Banking Glossary
ACH Automated Clearing House
ADR American Depository Receipt.
Issued by non US companies to represent their shares in the US markets,
this encourages US citizens to purchase the shares of non-US companies.
ADR’S can be traded on the London market.
Alternative Investment Market (AIM)
AIM opened in 1995 for small, growing companies. It is less difficult to
be listed here than on the London Stock Exchange and shares are higher
risk and more likely to be difficult to buy and sell.
Annuity
The investment you purchase with your pension fund which will provide
you with a regular income in your retirement.
APACS Association of Payment and Clearing Systems
Arbitrage
The activity of dealing in 2 parallel markets, or part of a market
borrowing funds or buying an asset in one market and simultaneously
lending the funds or selling the asset in a different market in order to
achieve a profit.
Australian-Type Mortgage (Flexible Mortgage)
Mortgage interest due is calculated daily as opposed to yearly, which can
make a significant difference to the cost of those on a repayment
mortgage. Also more flexible and allows periods of both under- and
over-payment of the mortgage to suit the borrower’s changing financial
circumstances.
Automated Bank Giro Credit
An electronic transfer involving BACS.
Back-to back
An arrangement whereby a lessor leases equipment to a sub-lessor, who,
in turn, leases the same equipment to the final lessee (end-user).
BACS Banker Automated Clearing Services
Balloon Payment
The large rental payment at the end of the lease period.
Balloon Repayment
Loan involving increasing repayments as the term progresses.
Bank of England
Set up in 1649, the “Old Lady of Threadneedle Street” has responsibility
for regulating the banking industry and since 1997 sets interest rates to
help the government meet its inflation targets.
Basis
In financial futures terminology, the Cash price minus the futures price.
Basis Point
One hundredth part of one per cent.
Bearer Bond
A bond, the ownership of which is not recorded by its issuer.
Bear Market
If traders think that the stock market is vulnerable and prices will fall, it
is known as a BEAR market.
Bid-Offer Spread
The difference between the bid price ( at which the holder can sell
shares) and the offer price (at which the holder can buy shares). On
occasion this can be quite large and depends on the equity’s underlying
price, liquidity, volatility and a number of other factors. Many unit trusts
also have a bid-offer spread and effectively this amounts to an extra exit
charge when the investor sells.
Big Bang
The first big shake-up of the stock market in October 1986, when
computers were introduced into the trading process for the first time.
Big Bang II
October 20th 1997. The use of a computer-driven trading system to cut
out the middlemen in share trading, who match buyers and sellers.
Initially this was just for FTSE 100 shares, but is likely to be extended to
the FTSE 250. Bid-offer spreads, rather than being reduced, as was
thought, actually increased especially during trading early in the day.
Big Ticket
A term used to signify large/complex leasing transactions with non-
standard terms and conditions.
Bill
A piece of negotiable money market paper having a maturity of up to one
year.
BLOC Buy Low Or Call
Blue Chip
A share in a large, safe, prestigious company.
Bond
A bond is essentially a loan. Bondholders lend money to governments or
companies and are promised a certain rate of interest in return. Interest
rates vary depending on the quality or reliability of the bond issuer.
Government bonds, or gilts, for example, carry little risk and thus offer
lower interest rates. The riskiest companies’ (or governments’) bonds
offering the highest interest rates are called junk bonds.
Bonus Issue
(Stock Split in USA). Whenever a company believes that the price per
share of its stock has risen to a point where investors may perceive it as
“expensive”, they will split the stock, reducing the price but increasing
the number of shares.
Bull Market
If traders think that the stock market is healthy and shares are going to go
up, it is known as a Bull market.
Bullet Payment
A large rental payment at the start of the lease period.
Bullet Repayment
Loan repaid in a single amount at maturity (although interest is covered
during its life).
Cable
Term used in the foreign exchange market to refer to the current spot
exchange rate between sterling and the US dollar.
CAC 40
French Index of forty major companies.
Call Option
A contractual right to buy a financial security or a commodity as an
agreed predetermined price at any time within 3 months of the contract
date.
