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Glossary

Use our glossary to search for definitions of some commonly used investment terms.

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Absolute Return

Absolute return: The total return of an asset, portfolio or fund over a given period of time OR an investment approach that attempts to achieve a return which is not benchmarked against an index.

Accumulation units (Acc units)

Units of a fund in which any interest earned or dividends paid are automatically reinvested into the fund.

Active management

Where a fund manager actively selects investments for a portfolio with the goal of performing better than its benchmark index.

Active Share

Active Share is a measure of the percentage of stock holdings in a portfolio that differs from the benchmark index.

Administrator

An institution that performs the day to day administration of a collective investment scheme (apart from the investment management).

Alpha

A measure of fund performance that compares the return of a fund with that of its benchmark, taking account of the risk taken by the fund. Alpha is often considered to represent the value that a fund manager adds to or subtracts from a fund’s return.

Alternative Investment Market (AIM)

A market for small, young and growing companies. AIM is operated by the London Stock Exchange and provides an opportunity for companies to raise capital without the cost and regulatory burden of a full listing on the main market.

Annual Management Charge (AMC)
An annual fee paid to a fund management company for the management and administration of a fund. The fee accrues daily and is reflected in the published unit prices of the fund.
Annual report

A report prepared by the fund management company which includes details of a fund’s investments, how it performed and financial information relating to the fund. Long form annual and half-yearly managers’ reports are available on request.

Ask price
The highest price for which a buyer is willing to buy a security.
Asset allocation

How a fund manager spreads the investments of a fund, for example between different industry sectors, countries or even between different kinds of investment such as shares and bonds (depending on what is appropriate for the remit of the fund). The purpose of asset allocation is to improve risk-adjusted returns through diversification.

Asset class

A wide category of investment e.g. shares, bonds, cash, etc where a market exists for the objective of trading these assets.

Authorisation

Any company wishing to conduct investment business in the UK is required to be authorised under the provisions of the Financial Services and Markets Act 2000. This authorisation is granted by the Financial Conduct Authority, the regulatory body for the financial services industry.

Authorised fund

A fund that has been authorised by the Financial Conduct Authority for marketing to the public in the UK.

Authorised fund by HKSFC

A fund that has been authorised by the Hong Kong Securities and Futures Commission (HKSFC) for marketing to the public in Hong Kong.

Balanced Fund

A fund typically investing in both stocks/shares, bonds or funds.

Bank of England Base Rate

The interest rate at which the Bank of England lends to financial institutions.

Bear market
A period during which the stock market falls, or is expected to fall.
Benchmark

An index of securities against which an investment trust can compare performance.

Beta

Beta is a measure of the volatility of a fund’s returns in comparison to the performance of the market as a whole. If a fund has a beta of less than one it is less volatile than the market, while a beta of more than one means it is more volatile.

Bid Price
The lowest price for which a seller is willing to sell a security.
Blue Chip
Indicates large, well-established companies
Bond
A debt instrument (‘I Owe You’) issued by a company (corporate bond), government (sovereign/government bond) or other institution in order to raise money. In most cases, bonds pay a fixed interest rate (coupon) over a fixed period of time and will be repaid on a particular date. See Coupon.
Bond Future

A bond future is a contractual obligation in which the contract holder agrees to purchase or sell a bond on a specified date at a predetermined price. This type of contract can be purchased on a futures exchange market and the prices and dates for the future are determined at the time of purchase of the contract.

Bottom Up
An investment approach in which a fund manager will pay a great deal of attention to analysing individual companies in terms of such factors as the strength of its management, growth prospects and operating models, to select companies for a portfolio. Market conditions and economic issues are taken into consideration but are of lesser importance.
Bull market

A period during which the stock market rises, or is expected to rise.

Capital gain

When an investment is sold for a higher price than it was purchased.

Capital Gains Tax (CGT)
A tax paid on the net increase in value of an investment when the investment is sold and the gain exceeds your annual exemption (after deducting any losses and applying any reliefs).
Capital growth
An increase in the value of an investment excluding any income that may have been received.
Capital Structure

The different types and amounts of shares a company may have.

Carbon footprint

A measure of the total amount of greenhouse gasses, primarily carbon dioxide, released into the atmosphere.

CFROI

Means cash flow return on investment.

