Sale and leaseback
Sale of an asset to a financial institution that then leases it back to the seller. It is used by companies to raise capital and may provide tax benefits.
Quantitative analysis of the financial impact on an investor’s assets and liabilities of a defined set of economic and financial conditions, usually projected over the medium term. (See also asset/liability modelling.)
S&P 500 index
US large cap stock market index maintained by Standard & Poor’s. Its 500 constituents represent over 80% of US equities by market capitalisation. S&P Composite 1500 Index Combination of the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indices. The 1,500 constituents represent 90% of US equities by market capitalisation.
Investment whose value is expected to remain relatively stable during periods of high market volatility. For example, during the credit crunch of 2008, there was a “flight to quality” when many investors viewed government bonds as a safe haven from corporate debt of questionable credit quality and for which there was perceived to be a high risk of default.
Employer that sets up and funds a pension plan for its employees. Also called plan sponsor.
Examination of various securities, usually through computer models, to identify certain predetermined factors such as valuations, earnings, liquidity, etc., with a view to the exclusion of those securities not meeting the criteria from an investment portfolio.
Payment of dividends in the form of additional shares rather than cash.
See bonus issue.
See stamp duty reserve tax.
See Stock Exchange Automated Quotations System.
See Securities and Exchange Commission.
Market in which securities are traded after they have been issued. (See also primary market.)
Purchase of a holding in an existing private equity fund from an investor who needs to sell. It can often be bought at a significant discount.
Stock markets are divided into sectors which comprise companies from the same industry — for example, telecommunications sector, oil sector, media sector, etc.
Long-term change attributable to an important fundamental shift in the economy or business environment that is not related to seasonal or cyclical factors. For example, industrialisation, globalisation. (See also cyclical trend.)
Bond for which the issuer has set aside assets as collateral to ensure principal repayment and encourage timely interest payments.
Securities and Exchange Commission (SEC)
Regulatory authority for the US securities industry.
Process where one investor lends stock to another investor. The borrowing investor has to issue collateral to the stock lender and usually borrows stock to engage in “short selling” aiming to profit from falling stock prices. The lending investor usually lends the stock to gain a return in the form of interest received from the borrower.
Passive fund managers may engage in stock lending and use the earned interest to help regulate their fund returns so that they are more in line with benchmark returns.
Process of creating a tradable financial instrument by combining other non- tradable, usually loan-based assets and marketing them to investors.
Shares in property companies or in real estate investment trusts (REITs).
a.Term for fixed interest stocks or ordinary shares or, in general terms, for any tradable financial instrument giving title to property or claims on income payments.
b.Assets or collateral pledged to support debt obligations.
Investment portfolio which is managed on behalf of a single client and has separately identifiable assets. (See also pooled fund.)
Self-invested personal pension (SIPP)
Investment vehicle that allows an individual to save for retirement by picking his or her own investments. The SIPP is essentially a UK government-approved tax wrapper which allows the individual to take advantage of tax savings on profits and income earned on his or her investments.
Debt issued by a company that has to be repaid before all other creditors in the event of the company’s liquidation. Senior debt is usually secured by providing some form of collateral assets.
Analysis using mathematical tools of the extent to which small changes in a particular variable, such as the weighting in a certain security or market, may impact on portfolio return or volatility.
Payment or collection of proceeds after trading a security. Settlement usually takes place some time after the deal and price are agreed.
See ordinary share.
Mechanism that prevents investors who wish to vote their shares at annual meetings from trading for a defined period of time prior to the meetings.
Company’s repurchase of its own shares. Typically increases the market price of the remaining shares because each remaining share now represents a larger claim on earnings and assets.
Public or confrontational approach to shareholder engagement. In addition to shareholder engagement, pressure can be exerted on companies through strategic divestment or attempts to influence public opinion.
Investment in companies whose practices conform with Islamic law.
Statistical measure of reward per unit of risk. Developed by William F. Sharpe, it is calculated as the excess return over the risk-free return divided by the standard deviation of the excess returns. (See also Sortino ratio.)
Measure of the degree to which a yield curve has moved upwards or downwards, across all maturities, without changing its overall curvature and slope.
Long/short fund with a net short position and therefore positive exposure to a decrease in the underlying market.
