Financial glossary

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | XYZ

A

Active investment– an investment strategy that seeks to achieve a particular goal or to perform better than a particular market through selection of individual stocks and/or asset allocation. This contrasts with passive investment, which involves tracking an index.

Administrator– see Fund administrator.

Annual/semi-annual report– a fund’s annual or semi-annual financial report includes a report on its investments and operations over a specific period, and includes detailed financial accounts. Annual and semi-annual reports allow investors to check whether the investment fund’s managers are doing their job properly and in accordance with the investment policy set out in the fund’s prospectus. The annual report also includes a certification by the independent auditor that the accounts give a true and fair view of the fund’s financial position.

Advisor– see Investment advisor and Fund advisor.

Assets– the investments held by an investment fund.

Asset allocation– the balance between different classes of investment held within a fund or an investor’s portfolio. Creating an asset allocation model is often part of a fund manager’s investment process and is designed to ensure that portfolios are diversified as stated in the fund’s prospectus. The asset allocation model may specify limitations for particular regions, sectors and asset types.

Asset class– the different types of investment that funds or individuals may invest in. The three main asset classes for UCITS funds are equities, bonds and cash-equivalent instruments (also known as money-market instruments).

B

Back-end load– also known as contingent deferred sales charge, a fee payable by the investor upon redemption. The fee typically amounts to a percentage of the value of the units or shares being sold. It is charged to discourage investors from withdrawals and is typically linked to a specific holding period. This fee will be described in the fund’s prospectus.

Balanced funds– investment funds (also known as mixed funds) that invest in both equities and bonds, and sometimes other asset classes such as money-market instruments.

Base rate– the main interest rate set by a country’s central bank or monetary authority. Other lending and saving rates are calculated with reference to this figure.

Bear market– an equity market when prices are falling consistently. The opposite of a bull market.

Benchmark– a financial yardstick, usually a stock or bond market index, against which the performance of an investment fund or portfolio of assets is measured and judged.

Bid/offer spread– the difference between the price at which securities are sold and the price at which they can be bought. Bid is the sale price and offer is the purchase price.

Blue chip– a description of the world’s or an individual country’s biggest and best-known companies or the shares and bonds they issue. Investors may prefer blue-chip equities or bonds because of the stability and reliability they are perceived to offer.

Bonds– Debt securities issued by governments, financial institutions or other companies to raise capital. They are traded on financial markets like shares and mostly offer a fixed level of interest over a specified period of time, with repayment of the original investment when the bond reaches the end of its term. While generally less risky than equity investments, some bonds carry a greater degree of risk than others. Risk is assessed according to the issuer’s financial strength and stability but bond prices can also be affected by changes in interest rates or in overall market conditions.

Bull market– a market enjoying a sustained period of growth. The opposite of a bear market.

C

Capital– an amount of money available for investment or that has been invested. Capital growth is the increase in the value of the investment, as opposed to any interest or dividend income it may pay out.

Capital gains tax– a tax applied in most countries on growth in the value of assets and payable when they are sold. Detailed rules vary greatly from country to country.

Closed-ended fund– an investment fund with a fixed amount of share capital. Once the fund’s capital is fully issued, investors must buy shares in a secondary market from existing shareholders (often on a stock exchange). Existing shareholders must also use the secondary market when selling their shares.

Collective investments– the pooling of investors’ money, usually through investment funds, in order to maximise the impact of their investments or to meet minimum investment levels, and to reduce the cost of making and managing investments.

CSSF– Commission de Surveillance du Secteur Financier (Financial Sector Supervisory Authority), Luxembourg’s financial industry regulator.

Custodian– the custodian of a fund is a regulated institution, usually a bank, and provides safekeeping of the fund’s assets in accordance with the applicable fund regulations. For some types of fund the custodian has additional monitoring functions.

D

Debt securities– financial instruments that represent a debt owed by the issuer to the holder, including government and corporate bonds, money-market instruments and other fixed-income securities.

Depository bank– see Custodian.

