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Glossary of Investment Terms

Glossary of Investment Terms

Mastering Investment Terms

Your essential investment definition guide to master the financial vocabulary necessary for successfully navigating the intricate world of investing and finance.

Search our glossary of investment terms for in depth definitions for the most common investing and finance concepts. Whether you’re a weathered captain steering through the turbulent currents of finance or a fledgling mariner tentatively testing the investment waters, our aim is to illuminate the murky depths of financial language.

A

Acquisition premium (see goodwill):

 An acquisition premium, also known as a takeover premium or acquisition price premium, is the amount by which the price paid for acquiring a target company exceeds its current market value or its standalone intrinsic value. It represents the additional cost that the acquiring company is willing to pay to gain control of the target company and its assets. The acquisition premium reflects various factors, including the perceived strategic value of the target, synergies expected from the acquisition, competitive bidding processes, and market sentiment. It is calculated as the difference between the acquisition price and the target company’s pre-acquisition market value, expressed as a percentage.

Active management:

Active management refers to an investment strategy where portfolio managers actively buy and sell securities in an attempt to outperform a specific benchmark or index. Active management involves ongoing research, analysis, and decision-making to capitalise on market inefficiencies and deliver above-average performance for investors.

Alpha:

Alpha is a measure of an investment’s performance relative to a benchmark index. It represents the excess return of the investment compared to the return predicted by its beta (systematic volatility).

Alternative Investment Market (AIM):

AIM is a sub-market of the London Stock Exchange, which allows companies to raise capital with a lower level of regulatory requirements than the main market.

Angel Investor:

An individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity.

Annual report:

An annual report is prepared by corporations or mutual funds, providing shareholders or investors with financial performance, operations, and strategic outlook over the past fiscal year, including audited financial statements and management discussions.

Annualised rate of return:

The annualised rate of return is the average annual return earned on an investment over a specified period, considering compounding effects and expressed as a percentage. It helps assess investment performance and consistency over time.

Appreciation:

Appreciation refers to the increase in value of a financial asset over time, driven by market demand, economic growth, and supply-demand dynamics. It results in capital gains for investors and is essential in investment analysis and wealth accumulation.

Ask price:

The ask price, also known as the offer price, is the price at which sellers are willing to sell a security in the market. It represents one side of the bid-ask spread, indicating the lowest price at which a seller is willing to transact.

Asset allocation:

Asset allocation is the starting point for portfolio construction. Asset allocation is the strategic process of determining and allocating various proportions of an investment portfolio to be invested in different asset classes, such as stocks, bonds, commodities, real estate, and cash, to achieve a desired risk-return profile based on objectives and risk tolerance. Asset allocation is one of the three major independent factors driving investment returns, along with market timing and stock selection.

Asset class:

An asset class is a group of securities or investments with similar characteristics, such as stocks, bonds, and cash equivalents.

Average maturity:

Average maturity, also known as average weighted maturity, measures the average time until the debt securities held in a bond fund’s portfolio mature or are repaid by issuers.

B

Bid-ask or buy-sell spread:

The bid-ask spread is the difference between the highest price buyers are willing to pay (bid price) and the lowest price sellers are willing to accept (ask price) for a security at a given time.

Balanced funds:

Balanced funds are investment vehicles that maintain a diversified portfolio comprising both equity and fixed-income securities. The balanced funds maintain a mix of equity and fixed-income securities to achieve moderate returns while mitigating downside risk.

Bank or Base interest rate:

The bank or base interest rate is the rate at which a central bank lends money to commercial banks within its jurisdiction. The rate serves as a benchmark for borrowing and lending rates rates in the broader economy.

Bayes Theorem:

Bayes’ Theorem is a mathematical formula that describes how to update the probability of a hypothesis based on new evidence. It calculates the probability of a hypothesis given prior knowledge and new data.

Bear market:

A bear market refers to a prolonged period characterised by declining stock prices, typically defined as a 20% or greater decrease from recent highs, often associated with economic downturns and investor pessimism.

Benchmark:

A benchmark is a standard or reference point against which the performance of a portfolio or investment is evaluated, typically represented by an index or peer group of similar investments.

Beta:

Beta is a metric used in finance to measure the volatility of an investment relative to the overall market. A beta of 1 indicates that the investment’s price moves in tandem with the market, while a beta above 1 signifies greater volatility, and a beta below 1 suggests lower volatility. It provides investors with insights into how an asset’s price have fluctuated in relation to market movements.

Bid price:

The bid price is the highest price that a buyer is willing to pay for a security at a specific point in time, representing the price at which an investor can start to sell their shares.

Bitcoin:

Bitcoin is a decentralised digital asset that operates on a peer-to-peer network using distributed ledger (blockchain) technology. As the pioneering cryptocurrency, Bitcoin boasts the largest user base and trading volume among distributed ledger currencies, offering enhanced security and utility compared to many other cryptocurrencies.

Blockchain:

Blockchain is a decentralised, distributed ledger technology that cross-references across multiple computers and records transactions in a secure and tamper-resistant manner. Each transaction is cryptographically linked to the previous one, forming a chain of blocks, hence the name. Blockchain technology offers transparency, immutability, and enhanced security in various industries, including finance, supply chain, and healthcare if the networks are large enough.

Blue-chip:

Blue-chip refers to large, established companies with a history of strong financial performance, market leadership, and stability. These companies are typically well-known, reputable, and have a track record of consistent earnings and dividends.

Board of Trustees:

The Board of Trustees is a governing body responsible for overseeing the management and strategic direction of an institution, such as a corporation, nonprofit organisation, or educational institution. Members of the board are typically elected or appointed and hold fiduciary duties to act in the best interest of the organisation and its stakeholders.

Bonds:

Bonds are fixed-income securities issued by governments, municipalities, or corporations to raise capital. Investors who purchase bonds effectively lend money to the issuer in exchange for periodic interest payments (coupon payments) and the return of the principal amount at maturity. Bonds offer investors a predictable stream of income and are valued based on interest rates, credit quality, and maturity dates.

Bottom-up investing:

Bottom-up investing is an investment approach that focuses on analysing individual securities based on their specific attributes and fundamentals. Investors employing this strategy conduct thorough research on company financials, management quality, competitive positioning, and growth prospects to identify attractive investment opportunities.

Bull market:

A bull market refers to a sustained period characterised by rising stock prices and positive investor sentiment. It is typically driven by optimism about economic growth, corporate earnings, and favourable market conditions.

Buy limit:

A buy limit order is an instruction placed by an investor to purchase shares at or below a specified price. It allows investors to acquire securities if prices reach predetermined levels, potentially enabling them to buy at favourable prices during market downturns or price corrections. Buy limit orders help investors implement disciplined and cost-effective investment strategies.

C

Call Option:

A call option is a financial contract that gives the holder the right, but hough not the obligation, to purchase a specified quantity of an underlying asset at a predetermined price within a specified time frame.

Capital gain:

A capital gain is the profit realised when an investment is sold at a higher price than its original purchase cost, reflecting the increase in asset value over time.

