Glossary

Accumulation date

The date when income will be paid by a unit trust. This income is reinvested back into the unit trust increasing the value of the units instead of being paid out to the investor.

ACD (Authorised Corporate Director)

An Authorised Corporate Director (ACD) is responsible for operating the ICVC company in accordance with the regulations and the ICVC’s instrument of incorporation.

Active market

A market in which the volume of securities traded is higher than normal.

Actuary

A professional person qualified to make calculations and valuations in respect of pension funds, insurance funds or other forms of investment. Actuaries apply mathematical, statistical, economic and financial analysis to a particular emphasis on longer-term financial assessment of risk or uncertain financial outcomes. 

Allocation rate

The percentage of the customer's money that is actually invested in the policy after any initial charges have been taken out.

Alternative energy companies

Companies working in and supporting the renewable energy sector.

AMC (Annual Management Charge)

A charge made each year by managers of unit trusts, OEICs or investment trusts to cover the expenses associated with running the fund. Although it is expressed in annual percentage figures it is usually split and taken from the fund daily.

Annual compound return

The annual rate of return earned on an investment which includes any growth, for example: Investment of £100 grows by 5% in the first year; You then have £105 at the start of year 2, this then grows by a further 3%, so at the beginning of year 3 the investment is worth £108.15. This is the effect of compounding. So a growth of £8.15 on £100 over 2 years is actually an annual compound return of 4% per year, not 8.15% divided by 2.

Annual Management Charge (AMC)

A charge made each year by managers of unit trusts, OEICs or investment trusts to cover the expenses associated with running the fund. Although it is expressed in annual percentage figures it is usually split into 12 monthly amounts and taken from the fund monthly.

Annuity

An arrangement under which periodic payments are made to a person in return for the investment of a lump sum, usually for the purpose of providing retirement income.

Arbitrage

Taking advantage of countervailing prices in different markets – eg the purchase of an asset for a low price in one market and its sale for a higher price in another.

Asset classes

The different types of assets available to investors. For example, equities, cash, fixed interest or property.

Assets

Items that are owned by an individual such as property and investments etc. Money in a bank or building society account is known as liquid assets.

At a premium

A security is said to be selling at a premium when its market price is above its par value.

Authorised Corporate Director

An Authorised Corporate Director (ACD) is responsible for operating the ICVC company in accordance with the regulations and the ICVC’s instrument of incorporation.

Balanced fund

An investment portfolio which diversifies its holdings over a range of asset classes which typically include shares, fixed interest, property and cash.

BARRA

Software programs developed by the international investment consulting firm Barra International used to evaluate risk profile, chiefly in equity investments.

Basic rate tax

The amount of tax you pay on income after you have earned over the lower rate tax band allowance. Basic rate tax is currently 20% (2012/2013).

Basis point

A measurement of fluctuation of an investment, equal to 1/100 of one percent.

Bear market

A market in which prices decline sharply against a background of widespread pessimism.

Benchmark

An index or other market measurement which is used by a fund manager as a yardstick to assess the risk and performance of a portfolio.

Best advice

A requirement of the Financial Services Authority that a financial adviser, whether independent or tied to a single product provider, must provide best advice regarding the most suitable product, having first established a full understanding of the financial background. An additional requirement is that commissions received on products sold should not influence recommendations.

Bid offer spread

This is a form of charging whereby the price that units are bought and sold at are different. The price of units which a customer can buy is higher than the price at which they can sell the same units.

Block

A large holding or transaction of shares. Also known as a block trade.

Bond

Securities which entitle the holder to interest during their life and repayment of the loan at maturity. They can be issued by companies or governments. Not to be confused with an investment bond.

Bond ratings

A system for measuring the relative credit worthiness of bond issues using rating symbols, which range from the highest investment quality (least investment risk) to the lowest investment quality (greatest risk).

Book closing date

The day by which you must be registered as an owner of the stock to receive the dividend. On this day, a record is taken of all the owners of the company and how many shares they own so the company knows whom to pay the dividend to on the payment date. It typically takes two to three days to become registered as a shareholder of a company, so this is not the last day to buy the stock; that is the ex-dividend date.

Bottom-up analysis

The search for outstanding performance of individual stocks before considering the impact of economic trends. The companies may be identified from research reports, stock screens etc. (as opposed to top-down analysis).

Brokerage

A fee charged by a broker for the execution of a transaction; or alternatively an amount per transaction or a percentage of the total value of the transaction. Sometimes also referred to as a commission or fee.

Bull market

An advancing market (as opposed to bear market).

Buoyant market

A market in which prices have a tendency to rise easily with a considerable show of strength.

Buying (offer) price

The price at which you can buy units in a unit trust or life fund.

Cancellation period

The period after signing a contract for some financial products during which you are entitled to cancel and receive your money back without penalty. For single payments you might get back less if the value has fallen.

Capital

The amount you invest in any type of savings or investment product.

Capital charge

When a unit trust manager takes the management charges out of the fund’s capital instead of the income it has produced.

Capital growth/gain

The amount you receive in addition to the capital you’ve invested when you cash in your investment.

Capital markets

The markets for medium- to long-term investments, ie three years and over, in securities such as shares and bonds, as distinct from the shorter term money market.

Capital Redemption Bond

A Capital Redemption Bond is a policy of assurance that will mature after a certain period of time with a minimum maturity value being calculated on an actuarial basis. A redemption contract has no lives assured, and therefore can be passed to future generations.

CAPM

Abbreviation for Capital Asset Pricing Model.

Cash

Generally, coin and note currency of a country in circulation and deposited in cheque accounts and other deposits that are available on short notice. One of the asset classes invested in as part of a typical balanced investment portfolio.

Cash-in value

The amount you might get if you cash in an investment.

Certificate of Deposit

A written certificate by a bank or financial institution stating that a fixed amount has been deposited with it for a fixed period of time at a predetermined rate of interest.

