29 September 2015
If you’re new to the CSS Investments blog, please make sure you read our introduction post here to find out how this blog will help you become a better informed investor or trader.
The second instalment to our Glossary of Market Terminology. It would seem that the first 6 letters of the alphabet is where the financial world gets most of its jargon from!
We hope you enjoy this second instalment, but if there is anything that we have missed out that is worth mentioning here or you are not sure of what it means, please leave a comment and we can help!
On with the glossary…
Deficit: If a country is importing more than it is exporting, it is said to be running a deficit, on the other hand, if a country is exporting more than importing (China as an example) then they are said to be operating in surplus. Countries can and will be operating in a surplus and a deficit at any given point in time.
Deflation: The word used to describe an economic slowdown in growth, where prices in goods and services begin to fall over a given time frame period. Deflation is officially declared when the inflation rate falls below 0%.
Depreciation: This is where an asset will lose value over a given time frame. In a business sense, it is the process whereby the cost of an asset is spread over the years a company hopes to own or use that asset. This cost is then taken from the profit over the course of the forecasted years of usage to give a fairer view of how the asset is being used, and so as to not write off the entire cost against profits in the year acquired.
Derivative: This is a traded security where its value is derived from the actual or expected price of an underlying asset. Derivatives include Futures, Options, CFD’s or Swap. Derivatives often utilise margin or only require small deposits to gain access to larger amounts of money, since the underlying asset is not owned. For this reason, derivatives are often considered higher risk.
Dividend: This is the payment to shareholders from company profits usually after all other calls have been met. These can be paid by the company on a quarterly, bi-annually or annually basis and the shareholder has the decision to reinvest as scrip, or receive the cash payment.
Dividend Cover: Whilst understanding the potential payment of a dividend and the yield, understanding dividend cover is equally as important. The question, will this company be able to afford to pay their dividend? The dividend cover will work out how many times the profit generated will cover the dividend pay-out.
Dividend Yield: This is a company’s annual dividend as a percentage of the current share price. Calculated by dividing the dividend per share by the current share price, this will help you to determine your level of income in relation the amount of stock under ownership.
Discount: This specifically refers to a security that is sold for less than its nominal or par value. Or a security that is sold below its present market value, instances where this will arise may be issuance of new stock to existing shareholders or employees. An Investment Company is referred to trading at a discount when its shares are below the Net Asset Value of its underlying holdings.
Discretionary Managed: This describes the type of investor who will employ the skills and expertise of dedicated financial services professional(s) to invest on their behalf, giving full power to the portfolio manager to make investments which are tailored to the investor’s needs and investment objectives. This service is often employed by investors who don’t have the time or expertise available to them to invest.
EBITDA: This is an acronym for ‘Earnings before Interest, Tax, Depreciation and Amortisation’. This is a figure which removes some of the weakness in determining a company’s profit after tax, because of this a lot of analysts and researchers prefer the EBITDA figure when performing analysis.
Emerging Markets: Emerging markets is a term to refer to the countries around the world which are becoming developed economies, with the inclusion of their stock markets. They are undergoing a process to see improving liquidity, market efficiency and security regulation.
EPS: This is an Acronym for ‘Earnings Per Share’. This figure represents the amount a company earned in profits in relation to the amount of shares in circulation. As an example, should a company earn £50m profit for the year, and they have 40m shares, EPS = £1.25. This is a figure that will be monitored by analysts and shareholders to determine shareholder value.
ETF: This is an acronym for ‘Exchange Traded Fund’. ETF’s are investment funds, which are actively traded and can be bought as a share on the stock market. It enables an investor to get access to the movement of an underlying index, sector or commodity without having direct ownership with the underlying asset, but simply own a share in the ETF which closely tracks it. They aim to closely follow the performance of the asset they represent. They may replicate this by the use of derivatives or by physically holding the underlying shares. Unlike Investment companies or trusts, they tend to be open-ended.
Equity: This is the value of an asset less the value of all liabilities of said asset. There are a variety of meanings specific to different asset types; we commonly refer to equity to describe a stock or any other security representing an ownership interest.
Execution Only: This is referring to a broker who will simply place trades on behalf of their clients, offering no advice to the transaction being made. This service is usually suited for investors who are fully confident with their own research and investing capability.
Ex-Dividend: If an investor owns a share of bond on the ex-dividend date, the seller is entitled to the next dividend or coupon payment. Ownership after the ex-dividend will not allow the owner to receive the dividend.
Fill or Kill: A ‘Fill Or Kill Order’ (FOK) is an order to buy or sell a security which must be executed immediately. It has to be filled within a short window – seconds – otherwise the order is cancelled.
Financial Conduct Authority: More commonly known by its acronym FCA, this is the regulatory body for all financial services in the UK. Its main aim is to protect customers and to promote best practice and healthy competition amongst all financial services firms.
Fixed Assets: This is an asset which is purchased by a business with the intention of long term use. They remain illiquid as they are not bought to be converted to cash, fixed assets can include land, buildings, motor vehicles. They are usually recorded on a company’s balance sheet upon acquisition and then written off by depreciation of an asset value over the expected time period of use.
Fixed Income: Most commonly referred to a style of investing where the return from a security will provide a fixed rate of return at regular intervals. Bonds are usually a staple security in this style of investing, where the investor will receive a coupon.
Fixed Interest Rate: An interest rate which has a pre-determined time duration agreement, these agreements of fixed interest are attractive to those who foresee an interest rate rise in the near future.
Floating Rate: This refers to an interest rate that is able to move up or down within a certain market or index. In essence, a rate that varies in accordance to external market factors, this is in comparison to a fixed interest rate in which the interest rate will remain static through duration of agreement.
Floating Stock: This is the number of shares available for trading of a particular stock. The stock amount is calculated from subtracting closely-held shares and restricted stock of the firm’s total outstanding shares.
Flotation: This is the new issuance of a security to be openly traded on the stock market.
FTSE: They are the leading provider of stock market indices in the UK. FTSE is a joint partnership between Financial Times and London Stock Exchange.
Fundamental Analysis: Is the analysis of a company or a sector, starting from the bottom up. This form of analysis will dissect a company’s financial statements and determine its attractiveness, often through the use of set criteria of ratios. The goal of the analysis is to draw up a forecast of future price moment.
Funds (Investments Funds): This is the collection of capital which belongs to a variety of investors, used to collectively purchase securities, where each investor retains control of their segmentation of the fund.
Fund Manager: This is an employee who is typically part of a large institution, who will manage the investment of money on its behalf (a fund). It takes a strong level of educational and professional experience to manage a fund. Funds usually take the shape of (mutual, pension, trust funds)
Futures: A financial contract which allows the buyer to purchase (or sell) an asset, such as a physical commodity or a financial instrument, at an agreed date and price in the future, hence its name. The contract outlines quality and quantity of the underlying asset and has their own traded exchange. A Futures contract is a derivative financial instrument.
I hope this was useful. Look out for the next instalments next week.
Did we miss anything? Let us know in the comments or please email me at editor@css:investments or leave your request in the comments section below.