• Accrued Interest

    The interest that a bond has earned since its most recent coupon was paid. The price for bonds ignores this element and quotes the price of bonds without accrued interest - it's said to be a 'clean price' as opposed to a 'dirty price', which includes accrued interest. However a buyer would have to pay for the interest that has accrued.

  • Active Management

    A portfolio is actively managed when the portfolio manager holds stocks of his choice with a view to performing better than a given index. The alternative is a tracker or index fund where stocks are chosen purely with a view to matching the performance of a chosen benchmark index. This is called passive management.

  • Adjustable-rate Preferred Stock

    Adjustable-rate preferred stock is a relatively recent innovation which ties preferred dividend rates to the market interest rates on a range of government debt. They have often included floors (upper limits) and caps (lower limits).

  • ADR

    ADRs (American Depository Receipts) are negotiable certificates in registered form, issued in the US by a US bank, certifying that a specific number of foreign shares have been deposited with an overseas branch of the bank - or another financial institution acting as a custodian in the country of origin.

    ADRs (American Depository Receipts) are negotiable certificates in registered form, issued in the US by a US bank, certifying that a specific number of foreign shares have been deposited with an overseas branch of the bank - or another financial institution acting as a custodian in the country of origin.

    ADRs can be either sponsored or unsponsored. Unsponsored ADRs are issued by a depository for already outstanding foreign shares without an agreement with the issuer of the shares. However, since 1983 unsponsored ADRs may only be issued if the issuer of the underlying shares has agreed to supply certain information about itself to the Securities and Exchange Commission (SEC).

    Sponsored ADRs are issues by a depositary by arrangement with the issuer and with its financial support for shares which are already outstanding or for shares issued specifically for an offering of ADRs in the US.

    ADRs provide a practical opportunity for investors who want to invest in the shares of a foreign corporation to buy, hold and sell their interests in these foreign securities without having to take physical possession of the securities, while receiving dividends and exercising voting rights.

    A holder of ADRs can at any time request the underlying shares. Conversely, ADRs enable foreign corporations with shares that have not been admitted to a US stock exchange to obtain access to US public capital markets.

    Usually, only shares traded on a recognised foreign stock exchange are represented by ADRs.

  • AIM

    AIM (the Alternative Investment Market) was created as a means for small and growing companies to access the stock market with reduced listing criteria to the main market.

    Typical market capitalisation ranges between £2 - £50m, although companies are listed at less than £2m and there are companies with a capitalisation of greater than £250m.

  • Allotment

    If a new issue is over subscribed, subscriber orders are scaled down accordingly. The amount subscribers actually get is called the allotment.

  • Alpha

    Investment managers often explain what they do with the help of two Greek letters, alpha and beta. These are used to describe the two main risks inherent in investing in stocks. Alpha relates to factors affecting the performance of an individual stock or the manager's skill in selecting a particular stock. Whereas, beta relates to market risks, or more specifically, the relative behaviour of stocks. Beta is therefore a measure of how sensitive the price of a specific stock is to changes in the price of the stock market. Thus a beta-neutral portfolio should be insensitive to swings in the stock market; it would be hedged.

    A stock's alpha is found by measuring the difference between an asset's actual returns and its expected performance given its level of market risk as measured by beta. An alpha of 1.0 means the asset's return is 1% higher than its beta would predict. An alpha of - 1.0 means it's 1% lower.

    The accuracy of an alpha rating depends on two factors: first, the assumption that market risk, as measured by beta, is the only risk measure necessary; and second, the extent of a stock's correlation to a chosen benchmark.

  • Alternative Investments

    The term alternative investments covers a range of different products and strategies. Perhaps the best known of these is the hedge fund, but there are many others. What distinguishes alternative investment strategies and products from what might be termed, traditional investment strategies and products?

    The key feature of any alternative investment is the pursuit of what are called 'absolute returns'; in other words, an alternative investment manager is seeking to generate returns irrespective of market direction. This, in turn, means that alternative investments use non-correlated assets (or synthetic non-correlated assets) in pursuit of their returns. As well as these key elements of any alternative investment strategy, common features of the alternative investment world include: the use of derivatives to achieve leverage; and the use of both long and short positions.

  • American Depository Receipts

    American Depository Receipts (ADRs) are negotiable certificates in registered form, issued in the US by a US bank, certifying that a specific number of foreign shares have been deposited with an overseas branch of the bank - or another financial institution acting as a custodian in the country of origin.

    ADRs can be either sponsored or unsponsored. Unsponsored ADRs are issued by a depository for already outstanding foreign shares without an agreement with the issuer of the shares. However, since 1983 unsponsored ADRs may only be issued if the issuer of the underlying shares has agreed to supply certain information about itself to the Securities and Exchange Commission (SEC).

    Sponsored ADRs are issues by a depositary by arrangement with the issuer and with its financial support for shares which are already outstanding or for shares issued specifically for an offering of ADRs in the US.

    ADRs provide a practical opportunity for investors who want to invest in the shares of a foreign corporation to buy, hold and sell their interests in these foreign securities without having to take physical possession of the securities, while receiving dividends and exercising voting rights.

    A holder of ADRs can at any time request the underlying shares. Conversely, ADRs enable foreign corporations with shares that have not been admitted to a US stock exchange to obtain access to US public capital markets.

