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25 January 2016
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This is the final installment of the CSS Investments Glossary. We have pooled together some of the most popular terms across the entirety of the alphabet, some of the terms which you will read in our reports, jargon you hear in the news and some everyday jargon defined.
Please enjoy this final instalment, and get the PDF below as an valuable resource when you are away from our website!
Leverage – This is a general term, similar to the UK term ‘Gearing’, which is used to describe a technique for multiplying gains or losses. In a company it can describe the relationship between debt and equity funding, with high-levered firms being those carrying a high level of debt compared with equity. It is also a technical term used in derivatives to describe the use of ‘leverage’ to gain a greater level of exposure by putting a deposit of a total amount. In both business and derivative sense it enables an investor/business to offer higher returns on investment when times are good, but leaves an investor exposed when times are bad.
LIBOR – This is an acronym for London Inter-Bank Offered Rate. This is a key benchmark interest rate for when one bank borrows from another, as measured in sterling. It is often used a reference point for the pricing of other financial products too.
Limit Buy – This is a term used to describe an order to buy a security at or below a specified price. This Buy Limit order will allow traders and investors to specify a price they are willing to pay for a security. Using this order enables the investor to buy at this specified price of less.
Limit Sell – Often referred the other way around ‘limit sell’, this is the inverse order of a ‘Limit Buy’, enable the owner of the stock to sell at or above the order price.
LPOA – This is an acronym for Limited Power of Attorney. It refers to the documentation which allows an individual or company the permission to make financial decisions on behalf of a person, with critical account functions left solely to the account holder.
LSE – This is an acronym for the London Stock Exchange. This is the main market for companies to list publicly in the UK and only allows certain companies to join based on strict criteria.
M&A – This is an acronym for Mergers & Acquisitions. It is the term to describe either the acquisition of one company by another or the merger of two companies together. The main difference being an acquisition allows the acquiring buyer all the shares of a company at a mutually agreed rate. The merger is where two companies will combine, usually by offering the stockholders of one company securities in the merging company, for the surrender of their stock.
Maintenance Margin – This is the term used to describe the minimum amount of equity that needs to be maintained in a margin account once securities have been purchased on margin (see below), as an example – let’s say a broker requires a 25% maintenance margin and you buy £30,000 worth of securities on margin, borrowing £15,000 from your broker and paying the other £15,000 yourself. Then the market value of the security drops to £21,000, then the equity in your account falls to £6,000 (£21,000 – £15,000). Assuming the 25% maintenance margin, you must have at least £5,250 (25% of £21,000). Should the market value fall further and you break below the £5,250 required, your broker will issue you with a margin call (as below).
Margin – This is the term to describe borrowed money used to purchase securities, you ‘buy on margin’ when you don’t put the full amount down to purchase a security, but you put a deposit of the total amount required. Traders use margin to gain greater exposure to securities they may not usually want to allocate so much capital towards. This will increase your exposure to risk and trading ‘on margin’ is considered high risk, as any potential to magnify rewards can also magnify losses.
Margin Call – A broker’s demand on an investor using margin to deposit more capital or securities so that the account’s margin level is brought up to the minimum required for ‘maintenance margin’.
Market Maker – A market maker is a professional trader, who often work for banks. They commit to providing liquidity in securities so that other investors and traders can buy or sell them. Their requirement to trade carries risk – as they could land themselves with large amounts of stock which is seeing very low volume, proving difficult to shift – this is reflective through the spread.
Market Order – This is an order instructed to buy or sell a security at the best price available during that immediate market value.
Mid-Cap – This is a term which describes the ‘next size up’ company from small-cap, that aren’t quite large enough in market capitalisation to be considered large. They are still big companies which can be actively traded. A usual market capitalisation range from £100m to £3bn, the FTSE 250 will accommodate a large quantity of these stocks.
Money Laundering – This is the action done by a criminal where they try to convert crime money in to other legitimate assets, such as funds – this is to prevent attraction from regulators or authorities. The money invested in to legitimate assets when money laundering is usually from a profitable crime so the criminal will accept small losses on the money so as to ensure the appearance of the money is from ‘clean’ means of investment.