Chartist

Technical analyst who charts the patterns of stocks, bonds and commodities to make buy and sell recommendations to clients. Chartists believe recurring patterns of trading can help them forecast future price movements. See also technical analysis.

Churning

The practice of acquiring a holding of shares and then placing both buying and selling order for those shares (usually at about the same price or slightly higher) in order to build up turnover.

Closed funds

Funds which are no longer accepting new investments, but where the fund is still invested and managed in the usual manner.

Closing price

The price at which the final transaction in a security took place on a particular business day. Share prices are quoted daily in the financial pages of leading newspapers and show opening, high, low and last sale (closing) prices, plus net change from the previous day.

Collective investments

Funds which take money from a number of private investors and pool it together in one fund. This method of investment enables investors to invest in a larger number of investments than would otherwise be the case and therefore spreads their risk. Examples are: unit trusts and OEICS.

Commingled fund

The collective investment of the assets of a number of small funds, sometimes through a master fund arrangement, allowing for broader and more efficient investing.

Commodity

A tradable item that can generally be further processed and sold; for example metals, wheat, sugar, coal etc.

Compound interest

In, for example, a deposit account, this is where interest is added to both capital and the accrued interest from time to time. The longer a customer leaves an investment the more advantage they can make of compound interest. Eg in Year 1 a customer is paid 10% on his/her £100 investment. At the end of Year 1 this investment is worth £110. In Year 2 with compound interest taken into account the customer now earns 10% on £110, giving him/her £121 by the end of Year 2. In Year 3 they earn 10% on £121 giving a grand total of £133.10.

Contract

An agreement between individuals, companies or other entities, which binds each party and is legally enforceable.

Contribution

An amount of money placed into a fund. In relation to pension funds, contributions may be made by either employers or employees or both.

Controlling Director

This is a director who owns or controls 20% or more of the voting capital of a company either directly or indirectly. This 20% includes shares held by the director’s family and associates.

Core portfolio

A portfolio comprising (generally), the bulk of a fund’s assets, which is invested in a highly controlled fashion in an attempt to secure the fund’s liabilities with a reasonable degree of confidence. The balance may then be invested in a satellite portfolio(s), which may be invested more aggressively.

Corporate governance

A generic term covering issues associated with the management practice, board structures and personnel policies of companies. From the investor’s point of view, corporate governance is normally concerned with the degree of influence which should be exerted over companies by their shareholders in order to advance their financial interest, normally through the exercising of voting rights.

Correction

A movement in prices which reverses a previous trend. The term is normally used to refer to a lowering of share prices after a sustained period of increase.

Cover note

A temporary document that can be used as evidence of insurance cover, while the actual policy and insurance certificate are being prepared.

Credit scoring

A test of an individual’s financial status. Points are awarded on a range of criteria that include income, home ownership, debts and repayment history.

Cum dividend

Referring to a share which is trading such that buyers rather than sellers qualify to receive the next dividend payment. This is usually reflected in the price of the security in question.

Currency

A country’s unit of exchange that has a value in terms of purchasing goods and services within the country.

Currency overlay

An investment management technique aimed at protecting an investor’s overseas currency exposure.

Custodial charges

Charges made by the bank or other financial institution that keeps custody of stock certificates and other assets on behalf of clients.

Custody

Possession of securities by a financial institution on behalf of others, for purposes of safekeeping.

Dealer

An individual who places orders to buy or sell securities.

Decile

A statistical measure dividing a sample into ten numerically equal groups. See also percentile and quartile.

Deferred (delayed) annuity purchase

An option available to a member of certain types of pension scheme, under which the purchase of an annuity can be delayed to no later than age 77 (depending on the pension scheme). In the meantime, income can be withdrawn from the fund.

Defined benefit fund

A pension fund in which the benefits to be paid to the member are defined in advance of the member’s retirement. The benefit is usually expressed as a proportion of the member’s salary on retirement. In these funds it is generally the company or sponsor of the fund (rather than the member) which carries the risk as to the ability of the fund to meet its liabilities. See also defined contribution fund.

Defined contribution fund

A pension fund in which the amount of the contribution payable (as distinct from the end benefit) is defined. In these funds, the benefit payable to a member on retirement constitutes the aggregate of contributions to the fund (both employer and employee) in respect of the member, plus the investment earnings on those contributions. Unlike a defined benefit fund, the investment risk in a defined contribution fund is borne by the fund members.

Delegated switching authority

A legal document in which a policyholder advises the life company that he/she is giving permission to an authorised person/company (usually a financial adviser) to switch the investments within his/her policy without requiring a specific signature each time.

Deposit account

A savings account from a bank or building society that pays interest on the amount of money held in it.

Depreciation

The writing-down of the cost of an asset systematically over the life of that asset.

Derivative

A financial contract that derives its value from an underlying security, liability or index. Derivatives come in many varieties, including forwards, futures, options, warrants and swaps.

Dilution

A reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities.

Discrete performance

The performance of an investment during a defined time period.

Distribution

When a company pays money (dividends) to its shareholders.

Diversification

The spreading of investment funds among classes of securities and localities in order to distribute and control risk.

Dividend (distribution) yield

The return on share investment, calculated by dividing the dividend rate by the market price of the share.

Dividend warrant

If a company pays a dividend it provides each shareholder with a dividend warrant. This gives information about the dividend such as the class of share, the amount and the tax credit.

EAFE Index

Abbreviation for Europe, Australia and Far East Index, a stock market index, often used as an ex-United States world equity benchmark by United States investors.

Earnings per share (EPS)

A measure of a company’s performance, calculated by dividing the company’s net operating profit after tax, divided by the number of shares in issue.

