CAC 40 A stock market index of French shares quoted in Paris.
Cadbury report The Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury, made recommendations on the role of directors and auditors, published in 1992. The first major standard-setting report on corporate governance.
Call-back feature The issuer of a bond has the right but not the obligation to buy back on specified terms.
Called-up (issued) share capital The total value of shares sold by a company when expressed at par (nominal) value.
Call option This gives the purchaser the right, but not the obligation, to buy a fixed quantity of a commodity, financial instrument or some other underlying asset at a given price, at or before a specified date.
Cap (1) An interest rate cap is a contract that effectively gives the purchaser the right to set a maximum level for interest rates payable. Compensation is paid to the purchaser of a cap if market-set interest rates rise above an agreed level. (2) (Derivatives) Any feature that sets a maximum return, payout or cost.
Capex The purchase of long-lived (more than one year) assets (i.e. fixed assets).
Capital (1) Funding for a business – can be equity only or equity plus debt; (2) another term for net worth – total assets minus total liabilities.
Capital asset pricing model (CAPM) An asset (e.g. share) pricing theory which assumes that financial assets, in equilibrium, will be priced to produce rates of return which compensate investors for systematic risk, as measured by the covariance of the assets’ return with the market portfolio return (i.e. beta).
Capital budgeting The process of analysing and selecting long-term capital investments.
Capital expenditure (Capex) The purchase of long-lived (more than one year) assets (i.e. fixed assets).
Capital gain A gain made when an asset has increased in value and is then sold.
Capital gearing The extent to which a firm’s total capital is in the form of debt.
Capital lease The lessor expects to recover the full cost (or almost the full cost) of the asset plus interest, over the period of the lease.
Capital market Where those raising finance can do so by selling financial investments to investors (e.g. bonds, shares).
Capital restructuring (reconstruction) Altering the shape of the firm’s liabilities profile, e.g. decreases/increases in the amount of equity or debt, or lengthening/shortening debt maturities.
Capital shares Issued by Split-capital investment trusts these investment trusts simultaneously issue different types of shares. Capital shares entitle the owner to receive all (or most of) the rise in the capital value of the portfolio. If you want to know more see Split-capital investment trusts.
Capital structure The proportion of the firm’s capital which is equity or debt.
Capitalisation (1) An item of expenditure is taken on to the balance sheet and capitalised as an asset rather than written off against profits. (2) Short for market capitalisation.
Capitalisation factor A discount rate.
Capitalisation issue The issue of more shares to existing shareholders in proportion to their current holdings. Shareholders do not pay for these shares. Company reserves are converted into issued capital.
Capitalisation rate Required rate of return for the class of risk.
Capitalised An item of expenditure is taken on to the balance sheet and capitalised as an asset rather than written off against profits.
Capped bonds The floating interest rate charged cannot rise above a specified level.
Cartel A group of otherwise competing firms supplying the same market entering into an agreement to set mutually acceptable prices, output levels and market shares for their products.
Cash cow A company with low growth, stable market conditions and low investment needs. The company’s competitive strength enables it to produce surplus cash.
Cash dividend A normal dividend from a company, paid in cash rather than a scrip dividend.
Cash flow statement The formal statement of a company’s cash movements over a period.
Cash fund Funds that invest in money market investments.
Cash settled In the derivative market some contracts are physically settled at expiry date (e.g. copper is delivered in return for cash under the derivative contract). However, many derivatives are not physically delivered, rather a cash difference representing a gain or loss on the closed derivative position changes hands.
Causal ambiguity A potential imitator is unable to clearly see which resource is giving the sustainable competitive advantage to a firm, or it is difficult to identify the way in which the extraordinary resource was created in the first place.
Cboe Europe Equities A stock exchange trading a wide range of European shares - more than 6,000 securities across 18 European markets,
Central bank A bankers’ bank and lender of last resort which controls the credit system of an economy (e.g. controls note issue), acts as the government’s bank, controls interest rates and regulates the country’s banking system.
Central counterparty (CCP) clearing house An organisation that acts as a buyer to every seller and a seller to every buyer. This is designed to eliminate the risk of failure to complete a deal by guaranteeing that securities will be delivered against payment and vice versa. The London Stock Exchange runs the Central Counterparty Service. Central counterparties can also offer a ‘netting facility’. Thus if a large bank conducts numerous buy trades in a single company in a day, amounting to say £10 million, and numerous sells amounting to £8.5 million, only £1.5 million (the net amount) is cleared and settled. A central counterparty system also allows the buyers and sellers to remain anonymous (they are known to the clearing house but not to each other).
CEO (Chief Executive Officer) The director with the highest power over the actions of the firm.
Certificate of deposit (CD) A deposit is made at a bank. A certificate confirming that a deposit has been made is given in return, to the lender. This certificate is normally a bearer security. Most CDs can then be sold in the secondary market whenever the depositor needs cash.
CGT (Capital gains tax) A tax on gains made when assets held are sold for more than cost, less some allowances and expenses.
Chairman’s statement A company’s annual report and accounts usually has a chairman’s statement commenting on the results and progress.
CHAPS (Clearing House Automated Payment System) The UK same-day interbank clearing system for sterling payments.
Chartism Investment analysis that relies on historic price charts (and/or trading volumes) to predict future movements.
Chasing the trend Buying financial securities after a recent upward trend in prices and selling after a recent downward trend.