Moving Average – This is a means of assessing live price trends, it can be one of the fundamental components of technical analysis and its main function is to help to clarify the overall trend of a security, by removing the appearance of short term volatility which can skew ones perception of trend. The formula behind the Moving Average is to first decide on the number of data sets to be calculated, let’s say we want to analyse the price over a period of 5 days. The Moving Average will divide the price of the 5 days price and that will determine the moving average value (£1.50, £1.70, £1.80, £2.00, £2.10/5 days = £1.82) once the sixth day arrives the formula will calculate from the prior 5 days, on the sixth day price spikes to £3, so as an idea: (£1.70, £1.80, £2.00, £2.10, £3.00/5 = £2.12) – this shorter period moving average is not so relevant for longer term investors, they would be more interested in the 90 or 200 day moving average. However, the moving average can be specific to any time period, so whilst we use the example of a daily chart, the 200-EMA on a 5 minute chart as an example, would wield slightly different means of trend analysis than the reading on the daily.
Mutual Fund – This is the U.S. equivalent of Unit Trusts and Open-ended Investment companies.
NASDAQ – Its historic state shows that this reference stands for: ‘National Association of Securities Dealers Automated Quotations.’ The NASDAQ is an electronically based stock market in the U.S. and has a considerably heavy bias towards its members being info-tech or bio-tech companies. The largest company by market cap Apple is a member of the NASDAQ.
NAV – This is an acronym for Net Asset Value. It is worked out by subtracting the total value of a company’s balance sheet liabilities, from its assets. The NAV is a stale part of an analyst’s research, by calculating the NAV per share. This is done by dividing the NAV by the total number of shares in issue. This calculation is also very common in investment trust research.
Nominee – This refers to a person or a firm whose name holds securities or other properties are transferred into, in order to facilitate transactions whilst leaving the client as the actual owner. This enables a broker to cut down on administration, as each transaction can be aggregated and recorded as one. Individuals can still request their holdings to be recorded separately however.
New Issue – This is where a security is introduced to the market for the first time and made available for public trading. It is usually used with shares, but can also be used by other asset classes.
Nikkei 225 – This is the most popular used index for the Tokyo Stock Exchange. Its name derives from the paper which calculates the index, the Nihon Keizai Shimbun. It is a price-weighted index with yearly reviews and is made up of 225 of Tokyo’s largest companies.
NYSE – This is an acronym for the largest stock exchange in the world, the New York Stock Exchange. With $19.69 Trillion in market capitalisation of its listed companies in May 2015, it far surpasses any other exchange.
Offer Price – The second type of pricing available to choose when making a security transaction, the offer price is the price that you pay in order to buy the security. The difference between the offer and the Bid Price is called the spread. So if the spread is 100 and 110, the offer price would be 110 and the broker would receive the difference of the 10p.
Open Ended Fund – This refers to a collective investment scheme which has no capped level of shares available in purchase. If demand is great, more shares will be produced to accommodate for the demand, when demand decreases, the fund manager will buy back the shares. An example of an open ended fund is a Unit Trust or Open-ended investment company.
Options – This type of investment product enables the holder the right, but not the obligation, to buy (call option) or sell (put option) an asset or security at a fixed price in the future. This investment product is a derivative by its nature and consequently can be considered high risk.
Order Book – This is an execution book which holds a list of all the buy or sell orders required. The book gives priority to the best prices and the order with the highest buy price or the lowest sell price usually feature at the top.
OTC – This is an acronym for over the counter. This is a term referring to the sale of a security directly from the seller and the purchaser, rather than through the stock market.
PBT – An acronym for Profit before Tax. PBT is a profitability measure that looks at what profit has been generated before any corporate taxation is carried out.
PE Ratio – The PE ratio stands for Price to Earnings ratio, in short it is used as a quick comparative to assess whether the share is cheap or expensive. The ratio compares one year’s share price to one year of company’s earnings. The higher the share price is currently in relation to a year’s earnings per share, the more expensive the firm. This would be seen as forcing investors to wait a long time to recoup their investment in earnings terms.
Pension – A pension is the income you will generate from savings, once you retire. The types spread across state pensions, company pensions and personal pensions.
