glossary of investment terminology

A GlossaryOf

Investment Terminology

Avondale Investment Management (UK)

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Avondale Investment Management (UK) www.avondaleinvestment.com Copyright © 2013 Tony Randall Page 1

Glossary of Investment Terminology

Investment terminology can at the best of times sound bewildering even to the most

hardened investment professional. So here to assist you is our no no-nonsense glossary of

investment terms.

Active management

A style of investment management that relies on research, forecasts, and experience to make

decisions about which securities to hold in a portfolio. Actively managed funds generally aim to

outperform their benchmark. (See also passive management.)

Alpha

Performance of a fund in excess of that which would be expected. The expected return is equal to the

market return multiplied by the fund’s beta. A high alpha value implies that the stock has performed

better than would have been expected given its beta (volatility). (See also beta.)

Asset allocation

The distribution of assets across a variety of geographic regions, asset classes, or sectors.

Authorised unit trust

A UK-based unit trust that is permitted to be marketed to all types of customers. The Financial

Services Authority regulates the assets in which such trusts are permitted to invest.

(See also unit trust.)

Bank of England

The UK’s central bank, responsible for the country’s monetary policy.

Basis points (BPS)

A hundredth of one per cent. There are 100 basis points in one per cent.

Bear market

A market in which prices fall over an extended period. Some regard a true bear market as one in which

prices fall by at least 20% from a recent peak.

Benchmark

A target against which investment performance is measured. A benchmark is usually an index or the

average performance of other similar funds. (See also median and quartile ranking.)

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Beta

The extent to which a fund outperforms a rising market and underperforms a falling market. A fund with a

beta above 1 is historically more volatile than the overall market; a fund with a beta below 1 is historically

less volatile. (See also alpha.)

Bond

A form of loan paying a generally agreed rate of interest over a fixed term, with the principal paid at

maturity. Bonds may be issued by governments or companies.

Bonds can generally be traded on the stock market and therefore may trade above or below their issue

price. (See also corporate bond; gilts; government bond.)

Bottom-up

An investment approach that favours the analysis of individual companies as opposed to sectors and

economics. (See also top-down.)

BRIC

Brazil, Russia, India and China. Many believe China is likely to become the world’s leading supplier of

manufactured goods, India the leading supplier of services, and Brazil and Russia dominant as raw

materials suppliers.

Bull market

A market in which prices rise over an extended period. Some regard a true bull market as one in which

prices rise by at least 20% from a recent low.

Capitalisation

The value of an asset assessed in relation to its expected future stream of income.

Capital value

In real estate investing, the value of a freehold or leasehold asset – as distinct from its rental (periodic)

value.

Cash investments

Relatively safe, liquid assets that can be readily converted into cash under most conditions with minimal

effect on principal and/or interest. Cash investments include Treasury bills, money-market funds, and

short-term certificates of deposits.

Closed-ended investment company

A collective investment scheme, such as an investment trust, with a fixed number of shares. Closed-

ended investment companies are traded on the stock exchange. (See also open-ended investment

company.)

Collective investment scheme

An investment scheme in which money from more than one investor is pooled into a single fund or trust.

Unit trusts, investment trusts, and open-ended investment companies (OEICs) are all types of collective

investment schemes.


Concentrated portfolio

A portfolio that holds fewer companies than similar funds within its sector.

Convertible securities

Fixed-interest securities that may be converted into equities at some future date.

Consumer discretionaries

Industries associated with goods and services that consumers are sensitive to changes in the economy.

Examples include retailers and media companies. (See also cyclical stocks.)

Consumer staples

Industries associated with goods and services that consumers tend to buy in any economic climate and

thus are less sensitive to changes in the economy. Examples include food and drugs. (See also

defensive stocks.)

Corporate bond

A form of loan issued by a company in order to raise capital and an alternative to issuing stock through a

rights issue. Bonds pay a fixed rate of interest over a fixed term (usually 1-30 years), with the principal

repaid at maturity.

Coupon

The interest rate stated on a bond when it’s issued. Typically coupons are paid semi-annually.

CPI

Consumer Price Index - a measure of inflation. An index of the cost of all goods and services to a typical

consumer.

Credit rating

An independent assessment of a company’s or government’s ability to pay its debt. Credit ratings are

provided by rating agencies; changes to a company’s or government’s rating can dramatically affect the

price of its bonds.

Currency hedging

The use of derivative transactions to protect the value of an investment against fluctuations in exchange

rates. (See also derivatives.)

Cyclical stocks

Stocks that rise quickly in a favourable economy and fall rapidly in an unfavourable one. Airlines,

automobile manufacturers and home furnishers are widely regarded as cyclical stocks.

