LCH Settles mutual indebtedness between a number of organisations. It settles trades for equity traders, derivative traders, bond traders and FX dealers, and guarantees all contracts. It often acts as counterparty to all trades on an exchange.
Lead manager In a new issue of securities (e.g. shares, bonds, syndicated loans) the lead manager controls and organises the issue. There may be joint lead managers, co-managers and regional lead managers.
Lead steer A term used to describe a dominant person with the power to induce others to follow.
Leasing The owner of an asset (lessor) grants the use of the asset to another party (lessee) for a specified period in return for regular rental payments. The asset does not become the property of the lessee at the end of the specified period. See also Finance lease; Operating lease.
Level 2 data (Level II) Online brokers provide streaming data on share prices. Level 2 data allow the investor to observe a lot of detail about trades (e.g. market makers’ transactions as they take place or the limit price which that investor put into the system in the search for a counterparty to buy or sell), allowing the investor a better feel for the supply and demand balance in the market.
Leverage (1) Borrowing or obtaining a large exposure to the movement on an underlying asset’s price with only a small amount initially committed, as in a derivative deal. (2) The proportion of debt capital in the overall capital structure.
Leveraged buyout (LBO) The acquisition of a company, subsidiary or unit by another, financed mainly by borrowings.
Leveraged recapitalisation The financial structure (debt–equity ratio) of the firm is altered in such a way that it becomes highly geared.
Liability An obligation to pay a debt.
LIBOR (London Inter-Bank Offered Rate) The rate of interest obtainable by highly rated (low-risk) banks in the London interbank market for a specific period (e.g. three months). Used as a reference rate for other loans.
Life insurance or life assurance Insurance against death. Beneficiaries receive payment upon death of the policyholder or other person named in the policy. Endowment policies offer a savings vehicle as well as cover against death.
Lifestyle pension fund Invests mostly in equities when the investor is decades away from retirement and then gradually switches to cash and bonds as retirement approaches.
Lifetime ISA A type of individual savings account which allows contribution of up to £4,000 per year. The government will add 25% of the amount saved. Interest, dividends and capital gains made within the fund are tax free. The money can be used to buy a first home or drawn on in retirement.
LIFFE (London International Financial Futures and Options Exchange) The former name of main derivatives exchange in London, now owned by the Intercontinental Exchange and renamed ICE Futures Europe.
Limit order/prices A type of buy or sell order instruction given by an investor to a broker to buy a quantity of a security at or below a specified price or to sell at or above a specified price.
Limited company (Ltd) ‘Private’ company with no minimum amount of share capital, but with restrictions on the range of investors who can be offered shares. Limited liability for the debts of the firm is granted to the shareholders. It cannot be quoted on the London Stock Exchange.
Limited liability The owners of shares in a business have a limit on their loss, set as the amount they have committed to invest in shares.
Liquid ratio The ratio of current assets, less inventory (stock), to total current liabilities.
Liquidation The winding up of the affairs of a company when it ceases business. This could be forced by an inability to make payment when due or it could be voluntary when shareholders choose to end the company. Assets are sold, liabilities paid (if sufficient funds) and the surplus (if any) is distributed to shareholders.
Liquidity The degree to which an asset can be sold quickly and easily without loss in value.
Liquidity risk (1) The risk that an organisation or individual may not have, or may not be able to raise, cash funds when needed. (2) For an equity investor illiquidity may arise because it becomes difficult to sell a shareholding quickly without moving the price against you.
Listed companies Those on the Official List of the United Kingdom Listing Authority.
Listed private equity (LPEQ) Funds which are companies investing in unquoted companies, but which have their own shares quoted on an exchange. A subset are private equity investment trusts.
Listing agreement The UK Listing Authority insists that a company signs a listing agreement committing the directors to certain standards of behaviour and levels of reporting to shareholders.
Listing particulars A document containing information about a company (or unit trust or OEIC), to assist with a new issue (initial public offering) by supplying detail about the company and how it operates.
Listing rules The regulations concerning the initial flotation of a listed company on a regulated stock market and the continuing requirements the company must meet.
Lloyd’s Insurance Market A medium-sized insurance business in London founded over two centuries ago. ‘Names’ supply the capital to back insurance policies. Names can now be limited liability companies rather than individuals with unlimited liability to pay up on an insurance policy.
LME (London Metal Exchange) Trades metals (e.g. lead, zinc, tin, aluminium and nickel) in spot, forward and option markets.
Loan stock A fixed-interest debt financial security. May be unsecured.
Local authority deposits Lending money to a UK local government authority.
London Metal Exchange (LME) Trades metals (e.g. lead, zinc, tin, aluminium and nickel) in spot, forward and option markets.
London Stock Exchange (LSE) The London market in which securities are bought and sold.
Long bond Often defined as bonds with more than 15 years to maturity, but there is some flexibility in this, so a 10-year bond is often described as being long.
Long-form report A report produced by accountants for the sponsor of a company being prepared for flotation. The report is detailed and confidential. It helps to reassure the sponsors when putting their name to the issue and provides the basis for the short-form report included in the prospectus.
Long position A positive exposure to a quantity. Owning a security or commodity; the opposite of a short position (selling).
Long-range structural analysis A process used to forecast the long-term rates of return of an industry.
Long/short strategy An investment strategy that takes long positions in some securities and short positions in others.
