.
Beta
The predicted effect on the price of the security of a 1% movement in the benchmark index.
Black Scholes Model
The most widely used mathematical formula for pricing options
Blue Chip Companies
Shares of Large companies (i.e. FTSE 100 Firms)
Bonds
Financial instrument that represents a loan made by an investor to a borrower with a fixed interest and redemption dates.
Buy Side
Investing institutions that buy shares, securities and other financial products based on the needs and strategy of their company or client’s portfolio needs.
Call Option
The right to buy a security at a fixed price at a future date
Capital Asset Pricing Model
A mathematical formula that describes the relationship between overall market risk and expected return for assets, particularly shares.
Carry Trade
Arbitrage strategies that yield repeated small profits, usually resulting from difference in interest rates.
Collateralised Debt Obligation
An asset backed security whose value is based on a variable pool of debt instruments of specified quality.
Confirmation Bias
A tendancy to select evidence which supports views that are already held.
Consumer Price Index
A statistical estimate that measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.
Contracts for Difference (CFDs)
An agreement to pay (or recieve) the difference between the present and the future prices of a security.
Contrarion Investor
Someone who buys assets that is currently not favoured by the market.
Cost of Capital
The cost to a firm for raising capital.
Counterparty
The person on the other side of the transaction.
Credit Rating
An estimate of the ability of a person or institution to fulfil thier financial commitment.
Credit Risk
A credit risk is the risk of default on a loan that may arise from a borrower failing to make required payments.
Day Traders
Speculators that buy and sell financial instruments within a single day.
Derivatives
Financial Instruments whose value is based on the value of other financial instruments.
Discounted Cash Flow
The process of discounting future revenues to compute present value.
Distressed Debt
Loans on which the borrower may fail to make payments.
Diversification
The process of reducing risk by buying assets whose returns are uncorrelated.
Earnings Per Share
Companies profit (earnings) per share, as a percentage of total shares in issue. The resulting number serves as an indicator of a company’s profitability.
Earnings Yield
Measure showing the percentage of how much a company earned per share.
Efficient Market Hypothesis
A theory that all relevant information relating to the value of the financial instrument is reflected in the price.
Financial Engineering
A field of finance where you use mathematical techniques to solve financial problems.
General Accepted Accounting Principles (GAAP)
Standard US accounting standard.
Hedge Funds
Usually open-ended investment companies that can take a position in multiple assets and strategies to create returns.
Scrip Issue
Offering free shares to its shareholders in proportion to their existing shareholdings. It is also called bonus issue.
Securities
This term is used for stocks, shares, debentures and so on where there is a right to receive interest or dividends from the investment.
Share Capital
The money invested directly in a company by its shareholders.
Share Premium (Account)
If shares are issued for more than their face value, the extra amount over face value is called a share premium. The total of all the share premiums is credited to a share premium account in the company’s books.
Spot Rate
The exchange rate for foreign exchange (FX) transactions which are being done straightaway.
Stakeholder Pension
The UK Government has announced plans for the stakeholder pension which is a type of personal pension. There will be a rebate which will reduce the employee’s national insurance contributions and the rebate will be invested in the stakeholder pension.
Standards and Poors (S&P)
This organisation rates companies according to their financial strength.
Statistical Sampling
Randomly choosing of items to be tested, and then using probabilities (the likelihood of things happening) to decide the acceptable rate of error for the test to be treated as successful.
Stock Exchange
A stock exchange is a market for stocks and shares. Organisations can raise capital by selling securities through a stock exchange.
Sharpe Ratio
Measure of how much of the excess return is generated by holding riskier assets.
Sophisticated or High Net Worth Individuals
Individuals who under FCA rules may invest in a wider range of investments but lose certain regulatory protections.
Specific Risk
Risk which applies only to a particular asset, company, industry or sector. It is opposite to overall market risk.
Systematic Risk
Risk that is inherent to the entire market. Also known as un-diversifiable, volatility or market risk.
Systemic Risk
Risk of the collapse of the entire financial system or the entire market. Systemic risk has wider consequences than the market or systematic risk.
Statistical Arbitrage
Computerised trading systems for exploiting short term inconsistencies between prices of similar securities.
Structured Product
A financial product with a complex relationship with underlying assets and liabilities.
Survivorship Bias
A logical error of concentrating on the samples that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways.
Swap (Interest Rate)
A transaction in which fixed and variable rate obligations on an interest paying instrument can be exchanged.
Tracker Fund
A fund that invest in the same shares and in the same proportions as those reflected in the financial index they are tracking (i.e. FTSE 100 index).
Total Expense Ratio
Management and related charges as a proportion of assets under management.
Total Return
Investment return as a percentage of assets under management. This will include both income and capital gains.
Tracking Error
Difference between the price behaviour of the portfolio to the price behaviour of the benchmark index. (i.e. FTSE 100) .
Tripe A (AAA/Aaa)
Highest possible rating that may be assigned to the bond .
Turnover
It is the total value of its sales over a particular period.
Value at Risk (VaR)
A measure of the potential risk of loss for investments and the likelihood of occurrence.
Volatility
Statistical measure of how much returns of a particular investment can fluctuate.
Underwriting
When the public is invited to subscribe for (ask for) shares in a company the directors may ask an investment firm, such as a bank, to agree to buy any unsold shares. This is called underwriting the issue of shares.
Unlimited Company
A company that does not limit what its members would have to pay towards the company’s debts, if the company was wound up.
Valuation Point
This is the date and time when the fund manager re-values the investments in a fund, such as a unit trust.
Warrant
A certificate which gives the person holding it the right to buy shares at a given price.
Yield Curve
A curve showing yield (interest rates) of similar quality (credit rating) bonds but differing maturity dates. It gives an idea of future interest rate changes and economic activity.
