Glossary

Glossary

Glossary : A

Advisory broker
An advisory broker advises (and executes) buy and sell decisions on behalf of the client. However, the final decision to buy and sell always rests with the client.

AIM
The Exchange's global market for smaller and growing companies.

At best order
An order submitted to an order book to deal in a specified number of shares. It may execute, either in part or in full, against eligible orders (at the price of those orders). Unexecuted portions of at best orders are rejected from the order book. Sometimes referred to as an 'Aggressive Type A' order.

At-the-Money (covered warrant)
A covered warrant is At-the-Money when the strike price is the same, or very close to, the price of the underlying. It applies to both Calls and Put warrants.

Authorisation
The process by which organisations are vetted and licensed to conduct investment business under the Financial Services and Markets Act 2000. Such organisations are known as Authorised Persons.

Authorised share capital
The total number of shares a company is authorised to issue with regard to its memorandum and articles of association.

Glossary : B

Balance sheet
One of the main components of a company's financial statements, the balance sheet provides an overview of the company's assets (what it owns) and liabilities (what it owes) at the end of a financial year.

Basket
A portfolio consisting of more than one security that may or may not replicate an index. For example, a share or equity basket is one that contains shares in more than one company.

Bear
An investor who sells a security in the hope of buying it back at a lower price, as he thinks the market will go down. A bear market is a falling market in which bears would prosper.

Bid offer spread
The difference between the bid and offer prices of a security.

Bid price
The price at which a market participant is bidding to buy shares.
Bidding Company (in a Takeover) The company that is planning to acquire another company.

Blue chip
A term used to describe large, well-known companies that offer stable earnings and consistent dividend record. Blue-chip companies are reputed to be reliable investments.

Bond price
The market price of a bond depends on the coupon rate, the market interest rate and the number of years to maturity. Bond prices are inversely related to interest rates.

Bonds
Debt securities issued by governments and companies as a means of raising capita lwhich generally entitle the holder to a fixed-rate of interest during their life and repayment of the amount of the bond at maturity.

Bonus issue
The issue by a company of new shares which do not require any payment to be made by the shareholder. This has the effect of making the company's shares more marketable because of the increased number available and the lower market price.

Broker (see Stockbroker)

Broker/Dealer
An Exchange member firm, which provides advice and dealing services to the public and can deal on its own account.

Bull
An investor who buys a security in the hope of selling it at a higher price, as he thinks the market will go up. A bull market is a rising market in which bulls would prosper.

Glossary : C

Call (option)
It is an option that gives the buyer the right to buy an underlying asset at a future date at a specified price.

Capital appreciation
This occurs when the market value of the shares exceeds the purchase price.

Capital Gains Tax (CGT)
The tax an individual is liable to on realised capital gains which accrue in a year of assessment during any part of which the individual is resident in the UK.

Capitalisation issue
The issue by a company of new shares which do not require any payment to be made by the shareholder. This has the effect of making the company's shares more marketable because of the increased number available and the lower market price. A Capitalisation Issue is the same as a Bonus Issue and Scrip Issue.

Cash-settlement
The investor receives cash if the covered warrant can be exercised profitably at expiry. The gain achieved on the warrant is transferred to the holder without the holder having to enact a buy or sell trade.

Certificate representing shares
An instrument which confers a contractual right (other than an option) to acquire shares otherwise than by subscription.

Change
The difference between the previous day's closing price and the most recent price of a security.

Closed-end fund
These funds have a fixed number of shares, which are listed on the stock exchange. The market price of the shares is determined by demand and supply factors. Investment trusts are closed-end funds.

Code of Market Conduct
The standards that are to be observed in the UK markets. The Code is issued and enforced by the Financial Services Authority (FSA).

Consolidations
When a company reduces the number of shares it has in circulation by consolidating its share capital e.g. shareholders would receive 1, 50p share for every 2, 25p shares held.

Conversion price
It is the price of the underlying shares at which the bond may be converted (see conversion ratio).

Convertible bond
These bonds can be converted into a specified number of shares of the issuing company at a pre-determined price

Convertible preference shares
These can be converted into ordinary shares at a given price at a future date.

Corporate Actions
This includes a wide range of corporate actions, including takeovers, rights issues, demergers, scrip dividends and conversions to name but a few.

Corporate finance
Any financial activity that deals with a company and its money. These include raising capital and mergers and acquisitions.

Counterparty
The participant with whom a trade is being transacted.

