Haircut A loss of value of a debt instrument due to some form of default.
Half-yearly report Describes the company’s activities and profit and loss, balance sheet and cashflow statement for the first six months of the financial year. Unaudited.
Hang Seng index Main index for Hong Kong shares.
Hard currency A currency traded in a foreign exchange market for which demand is persistently high. It is unlikely to depreciate by large percentages. The major currencies (e.g. the US dollar, euro and sterling) are considered hard currencies.
Head and shoulders formation A chartist’s (technical analyst’s) share price pattern in which the chart line resembles a shoulder followed by a head (a rise in price to a peak, followed by a fall) and then another shoulder.
Headline (underlying, adjusted or normalised) earnings per share Directors produce these profit per share numbers by excluding one-off costs, exceptional items and goodwill amortisation to show underlying profit-per-share trend (or just to make the managerial performance look better).
Hedge fund A collective investment vehicle that operates relatively free from regulation, allowing it to take steps in managing a portfolio that other fund managers are unable to take (e.g. borrowing to invest, shorting the market).
Hedge or hedging Reducing or eliminating risk by undertaking a countervailing transaction.
Her Majesty’s Revenue and Customs (HMRC) The principal tax-collecting authority in the UK.
Herstatt risk In 1974 the German bank Herstatt was closed by the authorities. It had entered into forex transactions and received Deutschmarks from counterparties in European time, but had not made the corresponding transfer of US dollars to its counterparties in New York time. It is the risk that arises when forex transactions are settled in different time zones.
High-frequency trading (HFT) Ultra-fast Internet trading using computers programmed with algorithms to enter and exit the market automatically in a fraction of a second.
High Growth Segment Companies can be admitted to this part of the London Stock Exchange’s Main Market only subject to the EU minimum standards and the HGS rulebook issued by London Stock Exchange, e.g. only 10 per cent of shares need to be in a free float rather than 25 per cent for a Premium Listing. The segment is designed specifically for high growth, revenue generating businesses incorporated in a European Economic Area (EEA) state, that over time are aspiring to join the Premium segment.
High watermark Many collective investment funds (e.g. unit trusts) increase the fees going to the fund manager if the fund outperforms. These performance fees are usually subject to a high-watermark rule whereby if it underperforms in a year (or a few years) then this has to be made up first before consideration of a performance fee for the current year.
High-yield debt See Mezzanine finance; Junk bonds.
High-yield shares (yield stocks, high yielder) Shares offering a high current dividend yield because the share price is low due to the expectation of low growth in profits and dividends, or because of perceived high risk. Sometimes labelled ‘value shares’.
Hire purchase (HP) The user (hiree) of a good pays regular instalments of interest and principal to the hire purchase company over a period of months. Full ownership passes to the hiree at the end of the period. The hiree is able to use the good from the outset.
Historic basis The price that an investor in unit trusts pays is determined by the price calculated at a specific time that has already past – usually 12 noon today or the previous day.
Historical price–earnings ratio (PER) Historical (or trailing) PER is share price divided by most recently reported annual earnings per share. If you want to know more see Price–earnings ratio.
HMRC (Her Majesty’s Revenue and Customs) The principal tax-collecting authority in the UK.
Holding company The one that partially or wholly owns other companies.
Holding period returns Total holding period returns on a financial asset consist of (a) income (e.g. dividend paid), and (b) capital gain/loss – a rise/fall in the value of the asset.
Horizontal merger The two companies merging are engaged in similar lines of activity.
Hostile merger The target (acquired) firm’s management is opposed to the merger.
Hot shares/sectors Those currently receiving a lot of attention from the press and investors.
Hubris Overweening self-confidence.
Hurdle rate The required rate of return. The minimum return required from a position, making an investment or undertaking a project.
Hybrid finance A debt issue or security that combines the features of two or more instruments, e.g. a convertible bond is a package of a bond with an option to convert. Also used to indicate that a form of finance has both debt risk/return features (e.g. regular interest and a right to receive principal at a fixed date) and equity risk/return features (e.g. the returns depend to a large extent on the profitability of the firm).
ICE Clear Europe Established in 2008 to provide central clearing services for ICE’s global energy markets (e.g. crude oil and refined oil futures). Also the clearing house for energy derivatives contracts, European credit default swaps (CDS) and the London derivatives market of ICE Futures Europe.
ICE, Intercontinental Exchange Operates some of the world’s leading regulated exchanges (e.g. New York Stock Exchange), trading platforms and clearing houses. Deals in shares, futures and other derivatives.
ICE Futures Europe An electronic exchange, trading in a variety of derivative instruments.
Iceberg order If a seller of a large quantity of shares, say 1 million, wants to disguise the size of the sale a popular technique is to leave an order to sell on the order-driven trading system, such as LSE’s SETS, for say 10 tranches of 100,000 shares. The system permits the automatic reloading of the next tranche each time one is sold, until the 1 million shares are all sold. An iceberg order may also be used by buyers.