Efficient Frontier Modelling

An investment portfolio is said to reside on the 'efficient frontier' if it is expected to produce returns greater than other portfolios (ie with different asset mixes) of the same or lesser risk, where risk is defined as the standard deviation of the returns. In order to calculate an efficient frontier, future investment returns and their standard deviation need to be known. These are, of course, unknown and need to be estimated from past market data. However, there is no guarantee that the past will be a suitable guide to the future and so efficient frontiers cannot be determined with certainty.

Emerging markets

Financial markets in countries with developing economies, where industrialisation has commenced and the economy has linkages with the global economy. The financial markets in these countries are immature compared to those of the world’s major financial centres, but are becoming increasingly sophisticated and integrated into the international markets. These markets provide potentially high returns but are subject to high risk and volatility.

Engagement

An ethical investment fund may follow an 'engagement policy' by using the influence of shareholders to challenge companies about their environmental or social performance. This means entering into a dialogue with companies to improve their environmental or social policies and to promote industry 'best practice'.

Equity

The value of an asset (eg a property) less any money owing on it (eg loans/mortgages).

Equity risk premium

The difference between the rate of return available from risk-free assets (such as government bonds) and that available from assuming the risk inherent in more volatile investment such as shares.

Ethical investment

An investment approach which takes into account considerations other than solely the financial return potential of particular investments. An ethical portfolio might, for example, avoid investing in alcohol or tobacco.

Excess return

The return achieved by a security over and above that obtained from a risk-free asset (such as a short-term government bond) held over the same period.

Exchange rate risk

The risk that the value of an investment may be diminished by movements in the exchange rate on a foreign currency.

Executor(s)

Individual(s) or company(s) who are appointed in a will to deal with the wishes of the deceased, in administering their estate.

External manager

An organisation (eg an investment management company) engaged to manage and invest funds on behalf of a client.

Face value

The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuer. Face value is ordinarily the amount that the issuer promises to pay at maturity and is not an indication of current market value.

Final salary scheme

An occupational pension scheme where the final pension an employee receives is linked to the size of their final salary. They are also referred to as defined benefits schemes.

Financial Ombudsman

The Financial Ombudsman was set up to provide a free and independent service to resolve disputes between consumers and financial firms. Consumers must complain to the firm involved first, but thereafter the Financial Ombudsman will aim to resolve the dispute within six months.

Fixed interest

Referring to income which remains constant and does not fluctuate, such as income derived from bonds, annuities etc. Any debt security which has a fixed flow of income is known as a fixed interest security.

Floating Rate Notes (FRN's)

Floating Rate Notes (FRN’s) are long-term (5 years or more) debt securities whose interest rates are adjusted periodically in line with a benchmark rate. FRNs appeal to investors who might otherwise be reluctant to commit funds to fixed interest investments for lengthy periods in times of fluctuating interest rates.

Forward contract

A cash market transaction in which two parties agree to the purchase and sale of a commodity at some future time under such conditions as the two agree. Unlike futures contracts, the terms of forward contracts are not standardised. they are not transferable and there is no margin or collateral requirement to assure performance of the contract.

FOS

Financial Ombudsman Service

FSA (Financial Services Authority)

The financial service industry’s regulator. One of the principal aims of the regulator is to protect the consumer.

FSCS

Financial Services Compensation Scheme

FTSE All-Share Index

An index of the Share prices of over 800 leading companies and Investment Trusts on the London Stock Exchange. See also FTSE 100 Index.

Fund

A fund is a 'collective' investment where a large number of investors pool their money into one 'pot', which is usually overseen by a fund manager.

Fund manager start date

The date on which the particular fund manager took on responsibility for running the fund.

Fund risk number

The Skandia Fund Risk Evaluator takes the actual volatility for a given fund measured over 1, 3 or 5 years (track record permitting) and maps it against the volatility ranges represented by the Skandia Risk Scores 1 to 10. For example, a fund with a three-year volatility figure of 10.8 sits within the volatility range corresponding to a Skandia Risk Score of 5. Fund risk scores provide a retrospective view of a fund’s volatility, which may vary widely over different time periods, and are not necessarily indicative of a fund’s future volatility. For this reason we show scores for three different time periods.

Fund supermarket

A fund supermarket gives you access to a variety of products and allows you to choose from hundreds of funds in one place.

Fund yield

The amount of income that a fund has paid out in proportion to its price, and is usually stated in annualised terms. It may express either actual or expected distributions. A fund's yield is commonly associated with a fund's interest rate or dividend payment.

Futures contract

An obligation to make or take delivery of a specified quantity and quality of an underlying asset at a particular time in the future and at a price agreed when the contract was executed.

Gearing

A measure of indebtedness, ie the extent of borrowing as against the equity held by a person or company in an asset. The ability to increase exposure by investing in futures contracts without making the underlying cash available. See also Leverage.

Gilt

A loan to the government usually with a fixed rate of interest and usually over a specified period of time. The original amount is usually repaid at the end of the loan period.

Global CAP:Link

A stochastic asset model built by Tillinghast Towers Perrin (now Towers Watson), which uses mathematical formulae to project many hundreds of plausible, although not necessarily likely, paths for future investment returns for the asset classes. Whilst every effort has been made to make this as accurate as possible, actual future investment returns could be significantly different to those projected by the model. It focuses on the longer term and does not try to predict short term factors that might make one asset class relatively attractive compared to other classes, as such it should not be used for short term, tactical investments.

Greenmail

A term that describes when a hostile bidder threatens a company with takeover by purchasing a large number of its shares, forcing the management of the company to repurchase the shares at an above market price.

Gross Domestic Product (GDP)

A measurement of the aggregate goods produced and services provided within an economy over a year and excluding income earned outside the country. Considered one of the main yardsticks of the health and vitality of an economy. See also Gross National Product.

Gross National Product

An economic statistic which includes GDP (Gross Domestic Product) plus any income earned by residents from their overseas investments, minus income earned within the domestic economy by overseas residents. See also Gross Domestic Product.

