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...
The Alternative Investment Market (Aim) was first established in 1995 by the London Stock Exchange as a way for newer firms to gain access to public funds...
The law requires an independent person to sign off that a firm's financial statements are "true and fair" and have been prepared using the relevant legislation...
The Bank of England is the UK's central bank. It started 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.
There is 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 known as the 'Bernanke Put'
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).
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 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.
Central banks impose capital adequacy ratios (also known as solvency ratios) that set the amount of its own money a bank needs to have relative to its total loan portfolio.
The capital asset pricing model has been widely used for many years by the global financial services industry to try and predict the returns you should expect from a stock.
Capex is short for capital expenditure. This is simply the purchase of fixed assets such as land, buildings and equipment for a business and it is often one of the biggest uses for a company’s cash flow.
Chapter 11 of the American bankruptcy protection laws effectively puts a protective ring around a company, winning it time to renegotiate its debts and stopping creditors from claiming assets...
A typical contract between two financial-market participants involves one agreeing to sell and later deliver a product (say, shares) and another agreeing to pay for it...
We use mental shortcuts (heuristics) to make decisions rapidly. These work in many circumstances, but when it comes to investing, they can be a major handicap, giving rise to “cognitive biases”.
A 'forward' is a contract agreed between two parties whereby one agrees to deliver a specific quantity of an asset – say one ton of aluminium – on an agreed date and the other agrees to pay a fixed price for it on that date...
When you invest money, you earn interest on your capital. The next year, you earn interest on both your original investment plus the interest from the year before...
When used in financial markets, contagion is a term associated with the kind of market turmoil seen in 2007 as well as previous crises such as those of 2001 and 1998...
An investment company’s articles of association often provide for shareholders to vote on whether the company should continue to exist. This is known as a continuation vote.
A convertible bond issued by a public company is one that starts as a bond but that can also be converted into ordinary shares in that company at any time before the bond matures, and at a previously specified price...
Also known as 'conversion rights', these give the buyer of a preference share or bond the right to convert it into a set number of ordinary shares for a pre-agreed 'strike' price at an agreed point in the future...
The Coppock Breadth Indicator, originally known as Trendex's Timing Technique for Texas Traders, is used to identify buy signals from around the bottom of a bear market...
When governments borrow - by selling 'gilts' in the UK and 'treasuries' in the US - they offer the buyer a low annual return or 'yield', as the risk of default is virtually non-existent...
When a country tries to keep its currency trading at a certain exchange rate, or within a tight range against another currency, this is known as a “currency peg”.
The performance of cyclical stocks is heavily dependent on the economic cycle - they do well when the economy is booming but very badly when it falls off a cliff...
A classic price/earnings ratio is the relationship between the current share price and one year's earnings, usually the last year, or a forecast for the year ahead...
'Dark pools' covers any share trade conducted directly between investing institutions, such as banks and hedge funds, rather than via a regulated exchange
The DAX is Germany’s blue-chip index, the most cyclical of the major western indices, with almost 80% of it comprised of economically sensitive industries.
There are several possible ways in which a debt swap can be done. However, the aim is usually the same – to refinance a borrower and strengthen its balance sheet.
The debt to equity ratio of a company is simply its level of debt (any type of borrowed money) divided by equity (the shareholders' money in the business).
A derivative is the collective term used for a wide variety of financial instruments whose price derives from or depends on the performance of other underlying investments.
Discounted cash flow is simply a method of working out how much a share is fundamentally worth based on the present or discounted value of expected future cash flows.
Investors have a tendency to hold onto losing positions long after we know in our heart of hearts, the stock is never going to recover, and to take profits on winning positions too early.
Fans of this theory say that bargains can be spotted by looking for high dividend yields – the annual dividend as a proportion of the current share price.
Earnings per share is seen as one of the best means of determining a share's true price, as it shows how much of a firm's profits (after tax) each shareholder owns.
The earnings yield is a firm's earnings per share for the most recent 12 months divided by the share price - effectively the opposite of the p/e ratio.
Earnings before interest, tax, depreciation and amortisation (EBITDA) takes operating profit and adds back two subjective costs: depreciation and amortisation.
According to Elliott wave theory, market movements conform to patterns - a series of waves reflecting the fact that people tend to think and behave in a herd-like way.