Idiosyncratic risk An alternative name for unsystematic risk.
Immediate solvency The ability of a firm to pay its short-term liabilities on time.
Impact day The day during the launch of a new issue of shares when the price is announced, the prospectus published and offers to purchase solicited.
Impairment The writing down of fixed assets and goodwill in the balance sheet if they are judged to have become permanently impaired (not expected to earn at least a satisfactory return). Impairments may also impact the profit and loss account.
Imperfect hedge The hedge position will partly, but not exactly, mirror the change in the underlying.
In-house share trading A broker is allowed to complete a share transaction without going to the stock exchange by taking on the deal himself if he can match the best prices offered by the market makers.
In-the-money option An option with intrinsic value. For a call option the current underlying price is more than the option exercise price. For a put option the current price of the underlying is below the exercise price.
Income drawdown (pension) With a personal pension, instead of taking benefits in the form of an annuity, you can draw money from your pension pot.
Income gearing (income leverage) The proportion of the annual income streams (i.e. pre-interest profits or cash flow) devoted to the prior claims of debt holders. The reciprocal of income gearing is the interest cover.
Income (‘Inc’) units (Distribution units) Unit trust units that pay out all income after deducting charges on set dates. Also applies to open-ended investment companies.
Income reinvested The performance of shares, other securities or portfolios is usually expressed as ‘total return’ including both capital gains or losses and the benefits of periodic reinvestment of income received in further shares, securities or units of the same kind as the original investment.
Income shares One where the investors anticipate a relatively high regular income from dividends but do not expect high capital growth (share price appreciation). Often found in slow-growing stable industries. See also Split-capital investment trusts.
Income statement Records whether a company’s sales revenue was greater than its costs.
Income yield on a fixed-interest security is the gross interest amount, divided by the current market price, expressed as a percentage.
Incorporation The forming of a company (usually offering limited liability to the shareholders), including the necessary legal formalities.
Independent complaints scheme Financial service companies generally belong to an independent complaints scheme, either an arbitration scheme or Ombudsman scheme. This permits customers to have their complaints looked into by an independent body.
Independent director One who is not beholden to the dominant executive directors. Customers, suppliers or friends of the founding family are not usually regarded as independent, for example.
Independent financial advisers (IFAs) Individuals authorised by the Financial Conduct Authority to provide financial advice.
Independent variables Two variables which are completely unrelated and show no co-movement.
Index A sample of shares is used to represent a share (or other security) market’s level and movements as a benchmark against which individual shares are judged.
Index huggers ‘Active’ investment managers of collective funds pretending to sift companies to select only the most underpriced, when in reality they are creating portfolios that are similar to a broad cross-section of the market.
Index-linked stocks (gilts) The redemption value and the coupons rise with inflation over the life of the UK government bond.
Index option An option on a share index (e.g. FTSE 100 or Standard & Poor’s 500).
Index trackers (indexed funds) Collective investment funds (e.g. unit trusts) which try to replicate a stock market index rather than to pick winners in an actively managed fund.
Indicative offer When a proper merger/acquisition offer of one company for another has not been made but the potential acquirer has raised the possibility of making a bid for the target firm without any commitment.
Indices A sample of shares is used to represent a share (or other security) market’s level and movements as a benchmark against which individual shares are judged.
Individual Savings Account (ISA) A savings account with special tax privileges. The saver can invest savings in cash deposits, shares, insurance products and/or other securities.
Industry attractiveness The economics of the market for the product(s), part of which is determined by industry structure.
Industry structure The combination of the degree of rivalry within the industry among existing firms; the bargaining strength of industry firms with suppliers and customers; and the potential for new firms to enter and for substitute products to take customers. The industry structure determines the long-run rate of return on capital employed within the industry.
Inevitable A company likely to dominate its field for an investment lifetime due to its competitive strength. A term used (invented?) by Warren Buffett.
Inflation The process of prices rising resulting in the fall of the purchasing power of one currency unit.
Inflation-linked Usually refers to investment securities the returns on which vary with inflation.
Inflation risk The risk that the nominal returns on an investment will be insufficient to offset the decline in the value of money due to inflation.
Informal venture capitalist Wealthy individual prepared to invest about £10,000 to £250,000 in a start-up, early-stage or developing firm. They will often have managerial and/or technical experience to offer the management team as well as equity and debt finance. This is medium- to long-term investment in high-risk situations.
Information asymmetry Situation where one party in a negotiation or relationship is not in the same position as other parties, being ignorant of, or unable to observe, some information which is essential to the contracting and decision-making process.
Informed investors Those who are highly knowledgeable about financial securities and the fundamental evaluation of their worth.