Growth investor

One who seeks capital gain from expected further growth in company earnings. Typically, growth investors care less about price/earnings ratios and other valuation measures and more about earnings growth.

Guaranteed minimum pension

A guaranteed pension amount paid, as a condition of contracting out of SERPS (State Earnings-Related Pension Scheme) under a Final Salary Scheme, up to and including 
5 April 1997, from which point different rules apply.

Hang Seng Index

The principal Hong Kong Share Price Index.

Hedge fund

A type of investment portfolio under which the fund manager is authorised to utilise a number of higher risk investment techniques, including using derivatives, short selling and borrowing funds to generate a higher return.

High conviction stocks

Investments that a fund manager has high confidence will do well in the future.

Higher rate tax

For the 2012/2013 tax year the higher rate of tax is 40%.

ICVC

Investment Company with Variable Capital.
The generic term for an OEIC (Open Ended Investment Company) or similar investment vehicle where investors pool their contributions with those of other people, to create a portfolio of assets.

IMA sectors

Grouping of funds for performance measurement by the Investment Management Association.

Income drawdown

Enables people with certain types of pension plans to take income direct from their pension fund.

Income tax

Tax paid by individuals on income received over a certain threshold. The amount paid will depend on the amount earned during a tax year period.

Indemnity insurance

An insurance designed to compensate a policy holder for any loss suffered.

Index fund

A portfolio of securities structured in such a way that its value will closely follow a nominated market index, eg an equity index fund may be designed to track the FT/S&P All Share Index.

Index linked gilts

A UK government bond (gilt) whose redemption value and interest payments are linked to inflation (as measured by the Retail Prices Index).

Inflation

An increase in the level of prices of goods and services in the economy. It is typically measured by examining a basket of goods and services.

In-house

Referring to an activity which is conducted within an organisation rather than contracted out to an external party.

Initial price

This refers to the range of Skandia pension funds where the pricing includes an initial charge within the offer (buying) price.

Insider trading

The illegal practice of trading in securities on the basis of 'inside' or secret information which is not available to the public at large.

Insurance premium tax

A tax levied on most non-life insurance policies.

Insurer

A company that offers an insurance policy.

Interest coverage

A measure of a company’s ability to meet its interest obligations, calculated by dividing interest payments into income. The higher the ratio the better.

Interest rate risk

The risk borne by fixed interest securities, and by borrowers with floating rate loans, when interest rates fluctuate. When interest rates rise, the market value of fixed interest securities declines and vice versa.

International Monetary Fund (IMF)

An international organisation founded in 1947 to promote maintenance of equilibrium in the balance of payments among the various nations of the world. The functions of the IMF include the levying of quotas on member nations to create a pool of funds available to be loaned to nations facing balance of payments problems.

Intestate

A person who dies without a valid will.

Investment analyst

A financial expert trained to analyse the activities and future prospects and earnings of companies and securities for the purpose of investment.

Investment environment

The general economic, political, legal and market conditions within which an investment is made.

Investment Management Agreement

A contractual agreement between an investor and an investment manager which states the terms and conditions applying to management of the stated assets.

Investment manager

An organisation or individual that specialises in the investment of a portfolio of securities on behalf of individuals and/or organisations, subject to the guidelines and directions of the investor.

Investment trust

A company that invests in shares of other companies. When investing in an investment trust customers actually own shares in the investment trust rather than owning the shares it invests in. Investment trusts are closed-ended investment vechicles.

ISA

ISA Individual Savings Account

A savings vehicle that allows customers to invest in equities, life assurance policies, or save in cash, without having to pay tax on the returns gained from them.

Joint life first death

Where a bond ends on the earlier of full encashment, or the death of one of the lives assured.

Junk bond

A high risk, high yield debt security rated below investment grade at the time of purchase.

Key person insurance

A life assurance policy to cover the death of a business’s key employee. It pays out a lump sum that is designed to cover the costs of finding and training a replacement, as well as covering any loss of profitability.

Level term assurance

A simple form of life assurance that pays out a lump sum if the policy holder dies within a specified time period.

Liabilities

The opposite of assets – ie debts. In the case of pension funds, a stream of obligations (pension payments).

Life assurance

An insurance policy which pays out a lump sum on the death of the policy holder.

Life company

Life assurance is a contract between an insurance company (the life company) and an individual(s), where the insurance company pays out, in return for premiums paid, if the insured person dies before the end of the contract.

Lipper Asset Allocation Analysis Models

Lipper Models are based on Lipper's Asset Allocation Analysis process. This Asset Allocation Analysis (AAA) provides a monthly peer survey, covering in excess of 2,800 life and pension and unit trusts, detailing their investment mix and geographical asset allocation.

Liquidity

The ability of an investment to be easily converted into cash with little or no loss of capital and with minimum delay.

Listed company

A company whose shares are traded on the stock exchange and are able to be bought and sold by members of the general public.

Loan stock

A security bearing a fixed rate of interest. The capital (the amount loaned) is repaid after a given period of time.

Long/long position

In relation to foreign exchange and share trading, referring to an ownership position in which the trader has bought more of a particular security than he or she has sold.

Lower earnings limit

The minimum amount which must be earned in any pay period before National Insurance becomes payable.

Managed fund

Managed funds are generally made up of a spread of other specialist funds so spreading the risk.

Marginal tax rate

The additional tax which someone pays on each £1 increase of their taxable income.

Market cycle

A business cycle concerned specifically with rises and falls in market activity, as measured by an index.

Market price

With reference to a security, the last reported price at which the security sold. Alternatively, the highest price which a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.

Market timing

The purchase or sale of securities on the basis of shorter-term price patterns and temporary market opportunities,as well as judgements of underlying value.

Market Value Reduction (adjustment)

If you take money out of a with-profits fund, an adjustment may be made to the value of the withdrawal if the value of the underlying assets is less than the value of your plan including bonuses. This adjustment is known as a market value reduction.

