Advising
Giving advice to investors on specific investments with a view to it being acted upon
Alternative Investment Market (AIM)
The second tier or junior market established by the London Stock Exchange in 1995 to provide trading facilities in the shares of smaller companies.
American Depository Receipt (ADR)
A negotiable receipt issued by a US bank or trust company certifying that shares of a non-US company are on deposit with it. The usual way for the shares of non-US companies to trade in the USA.
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.
Appointed Representatives
Individuals or companies acting on behalf of an authorised person who take responsibility for everything done by the representative. The representative is exempt from obtaining his own authorisation. Also individuals or firms representing a single investment product provider. Can only advise on the investments offered by that particular product provider.
Approved Persons
Individuals undertaking controlled functions and who therefore require approval from the FSA. There are 27 categories.
Arranging
Having some positive role in helping to promote an investment transaction.
Asset
Something that has earning potential or value. See Current Assets and Fixed Assets.
Authorisation
Status required by the Financial Services & Markets Act 2000 for any firm that wants to conduct investment business. It is achieved by direct application to the FSA.
Authorised Person
A firm authorised by the FSA to conduct investment business in the UK.
Back Office
The settlement, processing and accounting departments of a bank or broking firm. Now more usually referred to as Operations.
Bear Market
A market in which prices are falling, and sellers are more predominant than buyers. Usually refers to equity markets.
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. Affects the specification of derivatives based on the underlying share.
Broker/Dealer
Firm that operates in dual capacity in the securities marketplace : as principal trading for it's own account and as broker representing clients on the market.
Bull Market
A market in which prices are rising, and buyers are more predominant than sellers. Usually refers to equity markets.
Capital Gains Tax (CGT)
Capital gains tax is payable by the individual taxpayer at a rate equivalent to the taxpayer’s highest rate of income tax on gains arising from the sale of securities or other chargeable assets.
Central Securities Depository (CSD)
An organisation that holds securities in either immobilised or dematerialised form thereby enabling transactions to be processed by book entry transfer. Also provides securities administration services.
City Code on Takeovers and Mergers (The)
Principles and rules written by the panel to regulate conduct during a takeover, also known as the Blue Book. The code comprises of 10 general rules and around 38 detailed rules.
City Panel
Panel on Takeovers and Mergers: A non-statutory body which enforces the Takeover Code and Substantial Acquisition Rules.
Clearing
The centralised process whereby transacted business is recorded and positions are maintained.
Clearing House
A company that acts as central counterparty for the settlement of on-exchange transactions(also some OTC transactions ie, Swap clear). The clearing organisation acts as the guarantor of the performance and settlement of contracts.
Client
All people with whom an authorised person does business. Comprises market counterparties and customers.
Controlled Functions
Activities for which individuals require approval from the FSA. There are 27 categories.
Corporate Action
One of many possible capital restructuring changes, or similar actions taken by the company, which may have an impact on the market price of its securities, and which may require the shareholders to make certain decisions.
Custodian
An institution holding securities in safekeeping for a client. A custodian also offers different services to its clients like settlement, portfolio services etc, and can include services related to derivatives where the custodian settles margin calls etc on trades with the client’s broker.
Custody
The storing and safekeeping of securities together with maintaining accurate records of ownership. The term also implies management of those securities such as the collection of dividends.
Customer - Intermediate
A customer who is assumed to understand the workings of the investment world and therefore receives less protection from the Conduct of Business Rules than a private customer.
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
A customer who is assumed to be financially unsophisticated and therefore receives more protection from the Conduct of Business Rules.
Data Protection Act 1998 (DPA)
Legislation governing how data may be held and rights of access to it.
Dealer
Individual or firm that acts as principal in all transactions, buying for his own account.
Depositary (Depository)
An organisation such as a bank or insurance company designated as an authorised person in whom property of a UK OEIC is entrusted. Broadly similar to a trustee of a unit trust.
Derivative
A financial instrument whose value is dependent upon the value of an underlying asset.
Designated Investment Exchange (DIE)
Overseas exchange recognised by the Financial Services Authority as having sufficiently similar standards (efficiency, transparency, liquidity, etc) to those of Recognised Investment Exchanges.
Designated Professional Body (DPB)
Status granted by the FSA to organisations such as the Law Society and Institutes of Accountants. Their members are authorised through this membership to conduct a limited amount of investment business.
Discretionary Manager
Portfolio manager who has the power to make investments without the customer’s prior approval.