Derivatives– financial instruments “derived” from securities such as shares and bonds, including futures (contracts to buy or sell securities at a fixed point in the future) and options (contracts that give the holder the right but not the obligation to carry out a specified transaction) as well as other financial contracts.

Distribution– the sale of investment funds to investors through channels such as intermediaries including banks, brokers and independent financial advisers.

Distribution of income- income payment distributed to a shareholder or unit holder of a fund (see also Dividend)

Distribution fee– see Front-end load.

Dividend– the income shareholders receive from a company as a share of its profits. Some investment funds will distribute this income while others will re-invest any dividends received back into the fund.

Diversification– the spreading of investment risk by investing in different assets that may vary according to criteria such as country or region, sector, currency or asset type.

Domiciliation agent - provides the legal registered office of the investment fund. It is responsible for providing office accommodation and other facilities to the fund, keeps all correspondence sent to the fund, and arranges payment of bills on its behalf.

E

Earnings per share (p/e ratio)– a widely-used indicator of the return on equity investments, representing the total amount of a company’s earnings (after deductions) divided by the number of ordinary shares it has issued.

Equity– the shares of a company (also known as its stock). It is used to refer to the share capital of a company as a whole. An equity fund invests largely or solely in shares.

Exchange-traded funds – investment funds that are listed on a stock exchange. Their most important characteristic is that they can be bought and sold at any time that the exchanges are open. The majority of ETFs aim to replicate the performance of a particular index.

F

FCP– the French acronym for Fonds Commun de Placement (common investment fund). The FCP is a co-ownership structure whose joint owners are only liable up to the amount they have contributed and whose rights are represented by units. A common fund has no legal personality and must be managed by a management company in accordance with applicable regulations.

Financial advisor– a professional who is either independent or employed by financial companies such as banks or brokers, and provides guidance to individuals on the best way to manage their financial assets. It is the financial advisor’s job to examine the individual’s financial means, investment profile and goals, and to recommend investments that fit the individual’s needs.

Fixed income – securities such as bonds and money-market instrument that pay a set or floating (variable) rate level of interest over a predetermined period of time.

Front-end load–a fee payable when fund units or shares are purchased. The fee is also known as a sales charge and typically most of it goes to the fund distributor, such as a bank, broker, or financial advisor. This fee will be described in the fund’s prospectus.

Fund– see Investment fund.

Fund administrator– an administrator is responsible for the investment fund’s accounting and administrative duties, including the net asset value (NAV) calculation, and for carrying out the issue and repurchase of fund shares or units. The fund administrator may also act as transfer agent.

Fund advisor– see Investment advisor.

Fund assets– the securities, cash and other investments held by an investment fund.

Fund shares– portions of ownership of an investment fund’s net assets that investors receive in return for their investments of capital. Investors in a UCITS fund have a legal right to sell their shares back to the fund; they can do so in most cases daily, and in all cases at least twice a month.

Fund management company– see Management company.

Fund manager– the individual responsible for the investment management of a particular investment fund. The manager takes day-to-day decisions on what investments to buy and sell on behalf of the fund’s investors, often relying on research and analysis by a team of specialists.

Fund promoter– the individual, group of people or company that launches the investment fund and determines its business profile.

Futures– a futures contract is kind of derivative that creates an obligation to buy or sell a specific asset such as a number of shares or bonds at a particular price on a specified date in the future. Like other derivatives, futures can be traded on specialised regulated exchanges, such as NYSE Liffe or Eurex, or on an ‘over the counter’ (OTC) basis.

G

Growth stocks– stocks of companies whose earnings are expected to increase at an above-average rate. The investor will purchase the stock because he believes in the future growth of the company. Growth stocks are typically found in sectors benefiting from scientific or technological breakthroughs and where demand for companies’ products or services is growing rapidly.

H

Hedging– A strategy used to offset risk, usually using derivative instruments such as futures and options to insure against a fall in the price of assets held by a fund or within an investor’s portfolio.

I

Index– a measurement of the average price of a group of assets, especially shares and fixed-income securities. Indices can cover a whole national market, or a sector, or a combination of them. Indices are frequently used as a benchmark for measuring the performance of an investment fund that invests in a similar type of assets. They are also used as the basis for exchange-traded funds that aim simply to replicate the performance of a particular market.