Maturity

The date on which a loan, bond, mortgage, life policy, or other debt or security is due to be repaid.

Maximum gain

The maximum gain represents the best possible return, over a minimum of three months within the performance period.

Median

The median is always the middle value, as distinct from the mean, which represents the average value. For example, if five items cost £20, £80, £100, £300 and £500 respectively, the median value would be £100, whereas the mean or average would be £200.

Member choice

A facility made available to the members of a defined contribution fund allowing them to decide the proportion of funds to be allocated between high and low risk investment strategies, sectors and/or managers. Typically, a fund with a member choice facility will allow members the opportunity to switch between investment options at certain intervals.

Middle band earnings

Earnings between the lower earnings limit and upper earnings limit.

Minimum Income Guarantee (MIG)

A means-tested benefit that helps individuals on low incomes at retirement. If you apply, the Department of Work and Pensions assesses your income and decides whether you are eligible for a top-up.

Money market

The market for trade in short-term securities such as Bills of Exchange, Promissory Notes and Government and Semi-Government bonds. Participants in the money market include banks and other financial institutions, life offices, stockbrokers, pension funds and Government authorities. See also capital markets.

Moody’s

American credit rating organisation – operates in similar fashion to Standard & Poor‘s.

MSCI Index

Morgan Stanley Capital International Index.

A series of country indexes of equity prices. The MSCI World Index is one standard for comparisons of international equity performance, although there are others, including the Frank Russell and Financial Times indices.

Mutual fund

An American term for certain forms of collective investments. A mutual fund is a professionally managed scheme that pools money from many investors and invests typically in funds, other securities (stocks, bonds, short-term money market instruments), other mutual funds, other securities, and/or commodities.

National Savings

The total level of savings, defined as the income remaining after consumption, of a country’s households.

Negative screening

Negative screening is the most commonly recognised strategy. It means not investing in companies that do not meet the ethical standards by which the fund is run. For example, not investing in tobacco or defence companies.

Net

Interest received on a savings account after tax has been deducted. This term also applies to premiums paid net of tax relief.

Net interest

Interest received on a savings account after tax has been deducted.

Net relevant earnings

Net relevant earnings are used to determine the maximum contributions to a retirement annuity, personal pension or stakeholder pension. They are your relevant earnings less allowances deductible for tax in relation to business purposes and any losses from business.

NICO

National Insurance Contributions Office.

No claims bonus

A reduction in an insurance premium because the customer has a claim-free record.

Nominee

An individual or company in whose name a security is registered to be owned, although the real (or beneficial) ownership is actually held by another party. Nominee companies are often used by share investors who for some reason wish their identities to remain undisclosed or who simply require another party to manage (or hold as custodian) their investments.

Normal retirement date

Refers to the date when benefits can normally be taken from a pension scheme, as defined in the rules of the plan.

OBSR Ratings

Fund ratings awarded are AAA, AA or A.
There are several key factors which lead to the final OBSR Rating determination. These are: Strength of investment process and length of time it has been in place; Continuity of investment personnel; Investment style that has proven durable over time; Clearly defined investment objectives; Strong and consistent past performance record.

Off balance sheet

Referring to financial commitments or liabilities that do not generally appear in a company’s balance sheet (eg operating leases or derivative contracts).

Offer

The price at which a person or company is willing to sell (Also known as ask price). For example, a seller will present their stock for sale at the offer price. As a buyer, you will buy at the offer (or ask) price.

Offer to offer

Compares the original purchase cost or offer price (usually of a unit trust) with its current offer price.

Offshore sector

The group of funds all registered outside the UK.

Open ended investment company (OEIC)

An OEIC is an investment company where shares can be created or cancelled to match demand, in a way similar to the units of a unit trust. The principal difference lies in the fact that there is a 'single price' to which is added the initial charge for purchase, as opposed to unit trusts which always have two prices, the bid price (what you get when you sell back to the managers); and the offer price (what you have to pay when you buy).

Opening price

The price at which a security commences trading at the opening of a trading day.

Optimisation

A mathematical process which creates a compromise between conflicting objectives (eg between maximising return and minimising risk). An optimisation program will identify the asset mix which is likely to give the highest return for a given risk level, or alternatively, the lowest risk portfolio to achieve a desired return. See also portfolio optimisation.

Ordinary residence

For the purposes of taxation an individual may be ordinarily resident in the UK although he or she is not physically resident in a particular tax year. The term ‘ordinary residence ‘is broadly equivalent to habitual residence. If an individual is a resident in the UK year after year, he or she is ordinarily resident here and liable for UK tax.

Outperformance

Achievement of a higher investment return than a benchmark or other measure against which that return is being compared. For example an equity fund would be said to have outperformed the index if the fund achieved a 5% return against a 3% return by the index over the same period (As opposed to underperformance).

Overweight

Having a greater exposure to a particular sector or stock in an investment portfolio compared with a neutral or benchmark position (As opposed to underweight).

Paid-up benefits

A preserved benefit which is secured for an individual member of a pension scheme or the policyholder of a life assurance policy, where premiums have ceased to be payable in respect of that member.

Penny shares

Term used to describe shares with a low value, usually under £1 per share; very often high-risk shares.

Pension annuity

An insurance policy that pays out an income during retirement. The annuity is bought with savings made before retirement eg from a personal pension or occupational pension scheme. This can also be known as a compulsory purchase annuity.

Pension transfers

Refers to the current value of a pension plan that can be transferred from one approved scheme to another approved scheme. The value is transferred direct from one employer or pension provider to another.

Pensionable service

Period of service with a company that is used in the calculation of pension benefits.

Pensions Ombudsman

The Pensions Ombudsman deals with disputes about entitlement and complaints about maladministration from members of occupational pension schemes and personal pension schemes. The Ombudsman’s role also includes investigating complaints between trustees of occupational pension schemes and employers, and between trustees of different occupational pension schemes, or between trustees of the same scheme.