Long-term incentive plan (LTIP) A scheme designed to motivate senior managers and directors of a company by paying bonuses if certain targets are surpassed (e.g. share price has risen relative to market index).
Look-through earnings (true economic earnings) The profits for a holding company (or individual investor) with small percentage stakes (of the ordinary shares) in other companies not only includes the dividends received from those investees but also adds the retained earnings attributable to the holding company given its percentage stake. Thus a company owning 10 per cent of another company will add 10 per cent of the investee’s profits that year to derive look-through earnings. The accounting rules only permit the addition of dividends paid to investors and thus look-through earnings is not recognised by accountants, nor is it generally published.
Lot (piece) A standard unit of trading as set by convention or by the exchange regulating that trading (e.g. only multiples of 1,000 bonds are traded, each 1,000 being a ‘lot’).
Low-grade debt See Mezzanine finance; Junk bonds.
Lower-yield shares (stocks) Shares offering a relatively low dividend yield expected to grow rapidly. Often labelled ‘growth stocks’.
LPEQ (Listed private equity) Funds which are companies investing in unquoted companies, but which have their own shares quoted on an exchange. A subset are private equity investment trusts.
LSE (London Stock Exchange) The London market in which securities are bought and sold.
Ltd (Limited company) ‘Private’ company with no minimum amount of share capital, but with restrictions on the range of investors who can be offered shares. Limited liability for the debts of the firm is granted to the shareholders. It cannot be quoted on the London Stock Exchange.
M&A Merger and acquisition.
Macroeconomics The study of the relationships between broad economic aggregates: national income, saving, investment, balance of payments, inflation, taxation, etc.
Main Market The Official List of the London Stock Exchange, as opposed to the Alternative Investment Market.
Maintenance margin (futures) The level of margin that must be maintained on a futures account (usually at a clearing house). Daily marking to market of the position may reveal the necessity to put more money into the account to top up to the maintenance margin.
Making a book Market makers offering two prices: the price at which they are willing to buy (bid price) and the price they are willing to sell (offer price).
Managed fund A collective investment fund that allocates different proportions of the fund to UK equities, overseas equities, bonds, property and cash depending on the manager’s view on market returns.
Management buy-in (MBI) A new team of managers makes an offer to a company to buy the whole company, a subsidiary or a section of the company, with the intention of taking over the running of it themselves. Private equity organisations often provide the major part of the finance.
Management buy-out (MBO) A team of managers makes an offer to its employers to buy a whole business, a subsidiary or a section so that the managers own and run it themselves. Private equity is often used to finance the majority of the purchase price.
Managementism/managerialism Management not acting in shareholders’ best interests by pursuing objectives attractive to the management team. Three levels can be distinguished: (1) dishonest managers; (2) honest but incompetent managers; (3) honest and competent managers, but subject to the influence of conflicts of interest.
Management roadshow In an issue of shares (e.g. IPO, new issues) a management team from the company raising money, usually the chief executive and the chief financial officer, meet potential investors usually over a two-week period. They explain the business, the investment and the rationale for the money-raising. These meetings can be held in various regions or countries.
Manager risk The risk that you may choose a poor manager (e.g. of unit trust, OEICs) to invest your money.
Managing director (MD) An executive responsible for running a business.
Mandatory bid If 30 per cent or more of the shares of a company are acquired, the holder is required under Takeover Panel rules to bid for all the company’s shares.
Margin call A demand by a clearing house for a futures position taker to top up the margin held at the clearing house as the underlying moves unfavourably for the position holder.
Margin (futures) Money placed aside to back a futures purchase or sale. This is used to reassure the counterparty (effectively the clearing house in most cases) to the future that money will be available should the purchaser/seller renege on the deal.
Margin (market makers) The difference between the bid and offer prices announced by market makers.
Margin of safety A share should only be purchased when the value of a share is well in excess of the price paid. A probability of protection against loss under all normal or reasonably likely conditions or variations.
Market capitalisation The total value at market prices of the ordinary shares in issue for a company (or a stock market, or a sector of the stock market).
Market entry Firms that previously did not supply goods or services to this industry now do so.
Market 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.
Market in managerial control Teams of managers compete for control of corporate assets (e.g. through merger activity).
Market maker A person or organisation that stands ready to buy and sell shares (or other securities) from investors on their own behalf at the centre of the London Stock Exchange’s quote-driven system of share trading. Also known as a dealer.
Market order An investor instructs a broker to buy/sell at whatever is the current market price.
Market portfolio In finance theory it is a portfolio that contains all assets. Each asset is held in proportion to the asset’s share of the total market value of all the assets. A proxy for this is often employed (e.g. the FTSE 100 index).
Market power The ability to exercise some control over the price of the product.
Market risk That element of return variability from an asset which cannot be eliminated through diversification. Measured by beta. It comprises the risk factors common to all firms.
Market 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.
Market-to-book ratio Share price divided by capital invested per share (‘Capital invested’ is usually taken to be the balance sheet net assets).
Market value reduction (MVR) (Market value adjustor) An exit penalty that may be imposed on a with-profits policyholder should he/she withdraw money from the fund.
Market weightings The capitalisation of all the firms in an industry as a proportion of the total capitalisation of all the shares on the stock market.
Marking down Market makers adjust down bid and offer prices in response to news in anticipation of a high volume of sell orders at the previous price.
Marking to market The losses or gains on a derivative contract are assessed daily in reference to the value of the underlying price.
