There's nothing particularly complicated about the Laffer Curve. In fact, it's so easy to grasp, the man who came up with it in the 1970s, economist Arthur Laffer, first sketched it out on a cocktail napkin.

It may be simple, yet the Laffer Curve has been credited with inspiring Reaganomics the economic policies of American president Ronald Reagan and British prime minister Margaret Thatcher in the 1980s. The theory behind the Laffer Curve goes like this: the higher you set tax rates, the more you will receive in tax revenues until you hit a certain point. Thereafter, tax revenues will dwindle as tax payers lose the will to work harder.

Quite where the tipping point that maximises tax revenue lies has always been up for debate. Laffer would cut the top rate of income tax in America from 40% to 28% if he could, says Josh Glancy in The Sunday Times.

A collateralised debt obligation (CDO) is a type of financial product – a credit derivative – which is backed by an underlying pool of loans. An investment bank pulls together mortgages, bonds, car loans, or any other type of debt, bundles them all up, then repackages them to sell to investors.

You can think of this process – securitisation – as like baking a cake. The different loans form the ingredients of the cake. The cake is then sliced into “tranches”. The riskiest tranches (those with the lowest credit rating) are last in the queue to get paid, while the least-risky tranches – the senior tranches – are first. So if any of the loans default, the riskiest tranches will suffer losses first. This is reflected in the higher yields on offer on the latter.

There are many different types of CDO, including mortgage-backed securities (MBS); asset-backed securities (ABS), which might contain car loans and credit card debt; and collateralised loan obligations (CLOs), which are backed by loans to businesses.

The benefit to the bank of securitisation is that it gets the loans off its balance sheet and thus frees up more capacity for further lending. The benefit to investors is that the underlying loans behind CDOs are usually higher risk and so will offer better yields than most other debt. But because the investor is buying into a pool of loans, the risk is reduced (certainly for investors in the more senior tranches).

CDOs first appeared on the scene as far back as 1987, when they were backed by junk bonds. But they are best known for their starring role in the global financial crisis from 2007 to 2009. The US property bubble of the early 2000s created huge demand for exposure to CDOs backed by US sub-prime mortgages. When the housing bubble burst and homeowners started to default on these mortgages, the value of the CDOs collapsed and via various interconnections, threatened the solvency of the global financial system.

Indices such as the FTSE 100 play a huge role in investment. They are used for monitoring the performance of a market, for providing a benchmark for a tracker fund to replicate and as a reference when analysing a fund manager’s returns.

The rapid growth of tracker funds, combined with a greater focus on portfolio analytics, means that compiling indices is now big business. Providers charge licensing fees to fund firms to use their benchmarks, so owning famous indices that are in high demand for index funds can be very profitable.

MSCI, FTSE Russell and S&P Dow Jones are the three leading providers, accounting for about 70% of the industry in 2020. All three publish a huge number of global, regional and country indices, many of which are further broken down by style (such as value or growth), currencies or other metrics.

In some situations, they produce comparable indices where performance tends to be similar (eg, MSCI USA, FTSE USA and S&P 500). In other cases (eg, emerging markets) there may be greater variation because of different decisions on what to include and omit.

MSCI, which was spun out of Morgan Stanley in 2007, is the largest. Its key benchmarks include the MSCI World and the MSCI Emerging Markets. FTSE Russell, which is owned by London Stock Exchange (LSE), began as a joint venture between the stock exchange and the Financial Times in 1995. LSE took full control in 2011 and bought US-based Russell in 2015. It controls the FTSE 100, as well as the Russell 2000 small-cap index. S&P Dow Jones was formed in a merger in 2012, bringing the S&P 500 and the Dow Jones Industrial Average together in one firm.

Other providers behind many important indices include Bloomberg, Nasdaq and Stoxx (owned by Deutsche Börse). A few firms that are not major index providers also provide some key benchmarks, such as JP Morgan in the bond market.

Inflation is the rise in the general level of prices in an economy (or a sector of an economy) over a given period of time. Alternatively, it is sometimes defined as the decline in the purchasing power of each unit of money, which amounts to the same thing.

Inflation is usually measured by looking at the change in a price index that is based on the average prices of a basket of goods and services. Typically we look at the year-on-year inflation rate (eg, the change in the price index between May this year and May last year), or the annualised rate over longer periods (eg, if the price index is up by 9.3% over three years, that’s an annualised inflation rate of 3%).

When we talk about inflation in general, we are usually referring to inflation in the consumer price index (CPI). This index is a representative sample of the items a typical consumer spends their money on, such as food, fuel, clothing and entertainment. However, we might also want to know about changes in the prices that manufacturers receive for what they sell. This is measured using a producer price index (PPI), based on a basket of products ranging from raw materials to finished goods. Changes in the PPI generally precede changes in the CPI since rising or falling costs for producers (such as materials or labour costs) will ripple down the supply chain until they affect the prices that consumers pay in shops.