Performance management

A form of analysis that attempts to compare investment managers performance. Measurement should include: analysis of performance over a business cycle (typically 3-5 years) and assessment of returns on a quarterly basis, ideally by sectors as well as total returns; ensuring that like is being compared with like – the best way to do this is to look at each manager’s benchmark, or risk profile, and compare performance against the benchmark, preferably on a sector basis; and analysis of the reason for any extreme out-or-under performance in a given period (eg whether a large overweight position exists in one or a few securities or a sector).

Performance to date

The performance of an investment over a given period of time calculated to the most recent update date.

Personal allowance

The level of income above which income tax starts to be levied.

Personal pension plan

An arrangement, often in the form of a policy from a life insurance company, under which individuals can make contributions without the need for employer contribution.

Policy conditions

The ‘small print‘ of a policy, which sets out the rights and responsibilities of the parties involved.

Policyholder

Generally taken to mean the owner of the policy.

Pooled investments

Any form of investment in which a number of individuals place their money with a professional manager to manage the total fund on their behalf and produce a return to them individually. Also known as collective investment.

Portfolio construction

The process of identifying which asset classes to invest in, and in what proportions.

Portfolio optimisation

The process of selecting an investment portfolio that minimises risk for a given level of return, taking account of a) expected return; b) variances of expected return; and c) covariance of return with every other security under consideration.

Positive periods

The number of months over the last 12 months that a fund has grown in value.

Potentially exempt transfer

Gifts on which Inheritance Tax will not be payable unless the donor dies within seven years.

Power of attorney

A legal document whereby one person (the 'Donor') gives another person or persons (the 'attorney') the power to act on his or her behalf with regard to his or her property and financial affairs.

Premium

The amount of money an individual pays into a saving or investment product, as either a lump sum or a regular payment.

Present value

The current value of an investment which matures in the future, after discounting the maturity at an assumed rate of interest and adjusting for the probability of its payment or receipt.

Price series

A fund may have a number of price series assigned to it. Each one will generally have a different charging structure which will give rise to different prices over a period of time.

Primary market

The market in which securities are sold at the time they are first issued. (As opposed to secondary market).

Privatisation

The alteration of the legal and management structure of a Government trading body (eg a statutory authority) to permit private equity or ownership.

Program trading

A synonym for index arbitrage, or for package trading.

Protection overlay

A portfolio management technique whereby an investment manager aims to protect the capital value of a portfolio through risk management techniques, such as dynamic hedging.

Public sector

The part of the economy which is made up of Government enterprises, activities and public service departments such as health, education, transport and defence. See also private sector.

Put option

An option giving its purchaser the right, without the obligation, to sell an asset at a specified price (the exercise price) at any time between the purchase of the option and its expiry date. See also call option.

Quantitative management

An approach to investment management which seeks to use statistical or numerical methods to create efficient portfolios, with the optimum risk/return trade-off. Quantitative managers generally attempt to add value by exploiting pricing anomalies, or by providing particular levels of risk control, rather than by subjective forecasting of market behaviour.

Rally

A brisk rise following a decline in the general price level of the market or an individual share.

Rate of return

The yield earned in relation to a capital amount invested.

Real interest rate

The nominal interest rate less the prevailing rate of inflation.

Realise

To sell an asset (usually when it appears to have appreciated to the maximum extent that can be reasonably expected).

Redemption fee

A fee charged for the redemption (ie withdrawal/cashing in) of units in a unit trust. Also known as back-end load.

Redemption yield

The redemption yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures.

Reduction in yield

The amount by which an insurance company‘s charges can be expected to reduce the investment return on a policy.

Reserves

The proportion of a company’s profit not distributed to shareholders as dividends, or an account kept aside by the trustees of a pension fund to cover declines in asset values or investment returns.

Retained benefits

Pension benefits earned in previous employment that are taken into account when determining HM Revenue & Customs limits for a member of an occupational pension scheme.

Retirement date

This is the date that you choose to retire at.

Risk

In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must provide higher expected yields if investors are to be attracted to them. Risk can take many forms, but a major one is valuation risk – paying too much for an asset. See also currency risk, exchange rate risk, market risk, political risk, volatility.

Risk management

The monitoring and controlling of various risk factors in an investment portfolio with the aim of minimising volatility of investment returns.

Risk return

Risk is a measure of the variability of return. Return, in financial terms, represents the profit - in the form of income and capital appreciation on an investment. The Risk / Return trade off is how much an investor is willing to accept greater risk in order to pursue greater returns. The optimum position is the top left hand corner of the matrix, which represents the highest return and the lowest risk.

Roll-over relief

A tax concession, which allows investors and businesses to defer the payment of Capital Gains Tax. For example, if proceeds from the sale of a fixed asset are reinvested, Capital Gains Tax is not payable until the new asset is sold.

Running yield

Equal to the annual income payable on a bond as a percentage of its current market price.

S2P

State Second Pension.

Satellite funds

These funds are often used to complement the Core Funds in an investor’s portfolio. They tend to be more specialised and have a higher risk/return profile. 

Screening

Examination of various securities, usually through computer models, to identify certain predetermined factors such as valuations, earnings, liquidity, etc, with a view to the inclusion of those securities in an investment portfolio.

Section 226 (Retirement Annuity)

Prior to 1 July 1988, people not in pensionable employment (employment where no pension scheme exists) or people who were self-employed, were able to qualify for tax relief for contributions made to a pension scheme known as a Retirement Annuity under Section 226 of the Income and Corporation Taxes Act 1970. This was the forerunner to the Personal Pension Scheme.

Sector

A sector is a grouping of funds with a similar investment objective and make up.

An area of the economy where businesses share the same or a related product or service, for example, pharmaceuticals, telecommunications or retail.