Enterprise value to earnings before interest and tax (EV/Ebit) is a way of deciding whether a share is cheap relative to its peers or the wider market.
(AKA defined benefits and defined contributions pensions) With a money purchase scheme, the size of your pension depends entirely on the value of your fund when you retire.
The phrase ‘fiscal cliff’ was coined to capture the large and predicted reduction in the US budget deficit expected as specific laws kicked into effect from 2013.
Flipping is when you make an offer on a property and then either look to secure a new buyer at a higher price before you close on the deal, or wait for it to rise in value, then sell on.
A floating rate note is a form of security that carries a variable interest rate which is adjusted regularly by a margin against a benchmark rate such as LIBOR.
The Financial Services Compensation Scheme (FSCS) covers bank, building societies and investment accounts, and will pay compensation if the holding institution goes bust.
A future is a tradeable contract that commits you to taking delivery (if you buy), or making delivery (if you sell), of an agreed amount of something at an agreed time.
Gross domestic product (GDP) is a measure of the total amount of goods and services produced by a country in a specific period of time, usually a year or a quarter.
A gilt-edged security (gilt) is a government bond - a security or stock issued by the government paying a fixed rate of interest and redeemable on a set date for a set amount.
Global depositary receipts (or GDRs) offer a solution for investors wanting to buy shares listed in countries where there are government restrictions on who can own and trade them.
Gordon’s growth model is a very simple but powerful way of valuing shares based on a company’s future dividends. It is sometimes called a “dividend discount” model.
The term 'government-sponsored enterprises' (GSEs) refers to three US organisations – Freddie Mac, Fannie Mae and Ginnie Mae – which all play a crucial role in the US mortgage market.
When measuring inflation, some countries, such as the US, take into account changes in the quality of goods in a process known as 'hedonic' price adjustment.
A company’s directors may feel that a takeover bid undervalues the shares, and so do not recommend the offer to shareholders. The bidding company can instead approach the shareholders directly.
Index-linked gilts are sterling bonds issued by the Bank of England and listed on the London Stock Exchange, introduced to act as a hedge against inflation for pension funds.
Individual Voluntary Arrangements are an alternative to bankruptcy, whereby a debtor in financial difficulty comes to an arrangement with his creditors on how the debt will be cleared.
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. It is also sometimes defined as the decline in the purchasing power of each unit of money.
An initial public offering (IPO) is the process of launching a firm on to the stock exchange for the first time by inviting the general public and financial institutions to subscribe for shares.
A yield curve shows the relationship between the yield on securities and their maturities (how long it is until they can be redeemed at their face value).
Named after economist John Maynard Keynes, who believed the best way to ensure economic growth and stability is via government intervention in the economy.
The theory behind the Laffer Curve states that 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.
'Leverage' is a US term that is also known as 'gearing'. Both express the extent to which any transaction is financed by debt from lenders as opposed to capital provided by the investor.
These are two of the most important interest rates in the world. Libor is the London Interbank offered rate. The overnight index swap (OIS) is a broadly comparable rate in the US.
Low volatility – or “low vol” – investing means buying shares (or bonds) that tend to go up or down in price by less than the overall market (in other words, they’re less volatile).
When buying a derivative like a spread bet, an investor will only have to pay a small initial deposit, or 'margin', of say 10% of the value of the shares.
If an index is weighted by market cap (market capitalisation – the number of shares outstanding multiplied by the share price), it means the companies in the index are ranked by stockmarket value.
Market neutral funds aim to deliver above market rates of return with lower risk by hedging bullish stock picks (buys) with an equivalent number of short bets (sells).
Market timing refers to any strategy that involves trying to predict future price movements and shifting between different investments to take advantage of them.
Maturity transformation is when banks take short-term sources of finance, such as deposits from savers, and turn them into long-term borrowings, such as mortgages.
Mean reversion is the tendency for a number - say, the price of a house or a share - to return to its long-term average value after a period above or below it.
Monetary policy is about exercising control over the money supply (the amount of money circulating in the economy) with the aim of influencing the economy.
A monoline is any business that specialises in one particular financial services area, which could in theory be anything from mortgages to car insurance.