Situation in which an investor sells a stock that the investor does not own. The investor is expecting the stock value to fall, thereby making a profit when the position is closed at the lower price. (See also long position.)
short-term investment fund Alternative to a cash account which holds short-term, low risk investments. Often
used by investors holding large cash sums and have not decided where to invest these funds for the longer term.
Statement of investment arrangements. See SIP.
Legal structure of investment vehicle that is common in some western European countries, for example, Luxembourg, Switzerland, Italy, Spain, Belgium and France. A SICAV is open-ended, which means that new investors into the scheme are not required to buy units from existing investors. Instead, new units will be created which investors may purchase.
Stock of a company that provides goods or services that the investor has deemed unethical. Common examples include the stocks of companies that are involved in the production or provision of tobacco, alcohol, armaments, pornography or gaming facilities.
a.Statement of investment principles.
b.See UK Society of Investment Professionals.
See self-invested personal pension.
See structured investment vehicle.
Describes asymmetry from the normal distribution in a set of statistical data. Skewness can come in the form of “negative skewness” or “positive skewness”, depending on whether data points are skewed to the left (negative skew) or to the right (positive skew) of the data average.
Small cap stock
Stock with a market capitalisation of among the smallest within a market, although the definition of what is small is to some extent arbitrary. In the UK, it is usually defined as a stock with a capitalisation below that of the top 350 companies in the UK as represented by the FTSE Small Cap Index. (See also large cap stock, mid cap stock.)
Socially responsible investment (SRI)
Idea and practice of investing based on ethical criteria, whereby companies contribute to the welfare of society.
(See also ethical investment.)
Society of Investment Professionals (SIP)
UK member society of the Association for Investment Management and Research (AIMR), an international non-profit organisation of investment practitioners and academics. SIP oversees the Investment Management Certificate.
Arrangement whereby a fund manager directs commissions to a broker which are then used to purchase goods or services from a third party for the benefit of the fund manager. There are detailed FSA rules on the types of goods and services that may be softed.
Currency of a country that is emerging or less developed with political and economic uncertainty. These countries tend to have currencies with volatile exchange rates. (See also hard currency.)
Risk that an investor’s assets will be insufficient to meet its liabilities in the future. Used in the case of UK defined benefit pension plans, where liabilities are calculated as the costs of securing annuities with an insurer in the event of a plan wind-up. In the case of insurance companies, usually by reference to the statutory
Modification of the Sharpe ratio. Calculated as the difference between the actual return and the risk-free return, divided by the downside risk. Here, downside risk is a measure of deviation of historical returns falling below a specified target rate of return. (See also Sharpe ratio.)
Bonds issued by a government.
Where an investment manager’s mandate is restricted to a specific asset class or sectors, for example, UK equities. Internationally, there is a strong trend towards specialist management (away from a balanced or multi-asset approach). (See also balanced management, multi-asset management.)
Investment in highly risky securities with the expectation of making a profit from price increases. In some instances, the speculator’s decisions are not based on sound investment principles.
Spot exchange rate
Exchange rate for immediate delivery. (See also forward exchange rate.)
Spot interest rate
Interest rate quoted on a day for loans made that day.
Present market price of a commodity, currency or investment instrument.
Difference between the buying and selling price or, in the case of corporate bonds, between the gilt yield and the corporate bond-specific yield.
Regulated activity in which wagers are made on the range of possible outcomes of chosen events. The spread-better makes a profit or loss based on the difference between the actual outcome and the spread-better’s prediction.
See socially responsible investment.
See Style Research Portfolio Analyzer.
UK accounting standard for the disclosure of pension costs. Now replaced by FRS17.
Period characterised by low economic growth and high unemployment, and accompanied by increasing inflation.
Money purchase pension arrangements principally designed for people without access to employer-sponsored pension arrangements and provided by commercial financial services companies. Stakeholder pension schemes must satisfy a number of minimum government standards to ensure security, flexibility and value for money for members.
Tax paid (in the UK and some other countries) by the purchaser on the transfer in beneficial ownership of certain types of asset — for example, UK equities and property. Stamp duty depends upon there being a document which can be stamped. For that reason, stamp duty reserve tax was introduced in the UK in 1986 to cater for paperless transactions in shares. (See also stamp duty reserve tax.)