Closed-ended funds
Like companies, closed-ended funds issue a fixed number of shares to the public in an initial public offering, after which, shares in the fund are bought and sold on a stock exchange. The price of a share in a closed-ended fund is determined by market demand rather than solely the fund’s underlying assets. Investment trusts are examples of closed-ended funds.
Collective Investment Schemes - CIS
An arrangement that permits a number of investors to pool their money and have it professionally managed by an independent manager.
Commodities

A commodity is a raw material that can be bought or sold, including industrial items such as iron or oil, as well as agricultural items like milk or coffee.

Common share

A share of ownership of a company, often with voting rights.

Concentrated portfolio

A portfolio that holds only a relatively small number of investments.

Continuation vote

Where shareholders are offered an opportunity after a fixed period of time to wind-up a company.

Contract for Difference - CFD

A type of derivative instrument that generally provides a way of gaining exposure to the movement in price of an underlying share or index without owning the stock or physically investing in the index. Such instruments can be used with the aim of gaining a benefit from either increases or decreases of the value of the underlying asset.

Contract note
A document that provides details of an investment transaction.
Contrarian strategy

An investment style that often goes against the consensus in terms of current market trends or opinion.

Convertible bond

A bond that can be converted into shares at certain times during its life, usually at the discretion of the bondholder.

Convertibles
Securities (e.g. bonds or preference shares) that can be exchanged at some point in the future for a specified number of shares at a specified price of the company issuing the securities.
Corporate bond

A debt instrument (‘I Owe You’) issued by a company in order to raise money. In most cases, bonds pay a fixed interest rate (coupon) over a fixed period of time and will be repaid on a particular date. See Coupon.

Corporate engagement

Using shareholder power to influence corporate behaviour through direct engagement with a company’s board.

Corporate governance

The system of rules and principles by which a company is organised.

Counterparty Risk

The risk to each party in a contract that the other party might not live up to its responsibilities (particularly its financial responsibilities).

Coupon

Denotes the interest in % paid on a bond.

Credit Exposure

The total amount of credit (typically corporate bonds) in which a fund is invested.

Credit rating

An assessment of a borrower’s creditworthiness, i.e. the likelihood of the borrower to repay its debts.

Credit rating agency

A company that carries out analysis on governments, companies or other institutions with the aim of assigning them a credit rating. See Credit rating.

Credit research

The detailed study of the financial situation of companies. Credit research is done to give the data and information about their ability to meet the payment of borrowed money.

Credit Spreads

The difference in yield between two types of bond.

Custodian

An institution or individual that exercises legal authority over financial assets and safeguards them for another individual or company.

Cyclicals

A description for investments that generally rely on a positive economic background in order to perform well. They can likewise be expected to perform poorly when the economy is weak.

Dealing

Dealing is the process of buying and selling investments.

Decile ranking

A way of ranking funds that breaks the peer group into ten groups. For example, funds in the first decile are among the top 10% in their peer group.

Default risk

The risk that a bond issuer may fail to meet its contractual obligation by failing to pay their debts.

Delta
Delta measures the change in value of a derivative from a change in the price of the underlying asset. It is sometimes referred to as the “hedge ratio.”
Derivative

A financial instrument that derives its value from its underlying assets. Common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indices. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives can be purchased “on margin”, i.e. at a fraction of the value of the underlying asset. Thus, they are ‘leveraged’ instruments where the risk of loss can be greater than the initial outlay. Derivatives can be used like insurance contracts (i.e. to hedge market risk) or for investment purposes.

Discount

The amount, expressed as a percentage, by which the share price of an Investment Trust is less than its net asset value per share.

Discretionary investment

Where a fund manager has complete discretion (within the investments prescribed limits) as to where he or she invests clients’ money.

Distressed bonds

Distressed bonds are those issued by companies or governments which are experiencing financial or operational problems, or may be in default or under bankruptcy.

Distribution

The income that has either been paid out to you or reinvested into your fund.

Distribution yield
The total interest paid by a fund divided by the fund’s value.
Diversification

The spread of different types of investment within a portfolio.

Dividend yield

The income a company pays out to its shareholders in the form of dividends, expressed as a percentage. It is calculated by dividing the per share dividend payment by the market price of a share.

Dividends

A share of a company’s profit distributed to shareholders.

Divestment

The sale or disposal of securities based on corporate behavior that is not aligned with environmental objectives.

Domicile

The recorded location of a company or fund for tax purposes.

Dual-priced fund

A dual-priced fund has two prices, one at which an investor can buy units/shares and one at which they can sell. The buying price (also called the offer price) is typically higher than the selling price (also called the bid price); the difference between them is known as the “spread”.