Coupon
This is a regular payment received by the bondholder over the lifetime of the bond. The coupon rate is expressed as a percentage of the face value of the bond.

CREST
The paperless share settlement system through which trades executed on the Exchange's markets (and elsewhere) can be settled. CREST is operated by CRESTCo, and was introduced in 1996. See Settlement.

Cumulative preference shares
These preference shares accumulate unpaid dividend, which is then paid out when the company next declares it.

Glossary : D

Dealer
Dealers buy and sell securities on behalf of the broking firm (or investment bank) itself. Securities bought by the bank may be sold to clients or other firms or becomes part of the bank's own holdings.

Debenture
These are secured corporate bonds that are used to raise long-term debt capital.

Debt (see Bonds)

Demutualisation
Demutualisation involves the conversion of a not-for-profit association owned by its members into a for-profit company owned by its shareholders.

Depository receipt
Commonly known as 'DRs', Depositary Receipts are negotiable certificates that enable domestic investors to own shares in foreign companies. DRs are created when a broker purchases a non-UK company's shares in the home stock market and delivers those shares to the depositary's local custodian bank. The custodian then instructs the depositary bank to issue DRs to the investor. Each DR represents a given number of a company's shares and can trade as freely as any other security in the UK. Several types of DRs can be listed and traded in London, including Global Depositary Receipts (GDRs) and American Depositary Receipts (ADRs) that are denominated in US dollars.

Derivatives
A derivative is an instrument whose value depends on the performance of an underlying asset or security, which may be a commodity or a financial instrument.

Discretionary
A discretionary broker buys and sells shares on behalf of the client and also has the authority to make investment decisions without the prior approval of the client.

Diversification
The process of investing across a range of investments in order to diversify (or minimise risk). As a result, if one investment performs poorly, better performance from the rest of the portfolio helps to reduce the risk of loss.

Dividend
That part of a company's profits after tax which is distributed to shareholders - usually expressed in pence per share. Also see Scrip Issue.

Due diligence
Due diligence is a process carried out by accountants and lawyers when a company is about to acquire another. It involves verifying a company's liabilities and financial performance.

Glossary : E

Equity
The risk-sharing part of a company's capital, usually made up of ordinary shares.

Equity option
Equity options give the option buyer the right to buy or sell shares of companies. The standard LIFFE contract size for equity options is 100 or 1000 shares.

ETF (Exchange traded fund)
A collective investment vehicles which track indices - they can allow low cost exposure to the performance of an index as quickly and efficiently as the most liquid UK stocks.

Euro Depositary Receipt (EDR)
As with other depositary receipts, the EDR is a certificate representing ownership of the issuer's underlying shares. The EDR is denominated and quoted in euros.

Ex Dividend
Trading has previously commenced "ex" capitalisation on this stock today.

Exchange
An exchange provides access to capital and facilitates securities dealing through speedy and innovative trading platforms and services. An exchange is also responsible for delivering an orderly market.

Exchange traded contracts
Exchange traded futures contracts are standardised in terms of delivery date, contract terms and amount. These are traded on the LIFFE.

Execution only
An execution only broker merely buys and sells shares on the instructions of the client.

Exercise
The process of using the right to buy or sell the underlying at the specified price.

Exercise price
The exercise (or strike) price is the price at which the option can be exercised, regardless of the actual market price of the stock.

Expiry date
Every option/covered warrant contract has a specified date in the future when it expires. The option contract becomes worthless if it remains unexercised on the expiry date.

Glossary : F

Face value
This is the value of the bond or security as printed on the document. The face value represents the amount that the issuing company promises to pay at the time of maturity.

Financial Services Authority (FSA)
An independent body which regulates the financial services industry in the UK.

Financial year
The year for which corporate tax rates apply. It runs from April 1 of one year to March 31 of the next year.

Flotation
The process by which a company obtains a listing from the UKLA and is admitted to trading on the Exchange.

FSA
See Financial Services Authority

FTSE™ 100
An index of the share prices of the UK's 100 largest companies (by market capitalisation).

FTSE™ Indices
Indices, including the FTSE 100 index, which are calculated and maintained by FTSE International Ltd to illustrate the performance of various sectors of the UK and European markets.

Fund
A fund is a collective investment scheme where money is pooled, which is invested in a portfolio of securities with a common investment purpose.

Fund manager
A fund manager is a professional who decides how fund money is invested (see Fund).

Futures
A futures contract is an agreement or obligation to buy or sell a given quantity of a particular security, at a specified future date at a pre-determined price.

