Please note this section is in the process of being updated.

Glossary of Financial Terms

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Alternative Investment Market (AIM)
Second tier of market run by the London Stock Exchange.

American Depository Receipt (ADR)
Document giving the owner rights to UK shares. They are effectively bearer documents.

Annual General Meeting (AGM)
Meeting of shareholders which a company must call every year. Main purposes are to receive the accounts, vote on dividends and appoint directors.

Ask price
Price at which a market maker will sell stock. Also known as the offer price.

Association of British Insurers (ABI)
A trade body of insurance companies through which they can air their views collectively on matters of common concern.

At best order
Type of order input into SETS which is completed against displayed orders at the best price(s) available

Auction
Method by which the Bank of England issues gilts. Successful applicants pay the price that they offered.

Authorisation
Status required by the Financial Services Act 1986 for any firm that wants to conduct investment business. It is achieved by direct application to FSA or by becoming a member of an SRO.

Authorised Corporate Director (ACD)
Organisation which undertakes the role of managing the funds in an OEIC.

Authorised Unit Trust
Unit trust which meets the requirements of the Financial Services Authority to allow it to be freely marketable.
 

Balance of Payments
The difference between the total value of imports and exports. If imports are higher there is a deficit and if exports are higher there is a surplus.

Ballot
A random selection of applicants for a new issue of shares.

Bank - commercial
Organisation that takes deposits and makes loans.

Bank - merchant
Organisation that specialises in advising on takeovers and corporate finance activities.

Bank of England
The UK’s central bank which undertakes policy decided by the Treasury and determines interest rates.

Bargain
Another word for a transaction or deal. It does not imply that a particularly favourable price was obtained.

Beneficial Owner
The underlying owner of a security who has paid for the stock and is entitled to the benefits of ownership.

Bear
Investor who believes prices will fall.

Bearer Document
Documents which state on them that the person in physical possession (the bearer) is the owner.

Bid Price
Price at which a market maker will buy stock.

Bonds
Interest bearing securities which entitle the holder to interest during their life and repayment of the loan at maturity. They can be issued by companies or governments and are more usually called loan stocks in this country. See also Gilts.

Bonus Issue
A free issue of shares to a company’s existing shareholders. No money changes hands and the share price falls pro rata. It is a cosmetic exercise to make the shares more marketable. Also known as a capitalisation or scrip issue.

Book Entry Transfer
System of recording ownership of securities by computer where the owners do not receive a certificate. Records are kept (and altered) centrally in ‘the book’.

Broker/Dealer
Any member firm of the Stock Exchange except the specialists which are GEMMs and IDBs.

Broking
The activity of representing a client as agent and charging commission for doing so.

Bull
Investor who believes prices will rise.
 

Call Option
Option providing its buyer with the right to buy an item at an agreed price.

Capital Adequacy
Requirement for firms conducting investment business to have sufficient funds.

Capital Gains Tax (CGT)
Tax payable by individuals on profit made on the disposal of assets.

Capitalisation Issue
See Bonus Issue.

Cedel
An international settlement organisation which specialises in eurobonds.

Central Gilts Office (CGO)
Book entry transfer system for gilts run by the Bank of England.

Chinese Walls
Artificial barriers to the flow of information set up in large firms to prevent the movement of sensitive information between departments.

City Code
Principles and rules written by Panel on Takeovers and Mergers to regulate conduct during a takeover.

Closed ended
Organisations such as companies which are a certain size as determined by their share capital.

Closing
Reversing an original position by selling what you have bought or buying back what you have sold.

Commission
Charge levied by a firm for agency broking.

Commodity
Any item that can be bought and sold. Taken to refer to Exchange-traded items including sugar, wheat, soya beans, coffee and tin.

Compliance Officer
Person appointed within an authorised firm to be responsible for ensuring compliance with the rules.

Conduct of Business Rules
Rules required by FSA 1986 to dictate how firms conduct their business. They deal mainly with the relationship between firm and client.