Duration

Duration: Duration estimates the sensitivity of a bond or bond fund to changes in interest rates. It is measured in years. The longer a bond’s duration, the more sensitive it is to interest rate movements.

Earnings per share

The earnings of a company divided by the number of shares in issue.

Economic growth

An increase in an economy’s ability to produce goods and services over time.

Effective duration

Effective duration estimates the sensitivity of a bond´s price to changes in benchmark interest rates. Effective duration is required for the measurement of interest rate risk for complex types of bonds. See Bond.

Emerging market

A term used to describe a developing country, or its financial market.

Entitlement

The amount each class of shares is entitled to at the end of a fixed period.

Equity

A share representing an ownership interest in a company. “Equity market” means stock market.

Equity exposure

The proportion of a fund invested in shares.

Exchange Traded Fund (ETF)

A fund vehicle that is traded like a stock on a stock exchange. It is used to track and mimic the performance of a specific market index.

Ex-dividend date. ‘XD’ date

The date upon which holders of a share or fund will be entitled to the next subsequent dividend payment or income distribution.

Exposure

Describes the level of risk to a particular asset, asset type, sector, market or government. Also, the directional market exposure of a (absolute return) fund.

 

Externality

A consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices.

Face value (or Par value)

In bond investing, face value, or par value, is commonly referred to as the amount paid to a bondholder at the maturity date, given the issuer doesn’t default. However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest rates are higher than the bond’s coupon rate, then the bond is sold at a discount (below par). Conversely, if interest rates are lower than the bond’s coupon rate, then the bond is sold at a premium (above par).

Fettered

The manager of a fettered fund of funds can only invest in the funds of the investment house that employs him or her.

Final cover

The amount the investment company needs to ensure that zero dividend preference shares can redeem at the expected price at the end of a fixed period.

Financial Adviser

A professional individual or firm authorised by the Financial Conduct Authority to provide financial advice to the public.

Financial Conduct Authority (FCA)

The Financial Conduct Authority is the UK regulator for the financial services industry.

Financial Services Compensation Scheme (FSCS)

The FSCS is the UK’s statutory fund of last resort for customers of regulated financial services firms. This means that FSCS can pay compensation to consumers if a financial services firm is unable, or likely to be unable, to pay claims against it.

Financials

Assets such as shares or bonds issued by financial institutions such as banks, building societies, insurance companies etc.

Fixed Income / Fixed Interest

Denotes debt instruments [securities] that pay a fixed interest rate (e.g. bond, commercial paper). Also, a universal term for bond or debt investing.

Floating rate notes

A bond with a variable interest rate. The interest rate is variable as it is tied to a benchmark such as LIBOR (London Interbank Offered Rate).

Forward pricing

When units in a fund are bought or sold, the price is fixed at the next valuation point.

Frontier markets

A stock market that is typically smaller and less-developed compared to ’emerging’ markets.

Fund

A form of collective investment where investors’ money is pooled and invested in a variety of securities.

Fund size

The total value of assets held within a fund.

Fundamentals

The qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency.

Futures

An exchange traded contract between two parties to buy or sell a commodity or a financial instrument at a pre-determined price at a future date.

GARP

Growth at a Reasonable Price. An investment strategy that combines the principles of growth investing and value investing to find individual shares.

Geared investment companies

For some investment trusts, e.g. split capital trusts, different share classes capture different returns so some are more sensitive to market movements, meaning they are “geared”.

Gearing

Gearing: measures a company’s borrowings (debt) as a proportion of assets. See Leverage.

Gilts

Bonds issued by the UK government.

Government bonds

Bonds issued by governments.

Gross

Before tax.

Gross exposure

The percentage value of the long positions plus the percentage value of the short positions.

Gross income

Dividends and interest paid out before income tax is deducted.

Growth investing

An investment style that focuses on companies with the potential to grow their earnings significantly over time. Such companies typically reinvest earnings into the business to fund future expansion.

Hedge

An investment designed to reduce the risk of adverse price movements in an asset by taking an offsetting position. Derivatives are usually used as hedging tools.

High Water Mark

The highest level that a fund’s net asset value (NAV) has reached at the end of any 12-month accounting period.

High yield bond

A bond with a high coupon payment (interest payment) and typically a low/no credit rating (below investment grade, e.g. BBB-).

Historic yield

A calculation of the income return on an investment relative to its current price.

Holding

The amount a fund has invested in a security or the amount of units/shares an investor owns.

