Showing posts with label financial jargon. Show all posts
Showing posts with label financial jargon. Show all posts

Wednesday 21 October 2009

Financial jargon

November 26, 2007
The 50 weirdest terms of financial jargon – and what they actually mean

Flummoxed by front-end loading? Bamboozled by bridging? Don’t know if your cap is split or your asset orphaned?

Here is Times Money’s alternative guide, for anyone who blushes at the mention of cum-dividends, or thinks churning is something that only happens to dairy products.

1. AER – Annual Equivalent Rate refers to the actual rate of interest you will receive on savings and current accounts after a year. It is different to the gross rate because the AER takes into account how frequently the interest is applied. Daily is better than monthly, because of the effects of compounding. It is useful to know, because most accounts have a bonus rate for a few months, which is later replaced by more bog-standard rewards.

2. Amortisation – It sounds like something to do with death, and in fact, it is. It is to do with the depreciation of intangible assets, or alternatively, the process by which the decrease in value of an asset is calculated, ie. The intangible bit is important. Tangible assets, like Volvos, depreciate. Intangible assets, like a patent or brand, amortise.

3. Annuity – Not something that young people need to worry about, but anyone approaching or already in retirement definitely needs to care about these, because they will have to buy one. Annuities are Government-enforced income plans that you must buy with your pension to provide you with an income. They are enforced because people over a certain age cannot be trusted not to squander their retirement pots in one go, on things like round the world cruises or expensive drumkits. The Government doesn’t want this to happen because it would then be forced to pay out more state pension money.

4. APR – like AER, only it means the amount of interest you will pay on mortgages, loans and credit cards. You want a nice a low one. Mortgage lenders will quote a headline interest rate which lasts for a set time period, then a (usually much higher) APR, which is what you would pay if you stayed on that mortgage for the full term. If you thought that only dullards did not know what an APR was, note that 71 per cent of 16-18 year olds recently questioned thought that a high APR was a good attribute on a credit card. This does not necessarily disprove the point.

5. Bear – Not the grizzly kind. A way of describing the stock market or an attitude towards the economic outlook. Describing someone as bearish does not mean they are large and hairy, it means that they have a cautious and conservative outlook, and are more inclined to be pessimistic. A bear market is characterised by falling share prices and poor returns. Bear times are bad times.

6. Beta - Inexplicably, beta, in the finance world, measures the volatility of a share relative to other markets and is nothing to do with them being second rate, as Greek etymologists might assume. Something that has a beta of more than 1 is more volatile than other shares in the index, while something with a beta less than 1 is considered relatively stable. Risk-takers like betas. Buying a beta is the stock-market equivalent of magic mushrooms - you never know whether you will end up higher or lower.

7. Bonds Bonds is a restaurant in the heart of the City of London where top bankers meet, as well as a famous Australian underwear manufacturer. The term also refers to something altogether less exciting, a type of investment where the investor lends money to a company for a period of more than one year that is then repaid at a specified time, with interest. If it helps: Bonds are good, ie James Bond, but bills are bad, ie. Bill Clinton, an economics teacher once said. Bonds are not always good, however. They are safer than buying shares, but they do not have the potential to make you higher returns. They are for people who do not like surprises.

8. Bridging – A bridge is a structure spanning and providing passage over a gap or barrier, such as a river or roadway. It is also the upper bony ridge of the human nose. In finance however, bridging is a type of loan that provides short-term funding before long-term funding is secure. This could be particularly relevant if you are building your own house or setting up a business because this is what lenders are likely to offer if they don’t trust you completely, but think you might be on to something.

9. Bull - The opposite of bear. A bull market is strong, aggressive and opportunistic. Being bullish in the City is a good thing. It basically means optimistic about the outlook.


10. CAT – Short for catastrophe bond. These are issued by insurance companies to raise finance in the event of a catastrophe. Dead cats can also be bounced, according to stock market investors (see below).



11. Churning – Anchor butter does it to milk, but in finance, this refers to a fairly mercenary practice by stockbrokers and IFAs, whereby they buy and sell stocks for clients in large volumes frequently to make more money in commission. In business, a churn rate also refers to the attrition of customers. A high churn rate therefore means lots of new business coming in and going out, while a low one means customers stay put.

12. Compound Interest – There is no better illustration of the benefits of compound interest, which basically means earning interest on interest already paid, than here

13. Cum dividend – The word is latin for “with”, hence cum-dividend, benignly, relates to a share sale made close to the time that the dividend is due to be paid out that will still be eligible for the dividend. Nice if you can get it.

14. Dead cat bounce – Don't call the RSPCA, the bounce refers to a stock market phenomenon, where a temporary recovery in the market follows a long and pronounced period of decline. What this has to do with dead cats is unclear.

