Most traditional funds make money when markets are rising and lose it when they are falling.
As such they are judged by the returns that they achieve relative to their peer group. However absolute return funds are judged on their ability to generate positive returns regardless of market conditions and the performance of other funds. They may, for example, set a target of achieving returns above a benchmark such as LIBOR. In order to thrive when markets are trading sideways or down they often employ derivatives and may allocate a significant proportion of the fund’s assets to cash to preserve capital.


An important part of managing a pension fund is being able to forecast key variables such as how long people will live in retirement, what their pension will cost the fund and what sort of investment returns the pension fund can earn on its assets.
Actuaries are employed to make this type of estimate. Typically they work for the government, for life assurance firms who provide pensions and sometimes for companies who run final salary pension schemes for their employees and therefore need advice on how much money to pay into the fund.


An entry level stockbroking service where a client manages their own portfolio. A broker typically offers advice on single securities and funds rather than the composition or suitability of an entire portfolio.

This service level suits investors who take an active interest in the market and are happy to be directly involved in making their investment decisions.


This phrase describes a comprehensive stockbroking service where you are the manager of your investment portfolio.

A broker will provide advice on the design and construction of a portfolio and its on-going management plus provide individual stock recommendations.


The London Stock Exchange alternative investment market (AIM) is a market place for small, fast-growing firms that don’t qualify for a full listing but that want to raise capital from the public.

It helps these younger firms to gain recognition and also raise capital. Aim shares tend to be more volatile than their main market counterparts but can nonetheless be held within an Individual Savings Account (ISA).


This is the amount of added value that a fund manager brings to a portfolio that can be ascribed to their stock picking skills.

It is the gain above and beyond the one that an investor could expect from a portfolio based simply on the overall direction of the market and the extent to which the portfolio usually mirrors that movement (known as its “beta”).


This describes the way a firm writes off the value of an intangible fixed (long-term) asset over its remaining useful life.

For example if a firm has a software license worth £100m and the directors decide it has a useful life of ten years, then each subsequent profit and loss account will bear an amortisation cost of £10m (£100m/10).


You can save as much as you like towards a pension each year, however there is a limit on the total amount that can receive tax relief.

This amount is known as the annual allowance. If you save more than this amount you may have to pay a tax charge on the excess unless you are able to bring forward unused allowances from the previous three tax years.


This is an income stream purchased from a life assurance company on retirement.

When you retire you will no longer be earning a salary. If you have saved a lump sum via a pension it may (but doesn’t have to) be converted into an annuity to provide you with an income in retirement. Note that some annuities die with you and may have no value to anyone else after death.


In financial markets small pricing anomalies can arise which some traders like to exploit.

These are called arbitrage opportunities. For example, the same contract might briefly be priced slightly differently in two parts of the global market. A trader will buy the contract in the market where it is cheap and sell it where is pricier and take the difference as a small profit. As the gains available in this situation are usually tiny most arbitrageurs employ leverage (they borrow heavily) to magnify them.


A general term used to describe very broad investment categories.

Typical asset classes could include cash, property and shares. The first step in diversifying wealth is to ensure that it is spread across different asset classes.


It is a legal requirement that most companies have their accounts certified as being “true and fair” and prepared in accordance with the relevant legislation.

This is the job of an auditor. The job is typically done by a firm of accountants appointed by the firm with the report that they prepare being sent to its shareholders as part of the annual report and accounts.



A statement of a firm’s net worth, a balance sheet lists what the company owns (assets), what it owes (liabilities) and how it has all been financed (shareholders’ funds).

A growing balance sheet generally reflects the fact that a firm is profitable.


This is the name of Britain’s central bank tasked with several key responsibilities.

One is fiscal policy – setting the level of interest rates and also the amount of any additional monetary stimulus such as quantitative easing (QE) needed to hit its targets in relation to interest rates and the overall level of economic growth. The bank also has some regulatory responsibilities for banks and insurers. The central bank is also the lender of last resort should the banking system threaten to fail.


This is one one-hundredth (0.01%) of one percent.

So 5 basis points is equivalent to 0.05% – rather than saying 0.05% it is easier to say 5 basis points (or “bips”).


Someone who expects prices to fall, whether for property, shares, currencies or commodities.

When this occurs on a consistent basis – and the drop is 20% or more in the case of equity markets – you get what is called a “bear market”.


Shares are registered instruments, meaning that a name has to be recorded on the relevant share register to reflect legal ownership.

It is common for a broker with many clients to put their own name on the register. That makes the broker the legal owner of the shares however the beneficial owner is the underlying shareholder because they will ultimately benefit from any share price growth and/or income paid by the underlying company.


This is a measure of the volatility of a portfolio, or a single stock, in relation to the wider market.

The higher a stock’s beta the more volatile, or cyclical, it tends to be. In simple terms it compares the movement in a single stock to the movement of the wider market – if a stock moves say 20% when the stock market moves 10%, it has a beta of 2 (20%/10%). In short then, a stock with a beta of 2 usually moves, based on historic data, twice the distance of the wider stock market whereas a stock with a beta of say 1 moves exactly in step with it. Defensive portfolios or stocks tend not to swing around wildly and therefore have lower betas below 1.


Most prices for financial instruments are quoted “two way” – there is a bid and an offer price.

The price at which you can sell securities in the market is the bid price for your counterparty. So if a share has a spread of 210p-215p, 210p is the more relevant price when it comes to selling shares.


A virtual asset built on the Blockchain distributed ledger.

Labelled a “currency”, Bitcoin may be used to buy a limited range of goods and services and can be exchanged for other virtual currencies as well as hard currencies such as the US dollar (subject to restrictions). Its main use to date, however, has been as a means of speculating on the potential value of the underlying technology. Both Bitcoin and the market in which it operates are unregulated, which makes it highly risky as an investment.


A high quality well established company is said to be blue chip.

Typically its shares will be quoted on the main market of the London Stock Exchange.


Investors buy bonds looking for an annual return known as a yield.

There are two basic types – an income yield only takes account of the annual income a bond generates as a percentage of the current price. A yield to maturity also factors in any expected annual capital gain or loss between the point of purchase and the point the bond is redeemed by the issuer. See also redemption yield and net redemption yield.


One way for a UK firm to reduce its average share price is via a bonus issue.

Here a firm gives away free shares in a fixed ratio based on a shareholder’s existing holding. So for example a 1-for-4 bonus issue when the current price is £2.50 results in a shareholder receiving one free share for every four currently held. If you were the holder of 800 shares before the bonus issue, priced at £2.50 each your holding would be worth £2,000. A 1-for-4 bonus issue would allocate you another 200 free shares. Now your total holding is 1,000 shares worth £2,000 suggesting a new “ex-bonus” price of £2 per share.


This is the process where a bank seeks support for a share transaction from typically institutional clients.

So ahead of an IPO for example, where the bank needs to guarantee buyers for a firm’s shares when they are first sold, the bank will approach fund managers and ask for a commitment to buy. This is known as book building. The aim is to get a firm commitment for all of the shares on offer.


Firms are required to record assets and liabilities in a balance sheet at the point they are acquired or taken on.

The sum of a firm’s “book” assets, net of outstanding liabilities, is known as its net asset value. This can also be referred to as the firm’s total book value. It won’t necessarily be the same as a firm’s market value because assets and liabilities recorded in the book are not always kept up to date and there are valuable assets, such as a firm’s brand value, that are not recorded at all. That’s why a firm may be said to be trading at a premium to its book (its market value is above its book value) or a discount (the opposite).


This is the point where a particular deal leaves you with no overall profit or loss once all costs are factored in.

So if for example you buy a share for £2.50 and pay costs and commission of 5p, your breakeven point is £2.55 since at that price you could sell the share and recover all your costs (ignoring selling costs). If you buy a call option your breakeven point is the fixed strike plus any premium paid plus costs. With a put option it is the strike price minus any premium paid. So for example if a call option has a strike price of £2.50 and you have paid a premium of 20p per share with transaction costs of 5p per share the underlying share price will need to hit £2.75 (£2.50 + 20p + 5p) before you breakeven by exercising the option.


This is the acronym used as a short way to describe Brazil, Russia, India and China.

These countries (along with South Africa) were once identified as the leaders in emerging markets growth however their recent performance has been mixed.


Someone who expects prices, whether for shares, property, currencies or commodities, to rise.

When prices do rise consistently, it is referred to as a “bull market”.


Lasting around ten years or so historically in the UK, a business cycle is thought to be a consequence of the way businesses and investors interact.

There are two basic economic phases – expansion and contraction – and one inevitably leads to the other, according to traditional economics. For example, when confidence is rising, businesses tend to invest to meet rising consumer demand and the economy grows. However, after a shock such as a financial crisis, the reverse trends are observed as confidence wanes and growth slows. Deciding where we are in a given cycle is therefore important in terms of an investor’s asset allocation and the extent to which, for example, they are exposed to “growth” as opposed to “value” themes and assets.


Formerly known as business property relief, business relief (BR) is a way to potentially remove qualifying assets from the scope of inheritance tax on death.

Only certain assets qualify and must usually have been held for a minimum of two years before death. It can be particularly useful for investors who hold AIM shares as a number of these may meet the criteria for BR.



With a put option it is the strike price minus any premium paid.

So for example if a call option has a strike price of £2.50 and you have paid a premium of 20p per share with transaction costs of 5p per share the underlying share price will need to hit £2.75 (£2.50 + 20p + 5p) before you breakeven by exercising the option.


Throughout our lives, we will all have specific milestones that we need to fund, whether school fees, paying off a mortgage or even buying a second property.

These create future “calls on capital” as they will require sufficient liquid funds to be available to meet them. Part of successful planning is to identify and value these milestones so that an investment portfolio can be correctly allocated, between stocks, bonds and cash, to meet them as they arise without sacrificing long-term growth in the process.