Pip – An acronym for Price Interest Point. A pip is most commonly used in Foreign Exchange, a pip is a unit of measure equivalent to a change in value between two currencies. It is a very small measure of change in the two pairs and will equate to one pip being 0.0001, a movement of 0.0002 is two pips and so on.
Power of Attorney – This is a documentation to allow someone else to make decisions on your behalf (your attorney), when providing the ‘power of attorney’ in an investment sense, you will allow somebody to make investment decisions in the case that you become mentally incapacitated or no longer wish to make any critical decisions yourself.
Private Equity – This term refers to private investment. It is a source of investment capital from HNW for the purpose of acquiring equity ownership in companies. It is not listed on a public exchange and the investments are made directly in to the private companies.
Private Placing – This is a round of funding of securities which are listed but not through a public offering, but the listing or placing, is private. Investors usually take the shape of large banks, mutual funds, insurance companies and pension funds. To understand, it is the direct opposite of a public placement, where securities are openly available to the entire public.
Profit and Loss Statement – This is a financial statement that summarises the revenue that a firm has generated over a year less the costs. The bottom line will indicate whether there has been a profit or a loss made based upon the costs incurred.
QE – An acronym for Quantitative Easing, this is the term which described the process of Central Banks creating money electronically to purchase government securities, particularly bonds, this is to stimulate the economy through more money being readily available. Where the money ends up will vary, however the idea is to enable the government to provide loans for businesses and individuals.
Quantitative Analysis – This is a research format which requires the sole us of data and statistics to develop conclusions. Quantitative analysis is usually carried out on economies and companies.
RDR – This is an acronym for Retail Distribution Review. This is a regulation set up in 2012 by the Financial Conduct Authority to improve the standard of financial services being offered to the public. The RDR has a multitude of objectives, some of which including heightened clarity for them on products and services, to enhance a market that allows the customers of a financial firms needs and wants addressed. As well as ensuring that the remuneration agreements allow for a much more competitive market, are in the favour of consumers.
Recession – This is the term which is used to describe a breakdown in economic activity for a country. Technically speaking – a recession is in place when two consecutive quarters have negative growth rates.
REIT – An acronym that stands for Real Estate Investment Trust. This is the most common international investment platform for investing in to real estate, outside of actually purchasing property. A REIT is a company that will own or finance income-producing real estate, which will allow investors of all types regular income streams and a means of diversification. The company trades on the on major exchanges and is easily movable like equity stock.
Research Analyst – These are professional researchers who are paid to provide coverage and report their opinions on whatever criteria their analysis requires. The research analyst’s work will enable them to help a client to decide what investment action they should take, or the analyst can help formulate strategies amongst institutions.
Resistance – This is one element of a two part concept (Support & Resistance. The term is used to describe a simple means of technical analysis. Resistance is the idea that when a price appreciates to a certain level, the price of a security may begin to halter, stop or turnaround in predetermined levels.
Retail Price Index – Usually shortened in to the acronym RPI, this is an old UK inflation measure. It is the means of looking at change in the price of a basket of goods, consumed by a typical household. The measure includes property costs such as council tax and also includes average mortgage payments alongside everyday costs such as food, petrol and utilities.
Rights Issue – In short, this is where an existing public company issues more shares in an attempt to raise finance from its shareholders.
ROI – This is an acronym for Return on Investment. This is a performance measure used to determine the efficiency of the amount of capital invested relative to the investment’s return. The ratio is defined as gain from the investment – cost of investments / cost of investment. The results is then expressed as a percentage or ratio.
Scrip Issue – This is the term to describe the issuance of additional shares to shareholders in accordance to the shares already held. It is usually done by a company’s cash reserves or dividend payments converting to share issuance in its place.
Share – As an obvious understanding, it is a ‘shared’ unit of ownership of a company. As a shareholder the owner can receive dividend and it gives them a right to vote at Annual General Meeting.
Short Sell (shorting) – This is the act of attempting to benefit from a fall in an asset’s price. Assets are sold that are borrowed from a third party, the sale is then completed by buying them back at a later date, to return them to the lender. A stock is sold in the hope the price will fall before returned to the original owner.
SIPP – This is an acronym for Self-Invested Personal Pension. This is a private pension type and is created solely for the account-holder, through the use of various asset-class investments. One of the main advantages of a SIPP is that the choice of investments you can hold within them is large as you can purchase from the full range of HM Revenue and Customs approved investments and they can be ran in conjunction with other pension schemes.