Calculating inflation is surprisingly complicated. The selection of items in the index, the mathematical method used to average them and adjustments to reflect changes in the quality of items over time all affect the result. Two indices may produce different rates, as is often the case with the UK’s CPI and its older retail price index (RPI). Important items such as food and fuel have volatile prices, so we may need to look at an index that excludes these to get a sense of underlying trends (known as core inflation).

Many high-profile investment trusts have managed to raise their dividend every year for decades regardless of dividend cuts by companies. The main reason for this is that trusts, unlike open-ended investment funds, don’t have to distribute all the dividends they get each year. They can hold back up to 15% to build up a revenue reserve, which they can then draw on to maintain their own dividends in years when company payouts fall.

This can be useful for investors who prefer a steady income from their funds. You could do a similar thing with your own portfolio, by putting aside 10% or 15% of your dividend income to be drawn on only during market crises. However, avoiding dipping into that requires discipline, while having it out of reach inside an investment trust doesn’t present the same temptation.

That said, it is important to understand that a revenue reserve is not a sum of money separate from the trust’s portfolio, sitting in a bank account for emergencies. It is an accounting entry: the money will be invested alongside the trust’s other assets – in stocks, bonds or something else – on which the trust will hopefully be earning income and/or capital gains. Drawing on the reserve means selling assets. Typically the amount needed would be small, but if the trust had a large revenue reserve and had to draw on it for quite a while, the portfolio would shrink by a meaningful amount, which would cut future dividend income.

Following a change to tax laws in 2012, investment trusts are also allowed to pay dividends out of realised capital gains, known as the capital reserve. A few trusts now aim to pay out a flexible proportion of their value each year, regardless of whether that comes from capital or income. Drawing on capital to maintain a fixed dividend could make sense as a one-off in a crisis, but if a trust is forced to draw on revenue or capital repeatedly, the dividend is not sustainable.

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than those with scarcer resources. The term was first used by UK economist Richard Auty in 1993, but the concept is hundreds of years old.

There are several potential explanations. Some debate whether the idea of a “resource curse” is even valid, or whether it is more specific to individual countries and arises from a combination of problems rather than simply plentiful commodities.

But it’s not hard to find examples. Many Gulf nations, Latin American states and African countries are overly reliant on oil or other valuable but volatile resources. The theory goes that if a country has plentiful supplies of a given commodity, then it will invest too much of its time and energy in developing industries around this resource. That makes the economy vulnerable to swings in commodity prices, which are highly cyclical. The boom-bust cycle that results holds back investment in other sectors and growth in general.

And it’s not only emerging economies that struggle. The term “Dutch disease” was coined when the Netherlands discovered a huge natural gas field in 1959. Strong demand for the gas from other countries drove up the value of the Dutch currency (then the guilder), which in turn hit demand for its other exports, and helped to drive the economy into recession. This exchange-rate effect is one reason why exporting raw materials can make it harder to build “value-added” industries with high-skilled jobs such as manufacturing.

In “normal” times, central banks try to stimulate (or cool down) the economy by cutting or raising short-term interest rates, and thus wider borrowing costs. But since the 2008 financial crisis interest rates across the developed world have been stuck at near-0%. So central banks have experimented with more extreme monetary policies, such as quantitative easing (QE – printing money to buy government bonds and other assets). “Yield-curve control” is one such policy.

A yield curve compares the yields on bonds with the same credit quality across lengthening maturities. So the Treasury yield curve shows how interest rates on US government debt change as the repayment date gets further away. A healthy yield curve slopes upwards from left to right – bonds with longer maturities yield more than short-term ones. That makes sense, because in normal circumstances you expect to get paid more to wait for your money.

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to hold rates at a certain level. This is a form of “financial repression”. By capping bond yields at a level below inflation, government debt becomes easier to repay, but life becomes harder for savers. A key question, as Steve Russell notes on page 29 in this week’s MoneyWeek Roundtable, is how high inflation has to go in this scenario before investors feel that high asset prices can no longer be justified purely by interest rates being at or near 0%.

Decades ago, the majority of assets were either buildings and machinery – often referred to as plant, property and equipment (PPE) – or financial assets such as cash or securities. These are known as tangible assets. However, over time intangibles have grown to become a greater proportion of assets for many firms.

In some sectors, intangible assets may now be a far more significant part of a company’s value than tangible assets, even though much of this may not be fully reflected in its accounts. Valuable (and sellable) intangible assets include intellectual property, such as patents, copyrights and trademarked brands. Since the money that a firm spends on creating and maintaining these assets is usually classed as an expense for accounting purposes, these cumulative value of these outgoings is generally not recorded in the balance sheet (let alone any additional value created over and above the initial outlay). This differs from capital expenditure on physical assets, which will be recorded.