Capital gains tax:

Capital gains tax is a tax imposed on the profits generated from the sale of assets, including stocks, bonds, or real estate, calculated based on the realised capital gain.

Capital loss:

Capital loss refers to the decrease in value incurred when the selling price of a security or investment is lower than its original purchase price. It represents the difference between the proceeds from the sale of the investment and the amount initially invested, resulting in a financial loss for the investor if the sales prices is lower.

Carried Interest:

Carried interest refers to the share of profits that investment managers receive as compensation for managing a venture capital, private equity, or hedge fund. It typically represents a percentage of the fund’s profits above a specified threshold, usually after investors have received their initial investment back plus a predetermined rate of return. Carried interest aligns the interests of fund managers with those of the investors, incentivising them to maximise returns on investments.

Cash equivalent:

A cash equivalent is an investment that can be readily converted into cash without significant loss of value. These short-term financial instruments, such as Treasury bills, certificates of deposit, or money market funds, are considered to have high liquidity, making them suitable for temporary cash storage or short-term cash-management needs.

Commodities:

Commodities are raw materials or primary products traded on commodity exchanges, encompassing metals, energy resources, and agricultural goods, among others.

Common stock:

Common stock represents ownership in a corporation and provides shareholders with voting rights and the potential for capital appreciation through dividends and price appreciation. Unlike preferred stock, common stockholders have residual claim on the company’s assets and earnings, but they are subordinate to debt holders and preferred shareholders in the event of liquidation.

Concentration risk:

Concentration risk conventionally refers to the potential vulnerability of a portfolio due to overexposure to a limited number of assets, sectors, or geographic regions, leading to increased market price sensitivity to adverse events affecting those specific assets, sectors, or markets. Concentration risk assessment should involve both intra-risk analysis, examining concentration within specific risk types, and inter-risk analysis, assessing concentration risk across different risk types.

However, concentration risk is not inherently negative and its assessment should involve considering specific characteristics and risk factors of individual holdings, beyond comparisons to market capitalisation or benchmark weightings, and correlation with other portfolio holdingsThis includes analysis of factors such as asset quality, industry dynamics, regulatory environment, and correlation with other portfolio holdings.

Concentration risk can affect both active and passive investment strategies. In active management, it arises from intentionally overweighting specific assets, companies, or regions. In passive investing, it can occur when a single asset dominates the benchmark index being tracked.

Considering the investor’s perspective, time horizon, and contextual factors, as well as specific characteristics such as asset quality, industry dynamics, and regulatory environment, is crucial in evaluating risks, highlighting its dynamic nature within investment portfolios.

In fact, concentration can deliver positive benefits when done thoughtfully and managed effectively through careful selection of high-quality businesses with favourable economic characteristics. By aligning concentration with investment objectives and risk tolerance and considering both intra-risk and inter-risk analysis, investors can potentially enhance portfolio returns and manage risk more effectively.

Consumer price index (CPI):

The consumer price index is a metric tracking changes in the average prices paid by urban consumers for a predetermined basket of goods and services over time, providing insight into inflation trends and cost-of-living adjustments.

Corporate access:

Corporate access refers to the provision of opportunities for institutional investors to engage directly with corporate management teams and executives. These interactions, which can include meetings, conference calls, or site visits, allow investors to gain insights into a company’s strategy, operations, and financial performance.

Corporate bond:

A corporate bond is a debt security issued by a corporation to raise capital, typically for financing operations, expansion, or acquisitions. Investors who purchase corporate bonds lend money to the issuing company in exchange for periodic interest payments and the return of the principal amount at maturity. Corporate bonds vary in terms of credit quality, interest rates, and maturity dates.

Corporate social responsibility:

Corporate social responsibility (CSR) is a business approach that integrates social considerations into a company’s operations and interactions with stakeholders. CSR initiatives encompass a range of activities aimed at promoting sustainable business practices, ethical behaviour, and positive social impact, including environmental stewardship, community engagement, employee well-being, and ethical supply chain management.

Custodian:

A custodian is a financial institution or entity responsible for safeguarding and administering assets on behalf of clients. Custodians hold and protect securities, cash, and other assets, ensuring their safekeeping and proper record-keeping. They also facilitate securities transactions, process corporate actions, and provide reporting and administrative services to asset owners, such as institutional investors, mutual funds, and pension funds.

D

Default:

Default refers to the failure of a borrower to fulfill their obligation to repay a debt as agreed upon in the loan or bond contract. This can occur when the borrower misses payments, declares bankruptcy, or is otherwise unable to meet their financial obligations.

Derivatives:

Derivatives are financial instruments whose value is derived from the performance of an underlying asset, index, or security. Common types of derivatives include options, futures contracts, swaps, and forwards. Derivatives are widely used in investment and risk management strategies across global financial markets.

Differential taxation of individuals:

Differential taxation of individuals refers to a tax system where individuals are subject to varying tax rates or exemptions based on factors such as their income level, marital status, age, or, historically in some cases, social status or nobility. For instance, in the UK, individuals holding titles such as baronets and higher may have exemptions from certain taxes like inheritance or capital gains taxes.

Diversification:

Diversification is an investment strategy aimed at reducing risk by spreading investments across different asset classes, industries, sectors, or geographic regions. The principle behind diversification is that by investing in a variety of assets with different risk-return profiles, the overall portfolio risk can be mitigated. Diversification can help investors achieve a more stable and consistent return over time, as losses in one asset may be offset by gains in another, thereby reducing the impact of market volatility on the overall portfolio.

Dividend:

A dividend is a distribution of a portion of a company’s earnings to its shareholders, typically in the form of cash payments. Dividends provide shareholders with a source of income in addition to any potential capital appreciation from increases in the stock price. Companies may also issue special dividends as a one-time payment to distribute excess cash to shareholders.

Dividend yield:

Dividend yield measures the annual dividend income received by an investor relative to the current market price of a stock. It is calculated by dividing the annual dividend per share by the current market price per share and expressing the result as a percentage. Dividend yield provides investors with insight into the income-generating potential of a stock relative to its price, helping them evaluate investment opportunities and compare dividend-paying stocks.

Domestic bonds:

Domestic bonds are debt securities issued by domestic borrowers, such as governments, corporations, or financial institutions, in their own currency on their home market. These bonds are typically denominated in the local currency of the issuing country and are subject to the domestic regulatory framework and tax laws.

Double Taxation Agreement (DTA):

Double Taxation Agreements (DTAs) are international treaties designed to alleviate or eliminate the burden of double taxation for individuals and businesses operating across borders. Double taxation occurs when the same income or profit is taxed by two different countries. DTAs provide mechanisms to ensure that income is taxed only once or to provide relief by allowing credit for taxes paid in one country against taxes owed in another. Ultimately, DTAs serve to promote international trade and investment by reducing tax barriers and ensuring fair taxation for taxpayers operating globally.

Duration:

Duration is the weighted average time it takes for an investor to receive the present value of a bond’s cash flows, including both coupon payments and the return of principal, considering the time value of money.

E

Earnings per share (EPS):

The portion of a company’s net profit allocated to each outstanding share of common stock. It’s calculated as the net income of the company minus preferred dividends, divided by the weighted average number of common shares outstanding during the period.