(See also consumer discretionaries.)

Debenture

A debt instrument not secured by physical asset or collateral. Investors who purchase debentures

generally believe that the issuer is unlikely to default on the repayment.


Debt swap

Also known as debt conversion. An arrangement where part of loan repayments in a foreign currency is

converted into investment in the debtor country in local currency.

Default

Not being able to pay interest or principal when it is due, usually a sign of financial difficulty.

Defensive stock

Also known as a non-cyclical stock. A stock that historically has provided a relatively constant dividend

and level of profits irrespective of the overall performance of the stock market.

Tobacco companies and utilities are generally considered defensive stocks. (See also consumer

staples.)

Derivatives

A general term for a financial instrument whose value is derived from the price of an underlying

investment. Futures, options and warrants are all types of derivatives.

Direct property fund

A fund that invests wholly in direct commercial property and holds no property shares, REITs, other

equities or other indirect holdings.(See also indirect property fund.)

Discount

When shares of an investment trust trade at a price below their net asset value, they are said to trade at

a discount.

Distribution Yield

The distribution yield reflects the amounts that may be expected to be distributed over the next 12

months as a percentage of the fund’s mid-market unit price on a particular date.

Dividend

The income from a share investment distributed by the company. Dividends are usually issued annually

or semi-annually.

Duration

A measure of the maturity of a bond or portfolio of bonds that takes into account the periodic coupon

payments.

It attempts to measure market risk, or volatility, in a bond by considering maturity and the time pattern of

interest payments prior to repayment.

Two bonds with the same term to maturity but different coupon rates will respond differently to changes

in interest rates.

So will bonds with the same coupon rate but different terms to maturity. The higher the duration, the

greater a bond’s price-sensitivity to changes in yield.


Earnings

The profits made by a company over a specified period (typically, after tax).

EBITDA

Earnings before interest, tax, depreciation and amortisation. A measure of a company’s profitability.

Because EBITDA eliminates the effects of financing and accounting decisions, it is often used to

compare profitability between companies.

Economic cycle

The recurring and fluctuating levels of economic activity an economy experiences over an extended

period of time.

Enhanced index fund

A actively managed fund that, with certain modifications, tracks a stock market index with the aim of out-

performing it. An enhanced index fund may exclude certain securities or use leverage. (See also tracker

fund.)

Emerging markets

Countries with a low per-head income compared to the developed world but with a functioning stock

exchange.

The potential for rapid growth makes emerging markets attractive for investors prepared to accept a

higher level of risk. Emerging markets include Brazil, Russia, India and China (see BRIC); others of

significance include Mexico, Indonesia, Thailand, South Africa, Poland and South Korea.

Equities

Shares in a company listed on a stock exchange. Shareholders are effectively the owners of the

company and typically have the right to vote on important company matters.

European Central Bank (ECB)

The institution of European Union responsible for setting monetary policy for all European Union

countries that use the euro.

Exposure

The amount of a portfolio invested in a particular area. If £5,000 of a £10,000 portfolio is invested

overseas, it is said to have a 50% overseas exposure.

Face value

Also known as par value or par. The nominal value of a security stated by the issuer. For stocks, face

value is the original cost of the stock; for bonds, it is the amount due to the holder at maturity.

Fair market value

The price that an asset would realise in the marketplace over a reasonable time period. Fair market value

assumes the prospective buyer and seller are both reasonably knowledgeable about the asset and are

acting in their own best interests and free from undue pressure to trade.


Fed

The Federal Reserve Board or FRB. The US central bank, responsible for that country’s monetary policy.

Financial Services Authority (FSA)

The UK’s main financial services regulatory body.

Fixed-income securities

Investments that obligate the borrower to pay the owner interest during the term of the loan, and to return

the principal when the loan matures.

Bonds are an example of fixed-income securities.

FTSE

The Financial Times and Stock Exchange, a publisher of indices and the name of the family of indices it

publishes.

FTSE 100 index

An index that tracks the share price of the 100 largest companies, by market value, listed on the London

Stock Exchange.

FTSE All-Share index

An index of the UK’s leading companies’ share prices, covering around 800 companies and including

investment trusts.

Fund of funds

A fund that invests in several funds at the same time, with the aim of reducing the risk of poor

performance associated with investing in just one fund. Fund-of-funds managers select the funds they

invest in, but not the individual stocks.

Fund size

The total value of assets under management in a fund.

Future

A contract under which the owner agrees to buy or sell an asset at a fixed price at a fixed date in the

future. Futures contracts are transferable and can be traded like securities.

Gearing

The amount of borrowing a company or fund has relative to its share capital. unds that are geared have

the ability to borrow money and therefore take advantage of wider investment opportunities.

