Daily Official List (DOL) The daily record setting out the prices of all trades in securities conducted on the London Stock Exchange. See also SEDOL.
Dark pool Trading venue where large orders can be placed anonymously to reduce the effect of the trade on market prices.
Darling A stock market darling is one which receives a lot of attention and is regarded as very attractive.
Dawn raid Situation where an acquirer acts with such speed in buying the shares of the target company that the raider achieves the objective of accumulating a substantial stake in the target before its management has time to react.
DAX 30 (Deutscher Aktien Index) A stock market index of 30 German shares quoted on the Deutsche Börse.
Day trader Someone who trades in and out of a share in one day. They may have both buy and sell trades for many shares in the same day.
Dead cat bounce Traders’ humour: even a dead cat thrown from a tall building will bounce. Likewise, a market may rally a little, but this is temporary. Also known as a sucker’s rally.
Debentures Bonds issued with redemption dates a number of years into the future (or irredeemable). Usually secured against specific assets (mortgage debentures) or through a floating charge on the firm’s assets (floating charge debentures). In the USA and Canada debenture means an unsecured debt with a fixed coupon.
Debt capital Capital raised with (usually) a fixed obligation in terms of interest and principal payments, e.g. loans, bonds.
Debt Management Office (DMO) Organises the sale of gilts. An Executive Agency of the UK Treasury.
Debt maturity The length of time left until the repayment of principal on a debt becomes due.
Debt rating A rating given by one of the credit rating agencies focusing on likelihood of default and recovery in default
Debt restructuring Negotiating with lenders to vary the terms of the debt in time of difficulty.
Debt-to-equity ratio The ratio of a company’s long-term debt to shareholders’ funds.
Debtor One who owes a debt.
Debtor conversion period The average number of days to convert customer debts into cash. Equal to the average value of debtors divided by the average value of sales per day.
Debtors (accounts receivable, receivables) When goods are sold by a company on credit its customers owe it money. They are debtors or trade debtors.
Decentralisation (fund management) Delegating decision making to multiple managers.
Declining (reducing) balance method of depreciation The amount an asset is depreciated declines from one year to the next as it is determined by a constant percentage of the asset’s (depreciated) value at the start of each year.
Deep (depth) Financial markets with many buyers and sellers and therefore a great deal of activity.
Deep discounted bonds Bonds sold well below par value, usually because they have little or no coupon.
Deep discounted rights issue A rights issue priced much lower than the present market price of the old shares.
Default A failure to make agreed payments of interest or principal, or failure to comply with some other loan agreement provision.
Defensive industries Those industries where profits are not particularly sensitive to the growth rate of the economy.
Defensive shares Having a beta value of less than 1.
Deferred ordinary shares (1) These rank below preferred ordinary shares for dividends. So, if profits are low, holders of deferred ordinary shares may not receive a dividend. However, if the company achieves a predetermined level of profit or other performance target the deferred ordinary shares often entitle the owner to a higher than normal dividend. (2) The right to the dividend is deferred for a set period, after which the holders rank equal with ordinary shareholders.
Deferred tax In drawing up a set of company accounts there are some deductions that can be made for calculating taxable profit, thus lowering tax paid for that period, which is not tax deductible (to the same extent) for accounting profits. However, there will be future tax consequences because the expense cannot be used again, thus there is the prospect of raised tax payable in a future year. For example, with a fixed (non-current) asset on a company’s balance sheet, the writing down allowance, which can be used to reduce current tax payable, is often greater than the depreciation charge as determined by the company’s accounting policy. The difference is called a timing difference. A deferred tax provision is the difference between (1) the corporation tax actually payable on the taxable trading profit and (2) the tax that would have been payable if the taxable trading profit is the same as the
accounting profit (using normal depreciation, not writing-down allowances).
Defined benefit A pension pays out a fixed amount monthly in retirement based on years worked (contributed to fund) and final salary or some average salary over a number of years.
Defined contribution A pension into which the worker puts regular or irregular amounts during a career. The pension paid out is linked to the investment returns made by the pension fund, not related to salary.
Dematerialisation Traditionally the evidence of financial security ownership is by written statements on paper (e.g. share certificates). Increasingly such information is being placed in electronic records and paper evidence is being abandoned.
Demerger The separation of companies or business units that are currently under one corporate umbrella. It applies particularly to the unravelling of a merger.
Depletion A reduction in the value of a natural resource, e.g. oil in the ground, owned by a company.
Depositary Acts for an open ended investment company, OEIC, safeguarding the assets in a similar way to a trustee for a unit trust.
Depositary receipts Certificates representing evidence of ownership of a company’s shares (or other securities) held by a depository. Depositary receipts (DRs) are negotiable (can be traded) certificates which represent ownership of a given number of company shares. The DRs may be listed on a stock market and traded independently from the underlying shares. There are a number of forms of DRs including American depositary receipts (ADRs), global depositary receipts (GDRs), euro depositary receipts (EDRs) and retail depositary receipts (RDRs).
Depository Person or firm, often a large bank, entrusted with safekeeping of funds, securities, or other valuable assets. They can transfer ownership of shares/bons etc., from one investor’s account to another, reducing paperwork for executing a trade and speeding up the transfer process.
Depreciation The reduction in the stated value of assets with a useful life of more than one year that are not bought and sold as part of normal trading. The reduction may be due to wearing out, using up, effluxion of time or obsolescence.
Derivative A financial asset, the performance of which is based on (derived from) the behaviour of the value of an underlying asset.
Deutsche Börse The German Stock Exchange based in Frankfurt.
Development capital Second-stage finance (following seed finance or early-stage capital) to permit business expansion.
Differentiated product One that is slightly different in significant ways than those supplied by other companies. The unique nature of the product/service offered allows a premium price to be charged.
Diluted earnings per share This takes into account any additional shares that may be issued in the future under executive share option schemes and other commitments.
Dilution The effect on the earnings and voting power per ordinary share from an increase in the number of shares issued without a corresponding increase in the firm’s earnings.