Conflicts of Interest
Circumstances that arise where a firm has an investment which could encourage it not to treat its clients favourably. The more areas in which a firm is involved the greater the number of potential conflicts.

Continuing Obligations
Chapter of Yellow Book which contains the rules for listed companies, particularly on disclosure of information.

Contract
A standard unit of trading in options and futures.

Contract for difference
Contract designed to make a profit or avoid a loss by reference to movements in the price of an item. The underlying item cannot change hands.

Contract Note
Legal document sent by securities house to clients providing details of a transaction completed on their behalf.

Core Rules
40 rules written by FSA under the three-tier approach, to be universally applicable. De-designated in November 1994.

Corporate Finance
General title which covers activities such as raising cash through new issues.

Coupon
Fixed rate of interest payable on a bond.

Credit Creation
Expansion of loans which in turn expands the money supply.

CREST
Name of book entry transfer system used for UK equities.

CRESTCo
Organisation which owns CREST.

Customer-non-private
Customer who is assumed to understand the workings of the investment world and therefore receives little protection from the Conduct of Business Rules.

Customer - private
Customer who is assumed to be financially unsophisticated and therefore receives more protection from the Conduct of Business Rules.
 

Daily Official List
London Stock Exchange produced document which provides record of prices at which all stocks were traded on the previous day.

Dematerialised (form)
Circumstances where securities are held in a book entry transfer system with no certificates.

Department of Trade and Industry (DTI)
Department of government responsible for some commercial matters including monopolies and prosecution of insider dealing.

Derivatives
General title given to options and futures.

Dividend
Distribution of profits made by a company if it chooses to do so.

Dividend Yield
The dividend expressed as a percentage of the share price.

Diversification
Investment strategy of spreading risk by investing the total available in a range of investments.

Dow Jones Index
Main share index used in the USA.
 

Earnings per share (eps)
The total profit of a company divided by the number of shares in issue.

Electronic Order Book
The electronic order matching system used as the system for dealing in the shares which comprise the FT-SE 100 stock.

Endowment Policy
Form of saving linked in with life assurance. Must be held for at least 10 years to get full benefit.

Equity
Another name given to shares. Shareholders are the owners of a company who can vote on important matters such as the appointment of directors and would share in the increased value if the company is successful.

ERNIE
Colloquial name for computer which selects the winners of premium bonds prizes.

Euro
The name of the single European currency.

Eurobond
An interest bearing security issued across national borders, usually issued in a currency other than that of the issuer’s home country.

Euroclear
A settlement organisation similar to Cedel.

European Monetary System (EMS)
Agreement between most members of the common market on how to organise their currencies.

Exchange
Market place for trading.

Exchange Rate
The rate at which one currency can be exchanged for another.

Exchange Rate Mechanism (ERS)
That part of the EMS that relates to pegging the rates against each other within predetermined limits.

Execute and eliminate order
Type of order input into SETS. The amount that can be tracked immediately against displayed orders is completed, with the remainder being rejected.

Exercise an option
Take up the right to buy or sell the stock which is the subject of the option.

Extraordinary General Meeting (EGM)
Any meeting of a company’s shareholders other than its AGM.
 

Fill or Kill order
Type of order input into SETS. It is either completed in full against displayed orders or rejected in full.

Financial Intermediaries Managers and Brokers Regulatory Association (FIMBRA)
One of the SRO’s, responsible for independent advisers and life assurance salesmen. Its activities have now been taken over by PIA.

Financial Services Act 1986 (FSA 86)
The legislation (effective April ’88) that imposes regulations on who is allowed to conduct investment business and how it is conducted.

Financial Services Authority (FSA)
The agency designated by the DTI to regulate investment business as required by FSA 1986. It is the main regulator of the financial sector and was formerly called the Securities and Investments Board (SIB).

Fiscal Years
These run from 6 April to 5 April and are the periods of assessment for both income tax and capital gains tax.

Fit and Proper
Under FSA 86 everyone conducting investment business must be a ‘fit and proper person’. The Act does not define the term, a function which is left to the regulators such as FSA or SROs.