Stamp duty reserve tax (SDRT)
Tax paid on the transfer in beneficial ownership of certain types of asset, for example, units in UK unit trusts which invest in UK equities or property. (See also stamp duty.)
Standard & Poor’s (S&P)
Independent rating agency which assesses the creditworthiness of companies and their debt. The highest rating awarded is AAA, and the lowest is D. Other well-known rating agencies are Moody’s and Fitch.
Standard deviation of return
Statistical measure of the historical variability of returns relative to their mean (or expected return). An indicator of the degree to which an asset’s or portfolio’s returns deviate over a specific period in absolute terms or relative to another asset or benchmark portfolio. (See also mean, expected return.)
Statement of investment principles (SIP)
Statement setting out the investment policy being followed by a UK pension plan. Under the Pensions Acts 1995 and 2004, it is a legal requirement to have a SIP and keep it up to date. Regulations set out a minimum level of content, and the Myners Code recommends further additions to the SIP. (See also Myners Code, Pensions Act 1995.)
Finance used to form a completely new company that aims to develop a new and unproven product or service.
Sterling Overnight Interbank Average Rate (SONIA)
An index that tracks Sterling overnight funding rates for trades that occur in off hours. It is the rate that underpins the calculation of an interest rate curve used for discounting sterling OTC derivatives that are transacted under “clean CSAs”. It is also the required rate of interest to be paid to counterparties on any cash received as collateral to support derivative positions.
See short-term investment fund.
Statistical technique used in asset/liability modelling to estimate the probability of certain events occurring. It does this by simulating many possible outcomes for the factors affecting the assets and liabilities of the investor. A large number of outcomes are generated in order to derive a mean expected outcome and a statistical distribution of outcomes. (See also asset/ liability modelling.)
Market for trading in securities.
Stock Exchange Automated Quotations (SEAQ) system
Screen-based trading system that shows bid and offer price quotations of all market makers in the UK.
Lending of stock from one investor to another that entitles the lender to continue to receive income generated by the stock plus an additional payment by the borrower. There is potential risk as the lender may be exposed if the borrower defaults, but the exposure is controlled through high quality collateral (e.g. gilts) provided by the borrower that is marked to market daily. Investors may wish to borrow stock to cover short positions, for example. (See also mark-to-market, short position.)
Selection by investment managers of a portfolio of stocks in a particular market or sector, usually based on technical or fundamental analysis and usually with the aim of achieving a return superior to the overall market or sector or benchmark thereof.
Risk arising from a single stock holding, usually where the holding represents a position against a benchmark, in which case the term refers to risk relative to the benchmark.
Purchase or sale of call and put options for the same underlying asset with the same expiry date and strike price.
Purchase or sale of call and put options with the same expiry date but with different strike prices.
Strategic asset allocation
Benchmark allocation between the main asset classes with the aim of meeting the investor’s risk and return objectives. Also known as investment strategy or strategic allocation and sometimes prefixed with “long-term”. (See also benchmark, investment strategy.)
Price at which the holder of a call (put) option has the right to buy (sell) the underlying security.
Separately Traded Registered Interest and Principal Securities. Instruments created when the components of a bond (the principal and the coupons) are separated and traded individually. (Converts a coupon-paying bond into a series of zero coupon bonds.) (See also coupon, principal, zero coupon bond.)
Structured investment vehicle (SIV)
Pooled investment vehicle which attempts to profit by exploiting differentials in short- and long-term interest rates. SIVs are often set up by banks as independent units which do not impact directly on the bank’s balance sheet. In the stock market crash of 2008, SIVs became unpopular when it was revealed that they had been heavily invested in non-transparent asset-backed securities.
Approach followed by an active investment manager in selecting stocks. (See also growth investor/manager.)
Tendency of a portfolio manager to stray from its investment philosophy and process to boost short-term returns.
Style Research Limited
Firm providing tools for the analysis of equity portfolios at the stock level, which identify the particular style characteristics of the portfolio and highlight the components of risk relative to the portfolio’s benchmark.
Style Research Portfolio Analyzer
Tool developed by Style Research Limited for analysis of portfolio style bias and risk.
Debt which ranks after all other debts to be repaid if a company is liquidated. Subordinated debt will be repaid before shareholders. (See also senior debt.)