Dilution adjustment/levy When there are large numbers of buyers or sellers of shares in an open ended investment company, OEIC, the fund may incur high costs to buy/sell the underlying securities. To balance the interests of the old and new shareholders the new members may be charged an extra fee (say 0.5–2 per cent) which is then added to the fund.
Diminishing marginal attractiveness If shares are listed in order of attractiveness based on the difference between their value and current price, then the marginal (next stock) on the list would be less attractive.
Direct foreign investment The purchase of commercial assets such as factories and industrial plant for productive purposes by overseas organisations.
Direct market access (DMA) These systems allow private investors to trade directly in the stock market, placing buy and sell orders into the LSE electronic order book alongside the professionals.
Directors’ dealings Directors’ purchase or sale of shares in their own company. This is legal (except at certain times of the company’s year or when in possession of key information hidden from other shareholders). Some investors examine directors’ dealings to decide whether to buy or sell. Dealings are shown on free financial websites.
Directors’ report Information and commentary on company performance and other matters. Presented in a company’s annual report and accounts.
Dirty price, full accrual price, invoice price On a bond a buyer pays a total of the clean price and the accrued interest since the last coupon payment.
Disclosure of shareholdings If a stake of 3 per cent or more is held by one shareholder in a UK public company, then this has to be declared to the company.
Discount (1) The amount below face value at which a financial claim sells (e.g. bill of exchange or zero coupon bond). (2) The extent to which an investment trust’s shares sell below the net asset value. (3) The amount by which a future value of a currency is less than its spot value. (4) The action of purchasing financial instruments (e.g. bills) at a discount. (5) The degree to which a security sells below its issue price in the secondary market. (6) The process of equating a cash flow at some future date with today’s value using the time value of money. (7) The deduction from the normal price or value, the opposite of premium.
Discount rate (1) The rate of return used to discount cash flows received in future years. This is the opportunity cost of capital given the risk class of the future cash flows. (2) The rate of interest at which some central banks lend money to the banking system.
Discount to net asset value Shares (e.g. investment trust shares) sometimes sell at a value less than the per share net asset value of the companies.
Discounted cash flow Future cash flows are converted into the common denominator of time zero money by adjusting for the time value of money.
Discounting The process of reducing future cash flows to a present value using an appropriate discount rate.
Discretionary service A type of service provided by a stockbroker in which the broker will manage the investor’s portfolio at the broker’s discretion – the investor is not consulted on every deal.
Disintermediation Borrowing firms bypassing financial institutions and obtaining debt finance directly from the market.
Disinvest To sell an investment.
Distribution bonds A type of insurance company bond which invests in a mixture of equity, fixed-income securities and property, but biased toward fixed-income investments.
Distribution units Unit trust units that pay out all income after deducting charges on set dates. Also applies to open-ended investment companies.
Diversifiable risk That element of an asset’s variability in returns that can be eliminated by holding a well-diversified portfolio.
Diversification Investing in varied projects, enterprises, financial securities, products, markets, etc., in a portfolio.
Divestiture (divestment) The sell-off of assets or subsidiary businesses by a company or individual.
Dividend That part of profit paid to ordinary shareholders, usually on a regular basis.
Dividend cover The number of times net profits available for distribution exceed the dividend actually paid or declared. Defined as earnings per share divided by dividend per share, or total post-tax profits divided by total dividend payout.
Dividend discount model These methods of share valuation are based on the premise that the market value of ordinary shares represents the sum of the expected future dividend flows, to infinity, discounted to present value.
Dividend payout ratio (payout ratio) The percentage of a company’s earnings after tax deduction paid out as dividends.
Dividend per share The total amount paid or due to be paid in dividends for the year (interim and final), divided by the number of shares in issue.
Dividend policy The determination of the proportion of profits paid out to shareholders, over the longer term.
Dividend reinvestment plan (DRIP) A shareholder receives shares in lieu of a cash dividend. This avoids the cost and trouble of receiving cash and then reinvesting.
Dividend valuation models (DVMs) These methods of share valuation are based on the premise that the market value of ordinary shares represents the sum of the expected future dividend flows, to infinity, discounted to present value.
Dividend yield The amount of dividend paid on each share as a percentage of the share price.
Divorce of ownership and control In large corporations shareholders own the firm but may not be able to exercise control. Managers often have control because of a diffuse and divided shareholder body, proxy votes and apathy.
DMO (Debt Management Office) Organises the sale of gilts. An Executive Agency of the UK Treasury.
Domestic bond A bond denominated in the issuer’s local currency and offered to local investors.
Dow/Dow Jones Industrial Average (DJIA) The best known index of movements in the price of US stocks and shares. There are 30 shares in the index. It is not strictly an index, but an average of raw prices.
Dow theory A method of predicting share price trends by identifying primary trends from historic share price data.
Drawdown arrangement A loan facility is established and the borrower uses it (takes the money available) in stages as the funds are required.
Drawdown (pension) (income drawdown) With a personal pension, instead of taking benefits in the form of an annuity, you can draw money from your pension pot.
Dual capital trusts Also known as Split-capital investment trusts. These investment trusts simultaneously issue different types of shares. Income shares entitle the holder to receive all (or most) of the income from the portfolio. Capital shares entitle the owner to receive all (or most of) the rise in the capital value of the portfolio. Zero divided preference shares (Zeros) pay no income but do offer a predetermined return at the end of the trust’s life.
Dual-class Shares in some companies are divided into two or more classes, each with different voting rights.
Due diligence A detailed investigation of a company to ensure that it is in a satisfactory condition for the purpose of the transaction, e.g. in a merger the target is examined by accountants, lawyers, managerial consultants, etc. to reveal risks and other information.
Durable good One with an expected life of more than one year.
E-money Also known as electronic money, as e-currency, electronic cash, digital money, digital cash, digital currency, cyber currency. Money transferred by electronic means.
E-money institutions Issuers of electronic money, e.g. pre-paid cards and electronic pre-paid accounts for use online.
Early-stage capital Funds for initial manufacturing and sales for a newly formed company. High-risk capital available from entrepreneurs, business angels and venture capital funds.