Often, the only time most intangibles will be measured is as goodwill in an acquisition. When one company buys another, it will typically pay a premium to the estimated fair value of its target (fair value will be an adjusted version of the value of a company’s assets minus its liabilities). Goodwill is the difference between the acquired company’s fair value and the price paid. In theory, this is the estimated value of intellectual property, as well as any value placed on a skilled workforce or loyal customers.

The real value of these intangibles may be difficult to measure (and buyers often pay too much). So goodwill may be a bad guide to what the assets are actually worth. The value of goodwill must be reviewed each year and reduced if necessary. It is not increased even if the assets are now worth more.

Modern monetary theory (MMT) is an economic theory whose key implication is that governments should fund public spending by creating as much money as they need.

Conventional economics assumes that governments need to raise money either through levying taxes or by borrowing (usually through issuing bonds) before spending it. MMT instead focuses on the distinction between currency users and currency issuers. People and businesses cannot create their own currency; they must get enough money in a recognised currency, such as sterling, to pay for what they need. If they can’t get enough, they will default on their obligations. Governments are currency issuers. The British government controls the supply of sterling and can ultimately create as much as it needs to pay its debts.

Hence advocates of MMT argue that treating a currency issuer like a currency user is too restrictive and forces a government to limit spending on services or investment to what it thinks it can afford, rather than what is needed to ensure full employment and the long-term health of the economy. Governments should base their decisions on what is required, and issue enough currency to pay for it.

The most common objection to MMT is that governments that create their own money without restraint to fund their spending have tended to end up fuelling runaway inflation. Examples include Weimar Germany in 1921-1923 and, more recently, Venezuela and Zimbabwe. MMT supporters claim that spending decisions can take inflation into account, and taxes can be used to mop up excess money supply.

After the global financial crisis and again during the Covid crisis, central banks have funded governments by directly buying new bonds. To a large extent, this is MMT by the back door. We can expect more of this in future, so that we should eventually find out which view is right.

In weightlifting, a barbell is a long and relatively light metal bar to which heavy weights are attached at both ends. Similarly, a barbell investment strategy means weighting a portfolio towards the two extreme ends of an asset class with nothing in the middle. This generally means the investor ends up with a combination of lower-risk, lower-return and high-risk, higher-return holdings.

Unlike a real barbell, the amount invested at each end of the portfolio isn’t necessarily the same. For example, you might have 80% in safer assets and 20% in riskier assets, depending on what will produce the best balance of risk and return.

The traditional use of the barbell approach is in bond investing. A bond barbell consisted of very short-term bonds (which offer lower yields but will mature soon and can be reinvested in higher-yielding assets if interest rates rise) and long-term bonds (which lock in higher long-term yields in case interest rates fall, but are more vulnerable if rates rise). This strategy works best when there is a large gap between short-term and long-term yields.

When applied to equities, a barbell often means investing most of the portfolio in low-risk stocks (typically large blue chips in defensive sectors) and the rest in higher-risk stocks with higher potential returns (eg, small caps or emerging markets). Other styles might include income portfolios that combine high-yield stocks with low-yielding ones that grow dividends faster.

A barbell approach can also apply when investing across asset classes as well as within them. One strategy would be to invest much of the portfolio in very safe assets (cash or very short-term government bonds) and the rest in extremely risky assets that have very high potential returns under certain circumstances, but a high likelihood of large losses or ending up completely worthless. These might include distressed stocks, venture-capital investments or options.

The currency exchange rates that we see and use every day are nominal exchange rates. They tell us what we get if we swap a unit of one currency for another – for example, a pound-dollar exchange rate of $1.25 means that we get 1.25 dollars for every pound. This is all that matters if we are buying something from abroad or sending money internationally. But it doesn’t tells us everything we want to know about the value of different currencies.

For more insight into this, we can use the real exchange rate (RER), which combines the nominal exchange rate with the ratio of the price of goods or services in the two countries. Say that a burger costs $5 in the US, but £3 in the UK. Then the real pound-dollar exchange rate based on burger prices is 1.25×(3÷5)=0.75. This is lower than one, which says the pound is undervalued (the RER will be one if the burger costs the same in both countries once both exchange rates and local prices are taken into account).

In practice, a real exchange rate is calculated by using the price of a basket of goods and services (eg, a consumer price index) not one item. And we consider the trend in the RER index over the long term, rather than at a single point in time. Due to frictions such as trade barriers, transport costs or local taxes and their effect on price, the RER between two countries might persistently be higher (or lower) than one and what really matters is whether it is much higher or lower than usual.