Inheritance tax (IHT) A tax payable on transfers made on an individual’s estate at the time of death (it also covers some gifts made during the individual’s lifetime).
Inherited estates Reserves that an insurance company has held back from with-profits policyholders to act as a buffer should the market decline. Critics claim that the insurance companies have been too cautious and should give the majority of these assets back to policyholders.
Initial charge (sales charge, front-end charge) A charge to an investor when he/she buys securities to cover administration costs.
Initial margin An amount that a derivative contractor has to provide to the clearing house when first entering upon a derivative contract.
Initial public offering (IPO) (New issue) The offering of shares in the equity of a company to the public for the first time.
Innovative finance ISA, IFISA An Individual Savings Account which permits the holding of peer to peer loans tax-free
Inside the quote Being able to buy or sell a share or other security at better prices than those publicly offered by market makers.
Insider trading (dealing) Trading shares, etc., on the basis of information not in the public domain.
Insolvent (1) A company unable to pay debts as they become due. (2) Having liabilities in excess of a reasonable market value of assets.
Institute of Actuaries The UK professional body for educating, developing and regulating actuaries who evaluate, manage and advise on financial risks. Knowledgeable about business and economics as well as probability theory, statistics and investment theory, they can provide strategic, commercial and financial advice. The core of actuarial work lies within pensions and insurance funds.
Institutional imperative An insidious and dangerous unseen force at work in companies. It is the tendency of organisations to stray from the path of rationality, decency and intelligence.
Institutional neglect Share analysts, particularly at the major institutions, may fail to spend enough time studying small firms, preferring to concentrate on the larger 100 or so.
Institutional shareholder committee A grouping of UK institutional investors (e.g. pension funds, insurance companies) which works in partnership to impose codes of conduct on companies and on its own members.
Institutionalisation The increasing tendency towards investment through organisations, as opposed to individuals investing money in securities (e.g. pension funds and investment trusts collect the savings of individuals to invest in shares).
Instrument A general term for all types of financial documents, such as shares, bonds, etc.
Insurance company bonds A lump-sum investment is made with an insurance company for a fixed period, say five years. Guaranteed income bonds (GIBs) pay regular income (the money is invested in a portfolio of low-risk bonds such as gilts). With growth bonds the interest accumulates until the maturity date.
Intangible assets Those that you cannot touch, they are non-physical (e.g. goodwill).
Intelligent speculation A focus on information that is quantifiable. Based on a calculation of probabilities. Keeping the speculative element within minor limits. The odds are strongly in favour of success. (A term used by Benjamin Graham.)
Interbank brokers Brokers in the forex markets who act as intermediaries between buyers and sellers. They provide anonymity to each side.
Interbank market The money market in short-term money and foreign exchange in which banks borrow and lend among themselves. It is now extended to include large companies and other organisations.
Intercontinental Exchange (ICE) Operates some of the world’s leading regulated exchanges (e.g. New York Stock Exchange), trading platforms and clearing houses. Deals in shares, futures and other derivatives.
Interest cover The number of times the income (or operating cash flow) of a business in a period exceeds the interest payments made to service its loan capital in that period.
Interest rate risk The risk that changes in interest rates will have an adverse impact.
Interest rate swap A swap is an exchange of cash payment obligations. An interest rate swap is where one company arranges with a counterparty to exchange interest rate payments. If you want to know more see swap.
Interest-withholding tax Taxation deducted from payments made such as interest on bonds before the recipient receives the payment.
Interest yield on a fixed-interest security is the gross interest amount, divided by the current market price, expressed as a percentage.
Interim bonus The annual bonus given by an insurance company to with-profits policyholders.
Interim dividend A dividend related to a company’s first half-year’s (or quarter’s) trading, announced at the time of the interim profit statement.
Interim management statement (or trading update) Issued by a company in the middle of each half year, consisting of a few paragraphs providing a brief description of the firm’s trading performance since the last formal report.
Interim payment A dividend related to a company’s first half-year’s (or quarter’s) trading, announced at the time of the interim profit statement.
Interim report (statement) Describes the company’s activities and profit and loss, balance sheet and cashflow statement for the first six months of the financial year. Unaudited.
Intermediaries offer A method of selling shares in the new issue market. Shares are offered to financial institutions such as stockbrokers. Clients of these intermediaries can then apply to buy shares from them.
Intermediate debt See Mezzanine finance; Junk bonds.
Internal finance Funds generated by the firm’s activities, and available for investment within the firm after meeting contractual obligations.
Internal rate of return (IRR) The discount rate that makes the present value of a stream of cash flows equal to the initial investment(s).
International bonds Some people use the term to mean the same as Eurobonds, others extend the definition to encompass foreign bonds as well.
International Capital Market Association (ICMA) A self-regulatory organisation designed to promote orderly trading and the general development of the Euro markets (not the euro currency of the eurozone but money/lending outside of the control of regulators).