Earn-out The purchase price of a company is linked to the future profits performance. Future instalments of the purchase price may be adjusted if the company performs better or worse than expected.
Earning power The earning (profit) capacity of a business in a normal year, that is, what the company might be expected to earn year after year if business conditions continue unchanged.
Earnings Profits, usually after deduction of tax.
Earnings guidance A company guiding analysts to estimates of profits for the current period.
Earnings multiple Share price divided by earnings per share. If you want to know more see Price–earnings ratio.
Earnings per share (eps) Profit after tax and interest divided by number of shares in issue.
Earnings yield Earnings per share divided by current market price of share.
EBIT A company’s Earnings (profits) Before Interest and Taxes are deducted.
EBITDA Earnings Before (deduction of) Interest, Taxation, Depreciation and Amortisation.
EBITDA interest coverage ratio EBITDA divided by gross interest.
Economic franchise Pricing power usually facilitated by strong barriers to entry. The strength and durability of an economic franchise is determined by (a) the structure of the industry, and (b) the ability of the firm to rise above its rivals in its industry and generate exceptional long-run rates of return on capital employed.
Economic profit The amount earned by a business after deducting all operating expenses and a charge for the opportunity cost of the capital employed.
Economies of scale Producing a larger output results in lower unit cost.
Economies of scope The ability to reduce unit costs of an item by sharing some costs between a number of product lines (e.g. using the same truck to deliver both ketchup and beans to a store).
Efficient stock market Prices rationally reflect available information. The efficient market hypothesis implies that new information is incorporated into a share price (a) rapidly, and (b) rationally. In an efficient market no trader will be presented with an opportunity for making an abnormal return, except by chance.
EGM (Extraordinary general meeting) A meeting of the company (shareholders and directors) other than the annual general meeting. It may be convened when the directors think fit. However, shareholders holding more than 5 per cent of the paid-up share capital carrying voting rights can insist on the directors calling a meeting. If the directors do not call a meeting as properly requested, the members who requested it (or half of them by voting rights) may call the meeting themselves..
EIS (Enterprise Investment Scheme) Tax relief is available to investors in qualifying UK company shares (unquoted firms not focused on financial investment, farming and property).
Electronic Communication Network (ECN) An alternative trading venue for shares quoted on US and European stock exchanges.
Electronic platform/trading system A trading system matching buyers and sellers together using computers, communication links and/or the Internet.
Electronic settlement Transferring shares from sellers to buyers without certificates – computer entry only.
Emerging markets Security markets in countries with relatively low/middle incomes but with rapid economic growth, or in countries with fairly high income levels but relatively underdeveloped stock markets and limited internationalisation of financial markets.
Employee share ownership plans (ESOPs) Schemes designed to encourage employees to build up a shareholding in their company.
Endowment policies (saving schemes) Life assurance schemes with the additional feature of a lump-sum payment, either at the end of the term of the policy or on death. One use is for the repayment of house mortgages.
Enfranchisement Granting voting rights to holders of non-voting shares.
Enterprise Investment Scheme (EIS) Tax relief is available to investors in qualifying UK company shares (unquoted firms not focused on financial investment, farming and property).
Enterprise value The sum of a company’s total equity market capitalisation and borrowings minus the cash it holds. (Some analysts add pension provisions, minority interest and other claims on the business.)
Enterprise value to EBITDA ratio (EV/EBITDA) The total of the market value of equity plus the market value of debt (minus cash holdings) divided by earnings before deduction of interest, tax, depreciation and amortisation.
Entrepreneur Defined by economists as the owner-manager of a firm. Usually supplies capital, organises production, decides on strategic direction and bears risk.
EPIC code, Exchange Price Information Code A stock symbol abbreviation given to companies on the London Stock Exchange, e.g. Vodafone is VOD
Equilibrium in markets When the forces of supply and demand are evenly balanced.
Equities, Equity, Equity capital An ownership share of a business; each equity share (of the same class) represents an equal stake in the business. Capital invested in the business in the form of shares, not set to be repaid, but share owners can sell their shares to other investors, or vote for a liquidation of all the firm’s assets to release the capital to them after meeting all other obligations.
Equitisation An increasing emphasis placed on share (equity) finance and stock exchanges in economies around the world. A growing equity culture.
Equity indices Baskets of shares indicating the movement of the equity market as a whole or sub-sets of the market.
Equity kicker (sweetener) The attachment of some rights to participate in and benefit from a good performance (e.g. exercise option to purchase shares) to a bond or other debt finance. Used with mezzanine finance or high-yield bonds.
Equity-linked bond A bond with features of both debt and equity. It contains an option to purchase (or to exchange a bond for) an equity stake in the issuer, its parent or another company. This option can be by way of a right to convert the bond into equity or by way of warrant attached to the bond giving the right to purchase shares.
Equity long/short An investment strategy taking both a long (benefit from a rise in price) and short (benefit from a fall in price) position in different shares or other securities.
Equity risk premium The additional average annual rate of return for an averagely risky share over the return on a risk-free asset (e.g. a reputable government bond). It is the average extra return over many decades – a short period of observation will lead to a biased estimate.
Equity shareholders’ funds The net assets of the business (after deduction of all short- and long-term liabilities and minority interests) shown in the balance sheet.
Equity warrant A financial instrument which gives the holder the right but not the obligation to purchase shares in the company from the company at a fixed price at some time in the future (during or at the end of a specific time period).
Ethical investment The avoidance of securities that benefit from activities viewed as unethical (e.g. tobacco shares, genetically modified agriculture, arms sales).
Euribor (Euro Interbank Offered Rate) Short-term interest rates in the interbank market (very stable banks lending to each other) in the currency of euros.
Euro The name of the single European currency in use since 1999.
Eurobond Bond sold outside the jurisdiction of the country in whose currency the bond is denominated (e.g. a bond issued in yen outside Japan).
Euroclear A Belgium based settlement system to help settle domestic and cross-border financial transactions and reduce risk for clients.