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, the higher the potential profit for the holder. However in return for granting the option the seller (the “writer”) will demand a non-refundable sum (“the premium”) which is paid whether the option is used (“exercised”) or not.


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 the value of a firm’s “own funds” to its risk-weighted assets to ensure it is adequately cushioned should its asset base suddenly become threatened by third party defaults.


This is the tax charged when a UK individual makes a chargeable disposal, via a sale or gift, of a chargeable asset (certain assets such as your main home are exempt).

The tax is charged on any gain that arises between purchase and sale at a rate that varies according to that individual’s income tax bracket.


This is where an investor borrows in a currency where the interest rate is low and reinvests the proceeds in a currency where a higher rate of interest is available.

The difference between the interest being paid and earned is taken as a profit. The trade works as long as the currency of the loan doesn’t suddenly appreciate, which in effect boosts the outstanding amount owed.


Cash flow is the difference between the amount a firm receives in cash in a given period and the amount it spends in cash over the same period.

It can be measured in a number of ways. Free cash flow for example is a firm’s operating cash flow after certain non-discretionary cash flows, such as bank interest, tax and the amount needed to maintain fixed assets, have been deducted. Cash flow is different to profit in that it is based only on cash received and paid during a specified period rather than revenue earned or expenses incurred.


A financial statement that summarises the amount of cash that a business has generated less the amount spent over a twelve month period.

The statement generally breaks cash flows down into three broad categories – operating cash flows, financing cash flows and investing cash flows.


This phrase covers transfers of value (gifts typically) that are immediately chargeable to inheritance tax unless they qualify as an exempt transfer or a potentially exempt transfer.

Typical examples include gifts to children and to certain types of trust, including discretionary trusts.


Some investors believe that the best way to spot where shares will head next is to look for repeating patterns based on their recent share price history.

This approach is based on the idea that history tends to repeat itself meaning that you can predict how investors, and therefore share prices, will behave. Chartists give names to these repeating patterns (for example “head and shoulders”).


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 a year and that money will then attract no income or capital gains tax subsequently. However money transferred to a JISA cannot be withdrawn until the child reaches 18 and then it all belongs to the child.


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 multiple trades in shares, bonds and derivatives can be settled on time. To encourage both parties to a trade to hit the settlement deadline, a clearing house will take a form of safety deposit from each party. This is known as margin.


See investment trust. A closed ended fund is one that cannot issue further securities to investors to meet demand (in that sense it is not “open ended”) and does not buy them directly back when investor wish to sell.

Instead a fixed number of shares are traded between investors on a public exchange.


Compound interest is the ability to earn interest on interest.

So for example if you invest £1,000 at 10%, after one year you will have £1,100 (£1,000 x 1.1). After two years you will have £1,210 (£1,100 x 1.1). If you stay invested like this for ten years you will have £2,593, or nearly 2.6 times your original investment. The longer you invest for and the more risk you take the better your chances of a high return from compounding. However it is also effective even at relatively low interest rates especially if you can shelter any gains you make from tax using an ISA or a SIPP.


This is a derivative contract that enables an investor to bet on the price of an asset rising or falling without having to own the underlying asset.

As the name suggests any payment made from one party to another is simply based on the difference in price of the asset when the contract is opened compared to when it is closed. These are also known as CFDs and, unlike spread bets, any gains are taxable.


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 unpopular stocks and dump very popular ones. It’s a potentially profitable approach for anyone with the time and the talent to attempt to “beat the market” but it can also be risky – contrarians have, for example, been calling an end to London’s property boom for the last fifteen years and missed out on some big gains in the meantime.


This is a standard measure of inflation that has been adopted across Europe.

The US inflation measure goes by the same name. It measures the change in prices of a standard basket of goods consumed by a typical family over a month. It matters because many payments made to savers and pensioners may be linked to it (or another inflation measure known as the retail price index) and central banks often base their interest rate decisions, in part, on the level of this index. The CPI measure the cost of regular items of expenditure such as food, utilities and petrol but does not include property related costs such as mortgage interest and council tax.


A bond that may be converted into the shares of a firm at a predetermined date, or series of dates, in the future.

These are often issued by companies looking to pay a lower rate of interest on their debt by offering conversion rights later. The holder of the bond can expect a windfall should the firm’s shares trade higher than the fixed conversion price on the date of conversion.


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.


Some bonds are issued in convertible form which means they can be swapped for shares of the same company at a future date.

The holder of a convertible bond therefore has conversion rights. These may not be exercisable until a future date, or perhaps a series of future dates. Also the conversion will be done at a predetermined conversion ratio whereby a certain nominal value of a particular bond can be swapped for a specified number of shares at a set conversion price.


This is the extent to which the change in the price of two assets can be said to be related.

A high degree of correlation means that a movement in one asset, say the Dow Jones, is matched by a movement in the other, say the FTSE 100. This can be measured using “correlation coefficients”. Assets or prices that tend to move in the same direction have positive correlation, those that move in opposite directions have negative correlation.


Most firms are financed by a mixture of debt, say from banks and bondholders, and equity from shareholders.

These come at different costs. A firm’s average cost of capital will lie somewhere between those two costs and represents the cost of deploying a pound in the business. Let’s say a firm’s debt costs 4% a year and its equity 8% and it is financed using £100m of each. Its weighted average cost of capital is around 6% ((4%+8%)/2). The higher this is the bigger the return on capital the firm must earn to justify staying in business. If this firm earns say 12% on its capital employed then all is well but if it can consistently only earn say 2% then it is a wealth destroyer.


This court makes decisions on behalf of people who are unable to on their own and who have not granted power of attorney to someone who can act on their behalf.


This is one way that a fund manager can try to enhance the income in a fund.

It works by them writing call options (the right to buy) on the shares that they hold within a portfolio. The logic is that the premium income generated boosts the overall income of the fund if the option is not exercised. The downside is that the underlying shares may have to be delivered to the holder of the call option if it is. As such, covered calls are viewed as somewhat bearish as the normal expectation is that they will not be used once written.


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 to a bank which is non-refundable provided there is no “credit event” that affects the recoverability of the bond’s cash flows. If such an event takes place the bank is obliged to compensate the fund manager (the CDS buyer).


Credit rating agencies, such as Standard & Poor’s, Moody’s and Fitch assign ratings to bonds to reflect the risk that the issuer will be unable to meet its debt obligations.

Essentially, the ratings fall within two broad categories; investment grade and non-investment grade (also called sub-investment grade). For example, bonds with a Standard and Poor’s rating of ‘BBB-‘ or above are considered “investment grade” and issues with ratings lower than ‘BBB-‘ are called “sub-investment grade”. An issue rated ‘AAA’ is regarded as having the lowest default risk.


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 has a yield of 4.5% and the ten-year gilt yield is 2%, the spread is 2.5% (4.5%-2%) or 250 basis points (one basis point is 0.01%). The bigger this gap, or spread, the higher the market perception regarding the riskiness of the underlying security.


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 broker.


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 custodian may handle physical safekeeping too. Aside from safekeeping securities a custodian may also offer other services such as settlement (ensuring the right number of securities is legally registered in the relevant account at the right time), tax support, foreign exchange management and dividend and/or interest receipts and payments. Finally a custodian will typically manage corporate actions (share buybacks or splits) on behalf of its clients.


These are stocks that tend to be strongly affected by the business cycle.

So when consumers are feeling confidant they use a lot more of this type of firm’s goods or services which pushes up profits and the share price. However in bad times the same consumers will rein in spending quickly which in turn hits profits and dents the share price. Examples of cyclical firms therefore include banks (lending is often based heavily on confidence) and house builders (who only tend to build when forward orders look strong).


A standard P/E ratio compares the current share price of a firm to one year’s earnings.

Critics argue that this makes the ratio too sensitive to the changes in a firm’s profits that can occur at different points in a ten-year business cycle. So a CAPE compares the current share price to a profit figure that is an average of the last ten years. Fans argue that this smooths out earnings volatility and makes the resulting P/E ratio more reliable. This measure is also known as the Shiller P/E after the Nobel Prize winning Yale Professor Robert Shiller, who invented it.



Also known as gearing or leverage, this is the relationship between a firm’s total interest-bearing debt and its total equity, expressed as balance sheet debt plus equity (shareholders’ funds).

So for example if a firm has £100m of interest-bearing debt and £400m of equity the debt to equity ratio is (£100m/(£100m+£400m)), or 20%. The higher this number the riskier the firm although it also means it will make a higher return for shareholders when times are good. For that reason high debt to equity firms generally have more volatile share prices than their less indebted peers.


These are shares in sectors that tend to be in demand regardless of the economic climate.

For example we all need water, electricity and gas whether we are feeling rich or poor so utility companies tend to be labelled defensive. Equally most people don’t change their smoking habits to match their income – they smoke regardless – so tobacco stocks usually go into the same category. Typically defensive stocks are not fast growers in earnings terms, and therefore tend to attract lower price to earnings ratios than their more cyclical peers subject to where we are in the business cycle.  However they are often generous dividend payers as they usually enjoy strong, steady cash flow.


If a country exports less in terms of goods and services than it imports, it is said to run a deficit.

A classic example is the UK economy. China on the other hand usually exports more than it imports and runs a surplus as a result. The nature of international trade means that some countries will be running deficits and some surpluses at any given point in time.


Also known as final, or average, salary schemes, these arrangements offer many employees of the state and some larger companies a pension based on their salary whilst in employment.

For example you might accrue one eightieth of your final salary for every year that you work up to a maximum of 40/80ths based on forty years at work with that employer. This takes away the pension risk from an employee – who knows exactly what they will be entitled to under this type of arrangement – and places it on an employer who must ensure the pension scheme is sufficiently well funded to meet its obligations.


