L

Leveraged Buyout

The acquisition of another company using a significant amount of borrowed money – raised in the form of bonds or loans – to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company.

Limit order

An order to buy or sell a stated amount of a stock at a specified price.

Liquid Market

Describes the condition of a stock market where selling and buying is easily accomplished because a larger number of buyers and sellers are keen to trade and invest.

Liquidity

The ease with which a share or other investment can be sold with little expense and minimum delay. An example of a highly liquid asset is a short-term bank bill, while property is a relatively illiquid investment. For many securities, the degree of liquidity depends on the interest of investors. The term is also used to mean the amount of cash and reserves held by financial institutions, either to fund withdrawals or available for investment in stock markets.

Long Position

The buying of a security with the expectation of a rise in value, and therefore with the intention of holding the asset long term.

M

Market Capitalisation

The value of the total amount of various securities issued by a corporation, multiplied by the current market price of those securities.

Market order

An immediate order to buy or sell a share/stock at the most advantageous price available.

Maturity

The date when a loan, bond, mortgage or other debt is due to be repaid.

Medium Term Momentum

Price momentum versus benchmark over the past 12 months, unweighted.

Moving Averages

In statistics, a moving average or rolling average is one of a family of similar techniques used to analyse time series data. It is applied in finance and especially in technical analysis. It can also be used as a generic smoothing operation, in which case the raw data need not be a time series.

A moving average series can be calculated for any time series. In finance it is most often applied to stock prices, returns or trading volumes. Moving averages are used to smooth out short-term fluctuations, thus highlighting longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly.

Mathematically, each of these moving averages is an example of a convolution. These averages are also similar to the low-pass filters used in signal processing.

A simple moving average (SMA) is the unweighted mean of the previous n data points. For example, a 10-day simple moving average of closing price is the mean of the previous ten days’ closing prices. When calculating successive values, a new value comes into the sum and an old value drops out, meaning a full summation each time is unnecessary.

In technical analysis there are various popular values for n, like 10 days, 40 days or 200 days. The period selected depends on the kind of movement one is concentrating on, such as short, intermediate, or long term. In any case, moving average levels are interpreted as support in a rising market, or resistance in a falling market.

In all cases a moving average lags behind the latest data point, simply from the nature of its smoothing. An SMA can lag to an undesirable extent, and can be disproportionately influenced by old data points dropping out of the average. This addressed by giving extra weight to more recent data points, as in the weighted and exponential moving averages.

One characteristic of the SMA is that have a periodic fluctuation, then applying an SMA of that period will eliminate that variation. A perfectly regular cycle is rarely encountered in economics or finance.

For a number of applications it is advantageous to avoid the shifting induced by using only ‘past’ data. Hence a central moving average can be computed, using both ‘past’ and ‘future’ data. The ‘future’ data in this case are not predictions, but merely data obtained after the time at which the average is to be computed.

A weighted average is any average that has multiplying factors to give different weights to different data points. But in technical analysis a weighted moving average (WMA) has the specific meaning of weights which decrease arithmetically.

An exponential moving average (EMA), sometimes also called an exponentially weighted moving average (EWMA), applies weighting factors which decrease exponentially. The weighting for each older data point decrease exponentially, giving much more importance to recent observations while still not discarding older observations entirely.

N

NASDAQ

The NASDAQ (National Association of Securities Dealers Automated Quotient) is an American Stock Exchange. It is the largest electronic screen-based trading market in the United States. It lists more companies and on average trades more shares per day than any other U.S. market.

Negative Periods

The number of months over the last 12 months that a fund has reduced in value.

Net Asset Value

The total value of a company’s assets less liabilities divided by the number of ordinary shares in issue. Describes the underlying value of an investment trust’s share.

Nominee

An individual or company in whose name a security is registered although the real (or beneficial) ownership is actually held by another. Nominee companies are often used by share savings schemes to reduce costs and paperwork for private investors.