Matador A foreign bond issued in Spain.
Matched-bargain system Buy and sell orders for securities are entered on a central computer system, and investors are automatically matched according to the price and volume they entered. SETS is an example.
Maturity (Maturity date or Final maturity or Redemption date) The time when a financial security (e.g. a bond) is redeemed and the par value is paid to the lender.
Maturity structure The profile of the length of time to the redemption and repayment of a company’s various debts.
Maturity transformation Intermediaries offer securities with liquid and low-risk characteristics to induce primary investors to purchase or deposit funds. The money raised is made available to the ultimate borrowers on a long-term, illiquid basis.
Maximisation of long-term shareholder wealth The assumed objective of the firm in finance theory and the objective generally mouthed by executives.
Mean reversion The behaviour of financial markets is often characterised as reverting to the mean, in which an otherwise random process of price changes or returns tends over the medium- to long-term to move towards the average.
Medium-term note (MTN) A document setting out a promise from a borrower to pay the holders a specified sum on the maturity date and, in many cases, a coupon interest in the meantime. Maturity can range from nine months to 30 years. If denominated in a foreign currency, they are called euro medium-term notes.
Memorandum of Association Lays down the rules which govern a company and its relations with the outside world (e.g. states the objective of the company).
Merchant bank An alternative term for investment bank.
Merger The combining of two business entities under common ownership.
Mezzanine finance Unsecured debt or preference shares offering a high return with a high risk. Ranked behind secured debt but ahead of equity. It may carry an equity kicker.
Mid-market price A price between the offer and bid prices of a market maker at which shares (or other securities) can be bought and sold.
MiFID 1, the Markets in Financial Instruments Directive A European Union set of rules (launched in 2007) designed to engender greater competition in share trading in Europe. Brokers need to demonstrate they are achieving the keenest price and using the most efficient, cost-effective clearing and settlement systems. New exchanges sprang up to compete with the traditional national exchanges. These multilateral trading facilities (MTFs) took a significant share of trading in the large companies’ shares. MiFID also insists that some investors have to provide sufficient information to brokers to prove they have sufficient experience needed to invest in ‘complex’ structures such as hedge funds and derivatives.
MiFID II, MiFID 2, The Market in Financial Instruments Directive II. A second set of EU rules (launched in 2018) designed to strengthen investor protection and improve the functioning of markets making them more efficient, resilient and transparent. For example, more information on trades is made public, rules on financial product offerings and the quality of independent investment advice tightened and the appointment of a single officer in each financial services firm to protect client interests.
Mini-bonds A class of corporate bonds aimed at retail investors issued in small amounts usually by small companies. They are not vetted by the Financial Conduct Authority and have no secondary market.
Minority shareholder A shareholder who owns less than 50 per cent of the voting shares of a company.
MM Main Market on the London Stock Exchange.
Mobilisation of savings The flow of savings primarily from the household sector to the ultimate borrowers to invest in real assets. This process is encouraged by financial intermediaries.
Model Code for Directors’ Dealings UK Listing Authority rules for directors and senior staff dealing in shares of their own company.
Momentum investing Buying shares (or other securities) that have recently risen and selling shares that have recently fallen.
Monetary policy The deliberate control of the money supply and/or rates of interest by the central bank.
Money market Wholesale (large-volume) financial markets in which lending and borrowing take place on a short-term basis (less than one year). Example of instruments include Treasury bills, commercial paper and certificates of deposit.
Money rate of return The rate of return which includes a return to compensate for inflation.
Monopoly One producer in an industry. However, for Competition and Markets Authority purposes a monopoly is defined as a market share of 25 per cent.
Moral hazard The presence of a safety net (e.g. insurance policy) encourages adverse behaviour (e.g. carelessness). An incentive to take extraordinary risks (risks that tend to fall on others) aimed at rectifying a desperate position. The risk that a party to a transaction is not acting in good faith by providing misleading or inadequate information.
Mortgage-backed securities Securitised bonds backed by a collection of mortgage payments. Financial payments (e.g. a claim to a number of mortgage payments) which are not tradable can be repackaged into other securities (e.g. a bond) and then sold. These are called asset-backed securities (ABSs).
Mortgage debentures Bonds secured using property as collateral.
MSCI ACWI A market capitalization-weighted share index designed to provide a measure of maeket performance throughout the world. It includes shares from 23 developed countries and 26 emerging markets
MSCI EM, MSCI Emerging Markets Index A market capitalization-weighted share index comprising over 1,100 companies from 26 emerging markets.
MSCI World A market capitalization-weighted stock market index comprised of over 1,600 companies from developed stock exchanges throughout the world (23 countries).
Multi-bagger A share that rises to a multiple of the buying price.
Multilateral Trading Facilities (MTFs) Alternative trading venues for shares quoted on US and European stock exchanges.
Mutual fund A collective investment vehicle for shares or other financial securities. Many investors own stakes in the mutual fund which then invests in securities.
Mutually owned organisations Organisations run for the benefit of the members (usually the same as the consumers of the organisation’s output) and not for shareholders. Examples include some insurance organisations, building societies and the co-operative societies.
Naked (or uncovered) Long or short positioning in a derivative without an offsetting position in the underlying. See also Uncovered call option writing.
Nasdaq A large US stock exchange – second largest in the world
Nasdaq Nordic A series of computer-based information services and order execution system for the Scandinavian, Baltic and Caucassian countries. Part of the NASDAQ group. It includes the following stock exchanges: Copenhagen, Stockholm, Helsinki, Iceland, Tallinn, Riga, Vilnius, Armenia.