Also known as money purchase schemes, these are a way of building up a private pension fund.

An employee and an employer can both contribute with the contribution from an employer typically being a fixed percentage of the employee’s salary. Contributions into a money purchase pension receive tax relief at the employee’s marginal income tax rate. On retirement, the resulting pot may be turned into an income, usually by buying an annuity or may be left invested to take advantage of the income and capital drawdown rules. Since contributions into a money purchase scheme are invested, the size of the pension pot generated for a retiree is dependent on investment performance.


In a growing economy investors normally expect to see inflation – rising prices.

However when economic growth stalls the opposite is possible – deflation. This is where the overall cost of a typical basket of goods and services, measured in the US and Europe using the Consumer Prices Index, drops. This might sound like a good thing on the face of it as it means the average family is paying less to buy what it needs each month. However in reality it is anything but – it puts downward pressure on wages and discourages spending as people start to expect to buy things more cheaply by simply waiting. Delayed spending is bad news for firms’ profits expectations and ultimately jobs.


Firms and other organisations that carry a lot of debt funding are said to be leveraged.

It means they are quite exposed if their cost of borrowing increases. At times of financial stress these firms have to find a way to reduce their exposure to debt and this process is known as deleveraging. When this involves selling assets in order to raise the cash they need to pay down debt this can be tough as in a slow market it may not be easy to offload assets at the right price. Deleveraging can also be triggered by regulators changing their capital requirements and forcing firms to take on less risk.


If a firm acquires a big asset such as a factory, it will expect to use it for many years to help it to generate revenue.

The question then arises as to how to treat the initial cost, say £1m. Depreciation is the process whereby the cost of the asset is spread over the years the firm hopes to use the factory to generate sales. So, for example, if that period is 20 years, profits will take a charge each year of about £50,000 (£1m/20). That cost is known as a depreciation charge. It is thought to give a fairer view of how the asset is being used than simply writing off the whole cost against profits in the year that it is acquired.


In very simple terms a derivative is an instrument that derives its value from another one.

There are three basic types – the future, the option and the swap. These tend to be used by mainly institutional clients. For a retail investor the nearest thing to a future is a spread bet. This allows you to place up and down bets on assets such as shares or commodities without having to own, or pay for, the underlying assets. Indeed often the amount of cash that you commit to a derivative position is a relatively small proportion of the value of the underlying asset. In this sense derivative positions are “geared” – big profits and losses can be generated from small initial investments. For this reason they can be dangerous for novice investors.


These are mature, typically western, markets that are expected to grow at modest rates and offer reasonable security to investors.

Examples include the US, the UK, Europe and Japan. Developing markets on the other hand are those that are growing faster but from a lower base. As such they offer greater growth rates but also higher investment risk.


One pound today is worth one pound. But what is one pound received in one year worth now?

The answer depends on interest rates in the meantime. If interest rates are 10% one pound now could be invested to earn 10p over a year so that pound – which will be worth 110p – is more valuable than one pound received in a year’s time. To compare the value of the later pound with the pound now in today’s terms you need to reduce it by a discount rate of 10%. The sum is £1/1.1 which is more like 91p. In other words a pound received in a year’s time is worth less, in today’s terms, than £1 received now.


Here a broker has the power to help you create a tailored portfolio and to make investment decisions on your behalf.

Investors who don’t have the time, inclination or expertise to make their own investment decisions often use a discretionary service.


This is a type of trust where the trustees have a choice (discretion) about how to use the income of the trust and sometimes the capital too.

Typical holdings within these trusts can include cash, land or buildings and other investments. The reasons for setting one up vary but examples would include wanting to set aside capital for grandchildren that may need assistance later in life or wanting to help a beneficiary who may not be capable of looking after themselves. A trust may also be useful as a way of gifting assets to children for inheritance tax purposes, however, since the rules around this have tightened in recent years, you should seek advice to make sure the trust is structured both to meet the wishes of the settlor and comply with the rules.


Firms that make profits have two choices – they can either keep them and reinvest them in the hope of making more profits or pay them out to shareholders as a dividend.

Let’s say a firm makes profits of 10p per share, it might decide to pay out 2p per share as a dividend. This is cash paid directly to shareholders. The remaining 8p per share is reinvested in the business. For investors seeking regular income, dividend paying shares are better bets than non-dividend payers. The latter are known as growth shares and are higher risk in the sense that a shareholder’s gains all come from share price appreciation. There are two types of dividend – ordinary and preference – however ordinary dividends, which are determined by the directors each year, are the more common. Note that UK dividends are paid net of standard rate tax, so a 3.6% dividend yield is equivalent to 4.5% when stated gross (before basic rate tax).


An important question for a shareholder relying on dividends is whether a firm will be able to afford to carry on paying them in the future.

One measure of this is dividend cover. This is the number of times the profit available to pay a dividend actually covers the dividend paid. So for example if profit after tax is £100m and a firm’s annual dividend is £10m the dividend is covered 10 times (£100m/£10m). The higher this number the more comfort an investor has about dividend affordability.


If you own an income stock you want to know what annual return you are making. Enter the dividend yield.

This is a firm’s annual dividend as a percentage of the current share price. So if the annual dividend is 10p per share and the share price is £1, the yield is 10% ((10p/£1) x 100%). This can be compared to the income return on other investments such as fixed income securities and even cash accounts. Be careful though – sometimes a high yield is a function of a low share price which suggests investors may be nervous about the sustainability of the dividend. This situation is known as a dividend trap.


This is your permanent legal home for tax purposes.

It is usually the country you were born in or the one where your parents spent most of their time if that was not the country of your birth. It matters because, amongst other things, it is a key determinant of how you will be taxed and on what basis.


This captures the sensitivity of the price of a fixed income security to a change in interest rates, all in one number.

Two of the factors that influence bond prices are general interest rates and the time remaining until the security is redeemed, or bought back. A security with a high duration is usually more sensitive in price terms to changes in interest rates than one with a lower duration. As a rough rule of thumb the lower the coupon rate on the security and the longer it has to run until maturity, the higher the duration number will tend to be. Note that for a particular bond duration is not fixed and it decreases as the bond moves towards maturity.



This key number expresses the earnings available to shareholders in per share terms – hence the term earning per share.

So if a firm makes profits after tax of say £100m and has 50m shares in issue, EPS is £100m/50m or £2. The higher this number the better from a shareholder’s perspective although the overall trend is also important over say a five year period. EPS forms a key part of a standard price to earnings (P/E) ratio.


Earnings before interest, tax, depreciation and amortisation (EBITDA) is a number that some analysts prefer to use as a profits measure when analysing companies.

It tries to solve some of the weaknesses inherent in the profits after tax figure. In particular it takes out two of the more subjective costs – depreciation and amortisation of fixed assets – in an attempt to get closer to a cash based profits figure. It also removes interest, a financing cost, and tax. As a result EBITDA will usually be a higher number than profit after tax.


These were documents that gave someone else the power to make decisions concerning your welfare and finances.

They have now been superseded by the Lasting Power of Attorney. If you have an existing EPA you may wish to discuss updating it with an advisor.


An enterprise investment scheme (or EIS) is a way for those people who want to invest in the shares of risky, young companies tax-efficiently to do so.

There are generous income tax, capital gains tax and inheritance tax reliefs available. These are subject to certain criteria which include that the original investment must be held for at least three years. It should also be noted that tax relief alone is not a strong enough reason to make an EIS investment and you should fully understand the risks before committing.


When valuing a company there are several choices. Stock exchanges tend to quote firms on the basis of their market capitalisation – the number of shares in issue multiplied by the current share price.

However this measure doesn’t explicitly consider the impact of a firm’s decision to take on debt finance nor does it consider the value of any cash held by the firm. Enterprise value tries to solve this by valuing a firm using the market value of its debt, net of any cash on its balance sheet, plus its equity. So if a firm has £50m of debt in issue and £50m of equity, its enterprise value (EV) is £100m. This can be used in a valuation measure preferred by some analysts – EV/EBITDA.


Shares are riskier than say cash balances or government gilts because they are more price volatile and carry a higher overall risk.

That means investors should expect to earn a higher return for investing in equities as opposed to something safer. The difference between the return you expect to earn from a relatively low risk asset and the return you expect from equities is known as the equity risk premium. So for example if low risk government bonds offer a yield of 3% and you expect to get a return from equities of 8%, the equity risk premium, or ERP, is 5% (8%-3%).


When a UK firm borrows sterling from UK investors, it is known as a domestic bond issue.

However it is also possible for overseas firms to target Eurocurrencies when borrowing – that is money on deposit outside of its country of origin. For example if a US company wants to raise a euro-denominated loan here, the resulting bond is known as a Eurobond. Note that the issuer need not be European, the currency can be any currency held outside its country of origin and the investors being targeted to buy the security may be based in any country.


Also known as an ETF, this is a fund that gives investors exposure to the movement in an underlying index or sector or commodity without them having to own that underlying asset.

Instead the investor owns an exchange traded share that tracks it – one of the earliest ETFs tracked the S&P 500 for example. Most ETFs are passive in that all they do is try to replicate the moment in the chosen underlying asset. For this reason they tend to be cheaper than other funds. The downside however is an ETF will at best only ever match the performance of a particular asset rather than beat it.


When a person dies someone has to take responsibility for valuing their death estate, paying the relevant inheritance tax and distributing the remaining assets according to the terms of the deceased person’s will.

This job – known as probate – is done by an executor, who may typically be a family member or a paid professional.


Brokers who simply execute trades on behalf of clients and offer no advice are called execution only brokers.

This service is generally cheaper than an advisory service but only suited to clients who know exactly what they want to buy and/or are comfortable running a diversified portfolio without support.