EBIT:

A financial metric representing a company’s operating profit, calculated by subtracting operating expenses (excluding interest and taxes) from total revenue. EBIT provides insight into a company’s ability to generate profit from its core operations before considering the impact of financing and tax considerations.

EBITDA:

Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) is a non-GAAP financial metric used to represent a company’s operating performance by adding back non-cash expenses such as depreciation and amortisation to EBIT. It can be subject to manipulation through accounting practices related to the calculation of depreciation and amortisation expenses.

Emerging markets:

The term “emerging markets” was coined by Antoine W. Van Agtmael, a former World Bank official, in the early 1980s. He used it to describe financial markets in developing countries that were experiencing rapid economic growth and industrialisation. These markets often have lower income levels, less mature financial systems, and higher levels of risk compared to developed markets.

Environmental, social and governance (ESG):

ESG ratings are assessments of a company’s performance in environmental, social, and governance areas. The phrase “ESG” was introduced in a forward to a report by the United Nations Environment Programme Financial Initiative (UNEP FI) in 2004, authored by Klaus Toepfer. Initially, ESG criteria primarily focused on penalising companies lacking in governance, particularly those with opaque or collective ownership structures, which would adversely affect their ability to attract investment. However, as reporting systems have improved, ESG assessments have evolved to consider a broader range of factors, including environmental stewardship and social responsibility. This shift reflects a growing recognition of the importance of holistic sustainability practices in evaluating a company’s performance.

Equities (shares): 

A security or share provides ownership rights in a company that entitle the holder to a share of the company’s assets and profits.

Equity fund:

A type of mutual fund or exchange-traded fund (ETF) that primarily invests in stocks or shares of companies.

Ex-dividend:

Ex-dividend refers to the status of a security when it is traded without the right to receive a declared dividend. This status occurs on or after the ex-dividend date, which is set by the company’s board of directors.

Ex-dividend date:

The date on or after which a security trades without a previously declared dividend. Investors who purchase shares on or after this date are not entitled to the dividend payment.

Exclusion strategies:

Investment strategies that involve excluding certain companies or industries from a portfolio based on specific criteria such as ethical, environmental, or social considerations.

F

Federal Funds Rate (Fed Funds Rate):

The Federal Funds Rate, often abbreviated as Fed Funds Rate, is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an un-collateralised basis, as mandated by the Federal Reserve. It serves as a benchmark for short-term interest rates in the broader financial markets and plays a crucial role in influencing monetary policy, economic activity, and inflation levels.

Federal Reserve Banks:

The Federal Reserve System comprises 12 regional Federal Reserve Banks that operate under the supervision of the Board of Governors. These banks serve as the operating arms of the Federal Reserve and are responsible for implementing monetary policy, supervising and regulating member banks, providing financial services to depository institutions, and facilitating the stability of the financial system within their respective districts.

Federal Open Market Committee (FOMC):

The Federal Open Market Committee (FOMC) is the principal policymaking body within the Federal Reserve System, comprising 12 members. These include the seven members of the Board of Governors and five Reserve Bank presidents who serve on a rotating basis. The FOMC convenes regularly to evaluate economic conditions, establish monetary policy goals, and establish the target range for the federal funds rate.

Federal Reserve Board (The Fed):

The Federal Reserve Board, commonly referred to as the Fed, is the central banking system of the United States, responsible for formulating and implementing monetary policy. The primary goals of the Federal Reserve, as stipulated in the Federal Reserve Act, are to promote maximum employment and stable prices. Headquartered in Washington, D.C., the Fed comprises the Board of Governors, Federal Reserve Banks, and the Federal Open Market Committee (FOMC).

Fixed income security:

A fixed income security, also known as a fixed-income instrument or bond, is a type of investment that provides a predetermined stream of income over a specified period. Common types of fixed income securities include government bonds, corporate bonds, municipal bonds, and certificates of deposit (CDs).

Fiscal Policy:

Fiscal policy refers to the use of government spending and taxation to influence the economy’s overall level of economic activity, employment, and inflation. 

Free Cash Flow:

Free cash flow (FCF) is calculated by subtracting interest payments, and taxes from operating cash flow and then deducting capital expenditures necessary to maintain its existing asset base. This metric provides insight into a company’s ability to generate cash that can be used for capital allocation either via dividends, share buybacks, debt repayment, or further investments into growth.

Free Float:

Free float represents the portion of shares available for trading in the open market, excluding closely held shares.

Frontier markets:

Frontier markets refer to a subset of emerging markets characterised by smaller, less developed, and less liquid capital markets. Frontier markets often include countries with developing economies that are in the early stages of financial market development.

Fund of funds:

A fund of funds (FoF) is an investment fund that pools capital from investors to invest in a diversified portfolio of other investment funds rather than directly investing in individual securities or assets. These underlying funds may include mutual funds, hedge funds, private equity funds, or other types of investment vehicles.

Fund:

A fund, in the context of finance and investing, refers to a pool of money collected from various investors for the purpose of investing in securities, assets, or other financial instruments according to a specific investment strategy or objective. Funds can take various forms, including mutual funds, exchange-traded funds (ETFs), hedge funds, pension funds, and private equity funds, each catering to different investor preferences, risk profiles, and investment goals.

G

Gearing:

Gearing is net debt divided by shareholders’ funds, and shows how much a company relies on debt compared to equity to fund its operations and investments.

Goodwill (view acquisition premium):

Goodwill refers to the intangible asset representing the excess of a company’s purchase price over the fair value of its identifiable assets acquired in a business combination. In the first year following the acquisition this premium is recorded as an intangible asset on the balance sheet (goodwill). However, in subsequent years, the goodwill is amortised. The amortisation process essentially acknowledges the overpayment for assets and recognises it as an expense over time.

Government bonds (gilts):

Government bonds, also known as gilts in the United Kingdom, are debt securities issued by national governments to raise capital and finance public spending or budget deficits. These bonds typically pay periodic interest payments (coupon payments) to bondholders until maturity, at which point the principal amount is repaid.

Green bonds:

Green bonds are fixed-income securities issued by governments, municipalities, corporations, or financial institutions to finance environmentally sustainable projects or initiatives. Nonconformity to the standards or initiatives defined in the bond prospectus may result in a minute increase in borrowing costs.

Gross profit:

Gross profit is the revenue from sales minus the cost of goods sold (COGS), reflecting a company’s profitability from core operations. It excludes expenses like overhead costs, taxes, and interest payments, focusing solely on basic profitability.

H

Hedge:

A hedge involves taking a counterbalancing position to an existing position in another security or derivative to offset potential losses from market fluctuations, currency fluctuations, or interest rate changes.

Hedge fund:

A hedge fund is an investment fund that employs a range of sophisticated investment strategies and techniques to generate returns for its investors. Hedge funds typically target absolute returns and may use leverage, derivatives, short selling, and other tactics to hedge against market risks or exploit investment opportunities.

High yield bond:

High yield bonds, also known as junk bonds, are fixed-income securities issued by corporations or governments with lower credit ratings than investment-grade bonds. High yield bonds may be issued by companies undergoing financial distress, smaller companies, or issuers from emerging markets.