Hurdle Rate

The minimum level of return required before a fund can charge a performance fee.

I Class Shares

I Class Shares are typically offered to institutional investors and have high minimum investment requirements. Third party investment platforms such as fund supermarkets may provide access to this share class with lower minimum investment limits.

IA Sectors

The Investment Association (or IA) classifies all of the funds on sale in the UK into a broad range of groups or ‘sectors’.

Income investing

An investment approach that seeks investments that pay a regular income, for example in the form of dividends, by selecting stocks judged capable of delivering sustainable growth in dividends over the long term.

Income units (Inc units)

Units of a fund in which any interest earned or dividends paid are distributed to the investors.

Index

An index is an collection of shares or bonds that represents a particular part of the investment market (for example, the largest companies listed in the UK, or financial companies listed in any developed market).

Individual Savings Account (ISA)

A wrapper in which you can place your savings and investments to protect them from some forms of taxation.

Inflation

Increase in prices of goods and services over time.

Initial charge

The charge payable by investors on the purchase of units in a fund. This charge covers expenses like administration and dealing costs.

International Securities Identification Number (ISIN)

A unique code identifying a fund or security.

Investment grade bonds

Investment grade refers to the quality of a company’s credit. In order to be considered an investment grade issue, the company must be rated at ‘BBB’ or higher by Standard and Poor’s or Moody’s (two large credit rating agencies).

Investment trust (or investment company)

A closed-ended vehicle (i.e. with a fixed number of shares) which invests in a diversified portfolio of assets. Investors buy and sell their shares in the investment trust on a stock exchange.

Key Investor Information Document (KIID)

A document that includes important information about a fund, including risk factors and details of charges.

Large Cap

Refers to stocks issued by companies with a large market capitalisation, generally the bigger companies within a given market. Definitions based on market cap value can vary.

Launch date

The date on which a Unit Trust starts investing in assets and is introduced to the marketplace.

Leverage

The use of financial instruments (e.g. debt) to increase the potential return of an investment.

LIBOR (London Interbank Offered Rate)

An interest rate used to determine the level at which banks can borrow from other banks in the London interbank market.

Liability

Using shareholder power to influence corporate behaviour through direct engagement with a company’s board.

Liquidity

A company’s financial obligation which results in the future sacrifices of economic benefits to other entities.

Long position

Buying a security with the expectation that it will deliver a positive return if its value goes up or a negative return if its value falls.

Market Capitalisation (Market Cap)

This figure is used to determine a company’s size. It is calculated by multiplying the number of a company’s shares by the current market price per share. Companies are generally classified as large, mid or small cap.

Materiality

Information that is of the greatest significance in the investment decision-making process.

Maturity

Refers to a finite time period at the end of which a security/debt instrument is due to be repaid.

Medium Cap (Mid Cap)

Stocks issued by companies with a medium-sized market capitalisation, generally those companies that occupy the middle ground between large and small-cap. Definitions based on market cap value can vary.

Mid price

The mid point between the ask and bid prices. It is often used for the valuation of the securities within an investment company’s portfolio.

Minimum investment

The minimum amount of money that will be accepted when investing in a specific security or fund.

Modified duration

Modified duration estimates the effect that a 1% change in interest rates will have on the price of a bond or bond fund.

Money market

Markets in which short-term (less than one year) debt instruments are traded. Money market instruments are typically cash deposits and commercial papers.

Multi-Manager Fund

A fund that invests in a number of other funds.

Mutual fund

Term for a collective investment scheme, typically used in the USA.

Net

After tax.

Net Asset Value (NAV)

In relation to a fund, the market value of its assets less its liabilities. The market value is usually determined by the price at which an investor can redeem shares.

Net exposure

The percentage value of the long positions less the percentage value of the short positions.

Net income

A company’s net profits, calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses.

Net redemption yield

The amount an investor should receive if they hold a security to its maturity date minus taxes and other expenses.

Non-rated bonds

Bonds that are not rated.

Notional value

Commonly used in relation to a derivative, denotes the theoretical value of its underlying asset.

NURS

Non-UCITS Retail Schemes (NURS) are UK funds that do not comply with all the UCITS rules and, therefore, cannot be promoted across the EU. They can, however, be sold to UK retail investors. NURS can invest in a wider range of eligible investments than UCITS.

Ongoing charges figure

The total ongoing charges deducted from the assets of a fund, which includes the annual management fee charged by the investment manager.

Open ended fund

A fund whose number of units can be increased or decreased according to dema