This is the cash flow that is left once a firm’s operating cash flow (the cash it generates from the heart of its trading operations as shown towards the top of a cash flow statement) has been adjusted for non-discretionary payments such as the interest on debt and the tax bill.

It is also common to adjust the number for the capital expenditure required annually to maintain a firm’s business operations. Free cash may be used by the directors to pay a large dividend, invest in new operations or even pay for a share buyback. As such it is a key number for investors.


These are increasingly rare pension schemes (unless you are a government employee) where an employer guarantees to link your pension to your final salary whilst you were in employment.

The reason they are rare is that this puts all the risk onto an employer in terms of whether they will have the funds available to meet this commitment. A more common form of pension these days is defined contribution, or money purchase. Here an employer and an employee each may contribute to a pension fund the value of which is not fully known until the employee retires. As such the risk is borne by the employee in terms of what this fund will pay for on retirement.


This is the mechanism by which governments adjust their tax policies and spending levels.

For example, in order to stimulate growth they may try cutting tax (to encourage entrepreneurship) and/or boost spending in order to directly influence the jobs market and generate confidence. Opinion divides as to which measures are the most effective.


These are the long-term assets of a business intended for revenue generation and not onward sale.

Examples include land and buildings, motor vehicles and computer equipment. Usually they are recorded in a firm’s balance sheet at their acquisition or purchase price and then gradually written off via a depreciation charge against profits at a rate that reflects their estimated useful life to the business.


Also known as “bonds” these are IOUs issued by companies and governments.

They carry a fixed coupon so the income return to an investor is known in advance as is the final redemption date and the value of the bond at that redemption date (its “face”, “par” or “nominal” value). From an issuer’s point of view they can offer access to a relatively cheap source of finance. For an investor fixed income securities can be a way to secure a relatively predictable income stream and diversify a portfolio.


This describes a way for a pension saver, who is in danger of breaching the Lifetime Allowance (LTA), to exclude additional assets from the scope of the LTA penalty charge.

It does this by fixing the LTA at a higher amount based on previous years’ allowances.


This is a debt security where the interest paid to the holder floats up or down in accordance with a benchmark rate of interest (such as LIBOR) rather than being fixed.

Since the coupon payments are less predictable for the issuer with this type of security they are less common than simple fixed income securities. In theory the interest payments on these securities can be linked to any interest rate but typically one of the interbank rates is chosen. They should not be confused with index-linked securities where the benchmark is usually a rate of inflation.


This is a metric used to get a view on whether a firm is over, or under, valued in cash flow terms.

It compares the annual free cash flow per share to the price per share as a percentage. So if FCPS is 10p and the share price is 100p, then the FCF yield is around 10%. The higher this is, the better value the share. Cash flow is thought by many analysts to be more reliable than earnings or even dividends, which is why this number is commonly quoted by analysts alongside the better-known P/E ratio and dividend yield.


This is the proportion of a firm’s total shares that can be freely bought and sold and are therefore not held solely for directors, other firms within a group, or even the government.

This is an important number because if a firm has a low free float the shares may be very volatile if there is strong investor interest in them. Stock exchanges usually require a firm to have a minimum free float before they can apply for a listing.


The analysis of a company, sector or even economy from the bottom up, often using ratios.

This approach is common amongst “value investors” who believe that inefficient markets present opportunities to buy stocks for less than they are really worth.


Someone paid to run an active or passive fund.

Active funds are those where a fund manager makes decisions about what should be held within the fund according to an investment mandate. They are free to buy and sell securities on behalf of investors in order to meet the objectives of the fund (for example to achieve a certain level of income or capital growth, or both). There are two basic types of UK fund – open ended (this includes unit trusts), and closed ended (which includes investment trusts).


Most funds invest directly in a particular asset class whether that is shares, bonds, property, currencies or commodities.

However fund of funds specialise in investing in the best funds instead. They focus on selecting the best managers and allocate their capital to those funds. As a result of this two-tier approach, which means an investor is paying for the expertise of both the underlying fund manager and the fund of funds manager, charges tend to be slightly higher than for standard funds.


These are derivatives that try to mirror the movement in an underlying asset without requiring a buyer or seller to actually take or make delivery.

This can be useful for hedging purposes. For example you might hold a large portfolio of FTSE 100 shares and be worried about a short term price dip. Rather than selling the portfolio and triggering a tax bill plus all the hassle and expense of recreating it when conditions improve, you could sell a FTSE 100 future. Set up correctly this will compensate you for any dip in the FTSE 100 short-term whilst allowing you to retain your portfolio. Futures are typically exchange traded and as such tend to be easy and relatively cheap to use. However they are only suitable for experienced investors.



Gross domestic product (GDP) is a broad measure of the wealth being generated by an economy.

It is the total value of goods and services produced by an economy as measured by the Office for National Statistics (ONS). When things are going well, GDP will tend to rise and the reverse is true. One problem is in capturing reliable, up-to-date data, which is why the published number can sometimes be revised once more accurate figures are available. There are several ways to express this figure, whether as a total, on a per capita basis or in terms of its overall change. Economists try to predict GDP growth, since it is such a key number. That is where organisations such as the Institute for Supply Management (ISM) and the Institute for Economic Research (IFO) data often come into play.


This is the extent to which a firm is debt, rather than equity, financed expressed as a percentage of its total funding.

So for example if a firm has £100m of debt and £200m of equity, gearing is 33% (£100/£300m). Low gearing makes a firm relatively safe and low risk but also unlikely to sparkle in net earnings terms. Highly geared firms with poor cashflow on the other hand can be more volatile in share price terms as debt, which usually carries a fixed interest cost, boosts the return to shareholders when times are good but acts as a drag in a downturn.


These are gifts made during a person’s lifetime that are free of any obligation on the recipient.

The motive for making such a gift may be to avoid, or reduce, an inheritance tax liability (see potentially exempt transfer).


These are IOUs issued by the British government in order to meet the shortfall between its revenue (mainly tax) and its expenditure on public services and defence.

They are generally sold at competitive auctions to institutional investors looking for a relatively safe home for funds however they can subsequently be bought by anyone including retail investors. Gilts mostly carry a fixed income return in the form of a coupon and can be freely traded between issue and final redemption by the government. The nearest US equivalent is the Treasury.


When one business buys another it may pay more for it than the value of its tangible net assets.

That’s because buyers are often prepared to pay a premium for intangible assets such as reputation, brand name and market share, none of which will be recorded in the books of the target firm because accounting rules don’t allow it. So let’s say that a target has assets of £300m in its books and a buyer is willing to pay £500m for the firm – goodwill is the difference of £200m. This is recorded as an asset in the books of the predator.


This is the difference between a firm’s sales and cost of sales expressed as a percentage.

So for example if a firm makes annual sales of £500m and incurs cost of sales (direct costs of making sales) of £400m, gross profit is £100m (£500m-£400m) and the gross margin is 20% ((£100m/500m) x 100%). The higher this number the better, as it indicates the extent to which the core activities of a business are profitable. A firm with a low gross margin has little financial wiggle room should trading take a downturn.



This is a facility that preserves your pension lump sum into retirement and allows you to draw off income rather than say converting it into an annuity.

The amount of income that can be drawn in this way used to be capped at a percentage of what is known as the GAD (Government Actuary’s Department) rate. However, under the pensions freedom rules this is no longer the case and you can withdraw as much as you like, subject to the fact that it may be liable for income tax.


This is the tax that individuals suffer on income whether earnings or investment related (so it applies to interest on cash and dividends received from companies).

The rate varies depending on the level of income earned. There are various ways to reduce the bill including annual allowances and the use of individual savings accounts.


This is a government IOU that also pays a variable rate of interest but this time linked to a rate of inflation – typically this has been the retail prices index.

The British government issues fewer of this type of gilt because coupons can be hard to predict compared to a standard fixed income security. Usually the final redemption payment is also linked to an inflation rate which also makes these IOUs harder to forecast in cash flow terms.


Indices started off as baskets of stocks, carrying a single price, designed to make life easier for investors.

So for example the FTSE 100 index represents the market capitalisations of leading UK shares in one number. As such it is a useful way to get a snapshot of what is happening in the stock market and provides a useful performance benchmark for investors who hold portfolios of blue chip UK shares. It can also form the basis of derivatives contracts such as futures and options. With stock indices the name usually tells you who puts the index together (FTSE is short for Financial Times and London Stock Exchange) and the number of firms represented (about, although not always exactly, 100 in the case of the FTSE 100).


An initial public offering (IPO) is the mechanism by which a company offers its shares for public sale for the first time.

Typically this is done either because the existing directors want to cash in and/or the firm in question wants to raise new finance for expansion. IPO shares are often sold directly to institutions but may be offered to the public too. Demand for these new shares can be hard to predict so the selling firm will usually call on the services of an investment bank. These banks advise on the timing of any sale, the price of the shares being sold and help with regulatory issues. They may also act as underwriters, buying up any shares that are not wanted on the IPO date.


An individual savings account, or ISA, is a way to protect cash and investments from income tax and capital gains tax.

It works as a tax shelter – you choose the underlying asset and it provides the tax protection. You can protect a bank or building society account and/or stocks and shares. The amount you can invest each tax year is capped by the government and works on a use it or lose it basis – fail to invest the limit by the end of the tax year, either as a lump sum or a regular monthly investment, and you lose the allowance for that year.


The tax paid on a UK domiciled (the UK is their legal home) person’s death estate.

On death an executor takes responsibility for valuing a deceased person’s assets for inheritance tax purposes. Tax is then levied at a flat rate of 40% on any amount above the exemption limit. There are various ways this tax can be mitigated including gifting assets while the donor is still alive.


These are specialists who act on behalf of market participants seeking anonymity for certain trades.