Cap
Hedging technique involving an agreement whereby the seller agrees to
reimburse the buyer should interest rates rise above a specified level
during an agreed period.
Capital Account
The management account which records the funds invested in a business
in order to acquire the assets needed to trade.
Capital Gain
You bought a share and later sold it. The profit made is called capital
gain, if money is lost it is called capital loss.
Capitalisation Issue
Issue by a joint-stock company of additional shares to existing
shareholders without any further payment being required. This enables a
company to capitalise its reserves. Known as stock dividend in the USA.
CDs
Certificate of Deposit - a financial security issued by Banks, Building
Societies and other financial institutions as a means of borrowing money
for periods ranging from one month to five years.
CHAPS Clearing House Automated Payments System
UK electronic, interbank, high value credit transfer system for same day
value.
Chinese Walls
Expression for formal arrangements made within banks and other
financial houses to ensure that confidential information that comes into
the hands of the marketing departments does not come to the knowledge
of the dealing or investment teams which might be tempted to use it for
insider trading.
CHIPS Clearing House Interbank Payments System in the US
Churn
Churning is the unconscious or conscious over-trading by a stockbroker
in a customer’s account. Since stockbrokers are generally compensated
by the number of transactions made on a customer’s behalf, there is a
temptation to trade for the sake of it. Illegal but hard to prove.
The City
London’s financial district, which encompasses the equare mile of the
old City of London, bounded on the south by the Thames, on the West by
the Law Courts, on the East by the Tower of London and in the North by
Billingsgate Market.
CMO Collateralised Mortgage Obligation
A form of mortgage-backed security which allocates the cash generated
by the underlying mortgage collateral to several different classes of notes
with serial maturities.
COIE Contribution on Imputed Equity
Collar
Combination of a Cap and a Floor
Comfort Paper
A formal letter written to a lender, normally by a parent company,
indicating its willingness to acknowledge the existence of some
responsibility to honour the borrowings obligations of a subsidiary or
associate company, but without constituting a legal obligation to do so.
Commercial Paper
Paper (unsecured bearer promissory notes) issued by a company direct to
investors to provide short term finance, thus by-passing traditional
financial institutions.
Commodities
These are physical assets such as gold, copper, wheat etc. You can trade
in cattle in the same way that you can trade in shares.
Common Stock
US term for shares.
Contract Bond
A form of financial guarantee given to the customer of a large contract by
the supplier’s bank or by a surety company and at the supplier’s expense.
Also Performance Bond Advance Payment Bond, Tender Bond.
Convertible
Bond giving the investor (holder) the option to convert into shares within
an agreed time period in the future and at a pre-agreed price.
Correction
A decline, usually short and steep, in the prevailing price of shares traded
in the market or an individual share. At any time that commentators
cannot find a reason for an individual stock or the entire market falling,
they call it a correction.
Countertrade
International trading transactions under which export sales are made on
the conditional undertaking that imports are taken from the same, or
nominated market.
Covenant
A contractual undertaking given in a loan agreement by the borrower,
breach of which constitutes a trigger mechanism for default..
CREST
CREST is the name of the electronic share register introduced in 1996.
When you sell or buy shares the transfer goes on electronically.
Currency Rate Swap
Agreement between two parties to exchange a notional amount in one
currency for another currency at a prescribed rate of exchange, and to
meet/receive each other’s obligations /in-flows for a prescribed period of
time, at the end of which the two principal amounts are re-exchanged.
Cum-Dividend
“Cum” means “with” in Latin. If you buy shares cum-dividend, you are
buying them at a time when you will be entitled to receive the next
dividend
Dax
German index of major companies.
Day Trader
US term. Day traders are in and out of the market many times during the
course of one trading session and may not even hold a position in any
securities overnight. This approach tends to generate a lot of expenses in
the form of commissions.
Debentures
These are simply loans to a company, which then returns the money plus
interest. Very similar to bonds.
Derivatives
If shares are assets, derivatives represent contracts to buy a particular
security at a given point in the future for a particular price. Options and
Futures are derivatives. They can be used to lessen investment risk, but
often their main attraction is that they are highly geared and so can offer
spectacular profits.. and spectacular losses.