Holding period:

The holding period denotes the duration for which an investor retains a specific investment before selling. This timeframe can fluctuate, contingent upon various factors such as investment goals, market dynamics, individual inclinations, and even investor resilience amid challenging market conditions.

Holding Period Return:

The total return earned from holding an investment over a specific period, including any income generated and capital appreciation or depreciation.

I

Illiquid Asset:

An illiquid asset refers to an investment that cannot be quickly sold or converted into cash without incurring a significant loss in value. Examples include real estate properties, private equity investments, and certain types of bonds that lack active trading markets.

Immunisation:

A strategy used to protect a portfolio from interest rate risk by matching the duration of assets with the duration of liabilities. This aims to mitigate the impact of changes in interest rates on the portfolio’s value, but it doesn’t guarantee complete protection.

Impact Investing:

Impact investing refers to an investment approach aimed at generating positive social or environmental impacts alongside financial returns. Investors in impact investing seek to support projects, companies, or organisations that address specific social or environmental issues while also seeking a financial return on their investment.

Income Funds:

Income funds are investment vehicles that primarily focus on securities offering high dividend yields or interest payments, such as bonds and dividend-paying stocks, making them suitable for investors seeking regular income distributions.

Index Funds:

Index funds aim to replicate the performance of specific market indices, like the S&P 500 or FTSE 100, typically at lower costs than actively managed funds due to their passive investment approach.

Indexing:

The investment strategy of replicating the performance of a specific market index by holding a portfolio of securities that closely mirrors the index’s composition. Indexing is often used in passive investment strategies.

Inflation:

Inflation is the rate at which the general level of prices for goods and services in an economy rises over a specific period, leading to a decrease in the purchasing power of money. It is typically measured as the percentage change in the Consumer Price Index (CPI) or Producer Price Index (PPI) over time. Inflation erodes the real value of investments over time if the returns earned on those investments do not exceed the rate of inflation.

Inflation-Linked Bonds:

Inflation-Linked Bonds are financial instruments where the principal value adjusts periodically to reflect changes in the inflation rate. Inflation-Linked Bonds are often issued by governments as a hedge against inflation and are also known as inflation-indexed bonds or real return bonds.

Information Ratio:

The information ratio is a measure used to evaluate the risk-adjusted performance of an investment strategy or portfolio manager. It compares the excess return of an investment strategy or portfolio relative to a benchmark to the volatility of those excess returns. A higher information ratio indicates that the portfolio manager has generated greater excess returns relative to the risk taken, suggesting superior performance.

Initial Public Offering (IPO):

In an Initial Public Offering, or IPO, a private company transitions into a publicly-traded company by offering shares listed on the stock market to investors. This process allows the company to raise capital by selling ownership stakes to investors. IPOs are typically underwritten by investment banks, which help facilitate the offering process, set the initial offering price, and distribute shares to investors. IPOs are often preceded by a period of intense scrutiny and preparation by the company, as they involve significant regulatory requirements and public disclosure of financial information.

Insider Trading:

Insider trading refers to the illegal practice of trading stocks or other securities based on material, non-public information about the company. This unethical behaviour undermines the fairness and integrity of financial markets, as it gives individuals with access to privileged information an unfair advantage over other investors. Individuals found guilty of insider trading may face severe penalties, including fines, imprisonment, and civil lawsuits.

Institutional Investors:

Institutional investors are entities that invest sums of money on behalf of their members or clients. While commonly associated with large organisations such as pension funds, insurance companies, mutual funds, and hedge funds, institutional investors also include smaller entities like endowments, foundations, and certain investment firms.

Interest Rate:

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates play a crucial role in determining the cost of borrowing, the return on savings, and the valuation of financial assets.

Interest Rate Swap:

An interest rate swap is a financial derivative contract between two parties that involves the exchange of interest rate cash flows. In an interest rate swap, one party agrees to pay a fixed interest rate on a notional principal amount in exchange for receiving a floating interest rate based on a reference interest rate. Interest rate swaps are commonly used by market participants to manage interest rate risk or to modify the interest rate characteristics of their liabilities or assets.

International Bonds:

Bonds issued by foreign governments or corporations in currencies other than the issuer’s domestic currency. International bonds provide investors with diversification and exposure to different interest rate and currency environments.

International Equity:

International equity refers to the ownership of stocks or shares in companies that are domiciled outside of an investor’s home country.

Intrinsic Value:

Intrinsic value reflects what an asset is truly worth, independent of its market price or prevailing market conditions, based on its fundamental characteristics and future cash flows. Investors use various methods to estimate intrinsic value and assess investment opportunities.

Investment Company:

An investment company is a type of financial institution that pools money from investors and invests it in a diversified portfolio of securities, such as stocks, bonds, or other financial instruments. Investment companies offer investors the opportunity to access a diversified portfolio managed by professional investment managers, providing potential returns and risk mitigation.

Investment Grade:

An investment grade refers to a credit rating indicating that a bond or other fixed-income security carries a relatively low risk of default. This rating is assigned based on the issuer’s perceived financial strength and creditworthiness.

Investment Horizon:

The investment horizon refers to the duration or length of time that an investor anticipates holding an investment before selling or divesting it. It is a critical aspect of investment planning and strategy, influenced by various factors including financial goals, risk tolerance, market conditions, and the specific characteristics of the investment itself.

Investment Objective:

An investment objective delineates the specific aim or purpose an investor seeks to accomplish through their investment endeavours, such as capital preservation, income generation, or capital appreciation. It serves as a guiding principle for asset allocation and investment strategies, helping investors align their portfolio decisions with their financial goals and risk preferences, and determine appropriate asset allocation and investment strategies.

Investment Policy Statement (IPS)

An Investment Policy Statement (IPS) is a formal document outlining an investor’s financial objectives, risk tolerance, investment preferences, and constraints. The IPS guides the selection of appropriate asset allocation and investment strategies to achieve desired outcomes.

Investment Stewardship:

Investment stewardship is the responsible and active oversight of investment assets by fiduciaries, such as institutional investors or asset managers, to ensure that investments are managed in the best interests of the beneficiaries or clients. It involves engaging with investee companies on matters such as corporate governance, environmental policies, social responsibility, and long-term strategic issues.

Investment Trust:

An investment trust is a type of collective investment vehicle, often structured as a publicly traded company, that pools funds from investors to invest in a diversified portfolio of securities. Unlike mutual funds, investment trusts are closed-ended, meaning they have a fixed number of shares that trade on stock exchanges. Investment trusts are  also mandated to pay out a fixed percentage of their earnings each year, which can have taxation implications for individuals.

Issuer:

An issuer is an entity, such as a corporation or government, that creates and sells securities, such as stocks, bonds, or options, to raise capital.

J

Joint Venture:

A joint venture is a business arrangement where two or more parties collaborate to undertake a specific project or business activity, pooling their resources, sharing risks, and rewards and expertise to achieve mutual goals. Each party retains its individual legal identity, and the joint venture itself is typically a separate entity established for the purpose of the collaboration.