They will often act for example for market makers who want to buy or sell a large quantity of a security without giving away their identity to other counterparties. An IDB will contact other willing counterparties on their behalf and set up the deal in return for a commission. That’s why they are sometimes known as “the market maker’s market maker”.


If you have a large mortgage you may have done a comparison between your salary and the interest you pay each month as an affordability check.

The same principle applies to firms that borrow money. Interest cover is the number of times profit before interest covers the annual interest expense. The higher the result, the better, with anything above 4x considered to be reasonably good. The calculation can also be done from a cash flow perspective by comparing cash flow from operating activities to the amount spent on interest.


These are used where a settlor wants to create a lifetime interest in say the income from a property, perhaps to benefit a spouse, but with the ultimate intention of leaving an asset to someone else, say children.

An IIP is a trust structure that can achieve this, subject to certain conditions.


If someone dies intestate, they die without a will.

That means the distribution of any assets they hold on death is carried out according to rules devised by the state (Intestacy Laws) rather than according to the instructions of the deceased that would normally be contained in a will. For this reason, it is better for most people to make a will so that they can be sure about how their assets will be distributed on death.


If a bond is rated investment grade it means that the ratings agencies such as Moody’s, Standard and Poor’s and Fitch do not believe that the risk of default is high.

As such the bond may be suitable for a wide range of investors. As a rule of thumb an investment grade security carries a rating of BBB or better.


This is essentially a listed firm that buys shares in other companies.

It aims to buy shares that do well and boost its own share price in the process. Unlike unit trusts however, investment trusts can borrow money to invest and “gear up”. An investment trust lists its own shares on the stock market which means that buyers and sellers have to trade with each other. The result is the shares can trade at a discount (below) or a premium (above) to the net assets held by the firm.


An investor visa is a special visa available to overseas persons with more than £1m to invest in the UK.

A tier one visa typically lasts 3 years and 4 months during which time the holder may work or study here but may be extended on application at the end of that period.



This is short for “junior ISA”.

A JISA may be set up for any child that is aged under 18, lives in the UK and doesn’t have a Child Trust Fund. A JISA can hold cash and/or stocks and shares. The amount that can be paid in each year is capped, however anyone can pay into an account including the child themselves, parents and grandparents.


This is a catch-all phrase for bonds that are of sub investment grade quality and are therefore higher risk than safer equivalents.

Typically junk bonds are high yield as they have to offer a decent return to compensate buyers for the extra risk. Two factors contribute to junk status – the quality of the issuer and the quality of the bond.



This is used so that someone can give key decision-making powers to someone else to enable them to act on their behalf.

There are two basic types – one relates to Health and Welfare and the other to Property and Financial matter, such as control over investments and bank accounts. To set these up correctly takes a bit of time and requires some key decisions to be made. Without one, relatives can be left without the ability to raise funds and/or determine the right medical treatment and care for an ageing relative without seeking a mandate from the Court of Protection first.


These are shares in big firms that are typically available on the top lists of public exchanges such as the London Stock Exchange.

So for example FTSE 100 stocks are large caps. They are usually relatively easy to trade and widely held by both institutional and retail investors.


If your name appears on a share register then you are the legal owner of the underlying shares.

However a broker may put themselves on the register instead to make the administration of many small client holdings easier. In that situation the broker is the legal holder while the underlying investor is the beneficial holder.


This is a US term which is broadly equivalent to the UK term gearing.

It describes the relationship between a firm’s debt and equity funding with highly levered firms being those that carry a high level of debt relative to equity. This means they can offer higher returns on equity than non-levered firms when times are good but they are also more vulnerable in a downturn. As such highly levered firms with weak cashflow tend to have more volatile stock prices.


The London Inter-Bank Offered Rate is a key benchmark rate for financial markets that influences the price of many products including mortgages.

It represents the average rate at which certain key banks are prepared to lend to each other in sterling. This rate is published daily by the British Bankers Association (BBA). Companies can usually only borrow at rates above LIBOR – the less credit worthy they are, the higher the differential.


This sum, which is set by the government, represents the maximum amount you can withdraw from a pension fund without being hit for additional penalty tax charges.

If the total amount you have saved exceeds this sum at the point you crystallise the fund (by, for example, making a withdrawal or reaching the age of 75) you will become liable for tax on the excess above the LTA at a rate of up to 55% for a lump sum withdrawal. For the tax year 2017/18 the LTA is £1m, rising to £1.03m for 2018/19.


An order to trade at no worse than the price stated.

For example a limit order to buy 2,000 shares at £2.50 is, in effect, an instruction to buy the shares for £2.50 or less. Equally a limit order to sell is an instruction to not sell shares for less than a particular price.


The insurance market known as Lloyd’s of London is funded by its members.

These are firms or individuals who are prepared to fund insurance underwriting syndicates at Lloyd’s in return for a share in its underwriting profits (the profits it hopes to make from the premium it charges for helping clients to insure risky assets).


This term describes the relationship between a loan secured on an asset and the value of that asset.

So for example if a mortgage for £75k is secured on a house worth £100k, the LTV is 75%. The lower the LTV the more secure the deal is for the mortgage lender and the lower the overall cost of the mortgage. Most lenders will not offer high LTVs on second properties and/or investment properties.


This is the main market in London for publicly traded shares.

The LSE only lets certain companies join its lists subject to them meeting the requirements of its Listing Rules. There are two lists available – the official list for the larger, better established firms and the Alternative Investment Market (AIM) for smaller, faster growing companies that don’t meet the main list criteria. Companies usually seek a listing because it raises their profile and makes raising capital easier. However it also comes with obligations, such as preparing regular accounts and reporting events that may affect the share price to the exchange.



An abbreviation for mergers and acquisitions, this phrase describes the two main ways for firms to grow by combining forces.

In an acquisition one firm takes over another while in a merger two firms combine as equals. M&A can be a great way for investment banks to make fees by advising each party on the timing and structure of a proposed deal.


This is the method used by derivative counterparties to protect each other from default.

Let’s say that two parties agree to a spread bet whereby one bets on the FTSE 100 rising and the other on it falling. Each one might be required to lodge a deposit with a clearing house of say 10% of the total value of the trade. This is sometimes called initial margin. Each day that the trade remains open either party can be required to supplement this if the FTSE 100 subsequently moves against them. Margin is usually refunded, plus interest, once a trade is successfully closed.


The value of a firm’s equity computed by multiplying the number of shares it has in issue by the current share price.

This is used as the basis for ranking companies in indices such as the FTSE 100.


These are professional traders, often working for banks, who commit to provide liquidity in securities so that other market participants can buy or sell them.

Their willingness to trade carries risk (they might for example get stuck with a large amount of a stock that cannot be easily sold) and this is reflected in the bid to offer gap, or “spread”, for a given security. The wider this spread the riskier the stock, measured on the basis of illiquidity. Popular stocks may have many market makers competing for business whereas less popular stocks may have only few or even just one.


This is an instruction to buy or sell shares at the best available market price.

So the instruction might be to sell 1,000 “at market” meaning they will be sold at the price available in the market at that point.


This is the process of reflecting the latest prices at the end of a trading session in a portfolio of securities.

Let’s say for example 1,000 shares open at a price of £1 each but by the end of that day have closed at £1.50. Marking to market recognises the extra 50p per share, or £500, as a gain in the books of the holder despite the fact the shares have not been sold. When securities are listed on an exchange, getting a reliable mark to market price is straightforward. However where securities are not exchange traded this process can involve a degree of subjectivity and estimation.


This is also called a simple average and an arithmetic average.

It is calculated by adding up the items to be averaged and then dividing by the total number of items. So for example if a share closes over five days at £2, £2.20, £2.80, £2.40 and £2.60 the mean is ((£2+£2.20+£2.80+£2.40+£2.60)/5), or £2.40. Although commonly used to measure an average, the mean can be skewed by outliers – items with very low or high values – particularly where the sample size is small. It also sometimes gives odd results. For example the mean number of children being born in Spain is around 1.7!


Most things in nature, as well as financial markets, tend towards their long-term mean.

For example although it is possible for share prices to hit new peaks as they did at the height of the Dotcom boom of the late 1990s, mean reversion says they will correct downwards so that valuations sit closer to the long term average (measured as say a long-term price to earnings ratio). The hard part is working out when this will happen. Equally cheap markets may not stay cheap for long as once investors discover them they buy in and drive prices back up towards their long term fair value.


A way to calculate an average value, the median looks for the item in the middle of a sample.

So if a share closes at the following prices over five days, £2, £2.10, £2.50, £3, £3.10, the median value is £2.50.


These are stocks that are not large enough to be large cap but are nonetheless relatively big and widely held and traded.

The exact size depends on who is using the term but could vary from £100m up to £3bn. In the London market for example it would not refer to stocks in the FTSE 100 but would be used to describe firms in mid-250 (the next 250 biggest stocks by market capitalisation).


These arise where a firm is not owned outright by another firm – its “parent” company.

Say for example a predator buys 80% of another firm’s voting shares. It now has control of the entire business since it can outvote other shareholders. When it produces its accounts which combine the two firms together this control is reflected by adding both balance sheets together. However somewhere in those same accounts the part of the target firm that is not owned must be disclosed – this is called a minority interest.


This is an average value that is calculated simply by looking for the most common item in a sample.

For example if a share price closes at the following prices over five days – £2, £2, £2.40, £2.50 and £2.10, the mode is £2.


This is the process by which a criminal tries to convert money and other assets that are acquired from crimes (these include drug trafficking and terrorism) into legitimate funds that will not attract any attention from regulators or other authorities.

This usually involves concealing their origin via a series of “layering” transactions designed purely for that purpose. These are often on uncommercial terms as the original crime is likely to have been highly profitable so a criminal rarely minds if some of their illegitimate gains are given up in the process of cleaning up “dirty” money and/or assets. Money laundering, failing to report suspicious transactions and/or otherwise assisting a money launderer are all crimes.