International Financial Reporting Standards (IFRS) Accounting standards issued by the International Accounting Standards Board (IASB) adopted by dozens of countries. Companies listed on London’s Main Market and on AIM have now adopted IFRS.
Intraday (cash or spot) bet A bet with a spread betting company that starts and is closed in the same trading day.
Intrinsic value (company) The discounted value of the cash (owner earnings) that can be taken out of a business during its remaining life.
Intrinsic value (options) The pay-off that would be received if the underlying is at its current level when the option expires.
Introduction A company with shares already quoted on another stock exchange, or where there is already a wide spread of shareholders, may be introduced to the market, without underwriting costs. This allows a secondary market in the shares even though no new shares are issued.
Inventory (1)Inventory of raw materials, work-in-progress and finished items. (2) US term for a share.
Inverse ETFs Exchange traded funds whose returns move inversely with the returns on the underlying securities.
Investment bank Banks that carry out a variety of financial services, usually excluding high street banking. Their services are usually fee-based (e.g. fees for merger advice to companies).
Investment club A group of people who each contribute a few pounds per month which is then pooled to buy shares (or other financial securities) for the club.
Investment committees (ICs) Representative groupings of institutional investors. The main two are the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF). The ICs provide lobbying power and can guide corporate managers on what they regard as acceptable behaviour, e.g. they sometimes recommend the voting down of a director’s remuneration report.
Investment grade debt Debt with a sufficiently high credit rating (BBB– or Baa or above) to be regarded as safe enough for institutional investors who are restricted to buying safe debt only.
Investment-linked insurance plans A term covering with-profits policies, unit-linked policies and others supplied by insurance companies.
Investment Management Association UK trade association for investment management service companies who provide services to life assurance companies, pension funds, individual companies and private investors.
Investment operation One that, upon thorough analysis, promises safety of principal and a satisfactory return. If these criteria are not met then you are speculating.
Investment platform Online organisations that allow investors to invest in a range of unit trusts, investment trusts, shares, bonds ETFs, OEICs, etc. Investors can select one, two or a dozen funds from different management companies together with other investments. They usually charge either a flat fee or a percentage of funds held on the platform.
Investment trusts (investment companies) Collective investment vehicles set up as companies selling shares. The money raised is invested in assets such as shares, gilts, corporate bonds and property.
Invoice An itemised list of goods shipped, usually specifying the terms of sale and price.
IOU A colloquialism intended to mean ‘I owe you’. The acknowledgement of a debt.
IPO (Initial public offering) The offering of shares in the equity of a company to the public for the first time.
IRR (Internal rate of return) The discount rate that makes the present value of a stream of cash flows equal to the initial investment(s).
Irredeemable (perpetual) Financial securities with no fixed maturity date at which the principal is repaid.
ISA (Individual Savings Account) A savings account with special tax privileges. The saver can invest savings in cash deposits, shares, insurance products and/or other securities.
ISIN number, International Securities Identification Number A code that uniquely identifies a specific securities issue (e.g. bond, share, futures, options).
iShares A type of exchange traded fund (ETF) created by Barclays Global Investors but now owned and run by BlackRock.
Issued share capital That part of a company’s share capital that has been subscribed by shareholders, either paid up or partially paid up. See also Called-up share capital.
Issuing house An organisation (usually an investment bank or stockbroker) that lends its reputation to a new issue of securities, advises the client company (along with the issuing broker) and co-ordinates the new issue process.
Joint stock enterprise The ownership (share) capital is divided into small units, permitting a number of investors to contribute varying amounts to the total. Profits are divided between stockholders in proportion to the number of shares they own.
Joint venture A business operation (usually a separate company) is jointly owned by two or more parent firms. The term also applies to strategic alliances between companies where they collaborate on, for example, research.
Junior debt (junior security) A debt which ranks below another liability in order of priority for payment of interest or principal.
Junk bonds Low quality, low credit-rated, company bonds rated below investment-grade (below BBB or Baa). Risky and with a high yield.
Key investor information document (KIID) Produced by a collective investment fund, e.g. unit trust, and sets out the most important facts about the fund (e.g. fees) in standardised, jargon-free way, allowing comparison between funds to allow investors to assess which funds might suit their investment needs at a reasonable cost.
Key performance indicators (KPIs) Most companies include a number of KPIs in their reports and accounts, comparing actual performance based on these metrics against targets and against previous years, accompanied by a discussion of outcomes and aspirations. Examples: return on capital employed, customer satisfaction ratings.
Kicker 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.
Kick-out plans Investment deals offered by financial institutions which pay the investor their original capital plus a coupon if the share index (e.g. FTSE 100) is above its level at the beginning of the plan. If it is not, the payout occurs at subsequent anniversaries if the index has at least maintained its start level.
