AAA
The highest rating assigned by a number of credit rating agencies, indicating the relative security of an issuer of debt. Usually accorded to quasi-government and large multinational corporate borrowers.
absolute return vehicles/strategies
Investment strategies targeting a positive return in absolute terms rather than relative to an index or other benchmark. These strategies avoid construction limitations imposed by the measurement against a specific benchmark. Often also referred to as cash plus funds. (See also hedge fund.)
accrued benefits
Benefits that an employee has earned to date based on his or her membership of a pension scheme. Accrued benefits are often calculated in relation to the employee’s salary and completed service.
accrued interest
Interest that has been earned but not yet received. The purchaser of a bond in the market pays the seller the value of the accrued interest, as the former will receive the full coupon when it is next paid.
ACT
See Advance Corporation Tax.
Active management
Approach to investment management which aims to outperform a particular market index or benchmark through asset allocation and/or selection decisions. (See also enhanced indexation, passive management.)
Active position
Difference between the actual level of investment made in a particular stock or asset class and the benchmark allocation or weighting of that investment.
Active return
Increase in the expected return on a portfolio from active management.
Active risk
Risk measured in terms of volatility of a portfolio’s return compared with that of the benchmark return, arising from active management. Some level of active risk is necessary to achieve active return. (See also tracking error.)
Activism
Intervention by shareholders using their ownership rights to influence the actions of corporate management with a view to enhancing the value of the company.
Actuarial assumption
Estimate made for the purposes of an actuarial valuation. Possible variables include life expectancy, return on investments, interest rates and growth in earnings. (See also actuarial valuation.)
Actuarial valuation
Professional assessment undertaken by an actuary to determine whether the assets of a plan are likely to be sufficient to meet the accrued benefits; normally carried out at least every three years, in line with legislative requirements.
Actuary
Professional who advises on financial issues relating to risks, probabilities and mortality, most frequently in relation to the financing of pension plans and insurance companies.
Additional voluntary contributions (AVC)
Contributions over and above a member’s contractual contributions to a pension plan, enabling him or her to accrue additional benefits.
Adjustable-rate mortgage (ARM)
Mortgage loan whose interest rate is raised or lowered periodically in accordance with a stated reference interest rate. ARM refers both to the original homeowner loan and to a securitised pool of such loans.
ADR
See American Depository Receipt.
Advance Corporation Tax (ACT)
Tax formerly paid by companies on dividends distributed to shareholders.
Agency broker
Broker/dealer who acts as agent between market makers and investors.
Agency trade
Undertaken on behalf of the client on a best endeavours (and best execution) basis. The client bears the risk (profit or loss) of price movements between giving and completing the order.
AIM
See Alternative Investment Market.
AIMR
Association for Investment Management and Research. See CFA Institute.
All-Share Index
See FTSE All-Share Index.
ALM
See asset/liability modelling.
Alpha
Incremental return added by an investment manager through active management.
Alpha transfer
Investment strategy combining active management in one asset class (the alpha) with strategic exposure to a different underlying asset class.
Alternative Investment Market (AIM)
Market operated by the London Stock Exchange for smaller companies. The requirements and costs of listing are less onerous than on the main stock exchange.
Alternative investments
Investments that do not fit into the mainstream areas of equities, bonds and property, and which would normally only form a small proportion of pension plan portfolios. Examples include private equity/venture capital, hedge funds and commodities. They are typically brought into a portfolio to increase diversification.
AMC
Annual management charge. See management charges.
American Depository Receipt (ADR)
Security issued by a US bank to represent shares of a foreign (i.e. non-US) company, which can be traded on a US stock exchange as if they were American securities. Similar securities are available on other stock markets.
American Stock Exchange (AMEX)
Stock exchange for certain US stocks not listed on the New York Stock Exchange (NYSE). AMEX stocks tend to be smaller than those listed on the NYSE.
American-style option
Option that can be exercised at any stage during its life, at or before expiration date. The value of an American-style option will always be greater than or equal to the value of a similar European- style option.
Amortisation
Repayment by instalments over a period of time.
Analyst
See investment analyst.
Annual percentage rate (APR)
Cost of debt that is paid by borrowers, expressed as an annualised figure.
Annualised return
Periodic rate of return converted into an equivalent one-year rate of return. For example, a return of 75% earned over five years converts to an average annualised return of 11.8% per year.
