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CREDIT DEFAULT SWAP

This is a contract that allows someone like a fund manager to in effect insure an asset – say a bond – against default. This may be preferable to selling the bond if it is illiquid and/or difficult to replace later and/or may trigger a tax liability on sale. The fund manager pays a premium …

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CHILD TRUST FUND

A Child Trust Fund is a long-term tax-free savings account for a child if they were born between 1 September 2002 and 2 January 2011 and were living in the UK. They have now been replaced by Junior ISAs (see JISA) for new applicants. Under the new JISA rules you can invest up to £4,128 …

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COLLECTIVE INVESTMENT SCHEME

This term describes an investment vehicle that pools the funds of many investors together and invests them collectively via a fund manager. Unit trusts, investment trusts and exchange traded funds are all examples of collective investment schemes. READ MORE

CREDIT SPREAD

One way to measure risk with a fixed income security is to look at the gap between the yield to maturity offered by a corporate fixed income security and that offered by a government security with a similar maturity – gilts in the UK and Treasuries in the US. For example if a corporate bond …

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CLEARING HOUSE

Once a buyer and seller have agreed a deal, clearing is the process that ensures neither of them defaults while they are organising settlement of the trade – the point where cash moves from the buyer to the seller and the relevant securities move in the other direction. Clearing houses take responsibility for ensuring that …

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CALL OPTION

A contract that gives the person who buys it (the “holder”) the right, but not the obligation, to buy an asset (perhaps 1,000 shares) at a fixed price (“the strike”) on or before a specified date. The further the price of the asset is above the strike price at the point the option is exercised, …

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CREST MEMBER

Crest is the settlement system, owned by Euroclear that is responsible for the legal transfer of securities from a seller to a buyer. Brokers are members of CREST but a client can also apply to become one separately. This means that they can legally hold shares in their own name rather than that of their …

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CONTRARIAN INVESTOR

This is someone who believes that the market sometimes misprices shares and leave opportunities for anyone prepared to not follow the herd. They look for shares that are overlooked by mainstream analysts and therefore cheap or have been pushed too high and are therefore expensive. They then do the opposite of most investors and buy …

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CAPITAL ADEQUACY

Regulated firms such as banks are required to hold a minimum amount of capital as a rainy day fund in the hope that it stops them going bust too easily. Regulators set the level of this minimum capital and impose various “capital adequacy” tests that firms have to pass. A typical test might involve comparing …

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CUSTODY

This can be summarised as the safeguarding of a client’s assets. Shares, for example, are registered securities, just like property, so it is important that the right legal owner ends up on the right register at the right time. With shares this can all be done electronically however with bearer securities, such as Eurobonds, the …

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