Chicago Board of Trade (CBOT) The futures and options exchange in Chicago, USA – the world’s oldest (established 1848). Now part of CME Group.
Chicago Board Options Exchange (CBOE) The largest options exchange in the world, trading options on shares, indices and interest rates.
Chief executive’s review A comment, contained in a company’s annual report and accounts, on performance, strategy and managerial intentions.
Chief Financial Officer (CFO) The manager/director in overall charge of the financial affairs of the business.
Chinese walls Barriers within a financial service company designed to prevent sensitive information being passed on to another branch of the organisation.
Churn Buying and selling shares frequently. Fund managers are sometimes accused of doing this to generate fees or just in the vain search for higher returns.
Circle of competence The business areas that an individual thoroughly understands and is equipped to analyse.
City Code on Takeovers and Mergers Provides the main governing rules for companies engaged in merger activity. Largely self-regulated and administered by the Takeover Panel.
City of London A collective term for the financial institutions located in the financial district to the east of St Paul’s Cathedral in London (also called the Square Mile). However, the term is also used to refer to all UK financial institutions, wherever they are located.
City of London Police Lead the battle against financial fraud.
City Panel on Takeovers and Mergers The organisation that provides and enforces the rules governing behaviour in companies engaged in merger activity in the UK. The rules apply to unquoted and quoted public limited companies (plcs). Often shortened to ‘The Takeover Panel’, or ‘The Panel’.
Clawback Existing shareholders often have the right to reclaim shares sold under a placing as though they were entitled to them under a rights issue.
Clean price On a bond the prices are generally quoted ‘clean’, that is, without taking account of the accrued interest since the last coupon payment.
Clearing a trade The stock exchange (or other market clearer) ensures that (a) all reports of a trade are reconciled to make sure all parties are in agreement as to the number of shares traded and the price; and (b) that the buyer and seller have the cash and securities to do the deal. See Central Counterparty (CCP) clearing house for a linked service.
Clearing bank Member of the London Bankers’ Clearing House, which clears cheques, settling indebtedness between two parties.
Clearing house An institution which registers, monitors, matches and settles mutual indebtedness between a number of individuals or organisations. The clearing house may also act as a counterparty. See Central counterparty.
Closed-end funds Collective investment vehicles (e.g. investment trusts) that do not create or redeem shares on a daily basis in response to increases and decreases in demand. They have a fixed number of shares for lengthy periods.
Closet indexing (closet tracking) Fund managers declare themselves as active (i.e. searching out bargains) but really construct portfolios that are close to the market benchmark indices.
Closing out a futures position Taking a second action in the futures market (say, selling the future) which is exactly opposite to the first action (say, buying the future). Also called ‘reversing the trade’.
CME An exchange which trades a wide range of currency futures and options, interest rate futures and options, commodity futures and options, and share index futures and options. Within the CME Group are CME, CBOT, NYMEX and COMEX.
Code (City Code on Takeovers and Mergers) Provides the main governing rules for companies engaged in merger activity. Largely self-regulated and administered by the Takeover Panel.
Codes Three or four letter abbreviations given to a company share which are used by stockbrokers and on financial websites as shorthand for the company.
Collateral Property and/or other assets pledged by a borrower to protect the interests of the lender – they may be seized if the borrower reneges.
Collective funds Organisations (e.g. unit trusts) that gather together numerous small quantities of money from investors and then invest in a wide range of financial securities.
Combined Code of Corporate Governance A set of guidelines for best practice corporate governance (e.g. majority of board to be independent non-executive directors). The UKLA requires compliance with the Code or an explanation for non-compliance.
Commercial banking A range of banking services for retail and commercial clients, including taking deposits and making loans, chequing facilities, trustee services and security advisory services. For retail and corporate clients.
Commercial bill (bank bill or trade bill) A document expressing the commitment of a bank or firm to repay a short-term debt at a fixed date in the future.
Commercial paper (CP) An unsecured note promising the holder (lender) a sum of money to be paid in a few days – average maturity of 40 days. If they are denominated in foreign currency and placed outside the jurisdiction of the authorities of that currency, then the notes are Euro-commercial paper.
Commission Fee charged by brokers, usually a percentage of the amount of the transaction.
Commitment fee A fee payable in return for a commitment by a bank to lend money payable even if no borrowing subsequently takes place.
Commodity (commoditized) product (1) Undifferentiated compared with competitor offerings in any customer-important way by factors such as performance, appearance, service support, etc. For example, many personal computers are said to be commodity products. (2) Raw materials and foodstuffs.
Common stock Term used in the USA to describe ordinary shares in a company.
Companies Acts The series of laws enacted by Parliament governing the establishment and conduct of incorporated business enterprises. The Companies Act 2006 consolidated the Acts that preceded it.
Companies House The place where records are kept of every UK company. These accounts etc. are then made available to the general public.
Company registrar An organisation that maintains a record of share (and other securities) ownership for a company. It also communicates with shareholders on behalf of the company.
Company secretary Responsible for ensuring that the company complies with standard financial and legal practice and maintains standards of corporate governance. Acts as a point of communication between the board of directors and company shareholders,
reporting in a timely and accurate manner on company procedures and developments.
Comparative advantage A firm or a country has a comparative advantage in the production of good X if the opportunity cost of producing a unit of X, in terms of other goods forgone, is lower in that country compared with another country, or in that firm compared with another firm.