Euro-commercial paper Is a commercial paper that is denominated in foreign currency and placed outside the jurisdiction of the authorities of that currency, then the notes are Euro-commercial paper.
Eurocurrency Currency held outside its country of origin (e.g. Australian dollars held outside of Australia). Note: this market existed long before the creation of the euro, and has no connection with the currency in the eurozone.
Eurocurrency banking Transactions in a currency other than the host country’s currency (e.g. transactions in Canadian dollars in London). No connection with the currency in the eurozone.
Eurodollar A deposit or credit of US dollars held outside of the regulation of the US authorities, say in Tokyo, London or Paris. No connection with the currency in the eurozone.
Euromarkets Informal (unregulated) markets in money held outside of the jurisdictions of any country; often termed international securities markets. Euromarkets began in the late 1950s.
Euro medium-term notes (EMTN) If a note is denominated in a foreign currency, they are called euro medium-term notes.
Euronext The combined financial stock market comprising the French, Dutch, Belgian, Irish and Portuguese bourses.
European Central Counterparty A pan-European clearing and settlement service for financial transactions.
European Monetary Union (EMU) A single currency with a single central bank having control over interest rates being created for those EU member states which join the euro.
European-style options (or European options) Options which can only be exercised by the purchaser on a predetermined future date.
Euro-security markets Informal (unregulated) markets in money held outside the jurisdiction of the country of origin (e.g. Swiss franc lending outside of the control of the Swiss authorities – perhaps the francs are in London). Financial securities such as bonds,
commercial paper, shares, convertibles, floating rate notes, medium-term notes and promissory notes are offered on and traded in these Euromarkets.
Eurosterling bond A bond issued in sterling outside of the control of the UK authorities.
Eurozone Those countries that joined together in adopting the euro as their currency.
Event risk The risk that some future event may negatively affect the return on a financial investment (e.g. an earthquake event affects returns on Japanese bonds, or the resignation of a CEO endangers the company).
Ex-ante Intended, desired or expected before the event.
Ex-coupon A bond sold without the right to the next interest payment.
Ex-dividend When a share or bond is designated ex-dividend a purchaser will not be entitled to a recently announced dividend or the accrued interest on the bond since the last coupon – the old owner will receive the dividend (coupon).
Ex-post The value of some variable after the event.
Ex-rights When a share goes ‘ex-rights’ any purchaser of a share after that date will not have a right to subscribe for new shares in the rights issue.
Ex-rights price of a share The theoretical market price following a rights issue.
Exceptional items Gains or costs which are part of the company’s ordinary activities but are either unusual in themselves or have an exceptionally large impact on profits that year.
Exchange controls The state controls the purchase and sale of currencies by its residents.
Exchange rate The price of one currency expressed in terms of another.
Exchange rate risk The possibility of losing money on investments abroad because the foreign exchange rate moves against you.
Exchange market size (EMS) The threshold below which the market makers have to sell/buy shares at the prices they posted on the London Stock Exchange systems without modification. It is normally set at 1-2 per cent of the average daily customer turnover of a share on the LSE in the previous year. The term normal market size (MS) is an alternative.
Exchange traded commodities (ETCs) Similar to exchange traded funds except the underlying securities are commodities or derivatives of commodities.
Exchange traded funds (ETFs) Funds (companies) that issue shares using the proceeds to invest in the range of shares (or other securities such as bonds) in a particular stock market index or sector, such as the FTSE 100 index. Alternatively derivatives may be purchased which reflect the movements of the index or sector.
Exchange trading Trading of financial instruments on regulated markets.
Exchangeable bond A bond that entitles the owner to choose at a later date whether to exchange the bond for shares in a company. The shares are for a company other than the one that issued the bonds.
Execute and eliminate A type of buy or sell order instruction given by an investor to a broker. A price limit is set and the transaction is completed in part or in whole immediately and then expires on the spot. If only some of the order is fulfilled the remainder expires.
Execution-only broker A stockbroker who will buy or sell shares cheaply but will not give advice or other services.
Executive directors Manage day-to-day activities of the firm as well as contributing to boardroom discussion on company-wide policy and strategic direction.
Exercise price (strike price) The price at which an underlying will be bought (call) or sold (put) under an option contract.
Exit (1) The term used to describe the point at which a venture capitalist or private equity company can recoup some or all of the investment made. (2) The closing of a position created by a transaction.
Exit barrier A factor preventing/inhibiting firms from stopping production in a particular industry.
Exit charge Unit trusts may charge the investor when the units are sold.
Exotic A term used to describe an unusual financial transaction (e.g. exotic option, exotic currency), i.e. one with few trades.
Expansion capital Capital needed by cCompanies at a fast-development phase needing capital to increase production capacity, working capital and capital for the further development of the product or market. Venture capital is often used.
Expected return The mean or average outcome calculated by weighting each of the possible outcomes by the probability of occurrence and then summing the result.
Experience curve The cost of performing a task reduces as experience is gained through repetition.
Expert investor Legal term denoting an investor who may by their previous experience be taken to fully understand the nature of investment undertaken. An expert investor is given less protection under the financial regulatory regime.
Expiry date of an option The time when the rights to buy or sell under the option contract cease.
Exposure The amount of a portfolio invested in a particular area (e.g. a £50,000 portfolio with £25,000 in overseas shares has 50 per cent overseas exposure).
External finance Outside finance raised by a firm, i.e. finance that it did not generate internally, for example through profit retention.
Extraordinary general meeting (EGM) A meeting of the company (shareholders and directors) other than the annual general meeting. It may be convened when the directors think fit. However, shareholders holding more than 5 per cent of the paid-up share capital carrying voting rights can insist on the directors calling a meeting. If the directors do not call a meeting as properly requested, the members who requested it (or half of them by voting rights) may call the meeting themselves.
Extraordinary resources Those that give the firm a competitive edge. A resource, which when combined with other (ordinary) resources enables the firm to outperform competitors and create new value-generating opportunities. Critical extraordinary resources determine what a firm can do successfully.