We are often interested in how cheap or expensive a currency is on a global basis. For this, we can consider its effective exchange rate (EER), which is an index that measures the nominal value of a currency against a basket of other currencies (eg, a country’s major trading partners). The real effective exchange rate (REER) is an index calculated in the same way using RERs and provides a measure of a country’s competitiveness. A low REER means its exports should be more competitive on price.

The acronym FAANG refers to Facebook, Amazon, Apple, Netflix and Google (Alphabet) – five American companies that have been among the top-performing stocks in recent years and are seen by many investors as core long-term holdings because of the way that they dominate the online economy. The acronym was coined by Jim Cramer, the host of the TV show Mad Money, as FANG in 2013; the second A (for Apple) was added later.

Under this definition, the FAANGs do not include a number of other major firms with comparable influence. The most important is Microsoft:

it is now as fast growing as its peers, but back in 2013 it was a laggard whose best days seemed long gone. However, when investors talk about the FAANGs today, they are usually referring to Microsoft as well.

The FAANGs are typically described as tech giants, but most are not listed in the tech sector. Index compilers class Apple and Microsoft as information technology, but Alphabet, Facebook and Netflix as communications services, and Amazon as consumer discretionary. The thread that links them is that they offer communication and data services that drive the evolution of the digital economy in a way that goes beyond computer hardware – they are responsible for far-reaching online platforms that most of us depend on every day.

The FAANGs are also used as a shorthand for a broader universe of large stocks that have strong market positions or star power (ie, they are going up at the time). A non-exhaustive list might include Adobe, Broadcom, Nvidia, PayPal and Salesforce, plus firms such as Mastercard and Visa (due to their role in online payments) and China’s Alibaba, Baidu and Tencent. Including Walt Disney (whose online service may be a key threat to Netflix) stretches this reasoning, while adding carmaker Tesla breaks it. Older tech firms such as Cisco, IBM, Intel and Oracle are rarely viewed as peers.

Market timing refers to any strategy that involves trying to predict future price movements and shifting between different investments to take advantage of them. 

To take a simple example, if you believe that shares are likely to fall and bonds to rise over the next month, you would buy bonds and sell shares. You would only intend to hold these positions for as long as you think bonds will keep beating shares: as soon as you think the trend will reverse, you would buy shares and sell bonds. 

These predictions and trading decisions may be based on economic data: in the example above, you might believe that GDP growth will be much worse than expected and investors will dump shares because they fear a recession is coming. They could be derived from trends or patterns that you think you can see in price charts (known as technical indicators); you might think a bull market looks as though it is coming to a peak or that a bear market is near a bottom. Or they might be influenced by other major events, such as the threat of a war and the impact that you think it will have on markets. 

All of these involve an attempt to predict not only what will happen and how it will affect asset prices, but when that will occur. If you get the timing wrong, you can easily lose money even if your prediction eventually turns out to be correct. That‘s part of the reason why market timing is so difficult, together with higher costs. If a buy-and-hold investor buys a stock that they think is cheap and their analysis is correct, they should make a profit, even if it takes longer than expected, as their costs will be relatively low. 

But if a market timer regularly changes their positions based on what they think will happen, they will incur higher costs. Unless their predictions are very often correct, these costs will eat into their profits. Studies suggest that most market timers do worse than buy-and-hold investors.

ADRs (American Depositary Receipts) allow US investors to get exposure to shares in foreign companies without the hassle of owning shares denominated in a foreign currency.

They are created when a depository bank, such as JP Morgan, buys foreign shares and then issues separate dollar-denominated ADRs to US investors. These can be subsequently traded in the US market just like the shares themselves.

The attraction of ADRs is that holding them confers all the usual benefits of share ownership such as dividends and voting rights, but without the need to deal directly on overseas markets or in foreign currencies.

Aim, London's "junior market" was first established in 1995 by the London Stock Exchange. Originally called the Alternative Investment Market, it was a way for newer firms to gain access to public funds. It has less demanding entry criteria than those applied to companies wanting to join the LSE Official List.

An Aim 'quotation' is often used as a stepping-stone for firms planning a full listing in the future. The main benefits of joining Aim for new firms are the ability to raise finance and make acquisitions more easily. Aim is becoming increasingly popular with non-UK firms seeking an international listing, as a result of its low regulatory requirements compared with equivalent markets in the US.

See Tim Bennett's video tutorial: What is a stock exchange?

Alpha (also known as the "alpha coefficient") is a way of analysing the value that an active fund manager adds to his or her fund. If you invest in an active fund, then you want it to beat the market rather than simply track its performance (or worse still, underperform the market).