Sector index

Sector performance takes into account the contributions of all existing funds the sector comprises of and is therefore referred to as the 'sector index'.

The sector index performance may not match the straight average of the existing sector members, as the latter will not take into account the performance of new funds which have entered the sector during the nominated performance period and which would have affected the sector index performance. Over a long period these differences will be cumulative, resulting in wider divergence between the sector index and the straight sector average. 

Securities

A term used to describe stocks and shares.

Segregated fund

Pension scheme investments managed along side, but separately from, other investments under control of a particular manager.

Selling (bid) price

The price at which you can sell shares or units in a unit trust or units in a life policy.

Settlement

In relation to share trading, an arrangement between brokerage houses for the payment or receipt of cash or securities. It represents the final consummation of a securities transaction and is handled through a clearing house.

Settlement risk

In relation to foreign exchange transactions, the exposure of one party to another on the value date of the contract. It is the risk that one party, having received settlement of one currency amount from the counterparty, is unable to effect settlement of the other currency amount.

Share

The ownership of part of a company; a contract between the issuing company and the owner of the share which gives the latter an interest in the management of the corporation, the right to participate in profits and, if the company is dissolved, a claim upon assets remaining when all debts have been paid. See also equity.

Share certificate

A piece of paper representing legal evidence of ownership of a stipulated number of shares in a company. Also known as scrip.

Share holder

The owner of one or more issued shares of a company who is normally entitled to: a proportionate share of the issuing company’s undivided assets; dividends when declared by the directors; and the right of proportionate voting power.

Share Price Index

An index measuring movements in the price of shares, but not of their dividends (as opposed to an Accumulation Index, which measures movements in both price and dividend income).

Shares

Sold by a company to raise money. Shares give the owners an interest in the company and a right to share in the profits.

Short position

An excess of sales over purchases of a relevant commodity, currency or investment instrument (As opposed to long position).

Shorts

Bonds or Gilts that have a redemption date within five years. Some institutions use seven years as the cut-off date.

Single premium

A one off payment into an insurance policy or pension.

Single pricing

Single pricing means that there is just one price for both buyers and sellers of the units or shares. This contrasts with dual pricing where there is one price for sellers and a higher price for buyers, sometimes known as a bid/offer spread.

Smaller companies

Generally, companies with a market capitalisation of less than US$1 billion or the bottom 25% of the market, although definitions differ.

Specialist manager

An investment manager which confines its investment activity to specific asset classes (eg equities, fixed interest, property, overseas shares, etc.) instead of (or as well as) balanced funds. See also balanced manager.

Spread

In relation to share, bond and currency markets, spread is the difference between the bid price and the ask (offer) price, incorporating both an estimate of demand and potential profit for the seller. In relation to unit trusts, spread is the difference between the allocation of redemption price of units, as a result of transaction costs incurred in buying and selling the underlying securities which make up the value of the trust. In relation to option markets, spread is the holding of a long position and an offsetting short position, usually in contracts with the same underlying security or asset.

Stakeholder pension

Stakeholder pensions were introduced from 6 April 2001. The Government has laid down minimum standards to ensure that all stakeholder pensions meet the same basic criteria for payments, costs and terms.

Standard & Poor's (S&P)

A credit rating organisation.

State Earnings-Related Pension Scheme (SERPS)

SERPS
State Earnings-Related Pension Scheme.
The Government introduced SERPS in 1978 as an earnings-related top-up to the basic state pension. It was replaced with the State Second Pension in April 2002. Whether you are entitled to SERPS depends on your earnings while you were in employment and the National Insurance contributions you and your employers paid; therefore self-employed do not qualify for this pension.

State pensionable age

Fixed retirement ages for men and women, currently 65 and 60 respectively. To be equalised to 65 for men and women, by April 2020 (with ten years ‘phasing-in from 2010). This is the age at which state benefits may be taken as pension income.

Stock

A generic term for equities (shares) and, less frequently, bonds. See also Security.

Stock exchange

A market where stocks and shares are bought and sold.

Stock selection

The selection of an individual security within an asset class. For example, stock selection in relation to equity investments is made after analysing the financial standing, future earnings prospects and valuation of the shares of the company concerned. Along with asset allocation, stock selection is a key way in which investment managers add value.

Stocks and shares

A stock generally refers to fixed interest securities, usually issued in denominations of £100. Shares are sold by a company to raise money. Shares give the owners an interest in the company and a right to a share in the profits.

Subscription

An agreement to purchase a certain offering, eg a certain number of shares for a stipulated price.

Sum assured

The guaranteed amount paid on death or maturity under a life assurance policy.

Superannuation

A means of setting aside funds during working life for use as retirement income, under a regulatory system which provides certain taxation incentives and prudential controls for the benefit of contributors. See also pension.

Swap

An interest rate, currency or equity exchange transaction involving two parties. In the case of an interest rate swap, one party is obliged to pay a fixed interest rate to the other party in return for a floating interest rate. In the case of a currency swap, one party is obliged to make payments in another specified currency.

Switching

Transferring sums of money from one unitised fund to another. This is usually done on a bid-to-bid basis to avoid ‘new money‘ charges when buying units at the offer price.

Systematic risk

The systematic risk is the portion of the risk that relates to the movements in the underlying market of which this asset forms part. Systematic risk is normally measured in terms of beta. It should not be confused with systemic risk.

Tactical asset allocation

A process by which the asset allocation of a fund is changed on a short-term basis to take advantage of perceived differences in relative values of the various asset classes. A variation of asset allocation around a benchmark. See also strategic asset allocation.

Taper relief

Taper relief was introduced into the UK taxation regime with effect from 6 April 1998. Its purpose is similar to indexation, in that it aims to reduce the amount of Capital Gains Tax you have to pay when you sell shares, to account for the effect of inflation.