Extrapolate To estimate values beyond the known values by the extension of a curve or line.
Dark pool Trading venue where large orders can be placed anonymously to reduce the effect of the trade on market prices.
Darling A stock market darling is one which receives a lot of attention and is regarded as very attractive.
Dawn raid Situation where an acquirer acts with such speed in buying the shares of the target company that the raider achieves the objective of accumulating a substantial stake in the target before its management has time to react.
DAX 30 (Deutscher Aktien Index) A stock market index of 30 German shares quoted on the Deutsche Börse.
Day trader Someone who trades in and out of a share in one day. They may have both buy and sell trades for many shares in the same day.
Dead cat bounce Traders’ humour: even a dead cat thrown from a tall building will bounce. Likewise, a market may rally a little, but this is temporary. Also known as a sucker’s rally.
Debentures Bonds issued with redemption dates a number of years into the future (or irredeemable). Usually secured against specific assets (mortgage debentures) or through a floating charge on the firm’s assets (floating charge debentures). In the USA and Canada debenture means an unsecured debt with a fixed coupon.
Debt capital Capital raised with (usually) a fixed obligation in terms of interest and principal payments, e.g. loans, bonds.
Debt Management Office (DMO) Organises the sale of gilts. An Executive Agency of the UK Treasury.
Debt maturity The length of time left until the repayment of principal on a debt becomes due.
Debt rating A rating given by one of the credit rating agencies focusing on likelihood of default and recovery in default
Debt restructuring Negotiating with lenders to vary the terms of the debt in time of difficulty.
Debt-to-equity ratio The ratio of a company’s long-term debt to shareholders’ funds.
Debtor One who owes a debt.
Debtor conversion period The average number of days to convert customer debts into cash. Equal to the average value of debtors divided by the average value of sales per day.
Debtors (accounts receivable, receivables) When goods are sold by a company on credit its customers owe it money. They are debtors or trade debtors.
Decentralisation (fund management) Delegating decision making to multiple managers.
Declining (reducing) balance method of depreciation The amount an asset is depreciated declines from one year to the next as it is determined by a constant percentage of the asset’s (depreciated) value at the start of each year.
Deep (depth) Financial markets with many buyers and sellers and therefore a great deal of activity.
Deep discounted bonds Bonds sold well below par value, usually because they have little or no coupon.
Deep discounted rights issue A rights issue priced much lower than the present market price of the old shares.
Default A failure to make agreed payments of interest or principal, or failure to comply with some other loan agreement provision.
Defensive industries Those industries where profits are not particularly sensitive to the growth rate of the economy.
Defensive shares Having a beta value of less than 1.
Deferred ordinary shares (1) These rank below preferred ordinary shares for dividends. So, if profits are low, holders of deferred ordinary shares may not receive a dividend. However, if the company achieves a predetermined level of profit or other performance target the deferred ordinary shares often entitle the owner to a higher than normal dividend. (2) The right to the dividend is deferred for a set period, after which the holders rank equal with ordinary shareholders.
Deferred tax In drawing up a set of company accounts there are some deductions that can be made for calculating taxable profit, thus lowering tax paid for that period, which is not tax deductible (to the same extent) for accounting profits. However, there will be future tax consequences because the expense cannot be used again, thus there is the prospect of raised tax payable in a future year. For example, with a fixed (non-current) asset on a company’s balance sheet, the writing down allowance, which can be used to reduce current tax payable, is often greater than the depreciation charge as determined by the company’s accounting policy. The difference is called a timing difference. A deferred tax provision is the difference between (1) the corporation tax actually payable on the taxable trading profit and (2) the tax that would have been payable if the taxable trading profit is the same as the
accounting profit (using normal depreciation, not writing-down allowances).
Defined benefit A pension pays out a fixed amount monthly in retirement based on years worked (contributed to fund) and final salary or some average salary over a number of years.
Defined contribution A pension into which the worker puts regular or irregular amounts during a career. The pension paid out is linked to the investment returns made by the pension fund, not related to salary.
Dematerialisation Traditionally the evidence of financial security ownership is by written statements on paper (e.g. share certificates). Increasingly such information is being placed in electronic records and paper evidence is being abandoned.
Demerger The separation of companies or business units that are currently under one corporate umbrella. It applies particularly to the unravelling of a merger.
Depletion A reduction in the value of a natural resource, e.g. oil in the ground, owned by a company.
Depositary Acts for an open ended investment company, OEIC, safeguarding the assets in a similar way to a trustee for a unit trust.
Depositary receipts Certificates representing evidence of ownership of a company’s shares (or other securities) held by a depository. Depositary receipts (DRs) are negotiable (can be traded) certificates which represent ownership of a given number of company shares. The DRs may be listed on a stock market and traded independently from the underlying shares. There are a number of forms of DRs including American depositary receipts (ADRs), global depositary receipts (GDRs), euro depositary receipts (EDRs) and retail depositary receipts (RDRs).
Depository Person or firm, often a large bank, entrusted with safekeeping of funds, securities, or other valuable assets. They can transfer ownership of shares/bons etc., from one investor’s account to another, reducing paperwork for executing a trade and speeding up the transfer process.
Depreciation The reduction in the stated value of assets with a useful life of more than one year that are not bought and sold as part of normal trading. The reduction may be due to wearing out, using up, effluxion of time or obsolescence.
Derivative A financial asset, the performance of which is based on (derived from) the behaviour of the value of an underlying asset.
Deutsche Börse The German Stock Exchange based in Frankfurt.
Development capital Second-stage finance (following seed finance or early-stage capital) to permit business expansion.
Differentiated product One that is slightly different in significant ways than those supplied by other companies. The unique nature of the product/service offered allows a premium price to be charged.
Diluted earnings per share This takes into account any additional shares that may be issued in the future under executive share option schemes and other commitments.
Dilution The effect on the earnings and voting power per ordinary share from an increase in the number of shares issued without a corresponding increase in the firm’s earnings.