However, even if the manager manages to beat the market, that doesn't mean that they have added "alpha" (ie demonstrated skill). After all, a manager could potentially beat the market by putting all of their fund's money into a single stock that then happens to do very well, but that would involve taking a huge amount of risk, and none of their investors would be terribly happy about it.

So alpha measures the rate of return made by a portfolio relative to the return on its benchmark, but only after adjusting for investment risk (which is measured by beta).

For example, suppose a fund achieves a 30% return while its benchmark rises by 8%. But say the fund is three times more volatile than the benchmark (in other words, it has a beta of three). That would make the fund's alpha 6% (calculated by multiplying the benchmark return (8%) by the fund's beta (3) so in this case, 24% then subtracting from the fund's return). This means the fund has returned 6% more than you would expect, once an allowance has been made for the additional risk that the portfolio manager has taken on.

See Tim Bennett's video tutorial: What is 'alpha'?

Devised in the 1960s by Edward Altman, a Z score indicates the probability of a company entering bankruptcy within the next two years. The higher the Z score, the lower the probability of bankruptcy. A score above three indicates that bankruptcy is unlikely; a score below 1.8 indicates that bankruptcy is possible. It works by analysing the financial strength of a company using five balance-sheet and profit-and-loss-account measures profit to total assets, retained earnings to total assets, working capital to total assets, sales to total assets and market capitalisation to total assets. These are then weighted to reflect their relative importance before being combined into a single figure, the Z score.

Amortisation has two slightly different meanings, depending on whether you're in America or Britain. In the States it refers to the process of spreading the cost of any asset intangible or tangible over its useful economic life as estimated by the directors. In Britain, amortisation specifically refers to this process in relation to intangible fixed assets (such as goodwill).

Tangible fixed assets, such as buildings, are depreciated a similar process with a different name. Either way, the principle is that a firm's long-term assets will be used to generate income over many accounting periods and not just one.

So it would be misleading to dump the cost of the asset in the profit and loss account in the year of acquisition. Instead, it is better to spread it and charge it bit by bit as the asset is used up. This involves judgement, which is why some analysts prefer to replace the earnings figure with earnings before interest, tax, depreciation and amortisation (EBITDA).

See Tim Bennett's video tutorial:Beginner's guide to investing: the EV/EBITDA ratio.

Arbitrage is a technique used to take advantage of differences in price in substantially identical assets across different markets. An arbitrageur will buy foreign currency, bonds, stocks and commodities cheap in one market to sell more expensively in another. For example, if wheat is cheaper in Chicago than in London he will buy in Chicago and sell in London. Similarly, if the same stocks trade at 100p on the New York Stock Exchange and 101p in Tokyo, he will buy the first and sell the second. A successful arbitrage trade like this will see no net cash flow and carries no risk of loss. As it exploits the inefficiencies of current prices, it also helps establish equilibrium in markets by removing them.

Updated August 2018

The law requires that an independent entity certify that a company's accounts represent a "true and fair" view of its financial condition, and that the accounts have been prepared using the relevant legislation (in the UK, that's the Companies Act). The firms that carry out this work are auditors.

These are typically firms of qualified chartered accountants, who spend time at the company, talking to managers and checking records. The auditor is looking for fraud, or large errors in either the numbers that make up the accounts, or the narrative that appears in, say, the accompanying director's report.

Auditing in the UK is dominated by the "Big Four" accountants:PwC, KPMG, EY and Deloitte. Between them, these companies audit more than 95% of the UK's top 350 listed companies.

In theory, auditors are meant to be working on behalf of a firm's shareholders rather than its management after all, the shareholders are the ones who need to know that the accounts are trustworthy. However, in practice auditors are hired by executives rather than directly by shareholders, and the lack of competition in the sector has led to concerns that relationships between companies and their auditors can grow too cosy over time.

This is far from the only concern. Auditors make the majority of their money by selling unrelated services to the very companies that they audit, which suggests plenty of scope for conflicts of interest.

The sector came under even greater scrutiny in after the high-profile failure of government outsourcer Carillion, which was given a clean bill of health by KPMG just before it issued a huge profit warning.

If you ask for a price for forward delivery of a commodity as a buyer, it is usually higher than today's 'cash' price. That's because any seller, who has to look after the asset prior to the agreed delivery date, has to cover insurance, storage and finance costs (their money could be earning interest in the bank instead). When a forward, or future, price is above today's market price for the same asset, the situation is described as 'contango'.

However, it is possible for the cash price for an asset to slip above the price for forward delivery that's known as 'backwardation'. The reasons can vary perhaps there is a sudden short-term supply squeeze so the market puts a premium on assets available now. Typically, backwardations don't last long before a contango relationship is restored.

See Tim Bennett's video tutorial: What are 'contango' and 'backwardation'?