Half-yearly report Describes the company’s activities and profit and loss, balance sheet and cashflow statement for the first six months of the financial year. Unaudited.
Hang Seng index Main index for Hong Kong shares.
Hard currency A currency traded in a foreign exchange market for which demand is persistently high. It is unlikely to depreciate by large percentages. The major currencies (e.g. the US dollar, euro and sterling) are considered hard currencies.
Head and shoulders formation A chartist’s (technical analyst’s) share price pattern in which the chart line resembles a shoulder followed by a head (a rise in price to a peak, followed by a fall) and then another shoulder.
Headline (underlying, adjusted or normalised) earnings per share Directors produce these profit per share numbers by excluding one-off costs, exceptional items and goodwill amortisation to show underlying profit-per-share trend (or just to make the managerial performance look better).
Hedge fund A collective investment vehicle that operates relatively free from regulation, allowing it to take steps in managing a portfolio that other fund managers are unable to take (e.g. borrowing to invest, shorting the market).
Hedge or hedging Reducing or eliminating risk by undertaking a countervailing transaction.
Her Majesty’s Revenue and Customs (HMRC) The principal tax-collecting authority in the UK.
Herstatt risk In 1974 the German bank Herstatt was closed by the authorities. It had entered into forex transactions and received Deutschmarks from counterparties in European time, but had not made the corresponding transfer of US dollars to its counterparties in New York time. It is the risk that arises when forex transactions are settled in different time zones.
High-frequency trading (HFT) Ultra-fast Internet trading using computers programmed with algorithms to enter and exit the market automatically in a fraction of a second.
High Growth Segment Companies can be admitted to this part of the London Stock Exchange’s Main Market only subject to the EU minimum standards and the HGS rulebook issued by London Stock Exchange, e.g. only 10 per cent of shares need to be in a free float rather than 25 per cent for a Premium Listing. The segment is designed specifically for high growth, revenue generating businesses incorporated in a European Economic Area (EEA) state, that over time are aspiring to join the Premium segment.
High watermark Many collective investment funds (e.g. unit trusts) increase the fees going to the fund manager if the fund outperforms. These performance fees are usually subject to a high-watermark rule whereby if it underperforms in a year (or a few years) then this has to be made up first before consideration of a performance fee for the current year.
High-yield debt See Mezzanine finance; Junk bonds.
High-yield shares (yield stocks, high yielder) Shares offering a high current dividend yield because the share price is low due to the expectation of low growth in profits and dividends, or because of perceived high risk. Sometimes labelled ‘value shares’.
Hire purchase (HP) The user (hiree) of a good pays regular instalments of interest and principal to the hire purchase company over a period of months. Full ownership passes to the hiree at the end of the period. The hiree is able to use the good from the outset.
Historic basis The price that an investor in unit trusts pays is determined by the price calculated at a specific time that has already past – usually 12 noon today or the previous day.
Historical price–earnings ratio (PER) Historical (or trailing) PER is share price divided by most recently reported annual earnings per share. If you want to know more see Price–earnings ratio.
HMRC (Her Majesty’s Revenue and Customs) The principal tax-collecting authority in the UK.
Holding company The one that partially or wholly owns other companies.
Holding period returns Total holding period returns on a financial asset consist of (a) income (e.g. dividend paid), and (b) capital gain/loss – a rise/fall in the value of the asset.
Horizontal merger The two companies merging are engaged in similar lines of activity.
Hostile merger The target (acquired) firm’s management is opposed to the merger.
Hot shares/sectors Those currently receiving a lot of attention from the press and investors.
Hubris Overweening self-confidence.
Hurdle rate The required rate of return. The minimum return required from a position, making an investment or undertaking a project.
Hybrid finance A debt issue or security that combines the features of two or more instruments, e.g. a convertible bond is a package of a bond with an option to convert. Also used to indicate that a form of finance has both debt risk/return features (e.g. regular interest and a right to receive principal at a fixed date) and equity risk/return features (e.g. the returns depend to a large extent on the profitability of the firm).
ICE Clear Europe Established in 2008 to provide central clearing services for ICE’s global energy markets (e.g. crude oil and refined oil futures). Also the clearing house for energy derivatives contracts, European credit default swaps (CDS) and the London derivatives market of ICE Futures Europe.
ICE, Intercontinental Exchange Operates some of the world’s leading regulated exchanges (e.g. New York Stock Exchange), trading platforms and clearing houses. Deals in shares, futures and other derivatives.
ICE Futures Europe An electronic exchange, trading in a variety of derivative instruments.
Iceberg order If a seller of a large quantity of shares, say 1 million, wants to disguise the size of the sale a popular technique is to leave an order to sell on the order-driven trading system, such as LSE’s SETS, for say 10 tranches of 100,000 shares. The system permits the automatic reloading of the next tranche each time one is sold, until the 1 million shares are all sold. An iceberg order may also be used by buyers.