Nasdaq 100 A stock market index that tracks the 100 largest companies on the United States Nasdaq share market.
Nasdaq Composite An index of shares on the United States NASDAQ share market containing about 3300 shares.
National Fraud Authority Coordinates and oversees the fight against fraud in the UK.
National Savings Lending to the UK government through the purchase of bonds, and placing money into savings accounts.
NAV Net Asset Value.
Near-cash (near-money, quasi-money) Highly liquid financial assets but which are generally not usable for transactions such as buying an ice cream and therefore cannot be fully regarded as cash, e.g. Treasury bills.
Negative (restrictive) covenants Loan agreements conditions that restrict the actions and rights of the borrower until the debt has been repaid in full.
Negotiable (1) Transferable to another – free to be traded in financial markets. (2) Capable of being settled by agreements between the parties involved in a transaction.
Net asset value (net worth, net assets) (NAV) Total assets minus all the liabilities. Fixed assets, plus inventory, receivables (debtors), cash and other liquid assets, minus long- and short-term liabilities.
Net book value The original cost of an asset minus the accumulated depreciation for tangible assets or minus the amortisation for intangibles since their acquisition. The term can also be used for the totality of the balance sheet as an alternative phrase to net asset value.
Net current assets The difference between current assets and current liabilities.
Net interest yield Gross yield on a debt instrument less the tax payable on that interest.
Net operating cash flow Profit before depreciation, less periodic investment in net working capital.
Net present value (NPV) The present value of the expected cash flows associated with a project or other investment after discounting at a rate which reflects the value of the alternative use of the funds.
Net profit (net income) Profit after interest, tax and extraordinary charges and receipts.
Net realisable value What someone might reasonably be expected to pay less the costs of the sale.
Net worth Total assets minus all the liabilities. Fixed assets, plus inventory, receivables (debtors), cash and other liquid assets, minus long- and short-term liabilities.
New entrant A company entering a market area to compete with existing players.
New issue The sale of securities (e.g. debentures or shares), to raise additional finance or to float existing securities of a company on a stock exchange for the first time.
Nex Exchange Companies that do not want to pay the costs of flotation on the London Stock Exchange can gain a quotation on the London-based NEX Exchange. This allows their shareholders to buy and sell shares on a regulated exchange. It permits easier finance raising for the company, e.g. through a rights issue.
Niche company A fast-growing small to medium-sized firm operating in a niche business with high potential.
Nifty fifty Fifty shares declared in the late 1960s and early 1970s to have such a marvellous future that supposedly almost any multiple of current income could be justified as a share price.
Nikkei index or Nikkei 225 Stock Average A share index based on the prices of 225 shares quoted on the Tokyo Stock Exchange.
Nil paid rights Shareholders may sell the rights to purchase shares in a rights issue without having paid anything to obtain these rights.
Noise trading Uninformed investors buying and selling financial securities at irrational prices, thus creating noise (strange movements) in the price of securities. ‘Noise’ is derived from natural science: random interference in physical processes.
Nominal return (or nominal interest rate) The return on an investment including inflation. If the return necessary to compensate for the decline in purchasing power of money (inflation) is deducted from the nominal return we have the real rate of return.
Nominal value A stated and fixed nominal value of a share or bond. Not related to market value, which fluctuates.
Nominated adviser (Nomad) Each company on the Alternative Investment Market has to retain a nomad. They act as quality controllers, confirming to the London Stock Exchange that the company has complied with the rules. They also act as consultants to the company.
Nominated brokers Each company on the Alternative Investment Market has to retain a nominated broker, who helps to bring buyers and sellers together and comments on the firm’s prospects and advises the company on investor relations and market conditions for fund raising.
Nominee accounts An official holder of an asset is not the beneficial owner but merely holds the asset in a nominee account for the beneficiary. In the stock market, the most common use of nominee accounts is where execution-only brokers act as nominees for their clients. The shares are registered in the name of the broker, but the client has beneficial ownership of them.
Nominee company Brokers and investment managers hold investors’ shares electronically in a nominee company which appears as the registered owner. See also Dematerialisation and Nominee accounts.
Non-controlling (minority) shareholder One who has an insufficient percentage of the voting rights to control the composition of the board and how the company is run. Usually the cutoff is at 50 per cent of the votes, but in many cases shareholders with less than 50 per cent are deemed controlling shareholders. For accounting: a shareholder in a subsidiary
other than the parent company.
Non-executive (outside) director (NED) A director without day-to-day operational responsibility for the firm.
Non-voting shares A company may issue two or more classes of ordinary shares, one of which may not carry any votes.
Non-UCITS Retail Scheme (NURS) Funds authorised to be sold to the public in EU member states that are not governed by European regulation under the ‘UCITS directive’, because they invest in assets that the Directive does not permit or comply with different concentration limits. They only comply with domestic country regulations.
Normal market size (NMS) 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 exchange market size is an alternative.
Normal rate of return A rate of return that is just sufficient to induce shareholders to put money into the firm and hold it there.
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).
Note (promissory note) A financial security with the promise to pay a specific sum of money by a given date (e.g. commercial paper, floating rate notes). Usually unsecured.
Notional trading requirement A sum of money that has to be deposited by an investor with a spread betting company to reassure the company that the investor will not renege on the deal should the bet start to go against him or her.