Describes loans which are considered inferior or sub-quality due to the high risk of default by borrowers. Sub-prime loans granted in the United States property market are generally considered to have sparked the credit crisis of 2008.
Bond issued by an agency sponsored by a group of national governments — for example, the World Bank.
Tendency for samples of asset class returns to include only the funds that survived until the end of the measurement period. Funds that close due to poor performance are often excluded, and sample average return is thus biased upwards.
Instrument designed to permit investors to exchange payment streams for their mutual benefit. Payments can be based on interest rates, currencies or equity returns.
Failure of the entire financial system due to a domino effect in the collapse of multiple financial institutions (e.g. banks).
See market risk.
Difference in the yield available on a generic swap and a government bond. The difference arises mainly as a result of the credit risk on the swap. (See also credit spread.)
Option granting the buyer the right, but not the obligation, to enter into an interest rate swap on pre-defined terms.
Investment which has been spread amongst several institutional backers, generally because it is too large for a single investor to provide all the finance required.
An investment which simulates the return of an actual investment, but the return is actually created by using a combination of financial instruments, such as options contracts or an equity index and debt securities, rather than a single conventional investment.
A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.
Market where previously issued securities are bought and sold.
Common or preferred stock; a bond of a corporation, government, or quasi-government body.
Selling Hedge (or Short Hedge)
Selling futures contracts to protect against possible declining prices of commodities that will be sold in the future. At the time the cash commodities are sold, the open futures position is closed by purchasing an equal number and type of futures contracts as those that were initially sold. See Hedging.
See Settlement Price.
The last price paid for a commodity on any trading day. The exchange clearinghouse determines a firm’s net gains or losses, margin requirements, and the next day’s price limits, based on each futures and options contract settlement price. If there is a closing range of prices, the settlement price is determined by averaging those prices. Also referred to as settle or closing price.
One who has sold futures contracts or plans to purchase a cash commodity. (verb) Selling futures contracts or initiating a cash forward contract sale without offsetting a particular market position.
See Selling Hedge.
The price difference between where an order is placed, and where it is actually filled. Can occur in extremely volatile markets.
A market participant who tries to profit from buying and selling futures and options contracts by anticipating future price movements. Speculators assume market price risk and add liquidity and capital to the futures markets.
Usually refers to a cash market price for a physical commodity that is available for immediate delivery.
See Nearby (Delivery) Month.
The price difference between two related markets or commodities OR the difference in the buying and selling prices for the same instrument/market/commodity at any given point in time i.e. also referred to as the ‘’bid-ask’’ spread.
The simultaneous buying and selling of two related markets in the expectation that a profit will be made when the position is offset. Examples include: buying one futures contract and selling another futures contract of the same commodity but different delivery month; buying and selling the same delivery month of the same commodity on different futures exchanges; buying a given delivery month of one futures market and selling the same delivery month of a different, but related, futures market.
Steer/Corn Ratio: The relationship of cattle prices to feeding costs. It is measured by dividing the price of cattle ($/hundredweight) by the price of corn ($/bushel). When corn prices are high relative to cattle prices, fewer units of corn equal the dollar value of 100 pounds of cattle. Conversely, when corn prices are low in relation to cattle prices, more units of corn are required to equal the value of 100 pounds of beef. See Feed Ratio.
An indicator used to measure and report value changes in a selected group of stocks. How a particular stock index tracks the market depends on its composition the sampling of stocks, the weighting of individual stocks, and the method of averaging used to establish an index.
A market in which shares of stock are bought and sold.
A variation of a stop order in which a trade must be executed at the exact price or better. If the order cannot be executed, it is held until the stated price or better is reached again.
An order to buy or sell when the market reaches a specified point. A stop order to buy becomes a market order when the futures contract trades (or is bid) at or above the stop price. A stop order to sell becomes a market order when the futures contract trades (or is offered) at or below the stop price.
The price at which the futures contract underlying a call or put option can be purchased (if a call) or sold (if a put). Also referred to as exercise price.
Supply, Law of: The relationship between product supply and its price.
The place on a chart where the buying of futures contracts is sufficient to halt a price decline.
The end of the evening session for specific futures and options markets traded at the Chicago Board of Trade.