Tax relief

Amounts which you can deduct from your annual income to reduce the amount on which you have to pay tax. For instance, if your income before deduction of reliefs is £20,000, and you made pension contributions in the year of £1,000, you could deduct £1,000 from £20,000 to produce a total income for tax purposes of £19,000. That is because pension contributions are payments on which HM Revenue & Customs allows tax relief.

Technical analysis

An approach to the analysis of stock and futures and their future trends which examines the technical factors of market activity, often represented by charting patterns, as contrasted with fundamental analysis. Technical analysts normally examine patterns of price change, rates of change, and changes in volume of trading and open interest, in the hope of being able to predict and profit from future trends. Some investment professionals are sceptical of the predictive ability of technical analysis, but most managers keep an eye on the charts anyway.

Term assurance

A simple life assurance policy that pays out on death of the life assured during the time period specified by the policy.

Testate

A person who dies having made a will is described as ‘testate’.

Tied agent

A sales person who sells the policies of only one insurance company. Some sales people are tied to several companies – this is known as a multi-tie.

Tilt

The adoption of a particular view on a sector by over-weighting a portfolio in the direction of that sector, (eg a portfolio with a high level of resource shares and low level of industrials would be described as having a resource tilt). Such a technique is commonly employed by index fund managers when clients indicate a desire for above-index returns.

Timing

The art of deciding upon the exact moment to buy or to sell.

Top slicing

A method of calculating Income Tax liability on a chargeable gain from certain packaged products.

Total Expense Ratio (TER)

The Total Expense Ratio (TER) represents the true cost of running a fund. It includes the fund AMC (Annual Management Charge) as well as the depository and custodial charges, and audit, registration, and compliance fees. For direct property funds, the TER may also include the property expense ratio (PER), which captures all non-recoverable revenue costs associated with the management and operation of the property portfolio. Some fund groups show the PER included and for others it is excluded. Skandia aims to display property TERs inclusive of the PER, wherever possible.

Towers Watson

Towers Watson provides global actuarial and management consulting to insurance and financial services companies. 

Tracker funds

Aim to mirror or 'track' the performance of any of a number of worldwide stock market indices, such as the FTSE 100 Index. See passive management.

Trader

A person who actively buys and sells securities for his or her own account, usually with relatively short time horizons.

Transfer payment

Payment made from a pension scheme to another pension scheme, in lieu of benefits which have accrued to the member, to enable the receiving scheme to provide alternative benefits. The amount transferred is known as the transfer value.

Treasury bills

Short term negotiable debt obligations of the US government with maturities of one year or less, issued at a discount from face value.

Treasury notes

Intermediate term negotiable debt obligations of the US government with maturities of 1 to 10 years.

Trust

A legal obligation binding a person (the trustee) to deal with property over which he has control for the benefit of certain people (the beneficiaries).

Turnover

In relation to investment portfolios, the rate at which securities within a portfolio are exchanged for other securities of the same class; in relation to investment markets, the level of trading that occurs.

Unbundled

Referring to the structuring of a product or service where the individual components involved in the management of that product are split out with separate fees usually applying. For example, an unbundled pension arrangement might involve separation of investment management, trusteeship and insurance arrangements among different parties. (As opposed to bundled).

Under insured

When the maximum sum a company will pay out to cover a claim is less than the value of the loss or damage.

Underlying inflation

A calculated measure that takes the headline inflation rate and excludes certain volatile items or series that are affected by factors other than general economic conditions (eg government taxes, or the effect of weather on fruit and vegetable prices). The resulting rate is based on only those items directly related to the economy.

Undervalued

Referring to a security or currency which trades below what is perceived to be its proper market value, taking account of statistical or fundamental research or other relevant information.

Underwriter

An individual who decides whether or not to accept a risk and calculates the premium to be paid.

Unearned income

Income received from sources such as dividends from shares and bonds, which has not been earned by working.

Unit trust

An investment or company fund which pools together customers' money allowing them to increase the types of shares they can invest in, therefore reducing the risk. Many unit trusts have now become OEIC's, see Open Ended Investment Companies.

Units

When investing in a unit-linked contract, the individual's contribution is used to buy units. These units will fall or rise in line with the underlying investments.

Unlisted

Referring to a company and/or shares that are not available for purchase or sale through the stockmarket.

Value Added Tax

A tax on individual goods and/or services, which is added on to the retail price of those goods or services.

Value investor

One who seeks to buy shares when they are under priced and to take profits when they appear over valued. The price/earnings ratio is a key valuation measure.

Variable rate mortgage

A mortgage where the interest rate can move up and down. It is usually based on the Bank of England base rate.

Venture capital

Capital which is subject to more than a normal degree of risk, usually associated with a new business or venture and particularly in relation to new technology projects. Also called risk capital or development capital.

Voting right

A right enjoyed by a shareholder to participate in the affairs of the company by voting at its annual meeting or other policy making forum. See also corporate governance, proxy.

Weighting

The relative proportion of each group of securities or asset classes within a single investment portfolio. See also overweight, underweight.

Will

A legal document which lays out how the estate is to be distributed after the death of the Testator. The estate is administered by Executors on death.

With profits bond/ policy

A single premium bond issued by a life company where a lump sum is paid into a with profits fund made up of shares, property, cash and fixed interest securities. With profits bonds use a smoothing device to protect the investor from extreme fluctuations in market conditions.

Wrap account

This is the name given to an individual’s aggregated details available to a financial adviser via the Skandia online wrap service.

Yield curve

A visual representation of the term structure of interest rates. It shows the relationship between bond yields and maturity lengths. A normal or positive yield curve signifies higher interest rates for long-term investment, while a negative or downward curve indicates higher short-term rates.

Zero coupon bonds

Discounted bonds which are issued with no coupon, ie there is no periodic income payment, and the yield to the bondholder is derived from the capital value of the bond at its maturity.