NYSE The New York Stock Exchange.
Lead manager In a new issue of securities (e.g. shares, bonds, syndicated loans) the lead manager controls and organises the issue. There may be joint lead managers, co-managers and regional lead managers.
Lead steer A term used to describe a dominant person with the power to induce others to follow.
Leasing The owner of an asset (lessor) grants the use of the asset to another party (lessee) for a specified period in return for regular rental payments. The asset does not become the property of the lessee at the end of the specified period. See also Finance lease; Operating lease.
Level 2 data (Level II) Online brokers provide streaming data on share prices. Level 2 data allow the investor to observe a lot of detail about trades (e.g. market makers’ transactions as they take place or the limit price which that investor put into the system in the search for a counterparty to buy or sell), allowing the investor a better feel for the supply and demand balance in the market.
Leverage (1) Borrowing or obtaining a large exposure to the movement on an underlying asset’s price with only a small amount initially committed, as in a derivative deal. (2) The proportion of debt capital in the overall capital structure.
Leveraged buyout (LBO) The acquisition of a company, subsidiary or unit by another, financed mainly by borrowings.
Leveraged recapitalisation The financial structure (debt–equity ratio) of the firm is altered in such a way that it becomes highly geared.
Liability An obligation to pay a debt.
LIBOR (London Inter-Bank Offered Rate) The rate of interest obtainable by highly rated (low-risk) banks in the London interbank market for a specific period (e.g. three months). Used as a reference rate for other loans.
Life insurance or life assurance Insurance against death. Beneficiaries receive payment upon death of the policyholder or other person named in the policy. Endowment policies offer a savings vehicle as well as cover against death.
Lifestyle pension fund Invests mostly in equities when the investor is decades away from retirement and then gradually switches to cash and bonds as retirement approaches.
Lifetime ISA A type of individual savings account which allows contribution of up to £4,000 per year. The government will add 25% of the amount saved. Interest, dividends and capital gains made within the fund are tax free. The money can be used to buy a first home or drawn on in retirement.
LIFFE (London International Financial Futures and Options Exchange) The former name of main derivatives exchange in London, now owned by the Intercontinental Exchange and renamed ICE Futures Europe.
Limit order/prices A type of buy or sell order instruction given by an investor to a broker to buy a quantity of a security at or below a specified price or to sell at or above a specified price.
Limited company (Ltd) ‘Private’ company with no minimum amount of share capital, but with restrictions on the range of investors who can be offered shares. Limited liability for the debts of the firm is granted to the shareholders. It cannot be quoted on the London Stock Exchange.
Limited liability The owners of shares in a business have a limit on their loss, set as the amount they have committed to invest in shares.
Liquid ratio The ratio of current assets, less inventory (stock), to total current liabilities.
Liquidation The winding up of the affairs of a company when it ceases business. This could be forced by an inability to make payment when due or it could be voluntary when shareholders choose to end the company. Assets are sold, liabilities paid (if sufficient funds) and the surplus (if any) is distributed to shareholders.
Liquidity The degree to which an asset can be sold quickly and easily without loss in value.
Liquidity risk (1) The risk that an organisation or individual may not have, or may not be able to raise, cash funds when needed. (2) For an equity investor illiquidity may arise because it becomes difficult to sell a shareholding quickly without moving the price against you.
Listed companies Those on the Official List of the United Kingdom Listing Authority.
Listed private equity (LPEQ) Funds which are companies investing in unquoted companies, but which have their own shares quoted on an exchange. A subset are private equity investment trusts.
Listing agreement The UK Listing Authority insists that a company signs a listing agreement committing the directors to certain standards of behaviour and levels of reporting to shareholders.
Listing particulars A document containing information about a company (or unit trust or OEIC), to assist with a new issue (initial public offering) by supplying detail about the company and how it operates.
Listing rules The regulations concerning the initial flotation of a listed company on a regulated stock market and the continuing requirements the company must meet.
Lloyd’s Insurance Market A medium-sized insurance business in London founded over two centuries ago. ‘Names’ supply the capital to back insurance policies. Names can now be limited liability companies rather than individuals with unlimited liability to pay up on an insurance policy.
LME (London Metal Exchange) Trades metals (e.g. lead, zinc, tin, aluminium and nickel) in spot, forward and option markets.
Loan stock A fixed-interest debt financial security. May be unsecured.
Local authority deposits Lending money to a UK local government authority.
London Metal Exchange (LME) Trades metals (e.g. lead, zinc, tin, aluminium and nickel) in spot, forward and option markets.
London Stock Exchange (LSE) The London market in which securities are bought and sold.
Long bond Often defined as bonds with more than 15 years to maturity, but there is some flexibility in this, so a 10-year bond is often described as being long.
Long-form report A report produced by accountants for the sponsor of a company being prepared for flotation. The report is detailed and confidential. It helps to reassure the sponsors when putting their name to the issue and provides the basis for the short-form report included in the prospectus.
Long position A positive exposure to a quantity. Owning a security or commodity; the opposite of a short position (selling).
Long-range structural analysis A process used to forecast the long-term rates of return of an industry.
Long/short strategy An investment strategy that takes long positions in some securities and short positions in others.
Long-term incentive plan (LTIP) A scheme designed to motivate senior managers and directors of a company by paying bonuses if certain targets are surpassed (e.g. share price has risen relative to market index).