Dilution adjustment/levy When there are large numbers of buyers or sellers of shares in an open ended investment company, OEIC, the fund may incur high costs to buy/sell the underlying securities. To balance the interests of the old and new shareholders the new members may be charged an extra fee (say 0.5–2 per cent) which is then added to the fund.
Diminishing marginal attractiveness If shares are listed in order of attractiveness based on the difference between their value and current price, then the marginal (next stock) on the list would be less attractive.
Direct foreign investment The purchase of commercial assets such as factories and industrial plant for productive purposes by overseas organisations.
Direct market access (DMA) These systems allow private investors to trade directly in the stock market, placing buy and sell orders into the LSE electronic order book alongside the professionals.
Directors’ dealings Directors’ purchase or sale of shares in their own company. This is legal (except at certain times of the company’s year or when in possession of key information hidden from other shareholders). Some investors examine directors’ dealings to decide whether to buy or sell. Dealings are shown on free financial websites.
Directors’ report Information and commentary on company performance and other matters. Presented in a company’s annual report and accounts.
Dirty price, full accrual price, invoice price On a bond a buyer pays a total of the clean price and the accrued interest since the last coupon payment.
Disclosure of shareholdings If a stake of 3 per cent or more is held by one shareholder in a UK public company, then this has to be declared to the company.
Discount (1) The amount below face value at which a financial claim sells (e.g. bill of exchange or zero coupon bond). (2) The extent to which an investment trust’s shares sell below the net asset value. (3) The amount by which a future value of a currency is less than its spot value. (4) The action of purchasing financial instruments (e.g. bills) at a discount. (5) The degree to which a security sells below its issue price in the secondary market. (6) The process of equating a cash flow at some future date with today’s value using the time value of money. (7) The deduction from the normal price or value, the opposite of premium.
Discount rate (1) The rate of return used to discount cash flows received in future years. This is the opportunity cost of capital given the risk class of the future cash flows. (2) The rate of interest at which some central banks lend money to the banking system.
Discount to net asset value Shares (e.g. investment trust shares) sometimes sell at a value less than the per share net asset value of the companies.
Discounted cash flow Future cash flows are converted into the common denominator of time zero money by adjusting for the time value of money.
Discounting The process of reducing future cash flows to a present value using an appropriate discount rate.
Discretionary service A type of service provided by a stockbroker in which the broker will manage the investor’s portfolio at the broker’s discretion – the investor is not consulted on every deal.
Disintermediation Borrowing firms bypassing financial institutions and obtaining debt finance directly from the market.
Disinvest To sell an investment.
Distribution bonds A type of insurance company bond which invests in a mixture of equity, fixed-income securities and property, but biased toward fixed-income investments.
Distribution units Unit trust units that pay out all income after deducting charges on set dates. Also applies to open-ended investment companies.
Diversifiable risk That element of an asset’s variability in returns that can be eliminated by holding a well-diversified portfolio.
Diversification Investing in varied projects, enterprises, financial securities, products, markets, etc., in a portfolio.
Divestiture (divestment) The sell-off of assets or subsidiary businesses by a company or individual.
Dividend That part of profit paid to ordinary shareholders, usually on a regular basis.
Dividend cover The number of times net profits available for distribution exceed the dividend actually paid or declared. Defined as earnings per share divided by dividend per share, or total post-tax profits divided by total dividend payout.
Dividend discount model These methods of share valuation are based on the premise that the market value of ordinary shares represents the sum of the expected future dividend flows, to infinity, discounted to present value.
Dividend payout ratio (payout ratio) The percentage of a company’s earnings after tax deduction paid out as dividends.
Dividend per share The total amount paid or due to be paid in dividends for the year (interim and final), divided by the number of shares in issue.
Dividend policy The determination of the proportion of profits paid out to shareholders, over the longer term.
Dividend reinvestment plan (DRIP) A shareholder receives shares in lieu of a cash dividend. This avoids the cost and trouble of receiving cash and then reinvesting.
Dividend valuation models (DVMs) These methods of share valuation are based on the premise that the market value of ordinary shares represents the sum of the expected future dividend flows, to infinity, discounted to present value.
Dividend yield The amount of dividend paid on each share as a percentage of the share price.
Divorce of ownership and control In large corporations shareholders own the firm but may not be able to exercise control. Managers often have control because of a diffuse and divided shareholder body, proxy votes and apathy.
DMO (Debt Management Office) Organises the sale of gilts. An Executive Agency of the UK Treasury.
Domestic bond A bond denominated in the issuer’s local currency and offered to local investors.
Dow/Dow Jones Industrial Average (DJIA) The best known index of movements in the price of US stocks and shares. There are 30 shares in the index. It is not strictly an index, but an average of raw prices.
Dow theory A method of predicting share price trends by identifying primary trends from historic share price data.
Drawdown arrangement A loan facility is established and the borrower uses it (takes the money available) in stages as the funds are required.
Drawdown (pension) (income drawdown) With a personal pension, instead of taking benefits in the form of an annuity, you can draw money from your pension pot.
Dual capital trusts Also known as Split-capital investment trusts. These investment trusts simultaneously issue different types of shares. Income shares entitle the holder to receive all (or most) of the income from the portfolio. Capital shares entitle the owner to receive all (or most of) the rise in the capital value of the portfolio. Zero divided preference shares (Zeros) pay no income but do offer a predetermined return at the end of the trust’s life.
Dual-class Shares in some companies are divided into two or more classes, each with different voting rights.
Due diligence A detailed investigation of a company to ensure that it is in a satisfactory condition for the purpose of the transaction, e.g. in a merger the target is examined by accountants, lawyers, managerial consultants, etc. to reveal risks and other information.
Durable good One with an expected life of more than one year.
E-money Also known as electronic money, as e-currency, electronic cash, digital money, digital cash, digital currency, cyber currency. Money transferred by electronic means.
E-money institutions Issuers of electronic money, e.g. pre-paid cards and electronic pre-paid accounts for use online.
Early-stage capital Funds for initial manufacturing and sales for a newly formed company. High-risk capital available from entrepreneurs, business angels and venture capital funds.