Competition and Markets Authority (CMA) Established in 2014 as the main UK regulator of markets and firms focused on where there is a substantial lessening of competition leading to anti-competitive behaviour to the detriment of buyers of goods and services. It may then block anti-competitive action.
Competitive advantage (edge) The possession of extraordinary resources that allow a firm to rise above the others in its industry to generate exceptional long-run rates of return on capital employed.
Competitive floor Where shareholders receive a rate of return that only just induces them to put money into the firm and hold it there. This minimal rate of return occurs because of the high level of competition in the market for the firm’s product, or because of value being reduced to the minimum by one or more of the other of the Porter’s five forces.
Competitive position The competitive strength of the firm vis-à-vis rivals, suppliers, customers and substitutes, in a market.
Complementary product One that is generally bought alongside the product in question.
Compliance Methods of ensuring that Financial service firms regulated by the Financial Conduct. They often have a designated compliance officer who is supposed to ensure that any legal and supervisory rules are followed.
Compound interest Interest is paid on the sum which accumulates, whether or not that sum comes from principal or from interest received at intermediate dates.
Compound return The income received on an investment is reinvested in the investment and future returns are gained on both the original capital and the ploughed-back income. Usually measured as an annual percentage return.
Concentration When there are few investments in a portfolio, it is said to be concentrated.
Concert party A group of investors who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of a takeover offer for a company.
Conglomerate bank A bank with a wide range of activities, products and markets.
Conglomerate merger The combining of two firms which operate in unrelated business areas.
Consideration The price paid for something.
Consolidated (group) accounts All the income costs, assets and liabilities of all group companies, whether wholly or partially owned, are brought together in the consolidated accounts. Consolidation must take place if 50 per cent or more of the subsidiary’s shares are held by the parent. If less than 50 per cent of the shares are held, consolidation may still be required.
Consolidation of shares Reduction in the number of shares so that the nominal value of each remaining share rises.
Consumer price index (CPI) A measure of general inflation.
Continuing obligations Standards of behaviour and actions required of firm’s quoted on the London Stock Exchange, enforced by the United Kingdom Listing Authority.
Continuous order book Throughout the trading of securities orders are automatically matched and executed against one another.
Contract for difference (CFD) The buyer and seller agree to pay, in cash, at the closing of the contract, the difference between the opening and closing price of the underlying shares (or some other underlying), multiplied by the number of shares in the contract.
Contract note A statement from a broker to an investor stating the price, the time of deal, the number of shares, the broker’s commission and the stamp duty for a recent share transaction.
Contrarians Those taking the opposite position to the generality of investors.
Control premium The additional amount an acquirer has to offer above the pre-bid share price in order to succeed in a takeover offer.
Controlling shareholder Any shareholder able to control the composition of the board of directors and therefore the direction of the company. Strictly speaking this is 50 per cent, but even a 30 per cent shareholder can exercise this degree of power, and therefore 30 per cent is used as the cut-off point for some purposes.
Convergence The coming together of the futures price and the underlying share price as the final trading day of a futures contract approaches.
Conversion premium With convertible bonds, it is the difference between the current share price and the conversion price, expressed as a percentage of the current share price.
Conversion price The share price at which convertible bonds may be converted.
Conversion ratio (1) The nominal (par) value of a convertible bond divided by the conversion price. The number of shares available per bond. (2) The ratio of the number of warrants that must be held and exercised in order to buy or sell a single unit of the asset (e.g. one share).
Conversion value The value of a convertible bond if it were converted into ordinary shares at the current share price.
Convertible bonds Bonds which carry a rate of interest and give the owner the right to exchange the bonds at some stage in the future into ordinary shares according to a prearranged formula.
Convertible loan stock Bonds which carry a rate of interest and give the owner the right to exchange the bonds at some stage in the future into ordinary shares according to a prearranged formula.
Convertible preference share/stock A convertible preference share/stock may be converted into another type of security (e.g. an ordinary share).
Corporate acquisition The purchase of one company by another – buying the shares.
Corporate advisers These professional financial service firms (e.g. investment banks, accountants) advise companies gaining a quotation for their shares on NEX Exchange to ensure knowledge and compliance with the rules and responsibilities of being on NEX Exchange. They provide reassurance to investors that the company meets certain basic standards of financial record keeping, reporting and corporate governance.
Corporate acquisition Many people use these terms interchangeably with ‘merger’. However, some differentiate ‘takeover’ as meaning a purchase of one firm by another with the concomitant implication of financial and managerial domination. Usually applied to hostile (without target management approval) mergers.
Corporate bond A bond issued by a company.
Corporate broker Stockbrokers who act on behalf of companies quoted on an exchange (e.g. providing advice on market conditions or representing the company to the market). Corporate brokers are knowledgeable about the share and other financial markets. They advise companies on fund raising (e.g. new issues). They try to generate interest among investors for the company’s securities, and stand prepared to buy and sell companies’ shares.
Corporate finance department of investment banks The department assisting firms in raising funds (e.g. rights issues, bond issues) and managing their finances.
Corporate governance The system of management and control of the corporation.
Corporate Governance Code Guidelines of best practice for companies regarding powers and responsibilities of directors, shareholders and senior managers.
Corporate raider An organisation that makes hostile takeover approaches for quoted companies.
Corporate Social Responsibility (CSR) Taking into account the effects of the organisation’s impact on the environment and social well-being. Going beyond regulatory requirements in taking action to improve say communities, the environment, human rights and employee welfare, even at the expense of near-term profits.