If a company is highly geared, its profits and losses can be greatly affected by even small changes in

interest rates.


Gilts

Bonds issued by the UK government (though strictly speaking the term also applies to bonds issued by

Ireland and South Africa). (See also government bond.)

Government bond

A fixed-interest security issued by a government to raise finance. Government bonds are negotiable and

can be traded on the stock market.

Growth fund

Also known as capital growth fund. A fund whose main objective is to maximise the value of the capital

sum invested rather than generating income. (See also income fund.)

Hedging

Reducing the risk of an investment, or protecting an existing position, by using derivative investments to

cover adverse market movements.

High-yield bonds

Also known as sub-investment-grade bonds. Bonds issued by companies where there is perceived to be

a higher risk of default – but also the potential for higher returns. (See also investment-grade bonds.)

Historic Yield

The Historic Yield is the set amount of yield that a fund actually produced in a given period of time (e.g.

one year, two years, or five years).

Income fund

A fund whose main objective is to provide investors with a regular income from its investments.

Index

A scale that measures relative changes in performance. A financial market index, such as the FTSE 100,

is an imaginary portfolio of securities. The method for calculating changes in indices differs across

financial markets.

Index-linked bonds

A government-issued bond in which the payment of income is linked to a specific price index (such as the

Consumer Price Index).Index-linked bonds compensate investors for the effect of inflation and are

generally less volatile than other types of government bonds.

Indirect property fund

A fund that invests in real estate vehicles such as property shares, property investment companies.

REITs, limited partnerships or property unit trusts as opposed to the actual properties themselves.

(See also direct property fund.)


Information ratio

Measures the active return of the manager’s portfolio divided by the amount of risk that the manager

takes relative to the benchmark.

The higher the information ratio, the higher the active return of the portfolio, given the amount of risk

taken, and the better the manager.

Initial Public Offering (IPO)

A company’s first sale of stock to the public.

Investment-grade bonds

Bonds issued by companies or governments that are deemed to have a relatively low risk of default.

(See also high-yield bonds.)

Investment property

Real estate purchased as an investment rather than a place to live.

Investment trust

A company whose only function is to invest in the shares of other companies.

Investment trusts are listed on the stock exchange; their share prices are subject to normal market forces

and as such can move independently of the value of the underlying assets.

LIBID

London Interbank Bid Rate - the interest being offered to depositors.

LIBOR

London Interbank Offered Rate - the amount of interest payable by borrowers.

Liquidity

The ability to readily convert an asset or investment to cash by sale at a fair price. Liquidity also

describes the amount of cash held in a portfolio.

Macroeconomics

The branch of economics relating to the functioning of a nation’s economy. (See also microeconomics.)

Market value

Also known as capitalisation. The value of a company determined by multiplying the number of shares in

issue by the current market price, and basically a measure of a company’s size.

Median

The middle figure in a ranked series of numerical data. The median provides the basis for quartile

rankings. The first and second quartiles are above the median, the third and fourth below.

(See also benchmark and quartile ranking.)


Monetary policy

Decisions made by a government, usually through its central bank, regarding the amount of money in

circulation in the economy. This includes setting official interest rates.

Microeconomics

The branch of economics relating to the economy of consumers or households or individual firms. (See

also microeconomics.)

Net asset value

A key measure of the value of a company, fund, or trust – the total value of assets less liabilities, divided

by the number of shares.

Open-ended

Investment funds that is not restricted in the number of shares they may issue. (See also closed-ended.)

Open-Ended Investment Company (OEIC)

A company or fund in the UK that invests in other companies ,and is permitted to adjust its investment

criteria and fund size. Shares in OEICs are listed on the London Stock Exchange.

Option

A contract which gives the owner the right, but not the obligation, to buy or sell a security at a fixed price

for a fixed period of time.

Overweight

A portfolio holding an excess amount of a particular security (or sector or region) compared to the

security’s weight in the benchmark portfolio. (See also underweight)

Par value

The value at which a bond can be redeemed at its maturity date.

Passive management

A style of investment management in which the fund’s portfolio mirrors its benchmark. (See also active

management.)

Preference shares

Shares in a company that have a higher claim on the assets, and earnings than common stock.

Dividends for preference shares generally must be paid out before those to common shares. Preference

shares usually don’t have voting rights.

Price-to-earnings ratio (P/E ratio)

The current market price of a stock divided by the earnings per share. P/E ratios are often used to

compare companies in the same industry, or historically within a single company; a high ratio suggests

that investors are expecting higher earnings growth in the future.


Portfolio

The collection of investments held by an investor or a fund.