Look-through earnings (true economic earnings) The profits for a holding company (or individual investor) with small percentage stakes (of the ordinary shares) in other companies not only includes the dividends received from those investees but also adds the retained earnings attributable to the holding company given its percentage stake. Thus a company owning 10 per cent of another company will add 10 per cent of the investee’s profits that year to derive look-through earnings. The accounting rules only permit the addition of dividends paid to investors and thus look-through earnings is not recognised by accountants, nor is it generally published.
Lot (piece) A standard unit of trading as set by convention or by the exchange regulating that trading (e.g. only multiples of 1,000 bonds are traded, each 1,000 being a ‘lot’).
Low-grade debt See Mezzanine finance; Junk bonds.
Lower-yield shares (stocks) Shares offering a relatively low dividend yield expected to grow rapidly. Often labelled ‘growth stocks’.
LPEQ (Listed private equity) Funds which are companies investing in unquoted companies, but which have their own shares quoted on an exchange. A subset are private equity investment trusts.
LSE (London Stock Exchange) The London market in which securities are bought and sold.
Ltd (Limited company) ‘Private’ company with no minimum amount of share capital, but with restrictions on the range of investors who can be offered shares. Limited liability for the debts of the firm is granted to the shareholders. It cannot be quoted on the London Stock Exchange.
M&A Merger and acquisition.
Macroeconomics The study of the relationships between broad economic aggregates: national income, saving, investment, balance of payments, inflation, taxation, etc.
Main Market The Official List of the London Stock Exchange, as opposed to the Alternative Investment Market.
Maintenance margin (futures) The level of margin that must be maintained on a futures account (usually at a clearing house). Daily marking to market of the position may reveal the necessity to put more money into the account to top up to the maintenance margin.
Making a book Market makers offering two prices: the price at which they are willing to buy (bid price) and the price they are willing to sell (offer price).
Managed fund A collective investment fund that allocates different proportions of the fund to UK equities, overseas equities, bonds, property and cash depending on the manager’s view on market returns.
Management buy-in (MBI) A new team of managers makes an offer to a company to buy the whole company, a subsidiary or a section of the company, with the intention of taking over the running of it themselves. Private equity organisations often provide the major part of the finance.
Management buy-out (MBO) A team of managers makes an offer to its employers to buy a whole business, a subsidiary or a section so that the managers own and run it themselves. Private equity is often used to finance the majority of the purchase price.
Managementism/managerialism Management not acting in shareholders’ best interests by pursuing objectives attractive to the management team. Three levels can be distinguished: (1) dishonest managers; (2) honest but incompetent managers; (3) honest and competent managers, but subject to the influence of conflicts of interest.
Management roadshow In an issue of shares (e.g. IPO, new issues) a management team from the company raising money, usually the chief executive and the chief financial officer, meet potential investors usually over a two-week period. They explain the business, the investment and the rationale for the money-raising. These meetings can be held in various regions or countries.
Manager risk The risk that you may choose a poor manager (e.g. of unit trust, OEICs) to invest your money.
Managing director (MD) An executive responsible for running a business.
Mandatory bid If 30 per cent or more of the shares of a company are acquired, the holder is required under Takeover Panel rules to bid for all the company’s shares.
Margin call A demand by a clearing house for a futures position taker to top up the margin held at the clearing house as the underlying moves unfavourably for the position holder.
Margin (futures) Money placed aside to back a futures purchase or sale. This is used to reassure the counterparty (effectively the clearing house in most cases) to the future that money will be available should the purchaser/seller renege on the deal.
Margin (market makers) The difference between the bid and offer prices announced by market makers.
Margin of safety A share should only be purchased when the value of a share is well in excess of the price paid. A probability of protection against loss under all normal or reasonably likely conditions or variations.
Market capitalisation The total value at market prices of the ordinary shares in issue for a company (or a stock market, or a sector of the stock market).
Market entry Firms that previously did not supply goods or services to this industry now do so.
Market 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.
Market in managerial control Teams of managers compete for control of corporate assets (e.g. through merger activity).
Market maker A person or organisation that stands ready to buy and sell shares (or other securities) from investors on their own behalf at the centre of the London Stock Exchange’s quote-driven system of share trading. Also known as a dealer.
Market order An investor instructs a broker to buy/sell at whatever is the current market price.
Market portfolio In finance theory it is a portfolio that contains all assets. Each asset is held in proportion to the asset’s share of the total market value of all the assets. A proxy for this is often employed (e.g. the FTSE 100 index).
Market power The ability to exercise some control over the price of the product.
Market risk That element of return variability from an asset which cannot be eliminated through diversification. Measured by beta. It comprises the risk factors common to all firms.
Market 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.
Market-to-book ratio Share price divided by capital invested per share (‘Capital invested’ is usually taken to be the balance sheet net assets).
Market value reduction (MVR) (Market value adjustor) An exit penalty that may be imposed on a with-profits policyholder should he/she withdraw money from the fund.
Market weightings The capitalisation of all the firms in an industry as a proportion of the total capitalisation of all the shares on the stock market.
Marking down Market makers adjust down bid and offer prices in response to news in anticipation of a high volume of sell orders at the previous price.
Marking to market The losses or gains on a derivative contract are assessed daily in reference to the value of the underlying price.
Matador A foreign bond issued in Spain.
Matched-bargain system Buy and sell orders for securities are entered on a central computer system, and investors are automatically matched according to the price and volume they entered. SETS is an example.