Corporate venturing Large companies fostering the development of smaller enterprises through, for example, joint capital development or equity capital provision.
Corporation tax A tax levied on the profits of companies.
Correction A minor fall during a market rise.
Correlation coefficient A measure of the extent to which two variables show a relationship, expressed on a scale of –1 to +1. A correlation of –1 implies that two share prices, two markets, etc., move in opposite directions by the same percentages.
Cost leadership strategy Emphasis on standard no-frills product, exploiting scale economies and other cost advantages.
Cost of capital The rate of return that a company has to offer finance providers to induce them to buy and hold a financial security.
Cost of sales The expense incurred for bought-in raw materials or components.
Counterparty The buyer for a seller, and the seller for a buyer.
Counterparty risk The risk that a counterparty to a contract defaults and does not fulfil obligations.
Coupon An attachment to a bond or loan note document which may be separated and serve as evidence of entitlement to interest. Nowadays it refers to the interest itself: the nominal annual rate of interest expressed as a percentage of the principal value.
Covariance A measure of the extent to which two variables move together.
Covenant A solemn agreement.
Cover Offsetting one position in a financial security with an equal and opposite transaction in the same or linked (e.g. derivative) security.
Covered call option writing Writing a call option on an underlying when the writer owns at least the number of underlying securities included in the option.
Covered warrants The same as warrants, except that financial institutions issue them, selling the right to buy or sell shares in industrial and commercial companies.
Creation units of ETF shares Shares issued by an ETF provider which represent, and can be exchanged for, a bundle of securities, e.g. shares tracking an index or other assets.
Creative accounting The drawing up of accounts which obey the letter of the law and accounting body rules, but which involve the manipulation of accounts to show a more favourable profit and balance sheet.
Credit A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future.
Credit period The average length of time between the purchase of inputs and the payment for them. Equal to the average level of creditors divided by the purchases on credit per day.
Credit rating An estimate of the quality of a debt from the lender viewpoint in terms of the relative likelihood of interest and capital not being paid and of the extent to which the lender is protected in the event of default. Credit rating agencies are paid fees by companies, governments, etc., wishing to attract lenders.
Credit risk The risk that a counterparty to a financial transaction will fail to fulfil their obligation, e.g. be unable to pay interest when due.
Credit risk premium or credit spread The additional yield (over say reputable government bonds) on a debt instrument due to the borrower’s additional perceived probability of default.
Credit union A non-profit organisation accepting deposits and making loans, operated as a cooperative.
Creditor One to whom a debt is owed.
Creditors (accounts payable or payables) Amounts owed by a company to suppliers and others.
CREST or Crest An electronic means of settlement and registration of shares and other securities following a sale on the London Stock Exchange, operated by CRESTCo.
CREST nominee account Brokers and investment managers hold investors’ shares electronically in a nominee company which appears as the registered owner. See also Dematerialisation and Nominee accounts.
Crowdfunding (crowdsource, crowd finance) Websites connect entrepreneurial firms seeking equity or debt funding with investors. An investor can go to one of the crowdsource websites and commit to investing online.
Crown jewels defence In a hostile merger situation, the target sells off the most attractive parts of the business.
Cryptocurrency A digital currency created within computer systems using encryption methods which restrict the creation of currency units and verifies the transfer of funds under blockchain systems (distributed, decentralized, public ledger). Admired for operating independently of conventional institutions but has no regulatory or governmental back-up. It is a boon for scammers, rampers, tax-doggers, money launderers, extortionists, drug runners and North Korea – much money has been lost by the innocent.
Cum-dividend (cum-coupon) (1) When an investor buys a government bond when it is still designated cum-coupon, they are entitled to the accrued interest since the last coupon was paid. (2) A share designated cum-dividend indicates that the buyer will be entitled to a dividend recently announced by the company.
Cum-rights Shares bought on the stock market prior to the ex-rights day are designated cum-rights and carry to the new owner the right to subscribe for the new shares in the rights issue.
Cumulative If a payment (interest or dividend) on a bond or preference share is missed in one period those securities are given priority when the next payment is made. These arrears must be cleared up before shareholders receive dividends.
Cumulative preference share A cumulative preference share carries forward the right to preferential dividends. If you want to know more see Preference shares.
Currency swap A swap is an exchange of cash payment obligations. In a currency swap the two parties exchange interest obligations (receipts) for an agreed period between two different currencies.
Current asset value (net) Current assets (cash, accounts receivable, inventories) minus current liabilities (also called working capital).
Current assets Cash and other assets that can be rapidly turned into cash. Includes inventories (stocks) of raw materials, partially finished goods and finished goods, receivables (debtors) and investments expected to be sold within one year.
Current liabilities Amounts owed that the company expects to have to pay within the next year.
Current ratio The ratio of current assets to the current liabilities of a business.
Current yield (flat yield, income yield or running yield) The ratio of the coupon on a bond to its current market price.
Custodian/custody An organisation that acts for investors in an administrative capacity, managing the holding of shares and other financial securities. The custodian may handle dividend payments and carry out various other administrative duties for the investor.
Cyclical companies (or industries, or shares) Those companies in which profits are particularly sensitive to the growth level in the economy, which may be cyclical.
Cyclically adjusted price/earnings ratio (CAPE) Current market price of a single company’s
share (or the market as a whole) devided by average earnings over the past ten years.