Dividend
Distribution of profits made by a company to its shareholders if it chooses to do so.
Emerging Markets
Often a non-industrialised country with low or middle per capital income, as published annually by the World Bank, undeveloped capital market (i.e. the market represents only a small portion of their GDP). Investors sometimes prefer to use derivatives that give an exposure to shares, commodities, interest rates or currencies on the emerging market but which are traded on established derivative markets or off-exchange with banks.
Endowment Mortgage
Form of mortgage where the lender is only paid the interest on the loan and a separate endowment policy is taken out to provide sufficient funds to repay the loan on maturity.
Equity
A common term to describe stocks or shares.
European Union EU
Political union of the following: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Holland, Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom.
Exchange
Market place for trading futures and options, the derivative exchange develops markets and lists its own products as well as setting out the membership criteria, rules and regulations for trading.
Exchange-Traded Derivatives (ETD)
ETD is the common term, which is used to describe Exchange Traded Derivatives, which are the standardised products. It also differentiates products which are listed on an exchange as opposed to those offered Over-The-Counter.
Execution-Only
Instructions to buy or sell, given directly by the investor to the broker, without receiving any advice.
Extraordinary General Meeting (EGM) A meeting of shareholders, which is held by a company on an ad hoc basis for a particular purpose. A period of notice (usually 20 business days) must be given.
Factfind
The questionnaire created by most financial advisers and sellers of insurance products or packaged products to find out the details about a prospective client. Information from it provides the basis for structuring suitable advice.
Financial Ombudsman Service (FOS)
Facility established to hear complaints by customers and make awards where appropriate. Can award a maximum of £100,000.
Fit and Proper
Under Financial Services Act everyone conducting investment business must be a 'fit and proper person'. The Act does not define the term, a function that is left to the regulators such as the FSA.
Front Office
The term used for the Trading or Dealing room.
FSA Handbook
FSA’s requirements including rules and principles are all set out in its handbook.
Fund
Used to describe a collective investment scheme, into which investors’ monies are pooled and managed as a single entity with a common investment aim.
Future
An agreement to buy or sell an asset at a certain time in the future for a certain price.
General Principles
11 fundamental principles of business written by FSA to apply to all investment businesses.
Gilts
Abbreviated name for gilt edged stocks which are UK government issued fixed interest securities or index-linked securities.
Global Custodian
Institution that safekeeps, settles and performs processing of income collection, tax reclaim, multicurrency reporting, cash management, foreign exchange, corporate action and proxy monitoring etc, for clients' securities in all required marketplaces.
Government Bonds
Bonds issued by a government to finance its borrowing requirements.
Gross Domestic Product (GDP)
Measure of a country’s output which calculates the value of goods produced within that country.
Hedge Fund
A fund established to allow investors to transfer risk, either by offsetting it or taking an extra risk in return for expected higher returns.
Hedging
A trading method, which is designed to reduce or mitigate risk. Reducing the risk of a cash position in the futures instrument to offset the price movement of the cash asset. A broader definition of hedging includes using futures as a temporary substitute for the cash position.
High Net Worth Individuals
Specifically, individuals who have a current certificate signed by their accountant or employer stating that their previous year’s income was not less than £100,000 or that their net assets (excluding their home) throughout that time were not less than £250,000; and who have signed a statement acknowledging their status and their ability to receive exempt financial promotions in respect of securities in unlisted companies.
Home State Regulation
Under the Investment Services Directive (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.
Income
Dividends or distributions received from an investment.
Income Tax
The tax that is charged on all income as defined by tax laws. Includes, as well as income from employment, dividends, interest, rental income, pension receipts and retirement annuities receipts.
Independent Financial Adviser (IFA)
Adviser not employed by a single firm who can select from all companies’ products i.e. pensions, unit trusts etc when providing ‘best advice’ to their client.
Individual Savings Account (ISA)
Introduced in April 1999 and have taken the place of Personal Equity Plans (PEPs) and TESSAs. An ISA is a scheme of investment with no tax liability on income or capital gains arising from assets held within the scheme. It is not an investment in itself, but a wrapper put around one or more investments and may comprise components which fluctuate in value eg. stocks and shares.
Inflation
A persistent rise in prices in an economy.
Inheritance Tax (IHT)
The tax that is levied on a person’s estate after their death.
Inland Revenue
The government department responsible for the administration and collection of tax in the UK.
Inter-Dealer Broker (IDB)
A member firm of the London Stock Exchange authorised by the Exchange to act as an intermediary between two market makers who wish to buy and sell stock, but wish to remain anonymous.