Junk Bonds:

Junk bonds, also known as high-yield bonds, are fixed-income securities issued by companies or entities with lower credit ratings than investment-grade bonds. Junk bonds typically offer higher yields to compensate investors for the increased risk of default associated with lower-rated issuers. Although junk bonds carry higher credit risk, they can provide investors with higher returns compared to investment-grade bonds under certain market conditions.

K

Key Performance Indicators (KPIs):

Key Performance Indicators (KPIs) are quantifiable metrics used to evaluate the success of an organisation, investment, project, or a specific activity in achieving its objectives. These indicators are carefully selected to measure progress towards strategic goals and provide insights into performance trends over time and can include financial metrics, operational metrics, customer satisfaction scores, and more.

L

Leverage (gearing):

Leverage refers to the strategic use of borrowed funds or debt to increase the potential return on investment. Leverage magnifies both gains and losses, amplifying the risk of investment activities. Common forms of leverage include margin trading, derivatives, and loans.

Liability:

An obligation or debt owed by an individual or entity, arising from past transactions or events. Liabilities include loans, mortgages, accounts payable, and other financial obligations that must be settled in the future.

Liquidity:

Liquidity refers to the ease and speed with which an asset can be bought or sold in the market without significantly affecting its price. It indicates the ability to convert an asset into cash quickly without incurring substantial loss in value.

Listed Security:

A listed security is a financial instrument, such as a stock or bond, that is traded on a public exchange. These securities are officially listed and traded on recognised stock exchanges, providing investors with transparency, liquidity, and regulatory oversight.

Load Fund: 

A load fund is a mutual fund that charges investors a sales commission or fee. This fee compensates brokers or financial advisors for selling the fund to investors.

  • Front-end Load: A front-end load is a sales commission or fee charged to investors when they purchase shares of a mutual fund. It is deducted from the initial investment amount, reducing the total amount invested.
  • Back-end Load: A back-end load, also known as a deferred sales charge, is a fee imposed on investors when they redeem their shares from a mutual fund. The fee typically decreases over time and may be waived after a certain holding period.
  • No-load: A no-load fund is a mutual fund that does not charge investors any sales commission or fee when buying or redeeming shares. Investors in no-load funds typically purchase shares directly from the fund company, bypassing brokers or financial advisors.

Long-term Investment Strategy:

A long-term investment strategy is an approach to investing focused on achieving financial goals over an extended period. Industry norms have shifted it shorter and now already starts as typically five years or more. It involves selecting and holding investments with the expectation of achieving capital appreciation, income generation, or both, over the long term. Long-term investors often prioritise asset allocation, diversification, and a quality focus to align with their financial objectives and risk tolerance.

M

Management Fee:

A fee paid by investors to the fund manager or investment advisor for managing and overseeing investment portfolios. Management fees are typically calculated as a percentage of assets under management (AUM) and cover the costs of research, analysis, and portfolio management.

Market Capitalisation:

Market capitalisation, or market cap, is a measure of a company’s size calculated by multiplying its share price by the total number of outstanding shares, which excludes treasury shares. Market cap, increasingly adjusted for free-float, is used for index inclusion, benchmark tracking, and implementing size-biased investment strategies, such as distinguishing between Large Cap and Small Cap stocks.

Market Efficiency:

Market efficiency is a financial theory asserting that share prices fully reflect all available information at any given time. In an efficient market, prices adjust rapidly and correctly to new information, making it impossible for investors to exploiting market inefficiencies. There are three levels formulated:

  • weak efficiency suggests that past price and volume data are already incorporated into current prices, making technical analysis ineffective,
  • semi-strong efficiency suggests that public information are already incorporated into current prices, meaning neither fundamental nor technical analysis can consistently generate excess returns, and
  • strong efficiency posits that all information, public and private, is reflected in asset prices, rendering even insider information incapable of providing an advantage.

Despite its widespread application, empirical evidence for market efficiency is lacking, raising questions about its validity in financial theories like the Capital Asset Pricing Model (CAPM) or Modern Portfolio Theory (MPT).

Market Risk:

Market risk refers to the potential for losses in investment portfolios due to adverse fluctuations in asset prices or broader economic conditions over a designated time horizon. It encompasses the impact of unpredictable market movements, systemic risks affecting entire markets, and other factors that can result in financial losses for investors, provided investors act within that designated time horizon.

Market Timing:

Market timing involves attempting to predict movements in financial markets, including fluctuations in stock prices, interest rates, and currency exchange rates, and then adjusting investment positions between these assets accordingly, aiming to buy low and sell high. While market timing is widely regarded as a questionable strategy due to its inconsistency with the long-run investment policy of a portfolio, it continues to appeal to investors.

Most notably it appeals to those who do not believe that markets are efficient, or those who operate in inefficient markets, but it can also tempt those who are driven by the allure of quick gains, or the fear of missing out on lucrative opportunities.

However, serious investors recognise the challenges and risks associated with market timing, including transaction costs, market impact, and changes to portfolio risk profiles, particularly in efficient markets. As market timing actions always cause portfolios to deviate from desired characteristics, they strive to avoid significant deviations from their asset allocation targets and prioritise disciplined, long-term investment approaches over market timing tactics.

Market Value:

The current price at which an asset can be bought or sold in the market, determined by supply and demand dynamics. Market value may differ from intrinsic value and can fluctuate over time in response to market conditions and investor sentiment.

Maturity Date:

The date on which a bond or other fixed-income security becomes due for repayment by the issuer, at which point the principal amount is repaid to the investor. Maturity date is also used to refer to the expiration date of options and futures contracts.

Mid-Cap Stocks:

Stocks of companies with medium-sized market capitalisations, typically between those of large-cap and small-cap stocks. Mid-cap stocks generally refer to equities of companies with market capitalisations typically ranging from $2 billion to $10 billion in the United States, although definitions may vary in other regions, starting at lower thresholds.

MiFID (Markets in Financial Instruments Directive):

MiFID is a European Union directive that regulates financial markets and investment services within the European Economic Area (EEA). Originally implemented in 2007 and revised in 2018 as MiFID II, the directive aims to harmonize regulation across member states, enhance transparency, and improve investor protection in financial markets.

Momentum Investing:

An investment strategy that involves buying assets that have exhibited strong recent performance and selling assets that have exhibited weak recent performance. Momentum investors believe that trends in asset prices will continue in the short term and seek to capitalise on them.

Money Market:

The money market is a financial marketplace where short-term debt securities with high liquidity and low duration are traded. These securities typically include treasury bills, commercial paper, certificates of deposit, and repurchase agreements which have maturities of one year or less, making them suitable for investors prioritising short-term liquidity needs and seeking stability over the short term.

Money Market Fund:

A Money Market Fund is a type of mutual fund that invests in short-term, low-duration securities like treasury bills and commercial paper. It offers stability and liquidity making it suitable for investors prioritising capital preservation over the short term, and immediate access to cash. However, over longer horizons, returns may not outpace inflation, affecting purchasing power.