Idiosyncratic risk An alternative name for unsystematic risk.
Immediate solvency The ability of a firm to pay its short-term liabilities on time.
Impact day The day during the launch of a new issue of shares when the price is announced, the prospectus published and offers to purchase solicited.
Impairment The writing down of fixed assets and goodwill in the balance sheet if they are judged to have become permanently impaired (not expected to earn at least a satisfactory return). Impairments may also impact the profit and loss account.
Imperfect hedge The hedge position will partly, but not exactly, mirror the change in the underlying.
In-house share trading A broker is allowed to complete a share transaction without going to the stock exchange by taking on the deal himself if he can match the best prices offered by the market makers.
In-the-money option An option with intrinsic value. For a call option the current underlying price is more than the option exercise price. For a put option the current price of the underlying is below the exercise price.
Income drawdown (pension) With a personal pension, instead of taking benefits in the form of an annuity, you can draw money from your pension pot.
Income gearing (income leverage) The proportion of the annual income streams (i.e. pre-interest profits or cash flow) devoted to the prior claims of debt holders. The reciprocal of income gearing is the interest cover.
Income (‘Inc’) units (Distribution units) Unit trust units that pay out all income after deducting charges on set dates. Also applies to open-ended investment companies.
Income reinvested The performance of shares, other securities or portfolios is usually expressed as ‘total return’ including both capital gains or losses and the benefits of periodic reinvestment of income received in further shares, securities or units of the same kind as the original investment.
Income shares One where the investors anticipate a relatively high regular income from dividends but do not expect high capital growth (share price appreciation). Often found in slow-growing stable industries. See also Split-capital investment trusts.
Income statement Records whether a company’s sales revenue was greater than its costs.
Income yield on a fixed-interest security is the gross interest amount, divided by the current market price, expressed as a percentage.
Incorporation The forming of a company (usually offering limited liability to the shareholders), including the necessary legal formalities.
Independent complaints scheme Financial service companies generally belong to an independent complaints scheme, either an arbitration scheme or Ombudsman scheme. This permits customers to have their complaints looked into by an independent body.
Independent director One who is not beholden to the dominant executive directors. Customers, suppliers or friends of the founding family are not usually regarded as independent, for example.
Independent financial advisers (IFAs) Individuals authorised by the Financial Conduct Authority to provide financial advice.
Independent variables Two variables which are completely unrelated and show no co-movement.
Index A sample of shares is used to represent a share (or other security) market’s level and movements as a benchmark against which individual shares are judged.
Index huggers ‘Active’ investment managers of collective funds pretending to sift companies to select only the most underpriced, when in reality they are creating portfolios that are similar to a broad cross-section of the market.
Index-linked stocks (gilts) The redemption value and the coupons rise with inflation over the life of the UK government bond.
Index option An option on a share index (e.g. FTSE 100 or Standard & Poor’s 500).
Index trackers (indexed funds) Collective investment funds (e.g. unit trusts) which try to replicate a stock market index rather than to pick winners in an actively managed fund.
Indicative offer When a proper merger/acquisition offer of one company for another has not been made but the potential acquirer has raised the possibility of making a bid for the target firm without any commitment.
Indices A sample of shares is used to represent a share (or other security) market’s level and movements as a benchmark against which individual shares are judged.
Individual Savings Account (ISA) A savings account with special tax privileges. The saver can invest savings in cash deposits, shares, insurance products and/or other securities.
Industry attractiveness The economics of the market for the product(s), part of which is determined by industry structure.
Industry structure The combination of the degree of rivalry within the industry among existing firms; the bargaining strength of industry firms with suppliers and customers; and the potential for new firms to enter and for substitute products to take customers. The industry structure determines the long-run rate of return on capital employed within the industry.
Inevitable A company likely to dominate its field for an investment lifetime due to its competitive strength. A term used (invented?) by Warren Buffett.
Inflation The process of prices rising resulting in the fall of the purchasing power of one currency unit.
Inflation-linked Usually refers to investment securities the returns on which vary with inflation.
Inflation risk The risk that the nominal returns on an investment will be insufficient to offset the decline in the value of money due to inflation.
Informal venture capitalist Wealthy individual prepared to invest about £10,000 to £250,000 in a start-up, early-stage or developing firm. They will often have managerial and/or technical experience to offer the management team as well as equity and debt finance. This is medium- to long-term investment in high-risk situations.
Information asymmetry Situation where one party in a negotiation or relationship is not in the same position as other parties, being ignorant of, or unable to observe, some information which is essential to the contracting and decision-making process.
Informed investors Those who are highly knowledgeable about financial securities and the fundamental evaluation of their worth.