    Usually, only shares traded on a recognised foreign stock exchange are represented by ADRs.

  • American Style Option

    An "American" style option is an option that can be exercised (i.e. you can buy the underlying with a call, or sell with a put) by the buyer at any time before its expiry.

  • AMEX

    The American Stock Exchange (AMEX) is America’s second largest floor based stock exchange (after the NYSE). In terms of volume, market capitalisation and listings however, it is dwarfed by its rivals.

    In addition to equities, AMEX offers a range of derivative products, including options, index shares and depositary receipts.

    AMEX is an auction market, with "specialists" overseeing the auction process for each individual stock.

    Customer orders are electronically sent to the trading floor, then matched with the best available bid or offer currently available. Specialists are appointed in each security, whose job it is to oversee trading in their assigned stock, ensuring a fair and orderly market, and smoothing out supply and demand by trading themselves.

    Specialists also hold "away from the market" orders on behalf of customers: they are then responsible for executing these when the market reaches the specified price limit.

  • Amortisation is an accounting practice that companies use to write off intangible rights or assets — such as goodwill or copyrights. Where the assets being written off are fixed assets the process is referred to as depreciation. Expenses calculated by either process are subtracted from a company's operating revenues to give a figure for net income.

  • Analyst

    An employee of a brokerage or fund management firm who studies companies and makes buy and sell recommendations on stocks of these companies. Most specialise in a specific industry such as telecommunications, semiconductors or banks.

  • Annual Report

    An annual report is a record published every year by a publicly held corporation that details its financial condition. The report, which must be distributed to all shareholders, contains a description of the company's operations, its balance sheet, income statement, and other relevant information.

  • Annualised Return

    A way to calculate the return on an investment of more than one year.

    The annualised or average annual return is calculated by adding each year's return on an investment and dividing that number by the number of years invested. The return takes into account the reinvestment of dividends (and distributed capital gains for mutual funds) as well as the change in the price of the investment over time.

  • Annuity

    An annuity is a financial contract whereby the investor pays a principal sum and, in return, receives a series of equal cash payments for a specific number of years.

  • Appreciation

    An exchange rate changes when one unit of the base currency buys more or less units of the quoted currency.

    So if the USD/JPY rate changes from 112.85 to 113.14, one USD buys more yen.

    The dollar has strengthened or appreciated against the yen.

    If the USD/JPY rate changes from 112.85 to 112.42, one USD buys less yen. The dollar has weakened or depreciated against the yen.

  • Arbitrage

    Arbitrage means dealing simultaneously in the same product in two markets to take advantage of temporary price distortions with minimal risk. For example, a share with a bid-offer price of 100 - 101 in New York, and a bid-offer price of 102 - 103 in London, can be bought in New York at the offer price of 101 and simultaneously sold in London at the bid price of 102 - a risk free profit.

    In practice, the speed and global nature of financial markets means that simple arbitrage opportunities like this no longer exist in highly developed markets. And where arbitrage situation do arise, prices are quickly corrected by buying and selling activity.

  • Asset

    Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.

    Within a portfolio, shares, bonds and property are known as assets. Generally the term asset refers to something that has a realizable value or will generate net revenues greater than the cost of the item itself. Otherwise it is a liability.

  • Asset Allocation

    An investment technique that diversifies a portfolio among different types of assets such as stocks, bonds, cash equivalents, precious metals, real estate and collectibles.

    When it comes to risk and reward, different asset classes behave quite differently. Stocks, for instance, offer the highest return, but they also carry the highest risk of losses. Bonds aren't so lucrative, but they offer a lot more stability than stocks. Money-market returns are puny, but you'll never lose your initial investment.

    An asset allocation strategy allows you to achieve the optimal blend of risk and reward.

  • Asset Allocation Optimization

    Asset allocation is an investment technique that diversifies a portfolio among different types of assets such as stocks, bonds, cash equivalents, precious metals, real estate and collectibles.

    Asset allocation optimization allows the investor to achieve an optimal blend of risk and reward given their particular investment goals and risk tolerance.

  • Asset Backed Securities

    Asset-backed securities are debt securities backed by the collateral (the security) of a pool of ringfenced assets.

  • Asset Stripping

    Asset strippers take over a company and then sell parts of it for a profit. The concept behind asset stripping is that, for some companies, the sum of their parts is worth less than those parts are worth individually.

  • Asset-liability Management

    Whether you're talking about an individual or an institution, good financial housekeepting boils down to two things: first, earning an adequate return on funds invested; and second, making sure you've a comfortable surplus of assets over liabilities. The management of this relationship between your assets and your liabilities is known as asset-liability management.

  • At The Money

    An at-the-money option is an option where the exercise price is the same as the market price of the underlying security.

    An at-the-money option can be contrasted with an in-the-money option and an out-of-the-money option.

    For puts (the right to sell) an option is in-the-money if the market price is below the exercise price and out-of-the-money if it's above the exercise price.

    For calls (the right to buy) an option is in-the-money if the market price is above the exercise price and out-of-the-money if the market price is below the exercise price.

  • Authorised Share Capital

    Authorised share capital is the amount of shares that a company is allowed to issue. In the UK the amount of authorised capital is specified in a company's memorandum of association and there needs to be a shareholder meeting to change the amount. Not all of the authorised share capital has to be issued.