Premium

When shares of an investment trust trade at a price above their net asset value, they are said to trade at

a premium.

Prime unit

A real estate investment regarded as the best in its class and location. (See also secondary unit.)

Quantitative easing

Increasing the supply of money in a national economy by buying government (or other), securities from

the market in order to promote greater lending, and increased liquidity.

Quartile

A group containing 25% of the total - funds are often ranked by their quartile performance; an upper-

quartile fund has outperformed at least 75% of its peers. (See also benchmark and median.)

R-squared (R²)

A measurement of how closely a portfolio’s performance correlates with the performance of its

benchmark, and thus a measurement of the portion of its performance that can be explained by the

performance of the overall market or index.

Values for r-squared range from 0 to 1; a high value indicates the fund’s performance patterns have been

in line with its benchmark.

REIT

Real Estate Investment Trust. A form of indirect property investment. Distributions from REITs are made

tax-free and are taxed according to the tax status of the shareholders.

Return

The amount by which an investment may change due to a combination of capital growth and/or interest

dividend income.

This is normally expressed as a percentage.

Rights issue

A method of raising extra capital through the issue of new equity shares. Existing shareholders can buy

new shares in proportion to their current holdings, usually at a discount, or sell their rights to other

investors.

RPI

Retail Price Index. The main measure of inflation used for calculating indexation for capital-gains tax and

on index-linked gilts and National Savings products.


Secondary unit

A real estate investment not regarded as prime because of its location, configuration, or tenant.

Sector

Investment funds similar to each other in scope and objectives (for example, the Micro- Pal UK- All

Companies sector).

A sector also refers to an industry or area of commerce in which a company operates.

(For example, mining).

Securities

A broad definition of investments, including stocks, and shares, bonds and financial instruments such as

unit trusts.

Sharpe ratio

A measure of the reward a fund is achieving for each unit of risk taken. The higher the ratio, the greater

the risk-adjusted performance.

Sovereign debt

Debt issued and guaranteed by a national government (typically, bonds).

Stock exchange

A place where stocks and shares are traded.

Top-down

An investment approach that favours the analysis of sectors and economics as opposed to individual

companies. (See also bottom-up.)

Total return

The growth in value of a shareholding over a specified period, assuming that dividends are re-invested to

buy additional units of the stock.

Tracker fund

A fund that aims to replicate the performance of a particular stock market index by buying all or a

representative proportion of the stocks within that index.

Tracker funds are passively managed.

Tracking error

A measure of how much the performance of a fund deviates from the performance of its benchmark

index.

UCITS

Undertaking for Collective Investments in Transferable Securities. UCITS funds can be marketed in all

European Union countries.


Underlying Yield

The underlying yield reflects the annualised income net of expenses of the fund as a percentage of its

mid-market unit price on a particular date.

Underweight

A portfolio holding less of a particular security (or sector or region), than the security’s weight in the

benchmark portfolio. (See also overweight.)

Unit trust

Money from a number of investors pooled together and invested collectively in investments such as

shares and bonds.

Each investor owns a unit (or a number of them), the value of which relates to the value of those items

owned by the fund. (See also authorised unit trust.)

Utilities

Industries such as water, electricity and oil & gas.

Value at risk (VaR)

An estimation of the probability of portfolio losses, based on statistical analysis of historical price trends

and volatility.

Vacancy rate

In real estate investing, the percentage of a portfolio that is vacant. The rate is the total rental value of the

vacant properties divided by the total rental value of the portfolio.

Volatility

A statistical measure of how quickly the price of a security rises, and falls over time.

The greater the movement through a wide price range, the higher the volatility.

Warrant

A derivative that offers the holder the right to buy a specified number of shares in a company at a fixed

price at some agreed future date.

Warrants are commonly issued in conjunction with a bond, but they are often split off and traded

separately.

Yield

The annual dividend or income on an investment expressed as a percentage of the purchase price.

Yield spread

The difference between yields on different debt instruments.


Zero-coupon bond

Also known as an accrual bond. A debt instrument that doesn’t pay interest but is traded at a deep

discount from its value at maturity.

Zero-coupon bonds are popular with investors who have long-term investment goals with a definite time

horizon.

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Dear Reader ,

Every possible effort has been made to ensure that the information contained in this glossary is accurate at the

time of publication and we make know no warranty about the accuracy or completeness of the content to the

maximum extent permitted. No responsibility for loss or damage occasioned to any person acting, or refraining

from action, as a result of the material in this publication can be accepted by the company and author.

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Avondale Investment Management (UK) Limited 2013

Tony Randall

Company Director


Glossary of Investment Terminology 2013

http://www.avondaleinvestment.com/

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