Fixed Rate Borrowing
A fixed rate borrowing establishing the interest rate that will be paid throughout the life of the loan.

Floating Rate Note (FRN)
Bond where each interest payment is made at the current market levels, often by reference to LIBOR.

Forex
Abbreviation for foreign exchange (currency trading).

FT-SE 100 index
Main UK share index based on 100 leading shares.

FT-SE Mid 250
UK share index based on the 250 shares immediately below the top 100.

Fund Manager
An organisation that invests money on behalf of someone else.

Future
An agreement to buy or sell an item at a future date, at a price agreed now.

Futures and Options Fund (FOF)
Type of authorised unit trust which can invest partially in derivatives.
 

Geared Futures and Options Fund (GFOF)
Type of authorised unit trust which can invest in derivatives.

Gearing
In a derivative context, the possibility that a small sum of money can generate a disproportionately large return, inevitably matched by a larger risk. Also known as leverage.

General Principals
10 fundamental principles written by FSA to apply all investment businesses.

Gilt Edged Market Makers (GEMMs)
A firm that is a market maker in gilts and is not permitted to do much else. Also known as a primary dealer.

Gilt Edged Security
UK government borrowing.

Graphical User Interface (GUI)
Link to CREST which allows real-time input of instructions and enquiries.

Gross Domestic Product (GDP)
A measure of the country’s entire output.

Gross Redemption Yield (GRY)
The annual return on owning a bond, allowing both for interest and profit on redemption.

Group
Where one company controls one or more other companies, they are collectively a group.
 

Hard Commodities
Commodities such as tin or zinc. Futures on them are generally traded on the London Metal Exchange.

Hedging
Protecting an existing position or commitment.

Holding Company
A company which owns more than 50% of the shares of another company is its holding company.

Holder
A person who buys a put or call option.

Home State regulation
Under the ISD, an investment business is authorised in the place of its head office and registered office. This home state authorisation entitles it to conduct business in any member state of the European Union.

Host State regulation
Any European investment business operating outside its home basis is regulated by its host for its Conduct of business.
 

Inflation
A period of generally rising prices.

Index Funds
Unit trusts which invest in the constituent parts of an index.

Insider Dealing
The criminal offence whereby those with unpublished price sensitive information deal, advise others to deal or pass the information on. Maximum penalty is seven years jail and an unlimited fine.

Inter Dealer Broker (IDB)
Member of the London Stock Exchange that acts as a link between firms to enable them to trade with each other anonymously.

Intermediaries Offer
A system for primary issues on the London Stock Exchange. Stock is made available to brokers who can take it on behalf of clients.

International Equity
An equity of a company based outside the UK but traded internationally.

International Petroleum Exchange (IPE)
Market for derivatives of petrol and oil products.

Intervention
The process whereby the Bank of England acts to influence the exchange rate for sterling by buying it to support its value or selling to weaken it.

Investment Management Regulatory Organisation (IMRO)
One of the original SROs established for fund managers.

Investment Services Directive (ISD)
European Union Directive imposing common standards on investment businesses.

Investor Protection Committee (IPC)
Divisions of the ABI and NAPF set up to monitor their positions as shareholders.

Investment Business
Dealing, advising or managing investments. Those doing so need to be authorised.

Investments
Items defined in the FSA 86 to be regulated by it. Includes shares, bonds, options, futures, life assurance and pensions.

Investment Trust (Company)
A company whose sole function is to invest in the shares of other companies.

Irredeemable Gilt
A gilt with no fixed date for redemption. Investors receive interest indefinitely.
   

Lead Managers
In the eurobond markets the description given to the securities house appointed to handle a new issue.

Leverage
See Gearing.

Life Assurance and Unit Trust Regulatory Organisation (LAUTRO)
The SRO responsible for marketing these products. Its functions have now been taken over by the PIA and is scheduled to be disbanded.

Limit Order
Type of order input into SETS. If not completed immediately the balance is displayed on the screen and forms the Order Book.

Listing
Status applied for by companies whose securities are then listed on the London Stock Exchange and available to be traded.