Cadbury report The Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury, made recommendations on the role of directors and auditors, published in 1992. The first major standard-setting report on corporate governance.
Call-back feature The issuer of a bond has the right but not the obligation to buy back on specified terms.
Called-up (issued) share capital The total value of shares sold by a company when expressed at par (nominal) value.
Call option This gives the purchaser the right, but not the obligation, to buy a fixed quantity of a commodity, financial instrument or some other underlying asset at a given price, at or before a specified date.
Cap (1) An interest rate cap is a contract that effectively gives the purchaser the right to set a maximum level for interest rates payable. Compensation is paid to the purchaser of a cap if market-set interest rates rise above an agreed level. (2) (Derivatives) Any feature that sets a maximum return, payout or cost.
Capex The purchase of long-lived (more than one year) assets (i.e. fixed assets).
Capital (1) Funding for a business – can be equity only or equity plus debt; (2) another term for net worth – total assets minus total liabilities.
Capital asset pricing model (CAPM) An asset (e.g. share) pricing theory which assumes that financial assets, in equilibrium, will be priced to produce rates of return which compensate investors for systematic risk, as measured by the covariance of the assets’ return with the market portfolio return (i.e. beta).
Capital budgeting The process of analysing and selecting long-term capital investments.
Capital expenditure (Capex) The purchase of long-lived (more than one year) assets (i.e. fixed assets).
Capital gain A gain made when an asset has increased in value and is then sold.
Capital gearing The extent to which a firm’s total capital is in the form of debt.
Capital lease The lessor expects to recover the full cost (or almost the full cost) of the asset plus interest, over the period of the lease.
Capital market Where those raising finance can do so by selling financial investments to investors (e.g. bonds, shares).
Capital restructuring (reconstruction) Altering the shape of the firm’s liabilities profile, e.g. decreases/increases in the amount of equity or debt, or lengthening/shortening debt maturities.
Capital shares Issued by Split-capital investment trusts these investment trusts simultaneously issue different types of shares. Capital shares entitle the owner to receive all (or most of) the rise in the capital value of the portfolio. If you want to know more see Split-capital investment trusts.
Capital structure The proportion of the firm’s capital which is equity or debt.
Capitalisation (1) An item of expenditure is taken on to the balance sheet and capitalised as an asset rather than written off against profits. (2) Short for market capitalisation.
Capitalisation factor A discount rate.
Capitalisation issue The issue of more shares to existing shareholders in proportion to their current holdings. Shareholders do not pay for these shares. Company reserves are converted into issued capital.
Capitalisation rate Required rate of return for the class of risk.
Capitalised An item of expenditure is taken on to the balance sheet and capitalised as an asset rather than written off against profits.
Capped bonds The floating interest rate charged cannot rise above a specified level.
Cartel A group of otherwise competing firms supplying the same market entering into an agreement to set mutually acceptable prices, output levels and market shares for their products.
Cash cow A company with low growth, stable market conditions and low investment needs. The company’s competitive strength enables it to produce surplus cash.
Cash dividend A normal dividend from a company, paid in cash rather than a scrip dividend.
Cash flow statement The formal statement of a company’s cash movements over a period.
Cash fund Funds that invest in money market investments.
Cash settled In the derivative market some contracts are physically settled at expiry date (e.g. copper is delivered in return for cash under the derivative contract). However, many derivatives are not physically delivered, rather a cash difference representing a gain or loss on the closed derivative position changes hands.
Causal ambiguity A potential imitator is unable to clearly see which resource is giving the sustainable competitive advantage to a firm, or it is difficult to identify the way in which the extraordinary resource was created in the first place.
Cboe Europe Equities A stock exchange trading a wide range of European shares - more than 6,000 securities across 18 European markets,
Central bank A bankers’ bank and lender of last resort which controls the credit system of an economy (e.g. controls note issue), acts as the government’s bank, controls interest rates and regulates the country’s banking system.
Central counterparty (CCP) clearing house An organisation that acts as a buyer to every seller and a seller to every buyer. This is designed to eliminate the risk of failure to complete a deal by guaranteeing that securities will be delivered against payment and vice versa. The London Stock Exchange runs the Central Counterparty Service. Central counterparties can also offer a ‘netting facility’. Thus if a large bank conducts numerous buy trades in a single company in a day, amounting to say £10 million, and numerous sells amounting to £8.5 million, only £1.5 million (the net amount) is cleared and settled. A central counterparty system also allows the buyers and sellers to remain anonymous (they are known to the clearing house but not to each other).
CEO (Chief Executive Officer) The director with the highest power over the actions of the firm.
Certificate of deposit (CD) A deposit is made at a bank. A certificate confirming that a deposit has been made is given in return, to the lender. This certificate is normally a bearer security. Most CDs can then be sold in the secondary market whenever the depositor needs cash.
CGT (Capital gains tax) A tax on gains made when assets held are sold for more than cost, less some allowances and expenses.
Chairman’s statement A company’s annual report and accounts usually has a chairman’s statement commenting on the results and progress.
CHAPS (Clearing House Automated Payment System) The UK same-day interbank clearing system for sterling payments.
Chartism Investment analysis that relies on historic price charts (and/or trading volumes) to predict future movements.
Chasing the trend Buying financial securities after a recent upward trend in prices and selling after a recent downward trend.
Chicago Board of Trade (CBOT) The futures and options exchange in Chicago, USA – the world’s oldest (established 1848). Now part of CME Group.