Annuity
Contract designed to provide regular payments to the policyholder in return for an initial lump sum payment. Annuities may have a guaranteed period and/or be payable for life. Payments may be fixed or may vary.
APR
See annual percentage rate.
Arbitrage
Risk-free profit derived from differences in price when the same or equivalent investment is traded on two or more markets or in more than one form. By taking advantage of price disparities between markets, arbitrageurs perform the economic function of making these markets trade more efficiently.
Asian option
Option whose price at expiration depends on the average value of the underlying asset over the life of the option.
Ask price
Lowest price for which an investor or dealer will sell a given security or commodity. Also called offer price.
Asset
Anything that has a monetary value.
Asset allocation
Distribution of investments across categories of assets, such as cash, equities and bonds. Asset allocation affects both risk and return and is a central concept in financial planning and investment management.
Asset-backed security
Security backed by a pool of notes or receivables against assets of a similar type, such as credit card receivables.
Asset carry
Return associated with holding an asset, if positive (e.g. interest earned by the holder of fixed income bond), or the cost of holding an asset, if negative (e.g. warehousing costs of holding commodities).
Asset class
Broad category of assets of a similar type— for example, equities, bonds, property and cash.
Asset/liability modelling (ALM)
Projection of future movements in assets and liabilities, and especially the relationship between the two. ALM is used to provide an insight into the likely effect of different asset allocation strategies on a pension scheme’s future financial position. (See also stochastic modelling.)
Asset manager
Firm or individual who manages (i.e. buys and sells) a portfolio of assets.
Asset stripping
Process of splitting up and selling parts of a business separately for profit-making purposes.
Asset swap
The exchange of a flow of payments from a given security (the asset) in return for a different set of cash flows.
Association for Investment Management and Research (AIMR)
See CFA Institute.
At par
Having a current price equal to face or par value.
At-the-money
Indicates that a traded option has no intrinsic value (positive or negative), i.e. the underlying share price is equal to the strike price.
Attribution
See performance attribution.
Audit
Unbiased examination and opinion of the financial statements of an organisation. It can be internal (by employees of the organisation) or external (by an outside firm).
Authorisation
Required by the Financial Services and Markets Act 2000 for any firm or individual who wants to conduct investment business in the UK, unless the firm is exempt from regulation under the Act.
Authorised share capital
Nominal amount of share capital that a company is authorised to issue, in terms of its articles of constitution.
Authorised unit trust
Unit trust which has been authorised by the FSA. (See also unit trust.)
Autorité des marchés financiers (AMF)
French regulatory body tasked with improving the efficiency of France’s financial regulatory system. Its three main functions are to protect investor interests, to set standards for the provision of investor-related information and to marshal the functioning of financial markets.
AVC
See additional voluntary contributions. (See also FSAVC.)
Average Daily Volume
Average daily volume of portfolio Weighted sum of the quantity of each asset to be traded divided by that asset’s average daily traded volume.
After-hours Trading
After-hours trading, also known as extended-hours trading, refers to trading that occurs outside of regular trading hours.
All-Or-None Order
An All-Or-None (AON) order is an order to buy or sell a stock that must be executed in its entirety, or not executed at all.
Alternative Trading Systems (ATSs)
Alternative Trading Systems (ATSs) are SEC-regulated electronic trading systems that match orders for buyers and sellers of securities.
Add-on Method
A method of paying interest where the interest is added onto the principal at maturity or interest payment dates.
Adjusted Futures Price
The cash-price equivalent reflected in the current futures price. This is calculated by taking the futures price times the conversion factor for the particular financial instrument (e.g., bond or note) being delivered.
Against Actuals
See Exchange For Physicals.
Associated Person (AP)
An individual who solicits orders, customers, or customer funds (or who supervises persons performing such duties) on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Adviser, or a Commodity Pool Operator.
At-the-Money Option
An option with a strike price that is equal, or approximately equal, to the current market price of the underlying futures contract.
Arbitrage
The simultaneous purchase and sale of similar commodities in different markets to take advantage of a price discrepancy.
Adjusted Futures Price
The cash-price equivalent reflected in the current futures price. This is calculated by taking the futures price times the conversion factor for the particular financial instrument (e.g., bond or note) being delivered.