Earn-out The purchase price of a company is linked to the future profits performance. Future instalments of the purchase price may be adjusted if the company performs better or worse than expected.
Earning power The earning (profit) capacity of a business in a normal year, that is, what the company might be expected to earn year after year if business conditions continue unchanged.
Earnings Profits, usually after deduction of tax.
Earnings guidance A company guiding analysts to estimates of profits for the current period.
Earnings multiple Share price divided by earnings per share. If you want to know more see Price–earnings ratio.
Earnings per share (eps) Profit after tax and interest divided by number of shares in issue.
Earnings yield Earnings per share divided by current market price of share.
EBIT A company’s Earnings (profits) Before Interest and Taxes are deducted.
EBITDA Earnings Before (deduction of) Interest, Taxation, Depreciation and Amortisation.
EBITDA interest coverage ratio EBITDA divided by gross interest.
Economic franchise Pricing power usually facilitated by strong barriers to entry. The strength and durability of an economic franchise is determined by (a) the structure of the industry, and (b) the ability of the firm to rise above its rivals in its industry and generate exceptional long-run rates of return on capital employed.
Economic profit The amount earned by a business after deducting all operating expenses and a charge for the opportunity cost of the capital employed.
Economies of scale Producing a larger output results in lower unit cost.
Economies of scope The ability to reduce unit costs of an item by sharing some costs between a number of product lines (e.g. using the same truck to deliver both ketchup and beans to a store).
Efficient stock market Prices rationally reflect available information. The efficient market hypothesis implies that new information is incorporated into a share price (a) rapidly, and (b) rationally. In an efficient market no trader will be presented with an opportunity for making an abnormal return, except by chance.
EGM (Extraordinary general meeting) A meeting of the company (shareholders and directors) other than the annual general meeting. It may be convened when the directors think fit. However, shareholders holding more than 5 per cent of the paid-up share capital carrying voting rights can insist on the directors calling a meeting. If the directors do not call a meeting as properly requested, the members who requested it (or half of them by voting rights) may call the meeting themselves..
EIS (Enterprise Investment Scheme) Tax relief is available to investors in qualifying UK company shares (unquoted firms not focused on financial investment, farming and property).
Electronic Communication Network (ECN) An alternative trading venue for shares quoted on US and European stock exchanges.
Electronic platform/trading system A trading system matching buyers and sellers together using computers, communication links and/or the Internet.
Electronic settlement Transferring shares from sellers to buyers without certificates – computer entry only.
Emerging markets Security markets in countries with relatively low/middle incomes but with rapid economic growth, or in countries with fairly high income levels but relatively underdeveloped stock markets and limited internationalisation of financial markets.
Employee share ownership plans (ESOPs) Schemes designed to encourage employees to build up a shareholding in their company.
Endowment policies (saving schemes) Life assurance schemes with the additional feature of a lump-sum payment, either at the end of the term of the policy or on death. One use is for the repayment of house mortgages.
Enfranchisement Granting voting rights to holders of non-voting shares.
Enterprise Investment Scheme (EIS) Tax relief is available to investors in qualifying UK company shares (unquoted firms not focused on financial investment, farming and property).
Enterprise value The sum of a company’s total equity market capitalisation and borrowings minus the cash it holds. (Some analysts add pension provisions, minority interest and other claims on the business.)
Enterprise value to EBITDA ratio (EV/EBITDA) The total of the market value of equity plus the market value of debt (minus cash holdings) divided by earnings before deduction of interest, tax, depreciation and amortisation.
Entrepreneur Defined by economists as the owner-manager of a firm. Usually supplies capital, organises production, decides on strategic direction and bears risk.
EPIC code, Exchange Price Information Code A stock symbol abbreviation given to companies on the London Stock Exchange, e.g. Vodafone is VOD
Equilibrium in markets When the forces of supply and demand are evenly balanced.
Equities, Equity, Equity capital An ownership share of a business; each equity share (of the same class) represents an equal stake in the business. Capital invested in the business in the form of shares, not set to be repaid, but share owners can sell their shares to other investors, or vote for a liquidation of all the firm’s assets to release the capital to them after meeting all other obligations.
Equitisation An increasing emphasis placed on share (equity) finance and stock exchanges in economies around the world. A growing equity culture.
Equity indices Baskets of shares indicating the movement of the equity market as a whole or sub-sets of the market.
Equity kicker (sweetener) The attachment of some rights to participate in and benefit from a good performance (e.g. exercise option to purchase shares) to a bond or other debt finance. Used with mezzanine finance or high-yield bonds.
Equity-linked bond A bond with features of both debt and equity. It contains an option to purchase (or to exchange a bond for) an equity stake in the issuer, its parent or another company. This option can be by way of a right to convert the bond into equity or by way of warrant attached to the bond giving the right to purchase shares.
Equity long/short An investment strategy taking both a long (benefit from a rise in price) and short (benefit from a fall in price) position in different shares or other securities.
Equity risk premium The additional average annual rate of return for an averagely risky share over the return on a risk-free asset (e.g. a reputable government bond). It is the average extra return over many decades – a short period of observation will lead to a biased estimate.
Equity shareholders’ funds The net assets of the business (after deduction of all short- and long-term liabilities and minority interests) shown in the balance sheet.
Equity warrant A financial instrument which gives the holder the right but not the obligation to purchase shares in the company from the company at a fixed price at some time in the future (during or at the end of a specific time period).
Ethical investment The avoidance of securities that benefit from activities viewed as unethical (e.g. tobacco shares, genetically modified agriculture, arms sales).
Euribor (Euro Interbank Offered Rate) Short-term interest rates in the interbank market (very stable banks lending to each other) in the currency of euros.
Euro The name of the single European currency in use since 1999.
Eurobond Bond sold outside the jurisdiction of the country in whose currency the bond is denominated (e.g. a bond issued in yen outside Japan).
Euroclear A Belgium based settlement system to help settle domestic and cross-border financial transactions and reduce risk for clients.