Listing Particulars
Detailed information that must be published by a company applying to be listed.

Listing Rules
Rule book for listed companies which governs their behaviour. Commonly known as the Yellow Book.

Liquidity
Ease with which an item can be traded on the market. Liquid markets are described as deep.

Lloyd’s of London
World’s largest insurance market.

Loan Stock
See Bonds.

London Inter Bank Offer Rate (LIBOR)
Rate at which banks lend to each other which is often used as the benchmark for floating rate loans (FRNs).

London International Financial Futures and Options Exchange (LIFFE)
Market for trading in bond, interest rate, FT-SE 100 index and FT-SE Mid 250 index, futures, plus equity options and soft commodity derivatives.

London Metal Exchange (LME)
Market for trading in derivatives of metals such as copper, tin, zinc, etc.

London Stock Exchange (LSE)
Market for trading in securities. Formerly known as the International Stock Exchange of the United Kingdom and Republic of Ireland or ISE.

Long-dated
Gilts with more than 15 years until redemption.
 

Margin
Money that must be deposited by participants in options and futures markets as a guarantee that they will be able to meet their commitments at the due date.

Mandatory Quote Period
Time of day during which market makers in equities are obliged to quote prices under London Stock Exchange rules.

Market
Description of any organisation or facility through which items are traded. All exchanges are markets.

Market Forces
Supply and demand allowing buyers and sellers to fix the price without external interference.

Market Maker
A member firm of the LSE that has agreed to quote prices and buy and sell stock actively during the mandatory quote period. The status only exists for non SETS stocks.

Maturity
End of life of a loan security when it is repaid.

Medium Dated
Gilts due to be redeemed within the next seven to fifteen years.

Mergers and Acquisitions (M&A)
Divisions of securities houses or merchant banks responsible for advising on take-over activity. Usually work with the corporate finance department and is often kept as a single unit.

Mixed economy
Economy which relies on a mix of market forces and government involvement.

Model Code for Securities Dealing
Part of the Yellow Book that relates to directors dealing in their own company’s securities. Prohibits them from doing so during the two months before results are announced.

Money Supply
Measure of the money available in the economy.

M0
Most restrictive measure of the money supply which measures notes and coins.

M4
Broader measure of the money supply which measures bank and building society deposits, in addition to M0.

Monopolies and Mergers Commission (MMC)
Government established agency that advises the DTI whether or not a proposed take-over should be refused on competition grounds.

Mortgage
A form of security on borrowing commonly associated with home borrowing.
 

Names
Individuals of Lloyds of London who join together in syndicates to write insurance business. Their liability is unlimited and therefore all their personal wealth is at risk.

National Association of Pension Funds (NAPF)
Trade association of pension funds through which they can voice their opinions collectively.

National Savings
Department of government responsible for running a variety of short-term borrowings. Its operations are undertaken through the Post Office.

Nikkei Dow Index
Main share index in Japan.

Nominal Value
The amount of a loan that will be repaid on maturity. Also known as par value.

Nominated Advisor
Firm appointed to advise AIM company directors on their responsibilities. Role can be combined with that of nominated broker.

Nominated Broker
Firm appointed to assist dealing in AIM securities.

Nominee
An organisation that acts as the named owner of securities on behalf of a different beneficial owner who remains anonymous to the company.

Normal Market Size (NMS)
Minimum size in which market makers must quote on LSE.
 

Offer for Sale
Historically, the most popular form of new issue in the UK for companies bringing their securities to the stockmarket for the first time. The company offers its shares to the general public.

Offer Price
See Ask Price.

Office of Fair Trading (OFT)
Government department which advises the Secretary of State for Trade and Industry on whether or not a proposed takeover should be referred to the MMC for full investigation.

Open Economy
A country where there are no restrictions on trading with other countries.

Open Ended
Type of organisation such as Unit Trusts or OEICs which can expand without limit.

Open Ended Investment Company (OEIC)
New corporate structure introduced in 1997. It is a form of collective investment vehicle.