Small Cap – Another reference to market capitalisation of a company. This is the smaller end of the scale, with the size of the companies in this bracket stemming from £1m to £100m. Then, prior to this is the micro-cap which can have a market capitalisation of £1m.
Spoofing – This term refers to a type of scam where a criminal will attempt to gain unauthorised access to a user’s system or information by pretending to be the user. Creating a ‘spoof’, the criminal will attempt to trick the user into releasing strictly confidential and sensitive information.
Spread – Whilst this word has numerous different meanings, the most common reference to the stock market is the difference between the bid and the ask price of a security.
Stamp Duty – This is an obligatory tax paid on the purchase and registration of securities. Two of the most common types of asset where stamp duty is required is property and shares. The rate tends to remain static on shares at around 0.5% without deviating too far from that, whereas stamp duty for property can vary between 0% – 12% depending on the value of the property being purchased.
Standard Deviation – A mathematical formula used to calculate how sporadic or dispersed a set of numbers are. The formula is taken from the square root of the variance.
Stop Loss – This is an order type to sell a security or commodity at a specified price, in order to limit the possibility of a loss.
Support – This is the second element of a two part concept (Support & Resistance). This term is used to describe a simple means of technical analysis. Support is the concept that when a security’s price depreciates to a certain level, the price of the security may begin to halter, stop or turnaround in predetermined levels.
T+1, T+2, T+3, T+10, T+20 – This symbol refers to one of the two most important dates when buying or selling a stock; the transaction date and the settlement date. These abbreviations refer to the latter of the two and mark the settlement date. The formula being the transaction date (T) + one day (1 or corresponding number). The settlement date refers to the day in which ownership is transferred to the buyer or taken from the seller.
Technical Analysis – Arguably one of the more popular means of analysis in recent times, stemming from a long history of technique development. Technical analysis refers to evaluating a securities positioning in the market by analysis patterns in the price history from the past, or formulating an investment strategy from trends in the way the price has moved in the past. To accompany the analysis, indicators and formulae are applied to construct part of a strategy or as a stand-alone means of commenting on the markets.
Trend – This is a term to describe the general movement of the market when referring to securities. Technical analysts can use trend to determine what their purchase behaviour will be, as well as a key indicator towards where the price might head.
U.S. Federal Reserve – This refers to the central bank of the U.S., stemming back to its establishment in 1913, the FED for short, ensures a robust monetary and financial system, promotes healthy levels of employment and seeks low inflation.
U.S. Treasury – This refers to bonds issues by the U.S. Government.
Unit Trust – An investment company, set up to manage a portfolio of stock exchanged securities, in which investor can purchase ‘units’. Assets are held in the trust and profits are then passed on to unit holders, where the investor in the unit is a beneficiary under the trust. In the UK, the term Unit Trust is synonymous to Mutual Fund.
Upgrade – This term when used in the context of securities refers to a positive change in the rating of a security. Catalysts for a rating change such as an upgrade can come from improvements in the financials of a business or a more positive outlook from the financials of the security,
Venture Capital – This term refers to start-up capital or equity capital which is given by private investors or certain companies (venture capital businesses), it is used for funding for a new or growing business.
Venture Capitalist – Derived from the term ‘venture capital’, a venture capitalist is the private investor that invests the money in the start-up. The usual exchange for the money is around a 50% or more ownership of the business and whilst there are a variety of reasons for investment, their objectives are usually to bring the business to public offering level (IPO).
Vix – The symbol for the Chicago Board Options Exchange Volatility Index – Vix – shows the volatility expectancy (implied) over a 30-day period. It is generated through the collective level of volatility across a large range of options across the S&P500.
Volatility – This is the measure used to determine the fluctuation in an individual security, asset class or market. The best known measure of this volatility is the VIX which was described above – it also has the nickname ‘fear index’.
XD Date – This is the term describing the date that a buyer of a security forgoes the next dividend or coupon, where the seller receives the payment instead.
Yield – This is a measure of return, it could be the dividend income from an asset – as a percentage of the assets value, or the interest received as a percentage.
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.