Euro-commercial paper Is a commercial paper that is denominated in foreign currency and placed outside the jurisdiction of the authorities of that currency, then the notes are Euro-commercial paper.
Eurocurrency Currency held outside its country of origin (e.g. Australian dollars held outside of Australia). Note: this market existed long before the creation of the euro, and has no connection with the currency in the eurozone.
Eurocurrency banking Transactions in a currency other than the host country’s currency (e.g. transactions in Canadian dollars in London). No connection with the currency in the eurozone.
Eurodollar A deposit or credit of US dollars held outside of the regulation of the US authorities, say in Tokyo, London or Paris. No connection with the currency in the eurozone.
Euromarkets Informal (unregulated) markets in money held outside of the jurisdictions of any country; often termed international securities markets. Euromarkets began in the late 1950s.
Euro medium-term notes (EMTN) If a note is denominated in a foreign currency, they are called euro medium-term notes.
Euronext The combined financial stock market comprising the French, Dutch, Belgian, Irish and Portuguese bourses.
European Central Counterparty A pan-European clearing and settlement service for financial transactions.
European Monetary Union (EMU) A single currency with a single central bank having control over interest rates being created for those EU member states which join the euro.
European-style options (or European options) Options which can only be exercised by the purchaser on a predetermined future date.
Euro-security markets Informal (unregulated) markets in money held outside the jurisdiction of the country of origin (e.g. Swiss franc lending outside of the control of the Swiss authorities – perhaps the francs are in London). Financial securities such as bonds,
commercial paper, shares, convertibles, floating rate notes, medium-term notes and promissory notes are offered on and traded in these Euromarkets.
Eurosterling bond A bond issued in sterling outside of the control of the UK authorities.
Eurozone Those countries that joined together in adopting the euro as their currency.
Event risk The risk that some future event may negatively affect the return on a financial investment (e.g. an earthquake event affects returns on Japanese bonds, or the resignation of a CEO endangers the company).
Ex-ante Intended, desired or expected before the event.
Ex-coupon A bond sold without the right to the next interest payment.
Ex-dividend When a share or bond is designated ex-dividend a purchaser will not be entitled to a recently announced dividend or the accrued interest on the bond since the last coupon – the old owner will receive the dividend (coupon).
Ex-post The value of some variable after the event.
Ex-rights When a share goes ‘ex-rights’ any purchaser of a share after that date will not have a right to subscribe for new shares in the rights issue.
Ex-rights price of a share The theoretical market price following a rights issue.
Exceptional items Gains or costs which are part of the company’s ordinary activities but are either unusual in themselves or have an exceptionally large impact on profits that year.
Exchange controls The state controls the purchase and sale of currencies by its residents.
Exchange rate The price of one currency expressed in terms of another.
Exchange rate risk The possibility of losing money on investments abroad because the foreign exchange rate moves against you.
Exchange market size (EMS) The threshold below which the market makers have to sell/buy shares at the prices they posted on the London Stock Exchange systems without modification. It is normally set at 1-2 per cent of the average daily customer turnover of a share on the LSE in the previous year. The term normal market size (MS) is an alternative.
Exchange traded commodities (ETCs) Similar to exchange traded funds except the underlying securities are commodities or derivatives of commodities.
Exchange traded funds (ETFs) Funds (companies) that issue shares using the proceeds to invest in the range of shares (or other securities such as bonds) in a particular stock market index or sector, such as the FTSE 100 index. Alternatively derivatives may be purchased which reflect the movements of the index or sector.
Exchange trading Trading of financial instruments on regulated markets.
Exchangeable bond A bond that entitles the owner to choose at a later date whether to exchange the bond for shares in a company. The shares are for a company other than the one that issued the bonds.
Execute and eliminate A type of buy or sell order instruction given by an investor to a broker. A price limit is set and the transaction is completed in part or in whole immediately and then expires on the spot. If only some of the order is fulfilled the remainder expires.
Execution-only broker A stockbroker who will buy or sell shares cheaply but will not give advice or other services.
Executive directors Manage day-to-day activities of the firm as well as contributing to boardroom discussion on company-wide policy and strategic direction.
Exercise price (strike price) The price at which an underlying will be bought (call) or sold (put) under an option contract.
Exit (1) The term used to describe the point at which a venture capitalist or private equity company can recoup some or all of the investment made. (2) The closing of a position created by a transaction.
Exit barrier A factor preventing/inhibiting firms from stopping production in a particular industry.
Exit charge Unit trusts may charge the investor when the units are sold.
Exotic A term used to describe an unusual financial transaction (e.g. exotic option, exotic currency), i.e. one with few trades.
Expansion capital Capital needed by cCompanies at a fast-development phase needing capital to increase production capacity, working capital and capital for the further development of the product or market. Venture capital is often used.
Expected return The mean or average outcome calculated by weighting each of the possible outcomes by the probability of occurrence and then summing the result.
Experience curve The cost of performing a task reduces as experience is gained through repetition.
Expert investor Legal term denoting an investor who may by their previous experience be taken to fully understand the nature of investment undertaken. An expert investor is given less protection under the financial regulatory regime.
Expiry date of an option The time when the rights to buy or sell under the option contract cease.
Exposure The amount of a portfolio invested in a particular area (e.g. a £50,000 portfolio with £25,000 in overseas shares has 50 per cent overseas exposure).
External finance Outside finance raised by a firm, i.e. finance that it did not generate internally, for example through profit retention.
Extraordinary general meeting (EGM) A meeting of the company (shareholders and directors) other than the annual general meeting. It may be convened when the directors think fit. However, shareholders holding more than 5 per cent of the paid-up share capital carrying voting rights can insist on the directors calling a meeting. If the directors do not call a meeting as properly requested, the members who requested it (or half of them by voting rights) may call the meeting themselves.
Extraordinary resources Those that give the firm a competitive edge. A resource, which when combined with other (ordinary) resources enables the firm to outperform competitors and create new value-generating opportunities. Critical extraordinary resources determine what a firm can do successfully.
Extrapolate To estimate values beyond the known values by the extension of a curve or line.