15. Endowment – If your mortgage broker says you are well-endowed, don’t slap him across the face straight away – he could be commenting on the performance of your mortgage investment vehicle. Endowments are investments that were originally sold alongside mortgages that are designed to grow in value by enough over the period to pay off the loan. They also provide some life insurance cover to the holder. However, endowments have a black mark against them, after a big misselling scandal left many homeowners without enough to pay off their mortgage.

16. Equity – another way of saying value, for instance, of a home or share. With homes, it relates to only that part which represents debt-free value. It also means impartial and fair, although these attributes do not necessarily apply.

17. Ex-dividend – Not a perk of divorce, a share sold ex-dividend means that the buyer is not entitled to any recent dividend payments on the share and has to wait until next time around. Thus, shares sold ex-dividend are often a bit cheaper than their cum-dividend cousins.

18. Front-end loading – In a lad’s mag, this could mean all sorts of things that have no place in a financial glossary. What it actually refers to, however, is the fee that advisers lump onto a mutual fund or insurance policy at the time they sell it to you, meaning you end up with a smaller investment at the beginning. Advisers argue it is the cost of their expertise, but the jury is very much out about whether loading is a good thing.

19. Future – Buying a future means entering into a contract to buy an asset at a certain time at its future selling price. It’s a bit of a gamble, since no one knows what that future price will be. Future traders would find one of these useful.

20. Gearing – It sounds like something Jeremy Clarkson might talk about, but it is actually just another word to describe borrowing. However with gearing, the borrowing is done expressly for the purpose of investing more. Investment trusts gear, for example.

21. Gilt – Gold-edging is not just an interior design feature. A gilt is also another word for a Government bond, also known as a risk-free bond, because when you are the Government and you owe people cash when their bonds mature, you can just print more.

22. Gross – Can describe slugs, eels and ugly people kissing. It also means amount received before tax is paid. For instance, your gross income will always be startlingly higher than your net income – by around 30 per cent in the UK according to one study. Much better to live in Dubai, where net income is only 5 per cent lower than gross, on average. Same applies to gross interest.

23. Hedging – Nothing to do with green leafy boundaries and everything to do with funds and betting. Hedging means taking two positions that will offset each other if prices change and so limiting financial risk. In Roulette, the ultimate hedge bet is putting your money on both red and black, however this is pointless and bound to lose half your money. Hedge fund managers are far more clever than that.

24. Illiquid – On the liquidity scale, think of cash as water and things like houses as rocks. Liquid assets are those which can be accessed easily to buy other things, Illiquid assets are harder to turn into ready money than things like cash and cheques.

25. Intestacy – A mistake Paul McCartney would definitely not have made. This means dying without a will, and is a big no-no for anyone with rich with a big family who do not get on. If you die intestate, then everything automatically goes to the next of kin, which can obviously cause major family rifts if the next of kin is a loathed step-mother or sibling.

26. Junk bond – These offer high interest but are high risk. The lyrics to this song should help you remember.

27. Leverage – A word that will provoke a wince from investment bankers right now, leveraging is the main reason that banks across the world are in so much trouble. It means borrowing to complete a transaction. Private equity houses do a lot of it when they buy out a company. The problem now is that since the credit crunch, no one trusts anyone to pay back the money they borrow. The general view is that too much leveraging has been going on and that banks are now at risk.

28. Liabilities – People running around with scissors, Britney Spears, and also debts. A liability is anything you owe to someone else. If you are in debt, the phrase “I have a few liabilities” sounds less controversial, if a bit silly.

29. LTV – If mortgage lenders owned their own Sky channel, this is what they would call it. It means loan-to-value, and is the maximum proportion of a property’s value that a lender is willing to lend on. High LTVs are for people who have not saved up much, and come with higher interest rates. Low LTVs come with much lower rates, but require big deposits of 30 per cent of the property’s value. A real headache for first-time buyers. It looks like mortgage TV is only one step away.

30. Margin – This is the difference between costs and revenue and basically means the amount of profit. Obviously, you want a nice big one, like him.

31. Mutual – Is a lovely word that conjures up all sorts of feelings of warmth and reciprocity, which is arguably why building societies, which are mutual, are apparently so well liked. A mutual company does not have shareholders. Instead, it shares out profits between its customers, or “members”. If you couldn't care less about mutual values, what you want is a demutualisation. This gives you a taste of what it must feel like to win the lottery, because you could get a nice big cash windfall.

32. NAV – Nothing to do with Satellite Navigation systems or these boys, a NAV is the Net Asset Value of a mutual fund share. This is calculated by subtracting a mutual fund’s liabilities from its assets.

33. Negative equity – Lots of people who took out mortgages for 100 per cent or more of the value of their properties are in danger of this, which translates as losing money on your house. During times when house prices are falling, more homeowners are at risk of this. So expect to hear lots about negative equity in coming months then, if this forecast comes true.