The balance of payments is the record of all transactions between a country and the rest of the world. Defined as simply as possible, the balance of payments is broken down into the current account and the capital account.

The current account includes payments for exports and imports of goods and services, as well as money sent home by citizens working abroad and income from foreign investments. The capital account covers the difference between the amount that the country’s residents are investing abroad and the amount that foreigners are investing in it, plus some smaller items such as capital transfers and grants to other countries and changes in foreign currency reserves held by the central bank.

The balance of payments is an accounting identity in which every debit must be matched by a credit – so in theory the current account and capital account sum to zero. In practice, measurement errors mean the numbers don’t match up, so the definition includes a balancing item to make up the difference.

The International Monetary Fund’s official definition refers to the change in ownership of financial assets as the financial account, and uses the term capital account mostly to refer only to some capital transfers, grants and the change in ownership of certain fixed assets.

A balance of payments crisis occurs when a country can no longer pay for imports or service its debts. This is usually caused by a sudden stop in inflows (or large outflows) in the capital account. Both developed and emerging market nations regularly run current-account deficits (the UK has run a deficit for many decades now). But emerging markets – partly due to their more fragile institutions, and partly due to the fact that more “hot” (speculative) money tends to flow their way in the good times – tend to be far more vulnerable to rapid losses of confidence.

The Baltic Dry Index is a key barometer of global freight activity measuring the cost of ferrying raw materials around the planet. Despite its name, it isn't just about Scandinavia. It's published by London's Baltic Exchange, the global marketplace for buying and selling shipping contracts.

The BDI measures the demand for space on so-called 'dry bulk carriers', which carry cargoes such as coal, grain, timber, steel and iron ore. That makes it a 'leading' economic indicator. Manufacturers need to buy supplies of raw materials before they can churn out finished products. So a pick-up in industrial activity will show up in the BDI - as producers stock up on raw materials - before it appears in the official production statistics.

And as the supply of shipping capacity tends to stay relatively unchanged over the short-term it takes up to two years to build a new ship, and most carrier operators are reluctant to scrap their vessels unless they have to it doesn't take a big increase in demand for transport space to push the BDI higher. Simliarly, a downturn will tend to show up in the BDI first.

The Bank of England is the UK's central bank. It began life in 1694 as a private bank set up by London merchants as a vehicle to lend money to the government and to deal with the national debt. That makes it the second-oldest central bank still in operation (the oldest is the Swedish central bank, which was set up in 1668). In 1946, it was nationalised.

It has a number of roles including overseeing the operation of the Royal Mint, which issues sterling notes and coins but its most important and high profile is to oversee monetary policy with the goal of maintaining financial stability in the UK.

The Bank's specific economic target is to keep the annual rate of UK inflation (as measured by the consumer price index, or CPI rate) at, or close to 2%. The Bank's Monetary Policy Committee (MPC) sets UK monetary policy by moving the bank rate Britain's key interest rate up and down. The MPC can also supplement the economy with measures such as quantitative easing (digitally creating new money in order to buy assets such as government bonds, in order to pump more money into the financial system with the goal of boosting the economy).

See Tim Bennett's video tutorial: George Osborne's £35bn raid on the Bank of England.

When companies have more cash on hand than they need, they may decide to hand some of it back to shareholders. In recent years, some firms have done this through what are known as special purpose share schemes. These schemes usually work by issuing new types of shares, typically called B shares and C shares, that are given to existing shareholders. Each shareholder gets the choice of which type of share they receive.

Shortly after issue, the company repurchases and cancels the B shares, handing the B share owners a profit taxed as a capital gain. Meanwhile, the C share owners get paid an equivalent dividend, taxed as income. The C shares then become worthless and are cancelled.

These schemes allowed shareholders to choose between receiving their payment as income or capital. Higher-rate taxpayers with an unused capital gains allowance could reduce their tax liability by choosing the capital alternative. But HMRC takes an increasingly dim view of this kind of dodge.

So from 6 April 2015, both alternatives have beentreated as income for tax purposes, eliminating the reason to offer these schemes.

Following the dotcom crisis after which the then Federal Reserve chairman, Alan Greenspan, slashed the US Federal Funds rate in order to stimulate economic growth and stave off a recession, there has been a widespread belief that the US central bank can always rescue the economy by decreasing interest rates.

Since the current chairman is Ben Bernanke this is now known as the 'Bernanke Put' (named after 'put options' - derivatives that make money in falling markets). The theory is that if the central bank interest rate falls, other commercial banks should be able to lend more cheaply which in turn encourages their customers, namely companies and consumers, to borrow and spend thus rekindling growth.

The problem is that low interest rates also tend to stimulate price inflation and may encourage previously greedy borrowers to take on even more debt (the so-called 'moral hazard') so the central bank's 'put', if exercised, can be a very mixed blessing.