Inheritance tax (IHT) A tax payable on transfers made on an individual’s estate at the time of death (it also covers some gifts made during the individual’s lifetime).
Inherited estates Reserves that an insurance company has held back from with-profits policyholders to act as a buffer should the market decline. Critics claim that the insurance companies have been too cautious and should give the majority of these assets back to policyholders.
Initial charge (sales charge, front-end charge) A charge to an investor when he/she buys securities to cover administration costs.
Initial margin An amount that a derivative contractor has to provide to the clearing house when first entering upon a derivative contract.
Initial public offering (IPO) (New issue) The offering of shares in the equity of a company to the public for the first time.
Innovative finance ISA, IFISA An Individual Savings Account which permits the holding of peer to peer loans tax-free
Inside the quote Being able to buy or sell a share or other security at better prices than those publicly offered by market makers.
Insider trading (dealing) Trading shares, etc., on the basis of information not in the public domain.
Insolvent (1) A company unable to pay debts as they become due. (2) Having liabilities in excess of a reasonable market value of assets.
Institute of Actuaries The UK professional body for educating, developing and regulating actuaries who evaluate, manage and advise on financial risks. Knowledgeable about business and economics as well as probability theory, statistics and investment theory, they can provide strategic, commercial and financial advice. The core of actuarial work lies within pensions and insurance funds.
Institutional imperative An insidious and dangerous unseen force at work in companies. It is the tendency of organisations to stray from the path of rationality, decency and intelligence.
Institutional neglect Share analysts, particularly at the major institutions, may fail to spend enough time studying small firms, preferring to concentrate on the larger 100 or so.
Institutional shareholder committee A grouping of UK institutional investors (e.g. pension funds, insurance companies) which works in partnership to impose codes of conduct on companies and on its own members.
Institutionalisation The increasing tendency towards investment through organisations, as opposed to individuals investing money in securities (e.g. pension funds and investment trusts collect the savings of individuals to invest in shares).
Instrument A general term for all types of financial documents, such as shares, bonds, etc.
Insurance company bonds A lump-sum investment is made with an insurance company for a fixed period, say five years. Guaranteed income bonds (GIBs) pay regular income (the money is invested in a portfolio of low-risk bonds such as gilts). With growth bonds the interest accumulates until the maturity date.
Intangible assets Those that you cannot touch, they are non-physical (e.g. goodwill).
Intelligent speculation A focus on information that is quantifiable. Based on a calculation of probabilities. Keeping the speculative element within minor limits. The odds are strongly in favour of success. (A term used by Benjamin Graham.)
Interbank brokers Brokers in the forex markets who act as intermediaries between buyers and sellers. They provide anonymity to each side.
Interbank market The money market in short-term money and foreign exchange in which banks borrow and lend among themselves. It is now extended to include large companies and other organisations.
Intercontinental Exchange (ICE) Operates some of the world’s leading regulated exchanges (e.g. New York Stock Exchange), trading platforms and clearing houses. Deals in shares, futures and other derivatives.
Interest cover The number of times the income (or operating cash flow) of a business in a period exceeds the interest payments made to service its loan capital in that period.
Interest rate risk The risk that changes in interest rates will have an adverse impact.
Interest rate swap A swap is an exchange of cash payment obligations. An interest rate swap is where one company arranges with a counterparty to exchange interest rate payments. If you want to know more see swap.
Interest-withholding tax Taxation deducted from payments made such as interest on bonds before the recipient receives the payment.
Interest yield on a fixed-interest security is the gross interest amount, divided by the current market price, expressed as a percentage.
Interim bonus The annual bonus given by an insurance company to with-profits policyholders.
Interim dividend A dividend related to a company’s first half-year’s (or quarter’s) trading, announced at the time of the interim profit statement.
Interim management statement (or trading update) Issued by a company in the middle of each half year, consisting of a few paragraphs providing a brief description of the firm’s trading performance since the last formal report.
Interim payment A dividend related to a company’s first half-year’s (or quarter’s) trading, announced at the time of the interim profit statement.
Interim report (statement) Describes the company’s activities and profit and loss, balance sheet and cashflow statement for the first six months of the financial year. Unaudited.
Intermediaries offer A method of selling shares in the new issue market. Shares are offered to financial institutions such as stockbrokers. Clients of these intermediaries can then apply to buy shares from them.
Intermediate debt See Mezzanine finance; Junk bonds.
Internal finance Funds generated by the firm’s activities, and available for investment within the firm after meeting contractual obligations.
Internal rate of return (IRR) The discount rate that makes the present value of a stream of cash flows equal to the initial investment(s).
International bonds Some people use the term to mean the same as Eurobonds, others extend the definition to encompass foreign bonds as well.
International Capital Market Association (ICMA) A self-regulatory organisation designed to promote orderly trading and the general development of the Euro markets (not the euro currency of the eurozone but money/lending outside of the control of regulators).