Monetary Policy:

Monetary policy refers to the actions undertaken by a central bank or monetary authority to control the supply of money and credit in an economy to achieve specific economic objectives. Through monetary policy, central banks set interest rates, conducting open market operations, and establishing reserve requirements for banks.

Mortgage:

A mortgage is a legal agreement between a borrower and a lender, for financing the purchase of property. The borrower pledges the property as collateral and agrees to make regular payments, including interest, over a specified period until the loan is repaid.

Mortgage-Backed Security (MBS):

A mortgage-backed security (MBS) is a type of asset-backed security that represents an ownership interest in a pool of mortgage loans. Financial institutions, such as banks or mortgage lenders, bundle individual mortgage loans into a pool and then issue MBS to investors, who receive payments based on the interest and principal payments made by borrowers on the underlying mortgages. MBS can be structured in various ways, including pass-through securities, collateralized mortgage obligations (CMOs), and mortgage-backed bonds.

Mutual Fund:

A mutual fund is a pooled investment vehicle that collects money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional portfolio managers, mutual funds offer investors the opportunity to access a diversified investment portfolio without directly owning individual securities.

N

Net Asset Value (NAV):

The Net Asset Value (NAV) is a financial measure used to determine the per-share value of an investment fund or company. It’s calculated by subtracting liabilities from total assets and dividing the result by the number of outstanding shares. NAV reflects the market value of underlying securities and is typically calculated daily, guiding buying and selling prices of fund shares.

Net Income:

Net income, in finance and accounting, is the profit remaining after deducting all expenses from total revenue. It’s a key metric for assessing a company’s financial performance, representing the profitability available to shareholders after accounting for all obligations.

Nominal Value:

Nominal value in finance refers to the face value of a financial instrument like a bond or stock, not adjusted for inflation. It’s the value assigned by the issuer and is used for pricing and accounting, contrasting with real value, which adjusts for inflation.

O

Open-End Fund [Open-Ended Investment Companies (OEICs)]:

Open-ended investment companies (OEICs) are a type of collective investment fund structure commonly used for mutual funds and unit trusts. OEICs can issue an unlimited number of shares or units to investors and will buy back shares or units at their net asset value (NAV) upon request. In an OEIC, investors transact at the net asset value (NAV) of the fund. The fund can profit by creating units when NAV’s move higher and redeeming them when NAV’s move lower, taking advantage of price differentials.

Operating Income:

Operating income, also called EBIT, reflects the profit from a company’s core operations, excluding interest, taxes and non-operating expenses. It’s calculated by deducting operating expenses from gross income and is a key indicator of operational efficiency and profitability.

Option:

An option is a financial derivative contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (known as the strike or exercise price) within a specified time period or on a specific date.

OTC (Over-the-Counter):

OTC refers to the trading of financial instruments, such as stocks, bonds, currencies, and derivatives, directly between two parties outside of a formal exchange or organised trading venue. In OTC markets, buyers and sellers negotiate prices and terms bilaterally, often facilitated by brokers or dealers.

Overweight:

Investment overweight refers to a deliberate allocation of a larger proportion of a portfolio to a specific asset class, sector, or security compared to its weighting in a benchmark or target allocation. This strategic decision is typically based on the investor’s expectation of superior performance or higher potential returns from the chosen asset relative to others in the portfolio.

P

Par Value:

Par value refers to the nominal or face value assigned to a security, such as a bond or a stock, by the issuer. It represents the initial value at which the security is issued and is typically stated on the security certificate. Par value is used for accounting and legal purposes and does not necessarily reflect the current market price of the security.

Passive Management (Investing):

Passive management, also known as passive investing or index investing, is an investment strategy that aims to replicate the performance of a specific market index or benchmark rather than actively selecting individual investments. Fund managers in passive management construct portfolios intended to mimic the composition and weighting of securities in the selected index, striving to minimise tracking error.

Payout Ratio:

The payout ratio is the percentage of earnings paid out as dividends to shareholders compared to total earnings. A lower payout ratio indicates that a company retains more earnings for reinvestment or other purposes, while a higher ratio indicates a greater focus on shareholder returns. Adjusting the payout ratio based on anticipated returns is a strategic decision made by companies to optimise capital allocation and enhance shareholder value.

Portfolio:

A portfolio is a collection or assortment of financial assets, including stocks, bonds, mutual funds, and cash equivalents, owned by an individual or organisation. Portfolios are typically assembled with the objective of achieving specific goals, such as capital appreciation, income generation, risk diversification, social impact, or purchasing power preservation.

Preferred Stock:

Preferred stock, also known as preference shares, is a type of ownership in a company that entitles holders to fixed dividend payments, typically before common stockholders, but without voting rights. It ranks higher than common stock but lower than bonds in asset distribution during liquidation. Preferred stock can be callable and convertible, offering flexibility to both issuers and investors.

Power Purchase Agreements (PPAs):

Power Purchase Agreements (PPAs) are contracts between power generators (often a renewable energy company) and a utility or government agency, forming a public-private partnership. In these agreements, the generator commits to supplying a specified quantity of electricity over a predetermined period, at an agreed-upon price. The price may include predetermined adjustments based on specific factors such as inflation or changes in market conditions.

Price-Book Ratio (P/B Ratio):

The price-to-book (P/B) ratio, also known as the market-to-book ratio, compares a company’s market capitalisation (the total market value of its outstanding shares) to its shareholders’ equity (the difference between its assets and liabilities). It is calculated by dividing the market capitalisation by the shareholders’ equity. The P/B ratio is used by investors to assess whether a stock is undervalued or overvalued relative to its book value.

Price-Earnings Ratio (P/E Ratio):

The Price-Earnings Ratio (P/E Ratio) is calculated by dividing a company’s current share price by its earnings per share (EPS). The P/E ratio indicates how much investors are willing to pay for each dollar of earnings.

Private Equity:

Private equity involves investing in privately held companies to generate long-term returns. Unlike publicly traded firms, these investments are not traded on stock exchanges. Investors typically play an active role in managing and enhancing the value of these companies with the goal of selling them for a profit later on

Prospectus:

A prospectus is a legal document provided by mutual funds, exchange-traded funds (ETFs), and other securities issuers to prospective investors, containing information about the investment objectives, risks, fees, and financial performance of the securities to be issued. Prospectuses are required by regulatory authorities to adhere to regulatory standards for accuracy and transparency.

Proxy Voting:

Proxy voting is a process whereby shareholders delegate their voting rights to a designated representative, the company’s management, a proxy advisory firm, or a mutual fund, to cast votes on their behalf at a shareholder meeting or on specific corporate matters. This practice enables shareholders who cannot attend meetings in person to participate in decision-making and governance activities. Proxy votes are crucial for shaping corporate policies, electing directors, approving mergers or acquisitions, and other significant matters affecting the company’s direction and governance.

Public Offering:

A public offering, refers to the process by which a company offers its shares of stock to the general public for purchase, typically through a stock exchange, thus making them available for trading on the open market. Public offerings are regulated by securities laws and overseen by regulatory authorities to ensure fairness, transparency, and investor protection.