Glossary : G

Gearing
Gearing is a feature of leveraged instruments such as covered warrants, options and futures. In an option, by investing a small amount called the option premium, investors can multiply their gains since returns are magnified.

Gilts or Gilt-Edged Securities
Debt securities issued on behalf of the Government.

Going long
Buying futures involves a commitment to buy the underlying asset at a future date at a specified price. This is called going long.

Going short
Selling futures involves a commitment to sell the underlying asset at a future date at a specified price. This is called going short.

Gross
The total amount before deductions (e.g. before tax deductions).

Glossary : H

Hedge
A hedge is typically accomplished by making approximately offsetting transactions that will largely eliminate one or more types of risk. Hedging Investors can use derivatives and covered warrants to hedge investments. For instance, if an investor owns a particular stock, he or she can neutralize the impact of an impending fall in price by buying a put option, selling futures or buying a put warrant.

High
The highest price that a security traded at during a certain time period.

High-yield bonds
High-yield bonds, popularly known as junk bonds, are lower than investment-grade securities. These bonds are considered to be 'speculative' because the issuing company's ability to meet the debt obligations is less certain.

HM Treasury
Her Majesty's Treasury is the government department that formulates and implements the UK's financial and economic policy.

Glossary : I

In the money
Options and covered warrants have a 'positive intrinsic value'. In a call option / warrant, the underlying asset price exceeds the exercise price. In a put option / warrant, the underlying asset price is less than the exercise price. For a Call covered warrant, this is where the strike price is less than the price of the underlying. For a Put covered warrant, this is where the strike price is greater than the price of the underlying.
Intrinsic value A term used in options and covered warrants. For a call option / warrant, a 'positive intrinsic value' denotes the difference between the current underlying asset price and the exercise price. For a put option / warrant, a 'positive intrinsic value' denotes the difference between the exercise price and the underlying asset price

Index
A statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. For instance, the FTSE 100 and the S&P500 are examples of indices.

Index fund (see Tracker fund)

Initial Public Offering (IPO)
Also known as flotation, it is the company's first offer of shares in the stock market. The shares may be offered at face value or at a premium. Also see Offer for sale.

Insider dealing
The purchase or sale of securities by someone who possesses 'inside' information affecting securities which has not yet been made available to the market and which, if made available, would significantly affect the share price. In the UK such deals are a criminal offence.

Insolvency
The inability of a person (or a company) to settle debts

Issued capital
Issued share capital is the total number of shares subscribed to by the shareholders.

Investment bank
An investment bank is a financial intermediary that offers a range of services and advice to its clients. The role of an investment bank includes corporate finance, securities trading, research, investment management and international finance.

Investment trust
A collective investment fund in the form of a listed company which holds a portfolio of securities on behalf of its own shareholders. Because an investment trust is itself a listed company, its shares can be bought and sold in the usual way.

Glossary : J

Junk bonds (see High-Yield Bonds)

Glossary : K

No terms have been defined.

Glossary : L

Leverage (see Gearing)

Limit order
An order submitted to the electronic order book with a specified size and price which is either held on the order book or executes, either in part or full, against eligible orders with any remaining unexecuted portion being added to the order book.

Limited company
A limited company is privately owned with less than 50 shareholders having limited liability. Nearly all newly formed companies in the UK are incorporated as limited companies

Limited liability
When the liability of the shareholders is limited to the nominal value of their shares, it is called limited liability.

Liquidation
When a company becomes insolvent, it may go into liquidation, wherein all its assets are sold and the proceeds are distributed among the debtors and shareholders, in that order.

Liquidity
The ease with which a security can be traded on the market, usually defined by turnover.

Listed company
A company whose securities have been admitted to the UKLA's Official List and admitted to trading on the London Stock Exchange.

Listing
The process of being listed.

Long
A long position is when someone buys (holds) a warrant or holds the underlying asset. Contrasts with Short position.

Glossary : M

Management fee - investment trust
A fixed fee that a fund manager charges for his services.

Margin
An account with a broker where a client is able to purchase securities on credit after the margin has been deposited.

Market capitalisation
Market capitalisation is used to indicate the value of a company by multiplying the number of shares in issue by the current share price.

Market maker
A Securities firm which is obliged to offer to buy and sell securities in which it is registered throughout the mandatory quote period.

Market order
An unpriced order submitted to an order book to deal in a specified number of shares. Unexecuted portions of a market order are added to the order book.

Market price
The price of a security. For shares, there are two prices quoted on the exchange - bid price and offer price.