Chicago Board Options Exchange (CBOE) The largest options exchange in the world, trading options on shares, indices and interest rates.
Chief executive’s review A comment, contained in a company’s annual report and accounts, on performance, strategy and managerial intentions.
Chief Financial Officer (CFO) The manager/director in overall charge of the financial affairs of the business.
Chinese walls Barriers within a financial service company designed to prevent sensitive information being passed on to another branch of the organisation.
Churn Buying and selling shares frequently. Fund managers are sometimes accused of doing this to generate fees or just in the vain search for higher returns.
Circle of competence The business areas that an individual thoroughly understands and is equipped to analyse.
City Code on Takeovers and Mergers Provides the main governing rules for companies engaged in merger activity. Largely self-regulated and administered by the Takeover Panel.
City of London A collective term for the financial institutions located in the financial district to the east of St Paul’s Cathedral in London (also called the Square Mile). However, the term is also used to refer to all UK financial institutions, wherever they are located.
City of London Police Lead the battle against financial fraud.
City Panel on Takeovers and Mergers The organisation that provides and enforces the rules governing behaviour in companies engaged in merger activity in the UK. The rules apply to unquoted and quoted public limited companies (plcs). Often shortened to ‘The Takeover Panel’, or ‘The Panel’.
Clawback Existing shareholders often have the right to reclaim shares sold under a placing as though they were entitled to them under a rights issue.
Clean price On a bond the prices are generally quoted ‘clean’, that is, without taking account of the accrued interest since the last coupon payment.
Clearing a trade The stock exchange (or other market clearer) ensures that (a) all reports of a trade are reconciled to make sure all parties are in agreement as to the number of shares traded and the price; and (b) that the buyer and seller have the cash and securities to do the deal. See Central Counterparty (CCP) clearing house for a linked service.
Clearing bank Member of the London Bankers’ Clearing House, which clears cheques, settling indebtedness between two parties.
Clearing house An institution which registers, monitors, matches and settles mutual indebtedness between a number of individuals or organisations. The clearing house may also act as a counterparty. See Central counterparty.
Closed-end funds Collective investment vehicles (e.g. investment trusts) that do not create or redeem shares on a daily basis in response to increases and decreases in demand. They have a fixed number of shares for lengthy periods.
Closet indexing (closet tracking) Fund managers declare themselves as active (i.e. searching out bargains) but really construct portfolios that are close to the market benchmark indices.
Closing out a futures position Taking a second action in the futures market (say, selling the future) which is exactly opposite to the first action (say, buying the future). Also called ‘reversing the trade’.
CME An exchange which trades a wide range of currency futures and options, interest rate futures and options, commodity futures and options, and share index futures and options. Within the CME Group are CME, CBOT, NYMEX and COMEX.
Code (City Code on Takeovers and Mergers) Provides the main governing rules for companies engaged in merger activity. Largely self-regulated and administered by the Takeover Panel.
Codes Three or four letter abbreviations given to a company share which are used by stockbrokers and on financial websites as shorthand for the company.
Collateral Property and/or other assets pledged by a borrower to protect the interests of the lender – they may be seized if the borrower reneges.
Collective funds Organisations (e.g. unit trusts) that gather together numerous small quantities of money from investors and then invest in a wide range of financial securities.
Combined Code of Corporate Governance A set of guidelines for best practice corporate governance (e.g. majority of board to be independent non-executive directors). The UKLA requires compliance with the Code or an explanation for non-compliance.
Commercial banking A range of banking services for retail and commercial clients, including taking deposits and making loans, chequing facilities, trustee services and security advisory services. For retail and corporate clients.
Commercial bill (bank bill or trade bill) A document expressing the commitment of a bank or firm to repay a short-term debt at a fixed date in the future.
Commercial paper (CP) An unsecured note promising the holder (lender) a sum of money to be paid in a few days – average maturity of 40 days. If they are denominated in foreign currency and placed outside the jurisdiction of the authorities of that currency, then the notes are Euro-commercial paper.
Commission Fee charged by brokers, usually a percentage of the amount of the transaction.
Commitment fee A fee payable in return for a commitment by a bank to lend money payable even if no borrowing subsequently takes place.
Commodity (commoditized) product (1) Undifferentiated compared with competitor offerings in any customer-important way by factors such as performance, appearance, service support, etc. For example, many personal computers are said to be commodity products. (2) Raw materials and foodstuffs.
Common stock Term used in the USA to describe ordinary shares in a company.
Companies Acts The series of laws enacted by Parliament governing the establishment and conduct of incorporated business enterprises. The Companies Act 2006 consolidated the Acts that preceded it.
Companies House The place where records are kept of every UK company. These accounts etc. are then made available to the general public.
Company registrar An organisation that maintains a record of share (and other securities) ownership for a company. It also communicates with shareholders on behalf of the company.
Company secretary Responsible for ensuring that the company complies with standard financial and legal practice and maintains standards of corporate governance. Acts as a point of communication between the board of directors and company shareholders,
reporting in a timely and accurate manner on company procedures and developments.
Comparative advantage A firm or a country has a comparative advantage in the production of good X if the opportunity cost of producing a unit of X, in terms of other goods forgone, is lower in that country compared with another country, or in that firm compared with another firm.
Competition and Markets Authority (CMA) Established in 2014 as the main UK regulator of markets and firms focused on where there is a substantial lessening of competition leading to anti-competitive behaviour to the detriment of buyers of goods and services. It may then block anti-competitive action.