Q

Quantitative Easing:

Quantitative easing (QE) is a monetary policy tool used by central banks to stimulate the economy by purchasing long-term government securities and other financial assets. This aims to boost economic activity by increasing the money supply, encouraging lending and investment, and supporting asset prices. However, QE carries risks such as inflationary pressures, market distortions, and dependency on central bank intervention.

R

Real Estate Investment Trust (REIT):

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate assets. REITs pool funds from investors to purchase and manage various types of properties, such as commercial buildings, apartment complexes, hotels,
shopping malls, or warehouses. REITs are required to distribute most of their taxable income to shareholders in the form of dividends.

Real Return:

Real return is the net gain or loss on an investment after adjusting for inflation. It reflects the actual increase or decrease in purchasing power over time and is calculated by subtracting the inflation rate from the nominal return. Real return measures the purchasing power gained or lost on an investment and provides a more accurate assessment of investment performance.

Rebalancing:

Rebalancing involves making adjustments to a portfolio’s holdings to realign it with the desired investment strategy or target allocation. This involves buying or selling assets to keep the portfolio in line with its target allocation, helping manage risk and ensure alignment with financial goals

Recapitalisation:

Recapitalisation refers to the restructuring of a company’s capital structure. It may include issuing new debt or equity, repurchasing existing debt, or buying back shares. The goal is to adjust leverage levels and address financial challenges or opportunities.

Regulatory Risk:

Regulatory risk is the possibility of negative outcomes for businesses or investments due to changes in laws, regulations, or government policies. These changes can affect operations, compliance, costs, and market opportunities. It arises from uncertainties about future regulatory actions, requiring businesses and investors to monitor developments closely and adapt accordingly.

Risk Free Assets:

A risk-free asset is an investment perceived to offer a return without any significant risk of loss. US Treasury bills are often considered close to risk-free, as the issuer (US government) is regarded as one of the most financially stable entities globally, with a very low risk of default, and with rates that closely tracking historical inflation (price) increases. typically backed by a financially stable entity such as the US government. But unfortunately, they have not always provide returns that perfectly hedge against inflation. In certain periods, the returns on risk-free assets, like US Treasury bills, may fall short of inflation, resulting in a loss of purchasing power for investors after adjusting for inflation.

Risk Free Rate:

A risk-free rate is the theoretical rate of return on an investment that is considered to have zero risk of default. It serves as a benchmark against which the risk and return of other investments can be compared. Typically, the risk-free rate is derived from the yield on government bonds issued by financially stable governments, such as US Treasury bonds, which are perceived to have minimal risk of default.

S

Sector:

A sector refers to a distinct segment of the economy composed of companies or organisations that produce similar goods or offer related services. Sectors are classified based on common characteristics like industry type, business activities, or market focus.

Securitisation:

Securitisation is a financial process whereby a company pools various types of debt, such as mortgages, auto loans, or credit card debt, and sells them to investors as securities backed by the cash flows generated from those assets. These securities, known as asset-backed securities (ABS), provide investors with income from interest and principal payments made by borrowers.

Securities and Exchange Commission (SEC):

The Securities and Exchange Commission (SEC) is a government agency established in the United States to regulate and oversee the securities industry, including the nation’s stock and options exchanges, as well as other electronic securities markets.

Share class:

A share class can either refer to a specific category of shares within a company each with distinct rights and characteristics, or different type or category of shares issued by mutual funds, which can include variations in voting rights, dividend preferences, or other privileges. Various share classes typically offer different fee structures, minimum investment requirements, or distribution arrangements. Investors should carefully consider the characteristics of each share class before making investment decisions to ensure alignment with their financial goals and risk tolerance.

Shareholder:

A shareholder is an individual, institution, or entity that owns one or more shares of a company’s stock, thereby holding a fractional ownership interest in the corporation. Shareholders may vote on corporate matters and receive dividends. They also bear the risk of financial loss if the stock value decreases.

Short selling:

Short selling is a trading strategy where investors borrow securities from other investors via a broker and sell them with the expectation of buying them back at a lower price. This allows them to profit from any decline in the security’s price.

Solvency:

Solvency is the ability of an individual, business, or organisation to meet its financial obligations. A solvent entity has enough assets to cover its debts and fulfil its obligations.

Speculation:

Speculation refers to the act of engaging in financial transactions with the primary intent of profiting from short-term price fluctuations in assets, without necessarily considering their intrinsic value or underlying economic fundamentals. Speculators often rely on market trends, technical analysis, or sentiment rather than fundamental analysis to make investment decisions. Speculation typically involves assets whose value is uncertain or difficult to determine based on traditional economic factors or cash flows, such as commodities, currencies, or speculative securities. In contrast to investing, which prioritises safety of principal and adequate returns based on thorough analysis, speculation entails higher levels of risk and uncertainty, with a focus on capitalising on market movements for potential gains.

Spot market:

The spot market is where financial assets or commodities are traded for immediate delivery and payment, occurring “on the spot” within two business days. Spot trades happen at prevailing market prices, as opposed to futures or forward markets where transactions are settled at a later date.

Spread:

The spread is the difference between the bid and ask prices of a security, or between interest rates, bond yields, or other asset prices. In bond markets, it often reflects the additional yield a bond offers compared to a benchmark, compensating investors for credit risk or other factors. It also denotes the cost of trading or the profit margin for market makers.

Standard deviation:

Standard deviation is a statistical measure of the dispersion or variability of returns of data points from the average or expected return of an investment. A higher standard deviation signifies greater variability, while a lower standard deviation suggests less variability. It is commonly used in various fields to assess volatility in data sets.

Stock exchange:

A stock exchange is a regulated marketplace where securities like stocks, bonds, and derivatives are traded by investors using intermediaries like brokers and market-makers.

Stock split:

A stock split is a corporate action where a company divides its existing shares into  multiple shares, increasing the total number of outstanding shares while reducing the price per share proportionally. This makes individual shares more affordable for smaller investors and can enhance liquidity in the market.

Structured product:

A structured product is a financial instrument created by combining multiple securities, such as bonds and derivatives, into a single investment. These products have predetermined terms and are commonly used for targeted market exposure or investment strategies.

Subprime mortgage:

A subprime mortgage refers to a type of loan extended to individuals with limited credit history or poor credit scores, making them higher-risk borrowers. These mortgages typically feature higher interest rates compared to prime mortgages, reflecting the increased risk to the lender.

Supranational organisation:

A supranational organisation is a body created by multiple sovereign states to collaborate to address common economic, social, or political objectives. It has authority beyond national borders and can enforce decisions.

Systematic risk:

Systematic risk, or market risk, encompasses the inherent risk associated with the broader market or economy. Factors like interest rate fluctuations, inflation, and economic changes contribute to systematic risk, affecting all investments to some extent.

T

Tax-efficient investing:

Tax-efficient investing minimises the tax impact on investment returns by strategically managing portfolios. It involves using tactics like tax-deferred accounts, selecting tax-efficient investments, and employing tax-loss harvesting to reduce taxable events such as capital gains and dividends. This approach aims to optimise after-tax returns while adhering to tax regulations, helping investors preserve more wealth over time.