34. Net – simply means amount of money left after tax is paid. Usually looks pitiful when compared with your gross salary.

35. Nominal – means a value not adjusted to take account of inflation. Inflation is pretty high at the moment, and looks set to carry on rising, so nominal values should basically be ignored, as they might lead you to think that something is worth more than it actually is.

36. OEIC - pronounced OIK, like the word that tweedy men use to describe teenagers who play music on their iPods loudly in public. OEIC stands for an Open-ended investment company, which invests in other companies. It is open-ended because it can increase or decrease the amount of shares in issue at will.

37. Option – Unimaginatively titled, an option is a contract that gives a share buyer the right to buy or sell a stock at a given price until a specific date. Yet another way of making the stock market more interesting and lucrative. Do you ever get the feeling that city boys just make stuff up as they go along?

38. Orphan - The rather tragically-named orphan assets are so-called because they are the unclaimed pots of cash built up by with-profits funds, to which no-one is really entitled. What to do with these assets has become the subject of controversy. Can companies hold on to them to boost balance sheets or should they divide the spoils between policyholders and shareholders?

39. PEP – This stands for Personal Equity Plan. They are the O-levels of the tax efficient investment world - you can’t get them anymore – they were replaced by Isas in 1999, but some people still have them. Like Isas, they were designed as a tax-efficient way of investing in the stock market.

40. Preference – We all have them, but in finance, a preference is naturally more complicated than, say, favouring tea over coffee. A preference share is one which pays a fixed rate of interest. So, like insurance, it is only actually preferential in the bad times. They are lower risk than normal shares because if a company goes bust, then preference shareholders will be at the front of the queue for payouts. Good news, if you have preferential shares in Northern Rock, perhaps. But this rarely happens. On the downside, if a company does well, preference shareholders will not benefit as much as normal ones, who will receive bigger returns.

41. Price-earnings ratio – a company’s current share price compared to its earnings per share. That obviously still means nothing. So just remember that a high one means investors are expecting higher earnings growth in the future, whereas a low one is more pessimistic. Only compare the PE ratios of companies in the same industry.

42. Redemption – Hedonists and erring Christians seek it, and so do investors who want the money they put in bonds or shares back, thank you very much.

43. Scrip – It sounds cooler than it is. A way of paying something via a means other than money. Scrips are things like gift tokens, points and tickets that act as a subsititute for cash.

44. Sipp – SIPP stands for Self-Invested Personal Pension. In the pensions world, these are sexy. They are the Agent Provocateur lingerie of pensions, compared with other more Spanx-like products, such as stakeholders. This is because they are more flexible, as well as more expensive. They look prettier, because you can put things like your art collection in them. Pension advisers get very excited about these because they can make lots of money from selling them to you, but this doesn’t mean you should. Only those who think Agent Provacateur lingerie is a bargain need apply.

45. Split-cap – Can lead to pregnancy in another context, but investors are more likely to assume you are talking about a type of investment trust that splits capital growth from income. A full definition would take a while, but there is one here. A horrible misselling scandal in 2004 meant that they became as unpopular for a while, but there are reports that they are beginning to regain popularity.

46. Stagging – Where two male deer lock antlers? No. It describes the act of buying a share at its initial public offering price and selling it on immediately for a profit. It is also called flipping. Honestly, who invents these words?

47. Stagflation – The English language just keeps on giving. Stagflation describes an economic period of high inflation, low growth, rising unemployment and recession. The word comes from the marriage of stagnation and inflation, apparently. Expect to hear this word more often from taxi drivers and economists when debating whether the Bank of England should cut interest rates.

48. Serps – Not a sexually transmitted disease, SERPs was the State Earnings Related Pension Scheme set up provide a second pension income, on top of the basic state pension, for people who did not have occupational schemes. The system has now been replaced by the State Second Pension, or S2P, which is the Government’s way of making pension savings sound cool. Unfortunately however, it sounds too much like Y2K – the millennium computer bug that sparked fears of Armageddon, to ever go down well.

49. Underwriter – A company that stumps up the money behind insurance policies. These people have extraordinary power in society, because they can work out things like when you are likely to die.

50. Wind-up – It means something else to humourists, and Jeremy Beadle. In the world of money, it means when a company ceases activity with a view to shutting down altogether. It can also refer to a way of ending a pension scheme, or a relationship, if you want to dump someone: "I'd like to wind things up with you", should do the trick, or alternatively, do what this guy did. It's time to do that here too.

Compiled by Rebecca O'Connor



Posted by Rebecca O'Connor on November 26, 2007

http://timesbusiness.typepad.com/money_weblog/2007/11/the-top-50-mo-1.html