Also known as defined contribution schemes, money purchase schemes are a way of building up a pension fund.

An employee and an employer can both contribute with the contribution from an employer typically being a fixed percentage of the employee’s salary. Contributions into a money purchase pension receive tax relief. On retirement the resulting pot may be turned into an income, by for example, buying an annuity or by drawing income from the invested pension assets. Since contributions into a money purchase scheme are invested into the open market, the size of the pension pot generated for a retiree is dependent on investment performance.


Many people cannot afford to buy their home outright. A mortgage is a loan secured against a property that funds the part of it a borrower cannot afford themselves.

For example if you have a deposit of £50,000 towards a property that costs £200,000, your mortgage will be for the difference of £150,000. You pay the lender interest (alongside capital under a repayment mortgage) at a rate that varies according to several criteria including the size of the loan and whether you want to agree a fixed rate or a variable rate. Should you fail to make monthly payments on time the lender has the right to take possession of the property.


A moving average is a way of assessing price trends. The problem with looking at say single daily prices for stocks is the underlying trend, up or down, can be masked by short term volatility.

A moving average tries to solve this. For example say a share closes over three days at £2, £2.20 and £2.10. The average is the sum of these divided by three, or £2.10. Now let’s say on day four the closing price is £2.20. The new three day average based on the last three days is ((£2.20+2.10+2.20)/3, or 2.17p. That’s above £2.10 so the “3 day moving average” is rising. When the latest price (£2.20) is above the moving average (£2.17) you have a bullish signal. In practice a 3 day moving average is unrealistic – longer 90 and 200-day averages are much more common.


Share price rises can be driven by two factors – one is an increase in earnings and the other is multiple expansion.

This is where investors mark-up a share in the expectation of future earnings growth rather than on the basis of actual earnings growth. The reverse can also happen. When investors get nervous they may mark down a share, which creates price earnings multiple contraction, even in the face of decent earnings growth.


Share price rises can be driven by two factors – one is an increase in earnings and the other is multiple expansion.

This is where investors mark-up a share in the expectation of future earnings growth rather than on the basis of actual earnings growth. The reverse can also happen. When investors get nervous they may mark down a share, which creates price earnings multiple contraction, even in the face of decent earnings growth.


This is the umbrella US term that refers to their equivalent of unit trusts and open ended investment companies.



This is the yield to maturity on a fixed income security, also known as the gross redemption yield, adjusted for income tax.

Note that it is only the coupons that attract income tax and not any gain or loss that arises between purchase and redemption.


This term describes the situation when a security is first released to the market and made available for trading.

It usually applies to shares but can equally be applied to other asset classes such as bonds.


When a rights issue takes place an investor is usually offered the chance to buy new shares in a firm at a discount to the current price.

So for example in a 1 for 4 rights issue where the current share price is £2 each new share might be offered for £1. This implies an ex-rights price of £9/5 or £1.60. An investor not wanting to buy any more shares can sell his rights on nil paid. Here the implied value of those rights is about 60p i.e. the gap between the subscription price and the ex-rights price.


This is the total amount of a Death Estate (the assets you leave behind on death) that automatically escapes inheritance tax (IHT).

Currently it is £325,000 but this can be increased to take account of property (the “property nil rate band”, which will eventually add another £175,000 once the rules take full effect). Married couples can also take advantage of the fact they get one nil rate band each when estate planning.


This is a fixed amount of a fixed income security – usually £100 – and determines both the amount of the coupon, based on the fixed coupon rate, and the final redemption value when the security is redeemed by the issuer.

It is not however the market price of the security, something that is determined by buyers and sellers.


Rather than record every share purchase on behalf of a client in separate designated accounts with a settlement system, a broker may operate a nominee instead.

This means the holdings of many clients in a particular stock are aggregated and recorded as one. This cuts down on administration and reduces the volume of paperwork received by the client. However any client may specify that they want their holdings segregated and recorded separately.


This is the minimum number of securities for which a market maker is obliged to quote a price at which they are willing to trade according to London Stock Exchange rules.

Any deal in a volume above normal market size is subject to price negotiation.



There are two prices at which most securities can be traded – a bid and an offer.

The offer price is the price you pay to buy a security. So for example if the spread on a share is 210-215, you will pay 215p to buy it.


Examples of this type of fund include unit trusts and open ended investment companies.

The fund is structured so that as investors decide they want to buy the fund it expands to meet their demand by taking their money and investing in more assets. Equally when investors want to sell the fund is able to buy them back, cancel their holding and reduce the underlying asset base accordingly. As such the value of the units cannot vary much from the underlying net asset value. This is different to closed ended funds such as investment trusts where a finite number of shares are traded between investors which can result in them trading at a premium or discount to the underlying assets held by the fund.


This is the relationship between a firm’s fixed and variable costs.

Where fixed costs are high the firm is said to be highly geared, making it more sensitive to changes in sales than a firm with low gearing. For example if a firm makes sales of £100m and incurs variable costs of £10m and has fixed costs (which don’t vary with sales) of £80m, profit is £10m (£100m-£10m-£80m). Now let’s say sales rise by 10% to £110m. Variable costs can be assumed to rise to £11m (up 10%) and fixed costs to stay at £80m. Now the firm’s profit is £19m (£110m-£11m-£80m). So a rise of 10% in sales results in a 90% boost to profits thanks to the firm’s high operational gearing.


This is a derivative that gives the buyer a degree of protection against falling prices.

For example you might buy a “put” option on the FTSE 100 with a strike price of 6,000 points. You will pay an upfront premium for this which is non-refundable. If the FTSE starts falling your option will pay out the further below 6,000 it falls based on the gap between 6,000 and its closing level. That could be useful to compensate you for the corresponding fall in the value of your FTSE portfolio. If on the other hand the market rises your portfolio will benefit and you can abandon the option albeit you have still lost the premium. Similar contracts are available called “call” options based on markets rising.


Most financial decisions carry an opportunity cost – the value of the alternative course, or courses, of action available to you at the time.

For example if you decide to leave your money in a bank account you risk missing out on gains elsewhere available via say property or the stock market. Even within stock portfolios you make choices – such as investing in defensive stocks – that may carry an opportunity cost if other more cyclical stocks outperform subsequently.


Deal instructions to buy and sell shares, or other securities, that have not yet been executed are often held in an order book.

This is just a list of buy and sell orders that gives priority to the best prices – the order with the highest buy price and the order with the lowest sell price usually feature at the top.


There are basically two ways to do a deal to buy or sell a security – on exchange or over the counter.

Many shares for example are listed at large exchanges such as the London Stock Exchange so when a broker wants to place a trade they can do easily quickly and cheaply “on exchange”. Trades that are not routed this way are known as over the counter. Most currency trades and a large number of bonds trades are executed this way.



When you stop working you need an income to pay for your retirement – enter the pension.

There are several types; a final salary scheme pays you a proportion of your final salary in retirement whereas a money purchase scheme means you save a lump sum during your working life which can be converted into an income (via an annuity or income drawdown) on retirement. It may also be left invested. There is also a state pension of a fixed amount per week, although this is relatively low.


Investors usually buy shares hoping for capital appreciation and/or income.

However another reason for buying is the perks that come with some shares. Utility firms for example may offer discounts on their services.


This is a way for an investment bank to sell shares on behalf of a client, perhaps when they first come to market by way of an IPO.

It involves contacting selected buyers, institutional investors or discretionary private buyers, and trying to persuade them to commit to buy blocks of shares. The process often involves a roadshow where the selling bank will approach these potential buyers and pitch to them. The alternative is to offer shares to the public but this is often seen as a more time consuming, expensive and unpredictable route.


Also known as “robbing Peter to pay Paul” this is an illegal scheme whereby a fraudster comes up with a plausible sounding investment opportunity with a near-guaranteed return and persuades an initial batch of investors to commit money.

The fraudster will then make sure that a few of these first investors make the promised return. As word spreads of the profits to be made more investors are lured in but because the underlying investment opportunity is a fake, the fraudster will start to use these fresh deposits to pay some returns to existing scheme members. Provided new investors are enticed in this “pyramid scheme” can keep going. However such schemes usually collapse rapidly and messily once word finally gets out that the promised returns are infact a mirage.


This is a feature of regular, as opposed to lump sum, investing that can smooth out volatility and boost returns depending on what the underlying market does over the investment term.

For example if you invest £1,000 as a lump sum at the start of a five year period when unit prices are £2, you will own 500 units throughout the period. However let’s say that in the interim years unit prices are £1.80, £1.60, £1.80 and £2 and you decide to drip in £1,000 as five lots of £200. You will buy 100 units at £2 each, then £200/£1.80, or 111 units, then £200/£1.60, or 125 units, then £200/£1.80, or 111 units and finally £200/£2, or 100 units. So over five years you have amassed 547 units, or 47 more, thanks to pound cost averaging. However note that if prices rise continuously pound cost averaging will underperform lump sum investing.


A lasting power of attorney (LPA) allows you to appoint someone (your attorney) to make decisions for you.

There are two types covering Property and Financial Affairs and Health and Welfare. They are useful incase you become mentally incapacitated and unable to make financial decisions, or you are suddenly injured or you are located in a geographic location where you cannot take binding financial decisions. The alternative is to have assets supervised by the Court of Protection.


Firms issue two types of share – preference and ordinary, with the latter being more common.

Preference shares carry a fixed dividend, rather than a variable one determined by the directors and generally do not carry voting rights at meetings of shareholders as ordinary shares do. As such they behave more like debt than equity although they rank below debt when it comes to paying back investors in the event of liquidation. Usually the preference dividend for the current year and previous years must be paid by the directors before an ordinary dividend can legally be paid out of profits. Note that preference dividends are paid net of standard rate tax.