Tax-exempt:

Tax-exempt refers to income, assets, or transactions not subject to government taxation, granted based on specific criteria in tax laws. This status applies to entities like municipal bonds, charities, retirement accounts, and some government entities, allowing them to grow or generate income without taxation.

Technical analysis:

Technical analysis is a method used to identify trends and patterns that may indicate potential future price movements based on past market data, primarily focusing on price and volume patterns. Technical analysts believe that market trends and investor sentiment can offer valuable insights into the direction of asset prices, guiding traders and investors in their decision-making process.

Total return:

Total return refers to the overall performance of an investment over a specific period, typically measured as a percentage that includes both capital appreciation (or depreciation) and any income generated from the investment, such as dividends or interest.

Treasury bond:

A Treasury bond, also known as a T-bond, is a long-term debt security issued by the U.S. Department of the Treasury, typically with a maturity of 10 years or more, used to finance government spending and pay off existing debt.

U

UCITS: Undertakings for Collective Investments in Transferable Securities.

UCITS is a regulatory framework in the EU governing collective investment schemes. These funds are authorised for sale across all EU countries.

Umbrella fund:

An umbrella fund, also known as a multi-fund, is a collective investment scheme with multiple subsidiary funds under one legal entity, streamlining authorisation processes.

Underlying asset:

An underlying asset is the core financial instrument that serves as the basis for derivative contracts. It could be a stock, bond, commodity, currency, or market index, from which the derivative derives its value or performance.

Underweight:

Underweight means a portfolio allocation strategy in which an investor holds a smaller proportion of a particular asset or sector relative to its weight in a benchmark or reference portfolio.

Unit trust:

A unit trust is an investment fund, or mutual fund, where investors pool their money, managed collectively by professional fund managers. Investors buy units representing a share of the fund’s assets, which are invested into various securities to achieve specific investment goals.

Unsystematic risk:

Unsystematic risk, or specific risk, pertains to factors unique to individual companies or industries, such as management decisions or competitive dynamics.

V

Value:

Investment value refers to the intrinsic worth or perceived undervaluation of a security relative to its market price. Value-oriented investment strategies involve seeking opportunities in assets believed to be trading below their intrinsic value, often based on fundamental analysis of factors such as earnings, cash flow, and asset value. These strategies aim to capitalise on discrepancies between a security’s market price and its true worth, with the expectation of generating superior returns over the long term.

In efficient markets, where prices typically reflect all available information, value opportunities may be scarce, leading investors to seek them more in inefficient markets or during periods of market dislocation. Liquidity constraints can further influence the availability and pricing of value opportunities, with less liquid markets often exhibiting greater inefficiencies, such as those found in private markets or in securities with low trading activity.

In private markets specifically, value can be attained through identifying assets trading below fair value or enhancing corporate operations through specialized skills. Employing additional leverage in the capital structure can potentially improve returns but may also increase volatility.

Value of land:

The value of land refers to the estimated worth of a piece of land, considering its intrinsic qualities, location, and potential uses.

Venture capital:

Venture capital is a form of equity investment provided to early-stage, high-growth companies in exchange for ownership equity. It aims to fuel rapid expansion and offers potential high returns within a few years. Venture capitalists often provide strategic guidance and industry expertise to drive growth, with investments typically held for 5-10 years.

Volatility:

Volatility in finance refers to the degree of variation or dispersion of returns for a financial instrument or market index over a specific period of time.

W

Warrants:

Warrants are financial instruments entitling the holder to purchase shares at a predetermined price within a specified period. Unlike options, which are typically issued by the company itself, warrants are provided by other entities.

Withholding tax:

Withholding tax is levied on investment income payments to non-residents by the payer at the source, ensuring governments collect taxes from income earned within their jurisdiction. Rates and rules differ by country and apply to various types of income, including wages, interest, dividends, and royalties. Depending on income source and investor domicile, withholding tax may sometimes be reclaimed.

Y

Yield: Income return on an investment, expressed as a percentage of the asset’s market price.
Yield curve: Graph showing the relationship between bond maturities and yields.

Z

Zero-coupon bonds:

Zero-coupon bonds are fixed-income securities that do not make periodic interest payments like traditional bonds. They’re redeemed at face value upon maturity, representing the accumulated interest over the bond’s term. Or in other words, the discount to face-value at issuance represents a time-value-of-money instrument implying a certain fixed annual interest or earnings rate until maturity. 

# Numbers

10-K:

A 10-K is a comprehensive annual report filed by publicly traded companies with the Securities and Exchange Commission (SEC) in the United States. It provides detailed insights into a company’s financial performance, risks, governance practices, and other relevant information, serving as a vital tool for investors and analysts to assess the company’s health and prospects.

10-Year US Treasury Note:

A 10-Year US Treasury Note is a type of debt security issued by the United States government with a maturity of 10 years. It pays a fixed interest rate every six months until maturity and is considered a relatively low-risk investment, as it is backed by the full faith and credit of the US government.

130-30 Strategy:

A 130-30 strategy is an investment approach that combines both long and short positions in a portfolio. It involves investing 130% of the portfolio’s assets in long positions (typically equities expected to perform well) while simultaneously taking short positions (typically through derivatives or other instruments) equivalent to 30% of the portfolio’s value. This allows investors to both capitalize on potential gains from their long positions and hedge against downside risk by profiting from short positions.

30-Year US Treasury Note:

A 30-Year Treasury refers to a type of debt security issued by the United States Department of the Treasury with a maturity period of 30 years. It pays a fixed interest rate every six months until maturity and is considered a long-term investment with a relatively low risk, as it is backed by the full faith and credit of the US government. Investors receive periodic interest payments and the return of the principal amount upon maturity.

51% Attack:

A 51% attack, in the context of blockchain technology and cryptocurrencies, refers to a scenario where a single entity or group of entities gains control of more than 50% of the total computing power (hash rate) of a blockchain network.

Investment Terms

In conclusion, this glossary provides a comprehensive overview of key investment terms essential for navigating the complex landscape of finance and investing. From fundamental concepts like alpha and beta to more nuanced ideas such as duration and leverage, understanding these terms is crucial for making informed decisions in the financial markets. Whether you’re a seasoned investor or just beginning your journey, this resource of investment terms serves as a valuable reference to enhance your knowledge and confidence in managing your investments effectively.

Additional Reading

Investopedia
Investopedia’s comprehensive financial terms dictionary with over 13,000 finance and investment definitions.
https://www.investopedia.com/financial-term-dictionary-4769738

Little Square Capital Disclaimer

Please refer to our glossary for more detailed definitions of our data points.

This document is proprietary to Little Square Capital (LSC). It may not be copied, distributed, published, or disclosed without LSC’s explicit consent. LSC and its affiliates make no representation or warranty, express or implied, as to the accuracy or completeness of the information herein. Views expressed are not necessarily those of LSC. This document does not constitute financial, legal, or tax advice. Little Square Capital is authorised and regulated by the Financial Conduct Authority (FCA). The information provided is for general informational purposes only and does not constitute investment advice. Investing involves risks. LSC does not guarantee the accuracy or reliability of any information presented herein. Investors should seek professional advice before making any investment decisions.

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