Beta (or the "beta coefficient") is a way to measure the relative risk (as measured by volatility) of a share or tracker fund. It does so by comparing the historic movement in the share price to that of the market as a whole.

So, for example, if a share typically moves up by 10% when the market has risen by 50%, beta is 10/50 = 0.2. Equally, a share that increased by 100% when the market rose 50% has a beta of 100/50 = 2. Therefore, a stock that swings more than the market over time has a beta above 1.0, while a stock that is less volatile than the market will have a beta below 1.0.

Shares with a high beta are generally more volatile and therefore seen as higher risk than those with a low beta such as utility companies.

See Tim Bennett's video tutorial: What is 'beta'?

The bid-offer spread is simply the difference between the price at which you can buy a share and the price at which you can sell it. There is a difference between the two prices because this is how the people who ensure there is a market for the shares (known as market makers') make money.

The bid price is what the market maker will pay you to sell your shares to them (it's what they'll bid for it). The offer price is what you have to pay to buy shares from them. The offer price is usually higher than the bid price so that the market maker can make a profit.

The bid-offer spreads on large companies in the FTSE 100 which trade in huge volumes every day tend to be tiny. Smaller companies can have very big spreads, as they are harder to trade, so an investment in a very small company can easily be worth 10%-15% less than the price you paid for it as soon as you have bought it.

Bid-offer spreads are also a feature of investment trusts and exchange-traded funds (ETFs) and represent an extra initial cost of investing in them. In the case of certain funds having large bid-offer spreads it might be worth the effort of finding an alternative in order to minimise your investment costs.

When governments want to raise money, they do so by issuing bills (typically short-term) and bonds (longer term maturities can reach 30 years or more). The method is usually an auction. Remember that the issuer wants to raise capital as cheaply as possible and that means at the lowest possible yield (the yield is the annual return divided by price as a percentage. So the more a bidder bids, the lower the yield will be).

A competitive auction is where institutional and individual investors fight to get the bonds. It should ensure the issuing government raises the money it needs at the lowest cost.

Once all bids have been received, bonds are allocated at a single price to all successful bidders that price is usually the one that represents the highest yield from the bids accepted (so the higher your bid price, the more likely it is you will be allocated some bonds).

Alternatively, you may bid non-competitively and take bonds at the yield determined by the competitive bid process.

See Tim Bennett's video tutorial: Bond basics.

Updated August 2018

"Duration" is a measure of risk related to bonds. It describes how sensitive a given bond is to movements in interest rates. Think of the relationship between bond prices and interest rates as being like a seesaw: when one side (interest rates, for example) goes up, the other (in this case, bond prices) goes down.

Duration (which can be found in the factsheet of most bond funds) tells you the likely percentage change in a bond's price in response to a one percentage point (100 basis points) change in interest rates. The higher the duration, the higher the "interest-rate risk" of the bond that is, the larger the change in price for any given change in interest rates.

Duration also tells you how long (in years) it will take for you to recoup the price you paid for the bond in the form of income from its coupons (interest payments) and the return of the original capital. So if a bond has a duration of ten years, that means you will have to hold on to it for ten years to recoup the original purchase price. It also indicates that a single percentage point rise in interest rates would cause the bond price to fall by 10% (while a single percentage point drop in interest rates would cause the bond price to rise by 10%).

As a rough guide, the duration of a bond increases along with maturity so the longer a bond has to go until it repays its face value, the longer its duration. Also, the lower the yield on the bond, the higher its duration the longer it takes for you to get paid back. All else being equal, a high-duration bond is riskier (more volatile) than a low-duration bond. For zero-coupon bonds (bonds that don't pay any income at all), the duration is always the remaining time to the bond's maturity.

For interest-paying bonds, duration is always less than its maturity (because you will have made back your original investment at some point before the maturity date).

See Tim Bennett's video tutorial: Bond basics.

The risk of default (whether you will get paid back or not) on bonds varies from issuer to issuer - for example, the US government is more likely to repay than the Argentinian ministry of finance, and a multinational conglomerate is safer than a small company.

Credit-rating agencies grade bonds to help you gauge their risks.The three biggest agencies are Moody's, Standard & Poor's (S&P) and Fitch IBCA. They use broadly the same system of classifying bonds, the safest being AAA (or Aaa with Moody's), the next being AA+ (Aa1 with Moody's) and so on down to the bottom end of the spectrum, where CCC-listed bonds are deemed to be at a substantial risk of default, and D-listings, where the issuer has already defaulted.

Bonds at the bottom end of the scale are known as 'junk bonds' and offer a higher yield than those with higher ratings, but they are a lot more risky to invest in.

See Tim Bennett's video tutorial: Do we need ratings agencies?