Dispersal Credits
Bulk of Bank Giro Credits which need to be processed to pay
salaries/wages.
Dividend
A dividend is simply a payout to share holders of a percentage of the
company’s profit. Paid either once, but usually twice a year.
Dividend Cover
This is the total amount of dividend paid to shareholders divided into the
total after-tax profits. So if profits after tax are £1,000,000 and £100,000
is handed out to shareholders in total, the dividend cover would be 10.
Documentary Credit
A guarantee by the (buyer’s) issuing bank that bills drawn by the
exporter and accepted by the importer will be honoured, assuming the
agreed terms of trade have been met.
Double Option
A contractual right to buy/sell a financial security or a commodity at an
agreed predetermined price at any time within 3 months of the contract
date.
Dow Jones Industrial Average
The 30 companies chosen by editors of Dow Jones & Company that are
supposed to epitomise the very best American corporations.
Drawdown
To reimburse a customer for the cost of equipment being leased.
Earnings Per Share (EPS)
Net income divided by the current number of shares outstanding. This is
one of the principal elements used in determining at what value shares
should trade.
Eligible Bill
A properly claused Bill of Exchange, drawn on and accepted by a
Recognised Bank, eligible for discount at the Bank of England at the
finest rates.
EMU Economic & Monetary Union
ERM Exchange Rate Mechanism
Eurobond
Bond issue underwritten by a syndicate of banks, with the holders being
resident outside the country of the currency in which the bond is
denominated.
Evergreen
A facility where the availability period and/or repayment date may be
extended by mutual agreement.
Ex-dividend
A share sold without the right to receive the dividend payment which is
marked as due to those shareholders who are on the share register at a
pre-announced date.
Factoring
The provision of finance and other related services through discounting
unpaid invoices issued to customers i.e. the purchase of the clients trade
debts.
Financial Services Authority
The top investment watchdog, contact them on 0171 638 1240.
Floor
Similar to a cap, but where the seller compensates the buyer should
interest rates fall below a prescribed level.
Flotation
This is when a company offers shares in itself for the first time. It may be
a privately owned firm that wants to raise capital by getting investors to
buy its shares, or a building society converting into a PLC as a bank.
Forfaiting
Means of buyer-finance, without recourse to the export, involving
discounting of bills, already accepted by an overseas buyer, and
guaranteed by a known institution in that country.
Forward Exchange Market
A market which provides for the buying and selling of foreign currencies
for deliver at some future point in time.
Forward Rate
Rates based on forecast.
FRA Forward Rate Agreement
Between 2 banks or contract parties wishing to protect themselves
against a future movement in interest rates.
FRN Floating Rate Note
A form of bond, frequently issued in the eurodollar market, which bears a
variable rate of interest.
Front-end Loading
A sales charge paid when a PPP, AVC, or endowment or other
investment is purchased. It can amount to the whole of the first two
years’ contributions.
FTSE-A All Share Index
An index containing the 100 largest companies by market capitalisation
on the London Stock Exchange.
FTSE 100
An index containing the 100 largest companies by market capitalisation
on the London Stock Exchange, came into being in 1984 and largely
superseded the FT30.
FTSE 250
An index containing the 250 largest companies by market capitalisation
on the London Stock Exchange, created in 1992.
Futures
A type of derivative that allows you to bid for the right to pay a future
value on either an index option or commodity. Futures have a fixed
duration and normally only last for one year at the most.
GDP Gross Domestic Product
Gearing
Gearing can be expressed as the ratio of debt to assets and is used by
companies and investing individuals to enhance their profits, as well as
homeowners to allow them to buy a home.
Gilts (Gilt-edged)
These are government bonds or Treasury stock. They are the way
governments borrow money form individuals and institutions. Each gilt-
edged stock pays a set rate of interest over a fixed period of time. The US
equivalent is the Treasury Bill or T-Bill.
GROI Guaranteed Return On Investment Unit
Hedging
The act of reducing uncertainty about future (unknown) price movements
in commodity, financial security or foreign currency markets. This can be
done by undertaking forward sales or purchases in the futures market, or
by taking out an option which limits exposure to price fluctuations.