Maturity (Maturity date or Final maturity or Redemption date) The time when a financial security (e.g. a bond) is redeemed and the par value is paid to the lender.
Maturity structure The profile of the length of time to the redemption and repayment of a company’s various debts.
Maturity transformation Intermediaries offer securities with liquid and low-risk characteristics to induce primary investors to purchase or deposit funds. The money raised is made available to the ultimate borrowers on a long-term, illiquid basis.
Maximisation of long-term shareholder wealth The assumed objective of the firm in finance theory and the objective generally mouthed by executives.
Mean reversion The behaviour of financial markets is often characterised as reverting to the mean, in which an otherwise random process of price changes or returns tends over the medium- to long-term to move towards the average.
Medium-term note (MTN) A document setting out a promise from a borrower to pay the holders a specified sum on the maturity date and, in many cases, a coupon interest in the meantime. Maturity can range from nine months to 30 years. If denominated in a foreign currency, they are called euro medium-term notes.
Memorandum of Association Lays down the rules which govern a company and its relations with the outside world (e.g. states the objective of the company).
Merchant bank An alternative term for investment bank.
Merger The combining of two business entities under common ownership.
Mezzanine finance Unsecured debt or preference shares offering a high return with a high risk. Ranked behind secured debt but ahead of equity. It may carry an equity kicker.
Mid-market price A price between the offer and bid prices of a market maker at which shares (or other securities) can be bought and sold.
MiFID 1, the Markets in Financial Instruments Directive A European Union set of rules (launched in 2007) designed to engender greater competition in share trading in Europe. Brokers need to demonstrate they are achieving the keenest price and using the most efficient, cost-effective clearing and settlement systems. New exchanges sprang up to compete with the traditional national exchanges. These multilateral trading facilities (MTFs) took a significant share of trading in the large companies’ shares. MiFID also insists that some investors have to provide sufficient information to brokers to prove they have sufficient experience needed to invest in ‘complex’ structures such as hedge funds and derivatives.
MiFID II, MiFID 2, The Market in Financial Instruments Directive II. A second set of EU rules (launched in 2018) designed to strengthen investor protection and improve the functioning of markets making them more efficient, resilient and transparent. For example, more information on trades is made public, rules on financial product offerings and the quality of independent investment advice tightened and the appointment of a single officer in each financial services firm to protect client interests.
Mini-bonds A class of corporate bonds aimed at retail investors issued in small amounts usually by small companies. They are not vetted by the Financial Conduct Authority and have no secondary market.
Minority shareholder A shareholder who owns less than 50 per cent of the voting shares of a company.
MM Main Market on the London Stock Exchange.
Mobilisation of savings The flow of savings primarily from the household sector to the ultimate borrowers to invest in real assets. This process is encouraged by financial intermediaries.
Model Code for Directors’ Dealings UK Listing Authority rules for directors and senior staff dealing in shares of their own company.
Momentum investing Buying shares (or other securities) that have recently risen and selling shares that have recently fallen.
Monetary policy The deliberate control of the money supply and/or rates of interest by the central bank.
Money market Wholesale (large-volume) financial markets in which lending and borrowing take place on a short-term basis (less than one year). Example of instruments include Treasury bills, commercial paper and certificates of deposit.
Money rate of return The rate of return which includes a return to compensate for inflation.
Monopoly One producer in an industry. However, for Competition and Markets Authority purposes a monopoly is defined as a market share of 25 per cent.
Moral hazard The presence of a safety net (e.g. insurance policy) encourages adverse behaviour (e.g. carelessness). An incentive to take extraordinary risks (risks that tend to fall on others) aimed at rectifying a desperate position. The risk that a party to a transaction is not acting in good faith by providing misleading or inadequate information.
Mortgage-backed securities Securitised bonds backed by a collection of mortgage payments. Financial payments (e.g. a claim to a number of mortgage payments) which are not tradable can be repackaged into other securities (e.g. a bond) and then sold. These are called asset-backed securities (ABSs).
Mortgage debentures Bonds secured using property as collateral.
MSCI ACWI A market capitalization-weighted share index designed to provide a measure of maeket performance throughout the world. It includes shares from 23 developed countries and 26 emerging markets
MSCI EM, MSCI Emerging Markets Index A market capitalization-weighted share index comprising over 1,100 companies from 26 emerging markets.
MSCI World A market capitalization-weighted stock market index comprised of over 1,600 companies from developed stock exchanges throughout the world (23 countries).
Multi-bagger A share that rises to a multiple of the buying price.
Multilateral Trading Facilities (MTFs) Alternative trading venues for shares quoted on US and European stock exchanges.
Mutual fund A collective investment vehicle for shares or other financial securities. Many investors own stakes in the mutual fund which then invests in securities.
Mutually owned organisations Organisations run for the benefit of the members (usually the same as the consumers of the organisation’s output) and not for shareholders. Examples include some insurance organisations, building societies and the co-operative societies.
Naked (or uncovered) Long or short positioning in a derivative without an offsetting position in the underlying. See also Uncovered call option writing.
Nasdaq A large US stock exchange – second largest in the world
Nasdaq Nordic A series of computer-based information services and order execution system for the Scandinavian, Baltic and Caucassian countries. Part of the NASDAQ group. It includes the following stock exchanges: Copenhagen, Stockholm, Helsinki, Iceland, Tallinn, Riga, Vilnius, Armenia.