International Financial Reporting Standards (IFRS) Accounting standards issued by the International Accounting Standards Board (IASB) adopted by dozens of countries. Companies listed on London’s Main Market and on AIM have now adopted IFRS.
Intraday (cash or spot) bet A bet with a spread betting company that starts and is closed in the same trading day.
Intrinsic value (company) The discounted value of the cash (owner earnings) that can be taken out of a business during its remaining life.
Intrinsic value (options) The pay-off that would be received if the underlying is at its current level when the option expires.
Introduction A company with shares already quoted on another stock exchange, or where there is already a wide spread of shareholders, may be introduced to the market, without underwriting costs. This allows a secondary market in the shares even though no new shares are issued.
Inventory (1)Inventory of raw materials, work-in-progress and finished items. (2) US term for a share.
Inverse ETFs Exchange traded funds whose returns move inversely with the returns on the underlying securities.
Investment bank Banks that carry out a variety of financial services, usually excluding high street banking. Their services are usually fee-based (e.g. fees for merger advice to companies).
Investment club A group of people who each contribute a few pounds per month which is then pooled to buy shares (or other financial securities) for the club.
Investment committees (ICs) Representative groupings of institutional investors. The main two are the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF). The ICs provide lobbying power and can guide corporate managers on what they regard as acceptable behaviour, e.g. they sometimes recommend the voting down of a director’s remuneration report.
Investment grade debt Debt with a sufficiently high credit rating (BBB– or Baa or above) to be regarded as safe enough for institutional investors who are restricted to buying safe debt only.
Investment-linked insurance plans A term covering with-profits policies, unit-linked policies and others supplied by insurance companies.
Investment Management Association UK trade association for investment management service companies who provide services to life assurance companies, pension funds, individual companies and private investors.
Investment operation One that, upon thorough analysis, promises safety of principal and a satisfactory return. If these criteria are not met then you are speculating.
Investment platform Online organisations that allow investors to invest in a range of unit trusts, investment trusts, shares, bonds ETFs, OEICs, etc. Investors can select one, two or a dozen funds from different management companies together with other investments. They usually charge either a flat fee or a percentage of funds held on the platform.
Investment trusts (investment companies) Collective investment vehicles set up as companies selling shares. The money raised is invested in assets such as shares, gilts, corporate bonds and property.
Invoice An itemised list of goods shipped, usually specifying the terms of sale and price.
IOU A colloquialism intended to mean ‘I owe you’. The acknowledgement of a debt.
IPO (Initial public offering) The offering of shares in the equity of a company to the public for the first time.
IRR (Internal rate of return) The discount rate that makes the present value of a stream of cash flows equal to the initial investment(s).
Irredeemable (perpetual) Financial securities with no fixed maturity date at which the principal is repaid.
ISA (Individual Savings Account) A savings account with special tax privileges. The saver can invest savings in cash deposits, shares, insurance products and/or other securities.
ISIN number, International Securities Identification Number A code that uniquely identifies a specific securities issue (e.g. bond, share, futures, options).
iShares A type of exchange traded fund (ETF) created by Barclays Global Investors but now owned and run by BlackRock.
Issued share capital That part of a company’s share capital that has been subscribed by shareholders, either paid up or partially paid up. See also Called-up share capital.
Issuing house An organisation (usually an investment bank or stockbroker) that lends its reputation to a new issue of securities, advises the client company (along with the issuing broker) and co-ordinates the new issue process.
Joint stock enterprise The ownership (share) capital is divided into small units, permitting a number of investors to contribute varying amounts to the total. Profits are divided between stockholders in proportion to the number of shares they own.
Joint venture A business operation (usually a separate company) is jointly owned by two or more parent firms. The term also applies to strategic alliances between companies where they collaborate on, for example, research.
Junior debt (junior security) A debt which ranks below another liability in order of priority for payment of interest or principal.
Junk bonds Low quality, low credit-rated, company bonds rated below investment-grade (below BBB or Baa). Risky and with a high yield.
Key investor information document (KIID) Produced by a collective investment fund, e.g. unit trust, and sets out the most important facts about the fund (e.g. fees) in standardised, jargon-free way, allowing comparison between funds to allow investors to assess which funds might suit their investment needs at a reasonable cost.
Key performance indicators (KPIs) Most companies include a number of KPIs in their reports and accounts, comparing actual performance based on these metrics against targets and against previous years, accompanied by a discussion of outcomes and aspirations. Examples: return on capital employed, customer satisfaction ratings.
Kicker 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.
Kick-out plans Investment deals offered by financial institutions which pay the investor their original capital plus a coupon if the share index (e.g. FTSE 100) is above its level at the beginning of the plan. If it is not, the payout occurs at subsequent anniversaries if the index has at least maintained its start level.