"If the fiscal and monetary authorities won't regulate the economy, the bond vigilantes will," says economist Ed Yardeni on Bloomberg. 'Bond market vigilantes' is a term he coined in 1984 that can describe any bond-market participant (rather than an elite group of traders or fund managers).

Any bondholder may worry about whether the Federal Reserve has set interest rates too low and allowed the US government to borrow too cheaply to fund spiralling government spending. This may lead to inflation, a particular fear as it erodes a bond's value. If enough bondholders react by selling bonds then yields will tend to rise as prices fall. This makes debt issuance more expensive for heavily indebted governments.

See Tim Bennett's video tutorial: Do we need ratings agencies?

Book value is also known as equity, shareholders' funds, or net asset value (NAV). It is the value of all of a company's assets, less all of its liabilities (debts). Book value is sometimes used as an estimate of what a company would be worth if all of its assets were sold for their balance-sheet values. It’s often used as a way to value firms such as banks, housebuilders, and insurers. If you know the book value, you can get an idea of how cheap or expensive a share is by dividing the share price by the book value per share (hence the price/book, or p/b, ratio).

A p/b of below one means that – technically speaking – you can buy the company for less than its assets are worth on paper. In other words, if you could buy the whole company, you could sell everything it owned, and still make a profit.

One potential problem with this, of course, is that the book value of a company may not reflect what you would actually get were you to sell its assets. In particular, it may contain lots of intangible assets, such as goodwill, which often relates to the value of a brand. Intangibles – unlike a factory or a piece of land – can be very tricky to measure objectively. They may in fact not be worth very much at all, particularly when they need to be sold urgently. So if a company persistently trades on an unusually low p/b ratio, that could imply investors doubt its assets are worth as much as it claims, rather than meaning it’s a bargain.

If you subtract intangible assets from a company’s book value, you end up with a more conservative number, known as tangible book value, based on hard assets, such as land, buildings, machinery, stocks and cash. You can then divide this figure by the number of shares to get tangible book value per share. If you can buy a stock for a lot less than this figure (a relatively rare event), you may be getting a genuine bargain.

See Tim Bennett's video tutorial: Beginner's guide to investing: the price-to-book ratio.

Bottom-up investing is a strategy that overlooks the significance of industry or economic factors and instead focuses on the analyses of individual stocks and companies.

The approach assumes that individual companies can perform well in an industry that isn't doing well. If the company is strong, then macroeconomic concerns are thought to be of relatively little importance.

The bottom-up strategy therefore relies on extensive research and analysis of stocks and companies. Some investors look for firms with low p/e ratios and high earnings growth, while others look for financial stability, or seek to become familiar with the company's products and services.

See Tim Bennett's video tutorial: Six numbers that every investor should know.

Brazil is often touted as a major consumer market of the future now that the middle classes are expanding and spending more. But Brazil's benchmark index, the Bovespa, is hardly a pure play on this theme.

Basic materials, mining and oil and gas firms comprise almost 40% of the index. So sentiment towards commodities and China, a key buyer of Brazilian raw materials, is a major influence on this Brazilian index.

Financials, consumer goods and consumer services, all of which reflect consumption, collectively account for 46%. Industrials and telecoms, both worth around 3.5% of the index, complete the sectoral breakdown.

See Tim Bennett's video tutorial: What is an index?

The break-even point on an option is the price that the underlying asset has to hit in order to enable the option buyer (holder) to recover their premium.

So if a call option has a strike price of £2.50 and the up-front premium paid is 50p, the underlying share needs to rise to £3 (ignoring dealing costs and spreads) to hit breakeven. That's because the holder could then buy the share from the option writer for £2.50 and sell it on in the stockmarket for £3.

However, the 50p profit simply recovers the premium paid. Note that the option is 'in the money' as long as the underlying share is priced anywhere above £2.50. If it is, say, £2.70 on expiry, the option should be exercised to reduce the holder's 50p initial loss.

See Tim Bennett's video tutorial: What are options and covered warrants?

A management buyout (MBO) occurs when the management of a company buys up a controlling interest (often by buying all outstanding shares).

It doesn't always have to be the whole company. A group of managers might decide that they would like to own the particular part of the business they run, and operate it as an independent entity. This can happen either as part of a restructuring or if a company is split-up.

Funding for this can be difficult, so the management often uses borrowed money, in which case the deal is known as a leveraged buyout (LBO). In LBOs the lender, in addition to interest, often gets a chunk of equity too.

One of the chief advantages behind an MBO is that the management is no longer answerable to outside shareholders. A management buyin (MBI) is when an existing business is acquired with a view to putting in a new management team not previously associated with it. When new managers and existing managers and employees join forces, this is known as a buyin management buyout, or BIMBO.