Market Share
Dissemination of market share and ranking information to member firms.

Maturity period
This is the life of a bond or security. A bond usually ranges from 5 to 15 years but a few government bonds may even have a lifespan of 25 to 50 years.

Mergers
In a merger, two companies come together to become one. The shareholders of the merging companies often become joint owners of the combined entity.

Mid-cap shares
A company with a medium-sized market capitalisation

Money laundering
The process of disguising money obtained from criminal activity.

Mutual fund
A collective investment scheme in the US that pools investors' money to be invested in stocks, bonds and other securities.

Glossary : N

NASDAQ
National Association of Securities Dealers Automated Quotation (NASDAQ) - the first electronic stock market in the world.

Net
The amount remaining after deductions (e.g. after tax adjustments have been made).

Net asset value (NAV)
In the context of trusts and funds, NAV is the total value of the fund's portfolio less liabilities.

New issue
An issue of shares: when a company either comes to the market for the first time or issues extra shares.

Nominated Adviser (NOMAD)
Exchange-approved adviser for AIM companies. AIM companies must retain a nominated adviser at all times.

Normal market size (NMS)
A value assigned to a security by the Exchange. The NMS indicates the liquidity of that security. For quote-driven securities, the NMS is used to calculate the minimum quote size within which market makers are obliged to trade.

NYSE
The New York Stock Exchange (NYSE), the world's largest stock exchange, with a combined market capitalisation of £6 trillion in 2002.

Glossary : O

OEICs
These are Open-Ended Investment Companies. OEICs are a 'hybrid' of unit trusts and investment trusts (see unit trusts and investment trusts).

Offer price
The selling price for securities in the market.

Open-ended fund
These funds have no limit to the number of units (or shares) they can issue. The price of the units (or shares) remains closely aligned to the NAV of the fund. Unit trusts and OEICs are open-ended funds.

Option
The right (but not the obligation) to buy or sell securities at a fixed price within a specified period.

Ordinary shares
The most common form of share. Holders may receive dividends in line with the company's profitability and recommendation of its directors.

Out-the-money
For a Call covered warrant, this is where the strike price is greater than the price of the underlying. For a Put covered warrant, this is where the strike price is less than the price of the underlying.

Glossary : P

Pari Passu
This is the result of a line of stock being issued with a constraint on it, ie. Not ranking for a particular dividend. Once this constraint is passed the line of stock will be merged with the existing.

Partial execution
When only a part of an order is executed.

Partnership
In a partnership, two or more people jointly own the business. While general partners are fully liable for the debts of the business, limited partners have limited liability.

Passive fund
A fund in which the fund manager passively manages investments (see passive management).

Passive management
Fund managers do not attempt to beat the market. Instead, they try to mirror the performance of a selected market index such as the FTSE 100.

Pension fund
A fund set up by a company or government to invest the pension contributions of members and employees. These are then paid out when the beneficiaries reach the retirement age.

Percentage (%) change
The percentage change in the price of a security, i.e. the percentage of change between the last trade and the previous day's closing price.

Period name
Name given to a particular period. A period is defined by a specific set of rules which are effective for a specified period of time.

Physically settled
Settlement of a warrant by the delivery or receipt of an actual underlying asset. This contrasts with cash settlement, where no delivery of an underlying physical asset takes place just a cash difference.

Placing
It is a method of flotation in which a company issues shares to a select group of institutional investors.

Plc (See public limited company)

Portfolio
A group of investments held across asset classes (stocks, bonds, real estate, gold) or within the same asset class (exposure to stocks across companies and industries).

Pound cost averaging
A disciplined investment technique where fixed amounts are invested over regular periods (typically monthly) to accumulate wealth in shares, unit trusts and investment trusts.

Preference shares
These are normally fixed-income shares whose shareholders have the right to receive dividends before ordinary shareholders would rank above ordinary shareholders for the repayment of their investment in the company.

Premium
A term used to describe the price paid for a covered warrant.

Price/Earnings ratio (P/E ratio)
A measurement of a company's rating, calculated by dividing the share price by the annual earnings per share. A high P/E ratio means the company is highly-rated by the stock market, suggesting that investors think its prospects are good.

Private company
A company which is not a public company and which is not allowed to offer its shares to the general public.

Privatisation
Conversion of a state-run company to public limited company status - often accompanied by a sale of its shares to the public.

Public limited company (plc)
A company whose shares may be purchased by the public and whose share capital is not less than a statutory minimum. Not all plcs are listed companies.