Inflation– the amount in percentage terms by which the prices of a selected basket of goods and services rises each year (or falls, which is deflation). The level of inflation is important to investment in all kinds of securities, but particularly fixed-income securities and funds, because inflation must be deducted from the annual return on an asset to determine the real gain for the investor.

Independent financial adviser– IFAs, as they are known for short, are independent professionals that provide guidance to individuals on the best way to manage their financial assets. It is the IFA’s job to determine the individual’s financial means, investment profile and goals, and to choose investments that fit their needs.

Index fund– an investment fund whose investment strategy is to replicate an index such as a stock or bond market index as accurately as possible.

Investment advisor– any person or group that makes investment recommendations or provides securities analysis to the investment fund’s manager in return for a fee. In some cases the fund company may appoint an investment advisor to use their specialist skills in the particular field or market in which the fund invests.

Investment company– an investment fund structured as a company, with shareholders and a board of directors that is ultimately responsible for the successful operation of the fund according to the investment policy stated in its prospectus (see also SICAV).

Investment fund– the general term for any investment vehicle that pools together the money of a number of investors. A pooled fund will invest in certain markets and securities according to its investment strategy and objectives. Funds can take many legal forms, including companies, partnerships or contractual agreements.

Investment guidelines– the rules set out in an investment fund’s prospectus that explain how investments should be selected, including any restrictions on the type and size of investments.

Investment instruments– financial securities that are available for investment through funds or directly, including shares, bonds, money-market instruments, cash and derivatives.

Investment policy– the investment policy will set out the type of securities in which the investment fund will invest and the guidelines that the manager should follow, such as limits or restrictions on individual investments.

Investment style– different styles of investment include ‘growth’ and ‘value’ stocks, which display different characteristics and perform in different ways depending on the economic climate. Another aspect of investment style is the size of companies in whose securities a fund invests, usually designated as ‘small cap, ‘mid-cap’ and ‘large cap’.

Investment process– the established operating method fund managers adhere to when making decisions about which investments to buy and sell. Many fund managers use asset allocation, determining the mix of different types of asset according to geography and sector, the direct selection of individual companies’ securities, or a combination of these methods. Some managers use quantitative methods that employ computer systems to screen for securities with particular characteristics. Investment processes include risk management procedures and may include regular meetings of committees that approve each investment

IPO– initial public offering, which takes place when a company first sells its shares to the public and lists them on stock exchange.

L

Liquidity– the ease with which assets, including shares, bonds or fund shares, can be converted to cash. A highly liquid asset means it is quick and easy to sell. Property probably represents the least liquid of assets. If a fund offers daily liquidity, that means investors can buy (subscribe to) the fund’s shares or units or sell (redeem) them back on a daily basis.

Load– a fee charged to investors in an investment fund, notably in order to pay commission to distributors, and which may be paid when they buy fund shares or units, during the period of investment in the fund, or when they request their redemption (see also Front-end load and Back-end load). These fees will be described in the fund’s prospectus.

M

Management company– a company that organises, manages and administers an investment fund.

Management fee– the charge levied by the management company for the services it provides in connection with the investment management and the operation of an investment fund. The more complex the investment strategy, the higher the management fee is likely to be.

Market capitalisation– the value of a company, measured by its stock market price multiplied by the number of outstanding shares. It is widely used as a way to measure a company’s size for investment purposes, with companies classified as ‘small cap, ‘mid-cap’ and ‘large cap’.

Market maker– a specialist company that act as an intermediary for investors seeking to buy and sell a particular share on a stock exchange. Market makers participate in these transactions for their own account and at their own risk. Their profit comes from the difference between the buying and the selling price. There are also market makers for exchange-traded funds.

Merger(of funds) – the combining of two or more investment funds into one entity, which may happen for a variety of reasons. A fund may merge with another fund in order to create a larger pool of assets that is more economically viable to run, or where a merger of two fund management groups creates a range of overlapping funds with similar objectives.