Nasdaq 100 A stock market index that tracks the 100 largest companies on the United States Nasdaq share market.
Nasdaq Composite An index of shares on the United States NASDAQ share market containing about 3300 shares.
National Fraud Authority Coordinates and oversees the fight against fraud in the UK.
National Savings Lending to the UK government through the purchase of bonds, and placing money into savings accounts.
NAV Net Asset Value.
Near-cash (near-money, quasi-money) Highly liquid financial assets but which are generally not usable for transactions such as buying an ice cream and therefore cannot be fully regarded as cash, e.g. Treasury bills.
Negative (restrictive) covenants Loan agreements conditions that restrict the actions and rights of the borrower until the debt has been repaid in full.
Negotiable (1) Transferable to another – free to be traded in financial markets. (2) Capable of being settled by agreements between the parties involved in a transaction.
Net asset value (net worth, net assets) (NAV) Total assets minus all the liabilities. Fixed assets, plus inventory, receivables (debtors), cash and other liquid assets, minus long- and short-term liabilities.
Net book value The original cost of an asset minus the accumulated depreciation for tangible assets or minus the amortisation for intangibles since their acquisition. The term can also be used for the totality of the balance sheet as an alternative phrase to net asset value.
Net current assets The difference between current assets and current liabilities.
Net interest yield Gross yield on a debt instrument less the tax payable on that interest.
Net operating cash flow Profit before depreciation, less periodic investment in net working capital.
Net present value (NPV) The present value of the expected cash flows associated with a project or other investment after discounting at a rate which reflects the value of the alternative use of the funds.
Net profit (net income) Profit after interest, tax and extraordinary charges and receipts.
Net realisable value What someone might reasonably be expected to pay less the costs of the sale.
Net worth Total assets minus all the liabilities. Fixed assets, plus inventory, receivables (debtors), cash and other liquid assets, minus long- and short-term liabilities.
New entrant A company entering a market area to compete with existing players.
New issue The sale of securities (e.g. debentures or shares), to raise additional finance or to float existing securities of a company on a stock exchange for the first time.
Nex Exchange Companies that do not want to pay the costs of flotation on the London Stock Exchange can gain a quotation on the London-based NEX Exchange. This allows their shareholders to buy and sell shares on a regulated exchange. It permits easier finance raising for the company, e.g. through a rights issue.
Niche company A fast-growing small to medium-sized firm operating in a niche business with high potential.
Nifty fifty Fifty shares declared in the late 1960s and early 1970s to have such a marvellous future that supposedly almost any multiple of current income could be justified as a share price.
Nikkei index or Nikkei 225 Stock Average A share index based on the prices of 225 shares quoted on the Tokyo Stock Exchange.
Nil paid rights Shareholders may sell the rights to purchase shares in a rights issue without having paid anything to obtain these rights.
Noise trading Uninformed investors buying and selling financial securities at irrational prices, thus creating noise (strange movements) in the price of securities. ‘Noise’ is derived from natural science: random interference in physical processes.
Nominal return (or nominal interest rate) The return on an investment including inflation. If the return necessary to compensate for the decline in purchasing power of money (inflation) is deducted from the nominal return we have the real rate of return.
Nominal value A stated and fixed nominal value of a share or bond. Not related to market value, which fluctuates.
Nominated adviser (Nomad) Each company on the Alternative Investment Market has to retain a nomad. They act as quality controllers, confirming to the London Stock Exchange that the company has complied with the rules. They also act as consultants to the company.
Nominated brokers Each company on the Alternative Investment Market has to retain a nominated broker, who helps to bring buyers and sellers together and comments on the firm’s prospects and advises the company on investor relations and market conditions for fund raising.
Nominee accounts An official holder of an asset is not the beneficial owner but merely holds the asset in a nominee account for the beneficiary. In the stock market, the most common use of nominee accounts is where execution-only brokers act as nominees for their clients. The shares are registered in the name of the broker, but the client has beneficial ownership of them.
Nominee company Brokers and investment managers hold investors’ shares electronically in a nominee company which appears as the registered owner. See also Dematerialisation and Nominee accounts.
Non-controlling (minority) shareholder One who has an insufficient percentage of the voting rights to control the composition of the board and how the company is run. Usually the cutoff is at 50 per cent of the votes, but in many cases shareholders with less than 50 per cent are deemed controlling shareholders. For accounting: a shareholder in a subsidiary
other than the parent company.
Non-executive (outside) director (NED) A director without day-to-day operational responsibility for the firm.
Non-voting shares A company may issue two or more classes of ordinary shares, one of which may not carry any votes.
Non-UCITS Retail Scheme (NURS) Funds authorised to be sold to the public in EU member states that are not governed by European regulation under the ‘UCITS directive’, because they invest in assets that the Directive does not permit or comply with different concentration limits. They only comply with domestic country regulations.
Normal market size (NMS) 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 exchange market size is an alternative.
Normal rate of return A rate of return that is just sufficient to induce shareholders to put money into the firm and hold it there.
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).
Note (promissory note) A financial security with the promise to pay a specific sum of money by a given date (e.g. commercial paper, floating rate notes). Usually unsecured.
Notional trading requirement A sum of money that has to be deposited by an investor with a spread betting company to reassure the company that the investor will not renege on the deal should the bet start to go against him or her.
NYSE The New York Stock Exchange.