Competitive advantage (edge) The possession of extraordinary resources that allow a firm to rise above the others in its industry to generate exceptional long-run rates of return on capital employed.
Competitive floor Where shareholders receive a rate of return that only just induces them to put money into the firm and hold it there. This minimal rate of return occurs because of the high level of competition in the market for the firm’s product, or because of value being reduced to the minimum by one or more of the other of the Porter’s five forces.
Competitive position The competitive strength of the firm vis-à-vis rivals, suppliers, customers and substitutes, in a market.
Complementary product One that is generally bought alongside the product in question.
Compliance Methods of ensuring that Financial service firms regulated by the Financial Conduct. They often have a designated compliance officer who is supposed to ensure that any legal and supervisory rules are followed.
Compound interest Interest is paid on the sum which accumulates, whether or not that sum comes from principal or from interest received at intermediate dates.
Compound return The income received on an investment is reinvested in the investment and future returns are gained on both the original capital and the ploughed-back income. Usually measured as an annual percentage return.
Concentration When there are few investments in a portfolio, it is said to be concentrated.
Concert party A group of investors who, pursuant to an agreement or understanding (whether formal or informal), co-operate to obtain or consolidate control of a company or to frustrate the successful outcome of a takeover offer for a company.
Conglomerate bank A bank with a wide range of activities, products and markets.
Conglomerate merger The combining of two firms which operate in unrelated business areas.
Consideration The price paid for something.
Consolidated (group) accounts All the income costs, assets and liabilities of all group companies, whether wholly or partially owned, are brought together in the consolidated accounts. Consolidation must take place if 50 per cent or more of the subsidiary’s shares are held by the parent. If less than 50 per cent of the shares are held, consolidation may still be required.
Consolidation of shares Reduction in the number of shares so that the nominal value of each remaining share rises.
Consumer price index (CPI) A measure of general inflation.
Continuing obligations Standards of behaviour and actions required of firm’s quoted on the London Stock Exchange, enforced by the United Kingdom Listing Authority.
Continuous order book Throughout the trading of securities orders are automatically matched and executed against one another.
Contract for difference (CFD) The buyer and seller agree to pay, in cash, at the closing of the contract, the difference between the opening and closing price of the underlying shares (or some other underlying), multiplied by the number of shares in the contract.
Contract note A statement from a broker to an investor stating the price, the time of deal, the number of shares, the broker’s commission and the stamp duty for a recent share transaction.
Contrarians Those taking the opposite position to the generality of investors.
Control premium The additional amount an acquirer has to offer above the pre-bid share price in order to succeed in a takeover offer.
Controlling shareholder Any shareholder able to control the composition of the board of directors and therefore the direction of the company. Strictly speaking this is 50 per cent, but even a 30 per cent shareholder can exercise this degree of power, and therefore 30 per cent is used as the cut-off point for some purposes.
Convergence The coming together of the futures price and the underlying share price as the final trading day of a futures contract approaches.
Conversion premium With convertible bonds, it is the difference between the current share price and the conversion price, expressed as a percentage of the current share price.
Conversion price The share price at which convertible bonds may be converted.
Conversion ratio (1) The nominal (par) value of a convertible bond divided by the conversion price. The number of shares available per bond. (2) The ratio of the number of warrants that must be held and exercised in order to buy or sell a single unit of the asset (e.g. one share).
Conversion value The value of a convertible bond if it were converted into ordinary shares at the current share price.
Convertible bonds Bonds which carry a rate of interest and give the owner the right to exchange the bonds at some stage in the future into ordinary shares according to a prearranged formula.
Convertible loan stock Bonds which carry a rate of interest and give the owner the right to exchange the bonds at some stage in the future into ordinary shares according to a prearranged formula.
Convertible preference share/stock A convertible preference share/stock may be converted into another type of security (e.g. an ordinary share).
Corporate acquisition The purchase of one company by another – buying the shares.
Corporate advisers These professional financial service firms (e.g. investment banks, accountants) advise companies gaining a quotation for their shares on NEX Exchange to ensure knowledge and compliance with the rules and responsibilities of being on NEX Exchange. They provide reassurance to investors that the company meets certain basic standards of financial record keeping, reporting and corporate governance.
Corporate acquisition Many people use these terms interchangeably with ‘merger’. However, some differentiate ‘takeover’ as meaning a purchase of one firm by another with the concomitant implication of financial and managerial domination. Usually applied to hostile (without target management approval) mergers.
Corporate bond A bond issued by a company.
Corporate broker Stockbrokers who act on behalf of companies quoted on an exchange (e.g. providing advice on market conditions or representing the company to the market). Corporate brokers are knowledgeable about the share and other financial markets. They advise companies on fund raising (e.g. new issues). They try to generate interest among investors for the company’s securities, and stand prepared to buy and sell companies’ shares.
Corporate finance department of investment banks The department assisting firms in raising funds (e.g. rights issues, bond issues) and managing their finances.
Corporate governance The system of management and control of the corporation.
Corporate Governance Code Guidelines of best practice for companies regarding powers and responsibilities of directors, shareholders and senior managers.
Corporate raider An organisation that makes hostile takeover approaches for quoted companies.
Corporate Social Responsibility (CSR) Taking into account the effects of the organisation’s impact on the environment and social well-being. Going beyond regulatory requirements in taking action to improve say communities, the environment, human rights and employee welfare, even at the expense of near-term profits.