This is the relationship between the market capitalisation of a firm and the value of its assets as viewed by an accountant (“the book”).

It is normally expressed as a ratio, so if a firm’s market capitalisation is, say £500m and the book value of its assets is say £250m, the price to book ratio is 2. High ratios tend to suggest a firm is popular and may therefore not be a bargain. Low ratios on the other hand may suggest a firm is undervalued by the market. Care is required, however, when using this metric as a low ratio may also reflect hidden problems and liabilities that some investors will miss.


This compares a firm’s P/E ratio to its expected earnings growth rate to try and indicate whether it is cheap or expensive.

So for example if a firm has a P/E ratio of 10 and its earnings growth rate is 20%, the PEG is 10/20, or 0.5. A PEG below one suggests a share may be cheap as the P/E ratio is supposed to be a reflection of a firm’s future earnings growth rate (so in theory a P/E of 10 suggests a firm should grow at 10% per annum). Equally a share with a PEG above one may be said to be expensive. However care is needed as if the expected growth rate is wrong then any conclusion drawn from the PEG is also invalid.


Price to earnings ratios are a common way to assess whether a share is cheap or expensive.

The ratio compares the current share price to one year’s earnings, typically either the last year or a forecast for the next year. The higher the current share price in relation to one year’s earnings per share the more expensive the firm as this suggests investors could be waiting quite some time to recoup their investment in earnings terms. Equally a low ratio of share price to earnings per share can suggest the share is cheap although be warned – it may also indicate that investors see little prospect of future earnings growth.


This is the name typically given to the shares of small high risk firms.

Sometimes their share price may only be a few pence – hence the name – but this isn’t a requirement to be classified as a penny share. As a rule of thumb if the bid to offer spread (the gap between the buying and selling price for the share) is 10% or more and the share price is less than 50p the label penny stock is often used. Investors should note that these shares are often difficult to trade and highly volatile.


Assets that are given away by their owner before death may not form part of that person’s death estate on death and may therefore not attract inheritance tax.

The term “potentially exempt” refers to the fact that at the time of making the gift, the donor won’t know how long they will subsequently live. If they survive at least 7 years then the gift if fully exempt. However if they survive for less than that then inheritance tax can be levied on the recipient.


This ratio compares the current share price of a firm to the book value per share to give an indication about whether it is cheap or expensive.

For example if a firm has net assets (it’s “book”) of £100m and 100m shares in issue, the book value per share is £1 (£100m/100m). Let’s say the current share price is £2, then the price to book ratio is 2 (£2/£1). As a rule of thumb if this ratio is above one a firm may be considered expensive whereas below one it may be considered cheap – by buying the share you are getting its book at a discount. However this ratio is only really useful in asset intensive sectors where the book value of a firm’s assets is a reliable guide to a firm’s true value.


Used in sectors where firms struggle to make profits, this ratio compares a firm’s share price to revenue (or, sales) per share.

So if a firm has a share price of say £2 and makes sales of 80p per share, the price to sales ratio is 2.5 (£2/80p). A high number indicates that the shares are expensive. It is also worth noting that buying shares on the basis of sales alone can be dangerous if a firm is not also able to generate profits and cashflow.


This umbrella term for essentially private investment covers two main activities.

First off young fast growing firms can struggle to attract finance for expansion from traditional sources such as banks and may be too small to approach the public via a listing on an exchange. Private equity firms often specialise in providing the venture capital these young firms need, usually in return for an equity stake (which they will hope to sell in the future) and perhaps board representation. Other types of private equity firm specialise in buying public firms that are struggling, taking them into private hands, reorganising them and relisting them at a profit. Many private equity firms are privately owned partnerships although they may also be listed firms in their own right.


A financial statement that summarises the revenue (or “sales”) that a firm has generated over a year less the costs incurred.

The net result is its profit (where revenue exceeds costs) or loss (the reverse).


This is a £1 charge levied on share transactions valued at £10,000 or more which helps to pay for the Panel on Takeovers and Mergers.

This non-statutory body imposes certain requirements on publicly listed firms when they attempt to buy, or merge with, other firms.


A contract that gives the person who buys it (the “holder”) the right, but not the obligation, to sell 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 below the strike price at the point the option is exercised, the higher the potential profit for the holder. However in return for granting the option the seller (the “writer”) will demand a non-refundable sum (“the premium”) which is paid whether the option is used (“exercised”) or not.



This is the process whereby central banks create money electronically which enables them to buy government securities.

This is supposed to both create new funds for the sellers of these securities and reduce demand for very safe government assets as QE pushes up their price and squeezes their yield. Where this new money ends up is a matter of some debate – the central bank may hope it ends up creating new loans for businesses and individuals, however it may simply end up being used by banks to reduce their own funding costs. Tapering is the process whereby the pace of QE in terms of monthly purchases of government securities is slowed down and in some cases eventually stopped.


The reverse of QE (above), this is the process whereby a central bank will try to reverse monetary stimulus and reduce the size of its balance sheet in the process.

There are several ways this can be achieved in practice – to avoid too much market disruption, one is to simply allow the bonds which have been purchased by a central bank under QE to mature and for that bank to then cancel the money it receives rather than use it to purchase further bonds. A reduction in the money supply of this type should help to mute inflation – or, at least, that is the theory.



This is money that all of us should set to one side in a liquid home, such as a bank account.

The aim is to have a fund available should we need to fund an unexpected short-term problem, such as losing our job, getting sick or having to repair a leaky roof. The amount will vary from person to person but around 3-6 months of salary will usually suffice.


This is short for Retail Distribution Review. An initiative from the regulator, at the time the FSA, this is aimed at making the retail financial services market more professional, transparent and fairer.

For example it imposes new qualification benchmarks for anyone giving financial advice and requires advisers to be clearer about how charges work.


This is the gross, or “headline” yield on an investment, adjusted for inflation.

So, in simple terms, if the gross yield is 4% and inflation is running at 3%, the real yield is 1% (4-3). This matters because otherwise a quoted income yield won’t take account of the changing price of goods and services – this gets more important as inflation rises.


This is the total annual rate of return on a fixed income security that takes into account income and any capital gain or loss arising before it matures.

Let’s say a 5% bond trading at £105 has a remaining life of 5 years until maturity. We could estimate the annual yield to maturity as the £5 coupon, adjusted for an average annual £1 capital loss of £1 between now and maturity (all bonds are redeemed at their nominal value of £100 and this one is currently priced at £105) as a percentage of the current price. So that’s ((£5/105) x 100%) – ((£1/£105) x 100%) or about 3.8%. Other calculation methods will give a slightly different result. This 3.8% is also known as the “gross” YTM as it ignores income tax. When income tax is deducted the gross yield is quoted “net”.


These are professionals paid to give their opinions on securities.

Different analysts use varying language but in essence their job is to provide the analysis that helps a client to decide whether they should “buy”, “hold” or “sell” a stock. They may be employed by a number of different firms, ranging from banks to brokerages, or they may work independently. Some clients, such as fund managers, can afford to employ their own “buy side” analysts to screen opportunities and make recommendations.


This is a firm that acts as a link between a retail broker and the London Stock Exchange where a broker does not use the exchange’s direct market access option to place and execute trades directly via the LSE order book.


This is a firm that acts as a link between a retail broker and the London Stock Exchange where a broker does not use the exchange’s direct market access option to place and execute trades directly via the LSE order book.


Also known as ROCE this is the total return available from a firm.

There are several ways to calculate it – a common one is to express profits before interest and tax (PBIT or EBIT) as a percentage of total debt and equity capital employed. So if PBIT is say £40m and total capital employed is £400m, ROCE is 10% ((£40m/£400m) x 100%). The higher this number the better and it should usually be high enough to compensate an investor for the risk of investing in shares rather than just parking their funds in something safer such as a bank account.


This is where a company that is already listed on a public market makes a fresh issue of shares in a bid to raise more finance from its shareholders.

The term comes from the fact that in the UK an existing shareholder has a pre-emptive right to buy any new shares that are offered before other investors. This right may be taken up or sold on “nil paid”. Rights shares are usually offered at a discount to the current market price to make them more attractive. The whole issue may be underwritten by a bank as a safeguard against low public demand for the shares.


As a rule of thumb in investing, the more risk you take the higher the return you should expect.

The benchmark for this is usually a medium dated government security issued by a stable country such as the UK or the US. Since the default risk is practically zero the yield available on these securities is sometimes called the “risk free rate”. Someone investing in equities on the other hand should expect normally to earn more than this risk free rate as they are taking more risk – shares are more volatile and firms are more likely to default than governments. The gap between the return you expect on a very safe security and the return you expect from something riskier is known as a risk premium.



Once you meet certain criteria, you are expected to fill in a tax return every year.

These include being employed and earnings over £100,000 per year, being self-employed, having significant investment income or selling potentially chargeable assets such as property or investments. It is important to check this as failure to complete a tax return, when you normally should, can result in penalties.


One way to try and assess which way stock prices will move is via a sentiment indicator.

This measures the extent to which a group of investors is bullish or bearish via a survey. For example a survey may find out that 55% of investor are bullish, 40% are bearish and 5% are neutral (neither). This suggests most investors expect share prices to rise. It is worth noting that a contrarian investor may see very strongly bullish sentiment as a sell signal as when too many people all hold this view share prices can become toppy.


This is the mechanism by which firms raise capital from investors willing to take an equity stake in a business and share directly in its fortunes.

As a firm grows a shareholder may expect to receive an income return in the form of a dividend and also see the value of their share rise. As part owners of the business they are also entitled to vote at shareholder meetings on key issues such as whether the directors are reappointed or not. They also carry some risk in the event a firm goes bust since shareholders rank behind bond holders and other creditors in terms of recovering their money. Shares may be privately owned, in which case they can only be bought as and when existing shareholders decide to sell or they may be more freely available on a public market such as the London Stock Exchange if the issuer is listed.