O

Offer Price (or Asking Price)

The price at which a holder of an asset is willing to sell.

Open End Fund

Another name for a unit trust. An investment fund in which the number of units in issue varies according to demand and where the value of the unit closely reflects the underlying value of the total assets.

Open-Ended Investment Company (OEIC)

A type of collective investment in company form that issues shares which trade at a single price. Like a unit trust, it can also redeem and create shares depending on demand. For more detailed information, please click here.

Options

A contract in which the holder has the option to buy or sell a fixed number of shares at a fixed price in a certain period.

Ordinary Shares

A share which represents an interest in a company. If the company has also issued preference shares, both have ownership rights. The preference shareholder normally is limited to a fixed dividend, but has prior claim on dividends and, in the event of liquidation, assets. Ordinary shareholders assume the greater risk, but generally exercise greater control and may gain the greater reward from dividends and capital appreciation.

Overweight

A term used by fund managers which describes the relative amount of shares of a company they hold. Representing a comparison between their position and an index or benchmark, holding more shares is called being overweight, having the same proportion is known as being neutral, and less is being underweight.

P

Passive Management

A style of investment management that seeks to return the same as an index. In other words, another name for tracking. A more complex tracking method can tilt investment with the aim of producing improved returns.

Personal Equity Plans (PEPs)

PEPs were very popular tax-free schemes for personal investment in unit trusts, investment trusts and shares. They were closed for new business in April 1999. Latterly, PEPs could be transferred to another manager and the underlying investments could be changed. However, from 6 April 2008 all PEPs automatically became Stocks and Shares ISAs and became subject to ISA rules.

Portfolio

Mainly used to describe the investments of a fund which form the main component of its total assets.

Position

A word used to mean a commitment to an investment or assets or market. In addition, a buyer of a futures contract has a long position, while the seller of a futures contract has a short position.

Positive Periods

The number of months over the last 12 months that a fund has grown in value.

Preference Shares

Please see Ordinary Shares.

Proxy

Written authorisation given by a shareholder for another person to vote at a shareholders’ meeting.

Purchasing power parity (PPP) or The Big Mac Index

A theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.

Q

Quantitative Management

An approach to investment management which uses statistical or numerical methods to create portfolios, which are considered to be efficient in maximising returns. Quantitative management attempts to produce extra value by exploiting pricing anomalies, or by special measures to control risk.

Quartile

1st quartile means ranked in the top 25%, 2nd means ranked in the next 25% and so on.

R

R Squared

A measurement of how closely a portfolio’s performance correlates with the performance of a benchmark index. An R Squared of 0 signifies no correlation at all whereas an R Squared of 1.0 (100%) indicates a perfect fit. R Squared is a key ratio, in that other measures of a fund’s performance – such as Alpha and Beta – will have been calculated by reference to its benchmark. The weaker the R Square correlation, the more unsuitable the benchmark is and the more unreliable these measures will be in assessing the fund.

Rally

A brisk rise in a stock market following a fall in share prices.

Ratings

Ratings are provided by independent rating agencies based on a number of investment criteria. An ‘AAA’ rating is the highest possible for Standard & Poor’s, Forsyth-OBSR and Citywire. A 5 star rating is the highest possible for fund star ratings.

Real Return

The inflation-adjusted return.

Realise

To sell an investment (when it is thought to have risen markedly), so fund managers talk about realising profits on a holding.

Realising Profits

An opportunity to sell an investment when it has risen markedly or to anticipated levels.

Redemption Yield

Gives a long-term view, taking into account expected capital repayments and income payments, should bonds be held for 10 years.

Relative Performance

The return that an asset/fund achieves over a period of time compared to a benchmark. Effectively, the difference between the asset/fund’s absolute return and that of the comparative measure (i.e. its benchmark).

Return on Equity

Net income before preferred dividends divided by the book value of shareholders’ common equity.

Running Yield

Gives an indication of the income to be paid based on the fund’s current holdings.