Corporate venturing Large companies fostering the development of smaller enterprises through, for example, joint capital development or equity capital provision.
Corporation tax A tax levied on the profits of companies.
Correction A minor fall during a market rise.
Correlation coefficient A measure of the extent to which two variables show a relationship, expressed on a scale of –1 to +1. A correlation of –1 implies that two share prices, two markets, etc., move in opposite directions by the same percentages.
Cost leadership strategy Emphasis on standard no-frills product, exploiting scale economies and other cost advantages.
Cost of capital The rate of return that a company has to offer finance providers to induce them to buy and hold a financial security.
Cost of sales The expense incurred for bought-in raw materials or components.
Counterparty The buyer for a seller, and the seller for a buyer.
Counterparty risk The risk that a counterparty to a contract defaults and does not fulfil obligations.
Coupon An attachment to a bond or loan note document which may be separated and serve as evidence of entitlement to interest. Nowadays it refers to the interest itself: the nominal annual rate of interest expressed as a percentage of the principal value.
Covariance A measure of the extent to which two variables move together.
Covenant A solemn agreement.
Cover Offsetting one position in a financial security with an equal and opposite transaction in the same or linked (e.g. derivative) security.
Covered call option writing Writing a call option on an underlying when the writer owns at least the number of underlying securities included in the option.
Covered warrants The same as warrants, except that financial institutions issue them, selling the right to buy or sell shares in industrial and commercial companies.
Creation units of ETF shares Shares issued by an ETF provider which represent, and can be exchanged for, a bundle of securities, e.g. shares tracking an index or other assets.
Creative accounting The drawing up of accounts which obey the letter of the law and accounting body rules, but which involve the manipulation of accounts to show a more favourable profit and balance sheet.
Credit A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future.
Credit period The average length of time between the purchase of inputs and the payment for them. Equal to the average level of creditors divided by the purchases on credit per day.
Credit rating An estimate of the quality of a debt from the lender viewpoint in terms of the relative likelihood of interest and capital not being paid and of the extent to which the lender is protected in the event of default. Credit rating agencies are paid fees by companies, governments, etc., wishing to attract lenders.
Credit risk The risk that a counterparty to a financial transaction will fail to fulfil their obligation, e.g. be unable to pay interest when due.
Credit risk premium or credit spread The additional yield (over say reputable government bonds) on a debt instrument due to the borrower’s additional perceived probability of default.
Credit union A non-profit organisation accepting deposits and making loans, operated as a cooperative.
Creditor One to whom a debt is owed.
Creditors (accounts payable or payables) Amounts owed by a company to suppliers and others.
CREST or Crest An electronic means of settlement and registration of shares and other securities following a sale on the London Stock Exchange, operated by CRESTCo.
CREST nominee account Brokers and investment managers hold investors’ shares electronically in a nominee company which appears as the registered owner. See also Dematerialisation and Nominee accounts.
Crowdfunding (crowdsource, crowd finance) Websites connect entrepreneurial firms seeking equity or debt funding with investors. An investor can go to one of the crowdsource websites and commit to investing online.
Crown jewels defence In a hostile merger situation, the target sells off the most attractive parts of the business.
Cryptocurrency A digital currency created within computer systems using encryption methods which restrict the creation of currency units and verifies the transfer of funds under blockchain systems (distributed, decentralized, public ledger). Admired for operating independently of conventional institutions but has no regulatory or governmental back-up. It is a boon for scammers, rampers, tax-doggers, money launderers, extortionists, drug runners and North Korea – much money has been lost by the innocent.
Cum-dividend (cum-coupon) (1) When an investor buys a government bond when it is still designated cum-coupon, they are entitled to the accrued interest since the last coupon was paid. (2) A share designated cum-dividend indicates that the buyer will be entitled to a dividend recently announced by the company.
Cum-rights Shares bought on the stock market prior to the ex-rights day are designated cum-rights and carry to the new owner the right to subscribe for the new shares in the rights issue.
Cumulative If a payment (interest or dividend) on a bond or preference share is missed in one period those securities are given priority when the next payment is made. These arrears must be cleared up before shareholders receive dividends.
Cumulative preference share A cumulative preference share carries forward the right to preferential dividends. If you want to know more see Preference shares.
Currency swap A swap is an exchange of cash payment obligations. In a currency swap the two parties exchange interest obligations (receipts) for an agreed period between two different currencies.
Current asset value (net) Current assets (cash, accounts receivable, inventories) minus current liabilities (also called working capital).
Current assets Cash and other assets that can be rapidly turned into cash. Includes inventories (stocks) of raw materials, partially finished goods and finished goods, receivables (debtors) and investments expected to be sold within one year.
Current liabilities Amounts owed that the company expects to have to pay within the next year.
Current ratio The ratio of current assets to the current liabilities of a business.
Current yield (flat yield, income yield or running yield) The ratio of the coupon on a bond to its current market price.
Custodian/custody An organisation that acts for investors in an administrative capacity, managing the holding of shares and other financial securities. The custodian may handle dividend payments and carry out various other administrative duties for the investor.
Cyclical companies (or industries, or shares) Those companies in which profits are particularly sensitive to the growth level in the economy, which may be cyclical.
Cyclically adjusted price/earnings ratio (CAPE) Current market price of a single company’s
share (or the market as a whole) devided by average earnings over the past ten years.