MiFID– the European Union’s Markets in Financial Instruments Directive, known as MiFID for short, aims to provide a uniform set of rules for investor-oriented services throughout the EU, including stipulations on the quality of service offered by financial institutions to their clients. MIFID requires firms to categorise their clients and apply different levels of protection for each category, one of which comprises retail investors. Financial companies regulated under MiFID that deal with retail clients must have clear procedures in place and fulfil specific requirements to assess the suitability of each type of investment product for the investor.

Mutual funds– The US term for investment funds, normally used to denote open-ended funds that are available for sale to the general public.

N

Net asset value (NAV)– the total value of an investment fund’s assets, minus any liabilities such as expenses and other debts. The price per unit (net asset value per share) is calculated by dividing the NAV of a fund by the number of outstanding units. The frequency of the NAV calculation depends on the nature of the fund and the provisions of the prospectus, and provides a basis for the price at which investors can buy (subscribe to) or sell (redeem) shares or units of a fund, subject to any fees and commission charges.

No-load– an investment fund that does not require investors to pay fees (sales load) at the time they buy or sell shares or units in a fund.

O

OEIC– acronym for open-ended investment company used in the UK. Open-ended investment companies in Luxembourg are known as SICAVs after their French acronym.

Open-ended fund– an investment fund that allows the creation of new shares or units whenever investors seek to make an investment in the fund. The size of the fund varies according to the current number of investors and the number of shares or units they hold.

Options– derivatives that take the form of an agreement under which the holder of an option may (but is not obliged to) to buy or sell a particular security at a specific price in the future. Options can offer insurance against changes in asset prices.

P

Passive investment– an investment strategy that seeks to perform in line with a particular market, typically reflected by an index, by investing in the same stocks or securities in the same proportions as the index in question. If there are changes in the index, for instance because the weighting or identity of stocks changes, a passive investment fund needs to make similar adjustments.

Pension – an arrangement that provides an income for an individual’s retirement, which may be funded by that individual as part of their own savings, provided by their employer or offered by the government of the country they live in. Many company and private pensions use investment funds as the basis of their assets.

Performance– an investment fund’s performance is measured by the return it delivers over a particular time period, often compared with the returns of similar funds or with a benchmark such as a stock market index.

Portfolio– a collection of investments held by an individual or institutional investor. It also refers to the mix of assets that an investment fund holds.

Prospectus– the key legal document of the investment fund, providing comprehensive details of the fundamental goals of the fund, its investment policy and details of how it operates.

Protection– an investment fund with capital protection aims to ensure that the whole or a specified proportion of the investor’s original investment is returned at the end of a pre-defined investment period. Investors are protected against a fall in the value of their investment, but there is a cost to a guarantee, and if asset prices rise they may not receive the full value of market gains.

Purchase fee– see Front-end load.

Q

Quoted company– a quoted or listed company is one whose shares are traded on a stock exchange. Quoted companies must publish regular information about their financial position as well as other information that could affect their share price.

R

Redemption fee– a type of fee charged by some investment funds when investors sell or redeem their shares or units back to the fund. Unlike the back-end load, a redemption fee is paid to the fund and is typically used to defray some of the fund’s costs associated with the redemption.

Regular savings– the process by which investors make regular purchases of financial assets, usually according to a predetermined plan, usually monthly but sometimes annually. It is the opposite of a lump sum investment that involves a single purchase. Regular savings ensure that you put money in the market in all conditions, when prices are low as well as when they are high.

Risk– the general term given to the likelihood that investors may suffer a loss or fail to receive the expected level of return from an investment. Many investment funds today show the level of risk taken by the fund through an indicator such as volatility, which represents the historical level of price fluctuation a fund or an asset experiences.

Return– the gain enjoyed by an investor from a combination of the increase in value of an asset and the payments they receive in the form of interest or dividends.

S

Sales charge– a charge levied on the investor at the time they buy shares or units in an investment fund (see Front-end load).