Firms with excess cash may opt to return it to shareholders by offering to buy back existing shares in the open market.

This has several benefits for the firm including the fact that by reducing the number of shares in issue a firm boosts the price of the remaining ones. A buyback also boosts earnings per share even on static earnings. Let’s say a firm makes earnings of £20m on outstanding shares of 100m; EPS is 20p (£20m/100m). If a buyback reduces the number of shares outstanding by say 20m then EPS becomes £20m/80m, or 25p. Yet earnings have not changed.


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 anyway). In short the less risk the fund manager took in order to generate the returns they achieved, the better. A high Sharpe ratio indicates a better risk adjusted performance. The calculation itself takes a portfolio’s expected return, deducts a risk-free rate and divides the result by a portfolio’s standard deviation (a standard measure of risk).


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 shorting involves borrowing stock and then selling it on, hoping the price will fall before it has to be returned to the original lender plus a lending fee. It is risky because should the stock rise in price mid-way through a short trade it can be difficult and expensive for the short sellers to buy it back to make good on the original stock loan.


A self-invested personal pension (SIPP) is one way to set up a private pension fund that will hopefully provide a pension income on retirement.

The advantage of a SIPP is that the choice of investments that can be held within the SIPP wrapper is vast. You can also run them alongside an existing scheme. Under current rules the SIPP provides income tax relief at your marginal rate (so a higher rate tax payer in effect pays 60p to invest £1) and the resulting fund can be accessed from the age of 55 with up to 25% of it taken as a tax free lump sum.


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 a rule of thumb, once a share has a market capitalisation below £1m it may be referred to as micro-cap instead.


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 on a corporate fixed income security and a government security is known as a “credit spread”. As a rule of thumb in financial markets large spreads signal greater risk, especially where that spread is increasing or “widening”. Conversely “narrowing” spreads suggest that investors are willing to take on risk and are buying them, which tends to make the spread smaller.


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 example it is possible to place a downbet on the FTSE 100 index at a level of say 6,500 at £10 per point. If the index closes at say 6,400 points while the bet is still open an investor could make around 100 points x £10 per point, or £1,000. The word “spread” refers to the fact that there is usually a small gap between the index level if you are a buyer and the equivalent if you are a seller. This represents the spread betting firm’s profit.


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 can make such an investment, rather than a SIPP, which can’t.


This tax is levied on the buyer of registered securities.

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 stamp duty on properties worth up to £300,000.


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 that fluctuate significantly) should offer a higher return to shareholders to compensate for the additional risk.


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 barrier is breached the stop loss kicks in and triggers a sell order on the stock. This will limit losses on the trade although it should be noted that only a “guaranteed stop” will ensure the protection kicks in at exactly £1.80. When markets are moving quickly standard stop orders will not always execute at the specified stop price.


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 a client wants (fixed versus floating for example) at the lowest possible cost (some clients have a natural competitive advantage in fixed rate borrowing and other in floating depending on their size and the types of market that they have access to).



This is the process by which the Federal Reserve winds down its bond buying program in the US.

Part of the Fed’s stimulus for the US economy has involved printing money and using it to buy government bonds and also mortgage backed securities. This is known as quantitative easing and has been designed to reduce demand for government bonds (Treasuries) by pushing up the price and squashing the yield and releasing funds into the economy. Tapering is the reverse – the Fed buying fewer bonds and printing less money as it perceives that the US economy may be picking up.


Whenever you are able to offset an item of expenditure, or a cost, against income or profits in order to reduce the total amount of tax you will pay it is described as tax relief.

So for example you may be receiving rental income on a property but be able to deduct some of the costs of running the building against it – this is an example of tax relief as your net income, and therefore your tax bill, will be reduced as a result.


A word used in the context of charting, technical analysis is the opposite of fundamental analysis – the study of firms from the bottom up. Instead fans of technical analysis believe that the price trend is all that counts so as an investor you should look for a strong price trend and invest accordingly as quickly as possible regardless of the fundamentals (such as a p/e ratio).

The trick is then to spot when an existing trend might be about to end. In both cases price charts are used heavily as a way of spotting the best entry and exit points for a particular stock or index.


This is a useful way to compare the cost of two different funds.

It expresses the total costs including management fees, trading and legal costs and other operational expenses as a percentage of total fund assets. The TER is important to an investor as it has an impact on the overall return an investor makes from a fund. For example if a fund generates a gross return of 7% for the year and the TER is 2%, that return is reduced to a net 5%.


This is the nearest US equivalent to a UK gilt.

Treasuries are IOUs issued in the US to allow the government to borrow to fill the gap between tax receipts and expenditure. Like their UK peers these IOUs usually carry a fixed coupon and redemption (or maturity) date. They are considered to be low risk as the odds of a default by the US government are very low since the US Federal Reserve can always print more money to settle US liabilities.


This is used in different contexts.

If you are looking at a set of accounts, it refers to the sales (or revenue) figure. If, on the other hand, you are using it in the context of share trading then it refers to the volume of trades that have been executed during a particular trading session. High turnover is usually a good sign in a rising market in that it suggests that the bullish price trend is backed by a high number of deals. Trends that are observed on the back of low stock turnover may not be as reliable.


This is a vehicle that can help families to protect assets and also pass them on tax-efficiently.

There are three parties – a settlor puts assets into trust, a trustee then manages them in accordance with their wishes and a beneficiary receives income, capital or both at an agreed point in the future. There are several types of trust. The simplest is known as a bare trust where a beneficiary is known to and can be named by a settlor. Alternatively where there are multiple beneficiaries and/or the benefits from an asset are to be split, a discretionary trust may be more appropriate.



Investment banks can earn fees not just from advising on the timing, pricing and marketing of a new share issue but also from underwriting the whole thing.

When a firm first comes to market via an IPO for example there is always a chance that the investing public will not want to buy all the shares on offer at the offer price. In return for a fee an investment bank can offer to buy up any shares not taken up by other investors and thereby guarantee that the issuing firm raises a minimum amount of capital from the issue. It is quite possible for the same bank to both advise an issuer on the terms of the issue and also act as underwriter.


Unit trusts are open ended investment vehicles set up to make money on behalf of investors.

The term open ended refers to the fact that they can grow and contract as demand for units either expands, or contracts. So for example if a client wants to buy units in a fund, the fund can create additional ones for the investor. This means unit trusts can grow very big. Units share some characteristics with shares – they may offer income and/or capital appreciation for example – however, unlike shares, they cannot be traded between investors via an exchange. The “trust” element comes from the fact that when a fund manager takes money from investors and invests it, the assets of the fund are safeguarded by a separate trustee.


This is a collective investment scheme that does not have authorisation from the FCA.

As such it is not illegal but is subject to constraints on how, and how widely, it markets itself to investors.



This is a vehicle that allows investors to back fast growing, early stage companies via a trust structure that is listed on the London Stock Exchange.

Since this is a high risk investment there are tax breaks available including a maximum 30% rebate of your initial investment (subject to conditions) and a capital gains tax exemption on any profit that you make. The risky nature of the investment makes VCTs suitable for sophisticated wealthy investors who can afford to take a long-term view and weather a substantial loss of capital.


An index, created by the Chicago Board of Trade, to measure volatility.

Also known as the “fear gauge” the Vix captures in a single number the volatility in S&P 50 stock prices expected by Chicago-based options traders. The higher the Vix, the greater the expected volatility in the stock market.


This is the extent to which an asset prices rises and falls and also the speed with which it does so.

As such it is a way of describing the price risk associated with that asset. As a rule of thumb the higher the volatility of an asset the greater the returns an investor should expect to earn from that asset. There are several ways of measuring volatility. One way to mitigate volatility as an investor is to spread your cash over several asset classes and to then diversify within each asset class. For example someone who owns shares should ideally look to own 15-20 as a minimum to reduce the impact of single stock volatility on their portfolio.


This is short for volume weighted average price. It is, as the name suggests, the average price weighted by volume.

For example if four securities have prices of £1, £2, £3 and £4 the average is £2.50 ((£1+£2+£3+£4)/4). However if there are 500 of the first three securities and 2000 of the fourth, the VWAP is £3.14 (500+1,000+1,500+8,000)/3,500).



Wills are legal documents that deal with some crucial issues that only arise when you die.

These include who will act as your executor and distribute your assets on death and who will act as guardian to your children. Someone who dies without a will is said to have died intestate.



A yield curve is a graph that shows how yields on similar fixed income securities change.

It does this by plotting the yield on securities with different maturities and then connecting them using a line. Usually the resulting “curve” for say UK gilts slopes upwards from left to right – shorter dated bonds having lower yields than longer dated – because investors expect a higher yield for taking greater investment risk by investing with the UK government over the long-term rather than the short-term.


This is watched closely by investors because a change can be early warning of broader changes in the economy.

When, for example, the yield curve starts to flatten, such that short and longer-term yields are similar, it can be a signal that a full inversion may occur. In the past, this has tended to coincide with recession and contraction as investors shun long-term bonds in favour of the certainty and safety of higher yielding short-dated ones. In short, there is no reward for taking term risk with an inverted yield curve. In a bid to return the curve to its more usual upward slope, a central bank may cut interest rates and apply monetary stimulus in the form of quantitative easing (QE).



Many securities carry some sort of income return, whether a coupon on a fixed income security or a dividend on a share.

However some securities offer a coupon or dividend of zero. Instead these securities offer future capital gains. As such, in the case of a zero coupon bond for example, they may be issued at a discount to their nominal (or “par”) value to be redeemed later at par. Some preference shares also come in the form of zeros.