This is a derivative that allows two counterparties to keep their existing assets but change their exposure. For example two borrowers can use an interest rate swap to move their interest payments on existing liabilities from fixed to floating. Swaps are arranged by intermediaries, typically banks, who sell swaps to achieve the type of exposure …
This is an instruction given to a broker that limits the fallout from a trade that goes wrong. For example you might buy a risky stock at £2 but set a stop loss at £1.80 and pay your broker the corresponding extra charge for doing so. Should the price fall heavily such that the £1.80 …
This is a way of measuring risk. In simple terms it looks at how widely dispersed, or spread out, points of data are in relation to the group average – a wide dispersal is reflected in a high standard deviation. Stocks with a higher standard deviation of returns than their peers (i.e. those with profits …
The two big examples in the UK are property and shares. The rate varies; on shares it is usually 0.5% but on property it depends on the value of the property being bought with the range usually anywhere from 0% to 12% for individuals buying residential property – for example, first time buyers pay no …
This is short for Small Self-Administered Scheme. These are usually set up by the directors of a company who want greater control over the investment decisions relating to their pensions. They may even want their pension plans to invest in their business. That is one of the main reasons for setting up a SSAS, which …
This is a risky way for an investor to bet on the price of a security rising or falling without ever having to buy or sell the security itself. This opens up the possibility that the underlying asset being bet on isn’t a security at all – it might be an index instead. So for …
This is a word that can be used in a number of different contexts but essentially its meaning can be summed up as “gap”.. So for example the difference between the price at which you can buy and sell a security is known as the “bid to offer spread”. Meanwhile the gap between the yield …
This is the name given to small shares often of a certain size in market capitalisation (equity value) terms – generally they are worth between £1m and £100m. However it is worth noting that the definition varies between exchanges, brokers and ratings agencies – some indices set the maximum limit at £250m for example. As …
Most investors buy shares in the hope that they will rise in value – as such they are said to be “long”. However there are a few professional investors who bet against individual shares and try to make money when the price falls – these are known as “short sellers” or “shorts”. The process of …
This is one way to try and capture how a fund’s return compares to its risk profile. Investors want to know how much of a fund’s performance is down to the skill of the fund manager rather than just the fact that the fund chose higher risk stocks (which will tend to generate higher returns …
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