Intermediate Customer
Type of customer who is assumed to understand the working of the business and financial world and to whom only limited protections are provided in their relationship with investment businesses. Could be large corporate customers or individuals with expertise.
Investment
General meaning is any product in which money is spent with the aim of receiving more money back at a later date. FSMA 2000 defines it in terms of specified activities, which are regulated by the Act.
Investors Compensation Scheme
Scheme run by FSA to compensate private customers in the event of the default of the authorised investment business through whom they invested.
Joint Money Laundering Steering Group (JMLSG)
Group representing 14 trade bodies which has produced guidance notes on the standards expected to comply with the Money Laundering Regulations.
Key Features Document (KFD) A document drawn up for all potential investors explaining the features of a packaged product, eg, the objective of the fund, the risks, the effect of charges, containing essential information to enable individuals to determine whether they should invest and what their rights are.
Listed Money Market Institution
An institution, which undertakes transactions in the money markets and satisfies the criteria laid down by the FSA for listing. They are exempt from authorisation with respect to their money market activity.
Listing
Status applied for by companies whose securities are then listed on a stock exchange, eg, the London Stock Exchange and available to be traded.
Listing Rules
Rule book for listed companies which governs their behaviour.
Managing
Buying and selling investments for customers’ portfolios either on a discretionary or advisory basis.
Market Abuse
Offence introduced by FSMA 2000, which is enforced by the FSA and for which can apply to all UK markets. There are three possible offences: abusing information, misleading the market and manipulating the market.
Market Maker
A trader who works for an organisation such as an investment bank. They quote bids and offers in the market and are normally under an obligation to make a price in a certain number of contracts. They create liquidity in the contract by offering to buy or sell.
Member Firm
A firm that is a member of a stock exchange. A London Stock Exchange (LSE) member firm is one that acts either in a single or a dual capacity. Also see Broker Dealer.
Merchant Bank
A (now somewhat old fashioned) term for a UK bank which is primarily involved in matters such as portfolio management, bills of exchange acceptance, mergers etc, rather than retail banking business.
Mergers and Acquisitions (M&A)
Divisions of securities houses or merchant banks responsible for advising on takeover activity. Usually work with the corporate finance department and is often kept as a single unit.
Model Code (for Directors’ Dealing)
Part of the Listing Rules 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 Laundering
The process where criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities and to legitimise these proceeds by introducing them into the mainstream of financial activities.
N2
Midnight 30 November 2001. Date on which the FSA assumed full powers and previous regulators ceased to exist.
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 Savings Certificates
Certificates which are held for five years by an investor before being redeemed. No interest is paid over the five years. On redemption, all the proceeds are free of tax. If the certificates are redeemed early, the proceeds are tax free, but the effective interest rate achieved is fairly low. If the certificates are not redeemed after five years, they continue to accrue tax free interest but again at a fairly low rate of interest (referred to as the general extension rate). They are issued by the UK government’s National Savings department.
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.
Official Listing
Companies granted an official listing for their securities by the Listing Authority (now part of the FSA) can issue shares to the public and have them traded in the secondary market under Stock Exchange rules. The official listing enables the company to raise large sums of money and enables investors to trade shares in the company easily. A company must comply with strict regulatory requirements designed to protect investors in order to obtain a listing. Only relatively large companies will seek one. See also Alternative Investment Market.
Open Outcry
The style of trading whereby traders face each other in a designated area such as a pit and shout or call their respective bids and offers. Hand signals are also used to communicate. It is governed by exchange rules.
Option
An option is in the case of the buyer: the right, but not the obligation, to take (call) or make (put) for delivery of the underlying product and in the case of the seller: the obligation to make or take delivery of the underlying product.
Order-Driven Market
A stock market where brokers acting on behalf of clients match trades with each other either on the trading floor of the exchange or through a central computer system.
Over-The-Counter (OTC)
A one-to-one agreement between two counterparties where the specifications of the product are completely flexible and non-standardised. A negotiated trade where counterparty risk is potentially an issue.
Packaged Products
Investments, which evolve from a range of other investments such as life assurance, pensions and unit trusts.
Part IV Permission
Permission granted by the FSA, under Part IV FSMA 2000, to allow firms to conduct particular types of investment business.
Permitted Person
Someone who has applied to the FSA under Paragraph 23 of Financial Services Authority rules for permission to carry out deals in the course of non-investment business (eg, treasury department of conglomerate).