Savings plan– an investment mechanism under which individuals make regular investments in funds. This enables them to benefit from cost averaging that over time evens out highs and lows in the value of funds over the market cycle (see also Regular savings).

Sector– a particular part of the economy in which a fund may invest; for example an industry group, such as technology, a geographic location such as a single country or region, a continent or the entire world.

Securities– another word for financial assets such as shares and bonds.

Share classes– different types of share issued by a single investment fund that typically confer different rights on their owners. For example, some funds issue shares in different currencies, such as the euro, the US dollar and sterling, and others offer different classes of shares with varying conditions and fee structures for different types of investor.

SICAV– the French acronym for Société d’Investissement à Capital Variable (open-ended investment company), one of the main types of investment fund established in Luxembourg. In a SICAV the capital of the fund will always be equal to its net asset value, and the price at which shares are bought and sold is based on the current net asset value. SICAVs are one of the most commonly used investment vehicles in Europe and many other parts of the world.

Simplified prospectus– a document established under the UCITS III legislation in 2001 that provides a summary of the content of the full prospectus. From 2011 this will be replaced by a Key Information Document providing a concise overview of the fund’s main features on two pages.

Shares– units of ownership of a company. Shares can be listed and traded on a stock exchange or held by the company’s owners on a private basis. Shares are sold at a price decided by the issuing company in an initial public offering or subsequent share issue, but subsequently their price is determined by supply and demand, influenced by factors such as the company’s profitability and the overall economic environment.

Stock– another name for the equity or shares of a company (hence stock exchange). It is used to refer to the equity of a company as a whole rather than individual shares.

Stock exchange– a market in which securities such as shares, bonds and certain types of investment funds (including exchange-traded funds) are traded.

Stock selection– the investment process by which a fund manager decides which shares in a particular sector or market to buy rather than others. The decision usually involves detailed analysis of companies’ activities and accounts, and often face-to-face meetings between fund managers and company management.

Swing pricing– a mechanism for compensating an investment fund for the dilution effect of redemptions and subscriptions, and to protect continuing investors. It aims to ensure that investors subscribing to or redeeming from a fund bear a portion of the trading costs, i.e. transaction costs or the spread between the bid and offer prices of underlying securities.

T

Total expense ratio(TER) – a measure of the total costs charged to an investment fund and expressed in percentage terms of the fund’s total assets, known as the TER for short. This typically includes the management fee, administration fee, legal fee and audit fee.

Tracker fund– also known as an index fund, it aims to replicate the performance of a specific stock market or bond market index. Tracker funds exist both as open-ended funds, which are bought from and sold to the fund promoter, and as exchange-traded funds.

Trailer fee– a recurring fee, generally charged to the investment fund, which pays for the costs of ongoing payments to fund intermediaries.

Transfer agent– a regulated company that undertakes the administration of subscriptions to and redemptions from funds by investors and maintains the register of the fund’s shareholders.

U

UCITS– an acronym standing for Undertakings for Collective Investment in Transferable Securities, the title of a series of directives introduced by the European Union (EU) beginning in 1985. Funds that meet the conditions laid down by the directives are known as UCITS funds and may be marketed throughout the EU.

Umbrella fund– an investment fund that contains a number of sub-funds or compartments, each of which can have a different investment policy. The various sub-funds may hold investments in different assets or markets, be aimed at different types of investor such as individuals and institutions, or be priced in different currencies to suit investors from various parts of the world.The rights of investors and creditors of a sub-fund are in general limited to the assets of that sub-fund.

V

Valuation currency– the currency in which a fund’s assets are valued, even though the assets themselves may be denominated in a different currency.

Value stocks– shares of companies that are considered underpriced by the market considering their fundamental characteristics and that therefore represent an attractive investment opportunity. A value stock may be identified by key data such as a low market price compared with its book value, a high dividend yield or a low price relative to earnings multiple.

Volatility– the degree to which the price of a fund or security moves up and down during a given time period.

Y

Yield– the annual return realised from an investment such as stocks, bonds or investment funds, expressed as a percentage of the price. It is often used to compare and contrast the performance of financial assets and funds.