Put - option
It is an option that gives the buyer the right to sell an underlying asset at a future date at a specified price.

Glossary : Q

Quote
An offer to buy or sell a quote driven security. Quotes are displayed by market makers that are registered in that security.

Glossary : R

Rating agencies
Rating agencies determine the issuer's ability to meet their debt obligations to the investors. Agencies include Moody's, Standard & Poor's (S&P) and Fitch IBCA.

Recognised Investment Exchange (RIE)
An investment exchange in relation to which a recognised order granted by the FSA is in force.

Redeemable preference shares
The issuing company reserves the right to redeem these preference shares. The shares may, or may not, have a specific redemption date.
Redemption Certain stocks are repayable at a future date set by the issuing company.

Registrar
An organisation responsible for maintaining a company's share register.

Retail consumer
A private user of the financial markets. The retail investor is typically a small investor, who buys and sells shares through his/her broker.

Rights issue
An invitation to existing shareholders to purchase additional shares in the company.

Risk
Risk is the probability that the actual return of an investment will be different from the expected return. Higher the risk, higher will be the probability of gain or loss on the investment.

Glossary : S

S&P 500
Standard & Poor's Composite Index - an index comprising shares of 500 US companies reflecting the general trend in the US stock market.

Scrip issue
The issue by a company of new shares which do not require any payment to be made by the shareholder. This has the effect of making the company's shares more marketable because of the increased number available and the lower market price. A Scrip Issue is

Secondary market
Marketplace for trading in securities.

Securities
General name for stocks and shares of all types.

SEDOL
Stock Exchange Daily Official List code, a 7 digit alphanumeric reference for a listed security.

Sell note
Published by a brokerage/research firm, a sell note is a report that recommends the selling of a particular stock. On the other hand, a 'buy note' recommends the buying of a particular stock.

Settlement
The process of transferring stock from seller to buyer and arranging the corresponding movement of money between the two parties.

Share
The authorised share capital of a company is divided into a number of equal parts. Each part is called a share. See Ordinary shares, Preference shares, Securities.

Short
A short position is when someone sells a warrant or the underlying asset. Contrasts with Long position.

Sole trader
The sole promoter has unlimited liability. In other words, the sole promoter is fully liable for the debts of the business.

Speculation
The process of selecting a high-risk investment to profit from an anticipated price movement.

Stamp duty
A government tax levied on share dealing.

Stockbroker
A securities firm which provides advice and dealing services to the public and which can deal on its own account.

Glossary : T

Takeover
The acquisition of one business or company by another.

Third party account
A bank account that does not belong to the client. Money laundering transactions often use third party accounts.

Time weighted average spread
The average spread (calculated hourly) weighted by the length of time a spread applies.

Tracker fund
A fund that aims to mirror the performance of a chosen share index. The amount invested in each company is proportional to the company's weighting on the target index. Management fees for a passively managed tracker fund is lower than an active fund.

Transparent market
A market that provides timely and accurate information regarding all transactions.

Glossary : U

Underwriting
An arrangement by which a company is guaranteed that an issue of shares will raise a given amount of cash. Underwriters undertake to subscribe for any of the issue not taken up by the public. They charge commission for this service.

Unit trusts
These are open-ended funds where private investors pool their money to be invested in a portfolio of securities. Unit trusts issue units to investors.
Units Unit trusts issue units in response to demand. Being open-ended, unit price is closely aligned to the net asset value (NAV) of the fund.
Unlimited liability When a promoter is fully liable for the debts of the business, it is called unlimited liability.

Glossary : V

Volatility
A measure of the amount of movement in the price of an instrument.

Volume
The daily cumulative volume for each security.

Voting rights
The entitlement of ordinary shareholders to vote in person or by proxy at annual meetings or annual general meetings.

Glossary : W

Working capital
The capital used by the company to run its day-to-day operations. It is the difference between current assets and current liabilities of the business.

Writer
The issuer of a covered warrant is sometimes referred to as the writer.

Glossary : X

XONE
Execution Only - no order entry

Glossary : Y

Yield
The return earned on an investment taking into account the annual income and its present capital value. There are a number of different types of yield, and in some cases different methods of calculating each type.

Yield to maturity (YTM)
Yield to maturity or YTM is the rate of return anticipated on a bond if it is held until the maturity date.

Glossary : Z

Zero coupon bonds
Zero coupon bonds are corporate or municipal debt securities that trade at a deep discount from the face value, as the bond pays no interest to the bondholders during its lifetime.