Multiple compression is when company's price/earnings multiple falls as investors become wary of a company's growth prospects. The share price may be static or falling, despite increasing earnings.
Fund managers publish their ongoing charges figure (OCF) – previously known as the total expense ratio (TER) – to give an indication of the cost of investing in their funds.
An option is simply the right to buy (a 'call' option) or sell (a 'put' option) a quantity of any asset by an agreed expiry date for a fixed ('strike') price.
The Off Exchange (OFEX) was started as a way for shareholders to deal in the shares of small companies that do not meet the requirements of Aim and the LSE’s official list.
This technique allows a borrower to legally raise finance (so improving its cash position) without showing any associated liability on the balance sheet.
High operating leverage (also known as operating gearing) means that fixed costs (predominantly property and staff) are a high proportion of total costs in the profit and loss account.
The output gap is the difference between an economy's actual output, otherwise known as gross domestic product (GDP), and what it would be if that country's industries were working flat out.
The terms overweight and underweight are used by brokers and fund managers to indicate their preference for stocks or markets relative to particular indices or benchmarks.
Ponzi schemes are a type of illegal 'rob Peter to pay Paul' operation named after Charles Ponzi who took deposits from 40,000 US investors on the promise of fabulous returns
In general, the higher the price of a product the lower the demand for it. The extent to which this is true for each product is referred to as price elasticity.
The private finance initiative (PFI) is a way of getting private sector involved in financing public sector projects like schools, hospitals and prisons.
A put option gives someone the right to sell something (often shares, but they can be used in connection with other financial assets) for an agreed price on or before a certain date.
When investors buy different securities, they want to be able to compare expected annual returns. For bonds this is the 'redemption yield' or 'yield to maturity'.
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.
Investment trusts can hold back up to 15% of their dividends to build up a revenue reserve, which they can then draw on to maintain their own dividends in years when company payouts fall.
A rights issue gives investors who already hold shares in a company the right to buy additional shares in a fixed proportion to their existing holding.
One way to think about the size of return you should be aiming for is to consider the return you could get if you took absolutely no risk at all – the “risk-free rate of return”.
The risk premium is the difference between the highest risk-free return available and the rate of return investors expect from another asset over the same period
A mortgage is secured on the borrower's home, which can be seized later and sold should things go wrong. By extension, the mortgage itself can be securitised.
A segregated fund is a managed pot of assets belonging to just one client, managed alongside - but separately from - other investments under a manager's control.
The 'short term interest rate future' (or STIR) is also known as the 'short sterling' future. In essence, it facilitates bets on where interest rates will be.
Structured investment vehicles (or SIVs) are typically created by investment banks and can be a way to raise capital without having to record an associated obligation to repay it.
Smart beta funds aim to combine the best aspects of passive and active management, aiming to beat the index by eliminating any element of discretionary human judgement.
SPAC stands for “special purpose acquisition company” – a company listed on the stock exchange like a normal business, but with no business operations of its own.
Stock overhang is a phrase used to describe a sizeable block of shares which, if it were to be released in the market in one go, would flood it, and so depress prices.
The TAIEX is Taiwan’s benchmark index, with technology companies accounting for just over a third of the market. Semiconductors are the main subsector.
The total expense ratio (TER), also known as the 'expense ratio' is a way to capture the annual costs associated with running a fund such as a unit trust.
A conventional stop-loss will ensure you get out of the market at a fixed price above or below your initial trading price. A trailing stop allows you to keep more of your profits.
Vendor finance is a creative way for a firm to fight falling sales. If a customer cannot afford to pay up front, it borrows the funds from the manufacturer.
WACC stands for the weighted average cost of capital. It represents the rate of return a company must make on the money it has invested to stop investors putting their money elsewhere.
The term 'money market' covers the vast network of deals involving the lending and borrowing of cash in a range of currencies. 'Wholesale' means funds borrowed or lent in large quantities.
Also known as 'net current assets', working capital is the total of a firm's current, or short term, balance sheet assets minus all current liabilities.
A yield curve shows the relationship between the yield on securities and their maturities (how long it is until they can be redeemed at their face value).
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.
Bonds that are not government securities are evaluated by the market on the basis of the difference between their yield and the yield of a comparable government bond. That difference is called a spread