Open Outcry
Trading system used for options and futures. All participants meet on the floor of the Exchange and call out details of bargains they would like to complete hoping that one of the others will respond.

Opening
Undertaking a transaction which creates a position.

Option
A derivative instrument which provides the buyer of it with the right to do something which the seller of the option is obliged to do.

Order driven
Dealing system where firms match bargains.

Oversubscribed
Circumstances where people have applied for more shares than are available in a new issue.
 

Panel on Takeovers and Mergers (PTM)
A non-statutory body comprising City institutions which regulates take-over activities.

Par Value
See Nominal Value.

Personal Equity Plan (PEP)
Investment scheme whereby investors buy shares through a PEP manager; all profits and dividends being tax free.

Personal Investment Authority (PIA)
SRO created in 1994 to focus on the needs of retail investors. It has now taken over the role of FIMBRA and LAUTRO whose members have applied to join PIA.

Placing
Procedure used for new issues where a securities house contracts its own clients to offer them stock. It is almost always used for new issues of eurobonds and for equities on the London Stock Exchange more so since January 1996 when restrictions on their use were removed.

Price/earnings (p/e) Ratio
The share price of a company divided by its earnings per share. A high p/e ratio implies that the company is well thought of for its future prospects.

Primary Dealer
See Gilt Edged Market Maker.

Primary Market
The function of a Stock Exchange in bringing securities to the market.

Principal Trading
When a member firm of the London Stock Exchange buys stock from or sells stock to a non-member.

Privatisation
Process whereby the government puts state owned industries into the private sector, eg, water, electricity. Usually involves an offer for sale of its shares.

Prospectus
See Listing Particulars.

Proxy
Appointee of a shareholder who votes on his behalf at company meetings.

Public Sector Borrowing (PSBR)
Shortfall of government revenue over expenditure, which it needs to borrow.

Put Option
Option providing its buyer with the right to sell an item at an agreed price.
 

Quoted
Colloquial term for a security that is traded on the Stock Exchange.

Quote Driven
Dealing system where some firms accept the responsibility to quote buying and selling prices.
 

Recognised Investment Exchange (RIE)
Status required by FSA for Exchanges in the UK.

Referral
If a proposed takeover is investigated thoroughly by the MMC the procedure is that it is referred to the MMC by the Secretary of State for Trade and Industry.

Registered Title
Form of ownership of securities where the owner’s name appears on a register maintained by the company.

Registrar
An official of a company who maintains its share register.

Registrar of Companies
Government department responsible for keeping records of all companies.

Repo
Transaction in gilts, where the gilt is with a price and date fixed for its re-purchase.

Resolution
Proposal on which shareholders vote, put to them at a meeting.

Retail Price Index (RPI)
Index that shows the movement of prices in the UK.

Reverse Repo
Purchase of gilt where the price and date for its re-sale is fixed at the same time.

Rights Issue
Offer of shares made to existing shareholders.

Risk Warning
Document that must be despatched and signed by private customers before they deal in traded options.

Rolling Settlement
System used in most countries including England. Bargains are settled a set number of days after being transacted.

Running a Book
Firms who are buying and selling stock for themselves hoping to profit from price differences are said to run a book in that stock.
 

Scaling Down
When a new issue is over subscribed, the procedure whereby applicants receive a proportion of the number of shares for which they applied.

Scrip Issue
See Bonus Issue.

SEATS Plus
An order-driven system used on the London Stock Exchange for securities which do not attract at least two firms of market makers and for all AIM securities.

Secondary Market
Market place for trading in existing securities. The price at which they are trading has no direct effect on the company’s fortunes but is a reflection of investors’ perceptions of the company.

Securities
Bonds and equities.

Securities House
General term covering any type of organisation involved in securities although usually reserved for the larger firms.

Securities and Futures Authority (SFA)
SRO responsible for regulating securities and futures firms.

Securities and Investments Board (SIB)
Former name of the Financial Services Authority.

Selective Marketing
See Placing.