Primary Market
Initial launch of a company’s shares when they first become available for trading on the Stock Market.
Public Offer
A flat-rate levy on agency bargains, which is collected to finance the Panel on Takeovers and Mergers (POTOM).
Quote-Driven
Dealing system where some firms accept the responsibility to quote buying and selling prices, moving these prices to stimulate business.
Readily Realisable Investments
These are packaged products, or securities listed on an EEA exchange, or securities 'regularly traded' on one of those exchanges or any Recognised Investment Exchange or Designated Investment Exchange.
Recognised Clearing House (RCH)
Status granted by the FSA to organisations that it believes are acceptable to provide clearing and settlement facilities in the UK. LCH and CRESTCo are the only ones with the status.
Recognised Investment Exchange (RIE)
Status granted by FSA to UK exchanges, which it believes, are acceptable in the quality of market services they provide.
Recognised Overseas Investment Exchange (ROIE)
An overseas exchange, which can operate as an exchange in the UK.
Registrar
A quoted company usually appoints a registrar to manage its shareholder records. This company is responsible for the administration of the share register, distributing shareholder information on behalf of the company and paying dividends to shareholders.
Regulated Activities
The activities (investment business), which must be regulated under the provisions of FSMA 2000. The legislation describes a range of specified activities in a range of specified investments.
Regulatory Decisions Committee (RDC)
Committee of FSA responsible for most enforcement matters.
Rights Issue
Offer of shares made to existing shareholders. As a corporate action it may change the strike price and number of shares on which an option or share future is based.
Risk
Risk is best defined as the degree of exposure to change of a portfolio. This may be exposure to a change in the market (known as market risk) or to movement in a specific stock (specific risk). Systemic risk is defined as exposure to the stability of the financial system. There are also risks associated with currency and interest rate exposure.
Savings Certificates
National Savings product, which provides a tax-free sum. A lump sum investment is required and maximum benefits are obtained if the certificate is held for five years.
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
Can mean any instrument in the markets but generally refers to bonds and equities.
Settlement
The fulfilment of the contractual commitments of transacted business.
Share Capital
The figure on the balance sheet representing the nominal value of the shares that have been issued.
Shareholder
The owner of a share in a company - the part-owner of a company.
Soft Commodities
Description given to commodities such as sugar, coffee and cocoa, traded through LIFFE since its incorporation of the former London Commodity Exchange (LCE).
Specified Activities
The range of activities, which if undertaken in specified investments, must be regulated under the provisions of FSMA 2000.
Specified Investments
The investment products specified in FSMA 2000 for which providers of specified activities in them must be regulated.
Stock Exchange
An organisation that provides facilities for companies and governments to issue securities to raise money and for those securities to be traded among investors.
Takeover
When one company obtains more than 50% of another company’s shares.
Tied Agent
An individual or business, which only sells one company’s products (such as life assurance) rather than advising independently on all the products available.
Trader
An individual who buys and sells securities with the objective of making short-term gains.
Trust
An arrangement whereby people called trustees hold property for the benefit of others called the beneficiaries.
Trust Deed
The legal document drawn up between the trustees and the managers containing basic details of the constitution of a unit trust.
Two Way (Customer) Agreement
A customer agreement which is sent to the customer and to which the customer has signified his assent in writing. The firm must be satisfied that the customer has a proper opportunity to consider its terms. Assent could be in the form of a copy of the agreement signed by the customer and returned to the firm or a signed letter of assent.
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.
Undertakings for Collective Investment in Transferable Securities (UCITS)
A European Directive governing ‘Undertakings for Collective Investment in Transferable Securities’. It is designed to harmonise the operation of collective investment schemes, which includes authorised unit trusts throughout the European Community, with a view to facilitating the sale of funds in other member states.
Underwriting (Insurance)
The procedure of assessing a risk and deciding whether to accept it and at what premium.
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. Unit trusts can use derivatives subject to regulatory directives and trust mandates.
Warrant
An option which can be listed on an exchange, with a lifetime of generally more than one year.
Will
A written document signed by the testator and witnessed giving instructions as to the distribution of their estate on death.
Withholding Tax (WHT) Tax deducted from dividends on investments, which are paid to foreign investors. This can be claimed back if there is a Double Taxation Agreement in place between the two countries.
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.
Click here to access the Glossary of Professional Bodies.
For more financial definitions, take a look at the Securities & Investment Institute's Dictionary of Securities and Investment Terms (access restricted to SII members only).
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