Self Regulating Organisations (SROs)
Bodies which receive their status from FSA and are able to regulate sectors of the financial services industry. Membership of an SRO provides authorisation.

SEQUAL
The checking system used for international equities.

Short-dated Gilt
Gilts due to be redeemed within the next seven years.

Short Selling
Selling stock that you do not own.

Short Termism
Allegation made against fund managers that they expect prices of shares in which they have invested to rise quickly and are not willing to exert influence on management to improve corporate performance but prefer to sell the shares.

Soft Commodities
Description given to commodities such as sugar, coffee and cocoa. Most are traded through LIFFE since its merger with the former London Commodity Exchange (LCE).

Spread
Difference between a market maker’s buying (bid) and selling (ask) price.

Stag
Someone who applies for a new issue of shares intending selling them (at a profit) as soon as secondary market dealings start.

Stamp duty
Tax at ½% on purchase of equities.

State-controlled Economy
Country where all aspects of activity are controlled by the government.

Sponsored Member
Type of CREST member whose name appears on the register but has no computer link with CREST.

Stock Exchange Automated Quotation System (SEAQ)
Electronic screen display system through which market makers in equities display prices at which they are willing to deal.

Stock Exchange Electronic Trading System (SETS)
Computerised matching system introduced by the LSE in October 1997 for dealing in FT-SE 100 stocks.

Stockmarket
Description usually given to the London Stock Exchange.

Stripped Bonds (Strips)
Bonds where the rights to the interest payments and eventual repayment of the nominal value have been separated from each other and trade independently. Facility introduced for gilts in December 1997.

Subsidiary
A company, at least 50% of which is owned by another company. See Holding Company.

Swap
Arrangement where two borrowers, one of whom has fixed interest and one of whom has floating rate borrowings, swap their commitments with each other. A bank would arrange the swap and charge a fee.

Syndicate
A group of securities houses who are placing a new issue of eurobonds under the authority of a lead manager.
 

Takeover
When one company obtains more than 50% of another company’s shares.

Term Insurance
Insurance that pays the insurer’s beneficiary on death. There is no savings element.

Tax Exempt Special Savings Account (TESSA)
Scheme whereby certain savings plans will generate interest, free of income tax.

Three-tier Approach
System devised by FSA to be more flexible than the original regulatory framework. It comprises 10 general principles as Tier 1, 40 core rules as Tier 2 and detailed rules and codes of conduct written by individual SROs as Tier 3. This System ceased in November 1994 with the de-designations of Tier 2 rules.

Tied Agent
An individual or business which only sells one company’s products (such as life assurance) making no pretext of offering independent advice on all the products available.

Touch
The best prices available for a stock on the stockmarket, looking at all market makers.

Tracker Fund
See Index Fund.

Tradepoint
RIE established in 1995 as a rival to the London Stock Exchange. Uses an order-driven matching system.

Transfer Form
Document which owners of registered documents must sign when they sell the security. Not required where a book entry transfer system is in use.

Treasury
Arm of Government responsible for all financial decisions and regulation of the financial services sector.

Turn
See Spread.

Two-way Price
Simultaneous prices in a stock quoted by a market maker, the lower at which he is willing to buy and the higher at which he is willing to sell. Circumstance when people have applied for fewer shares than are available in a new issue.

Undersubscribed
Circumstance when people have applied for fewer shares than are available in a new issue.

Underwriters
Institutions which agree to take up shares in a new issue if it is undersubscribed. They will charge an underwriting fee.
 

Unit Trust
A system whereby money from a number of investors is pooled together and invested collectively on their behalf. Each owns a unit (or number of them) the value of which depends on the value of those items owned by the trust.
  

Warrant
Security that gives the owner the right to force the company to issue new shares at an agreed price at a future date.

Weekly Official Intelligence (WOI)
Weekly publication by the London Stock Exchange which provides (amongst other things) a summary of company announcements during that week.

Writer
A person who sells an option in order to receive a premium for running the risk of being exercised against.
  

Yellow Book
See Listing Rules.

Yield
Income return from an investment.