Index
Groups of shares mathematically reworked to be representative of the
current level of the market or of different sub-groups of companies
within the market e.g FTSE 100.
Index-linked
This means linked to inflation.
Investment Trusts
A public limited company which makes investments into a variety of
other companies - a pooled stock market investment fund. The
investment trust’s product is other company’s shares. There are lots of
investment trusts all specialising in different areas. The oldest is Foreign
and Colonial.
ISEQ
Irish Stock Market Index
LBO
Leveraged Buy-Out
Leading & Lagging
Techniques of cash and currency management under which cash
positions and/or exposures are reduced or inflated by arranging for the
settlement of obligations to be accelerated (leading) or delayed (lagging).
Leverage
US term for gearing.
LIFFE
London International Financial Futures Exchange
Liquidity
Ease of which an asset can be turned into cash.
LYON
Liquid Yield Option Note
A convertible bond, the interest on which is not paid but is allowed to
accumulate and to attract corresponding conversion rights.
Margin
a) A measure of profitability of a company e.g profit margin, operating
margin or gross margin.
b) Borrowing money to use specifically for buying securities of any kind
in a brokerage account.
Market Capitalisation
Total market value of all of a firm’s outstanding shares, calculated by
multiplying a firm’s share price by the number of shares outstanding.
Large cap, medium cap and small cap refer to shares in decreasing order
of market capitalisation.
Mezzanine Finance
Debt finance with certain characteristics of equity, usually associated
with MBO’s and LBO’s, provided by equity/venture capitalists and
certain banks.
“Mid-price”
A share has a buy value and a sell value. The buy value is always more
than the sell value, and the mid-price is the value between the two. It is
this figure that is quoted in most newspapers.
MIG
Mortgage Indemnity Guarantee.
MIRAS
Mortgage Interest Relief At Source
MOF
Multiple Option Facility
A flexible, tailored package of financing facilities, incorporating a
medium term commitment by a group of banks; a company may also
benefit from finer rates as nominated banks on the tender panel bid
competitively to provide the funds required.
Money Market
A market engaged in the short term lending and borrowing of money,
linking together financial institutions, companies and government.
Money Purchase Scheme
Pension schemes where you build up a pot of cash, out of which your
pension will be generated, also known as a defined contribution scheme.
MOOF Multiple Option Facility Incorporating Overdraft
MTN
Medium Term Notes: Similar to commercial paper, debt securities,
generally with maturities in excess of one year, offered and sold on a
continuous basis through a facility agreement between the issuer and one
or more dealers purchasing Medium Term Notes as principals, in
unsecured bearer promissory note form to raise medium term finance.
Mutual Fund
US equivalent of unit trust.
Nasdaq
National US stock market where trades are made exclusively via
computers. Nasdaq is home to many high-tech and newer firms.
Net Asset Value
Figure derived by dividing a company’s total net assets by the number of
shares in issue. Assets (assets minus liabilities) mean all your assets
minus loans, outstanding bills etc.
Nominee Account
A type of account in which execution-only stockbrokers tend to hold
shares belonging to clients, to make buying and selling of these shares
easier.
Note
A piece of negotiable money market paper having a maturity of 2 - 4
years.
NYSE New York Stock Exchange
The largest and oldest stock exchange in the US.
OEIC Open Ended Investment Company
Many unit trusts have already converted to OEICs. OEICs are simpler to
understand and the charges are lower than unit trusts as there is no bid-
offer spread between the buying and selling prices. In practice this is
likely to be replaced by a Dilution Levy.
Off-Balance Sheet
Method of financing which preserves balance sheet strength, whereby
both the asset and the liability are removed from the balance sheet.
Open Credit
A system in place where a customer can collect funds from a non account
holding branch.
Operating Lease
The cost of the asset is not fully repaid by the rentals during the primary
period. The lessor relies on the sale proceeds of the asset to clear the
outstanding amount and to provide him with a profit.
Options
Contracts that give a person the right, but not the obligation, to buy (call
option) or sell (put option) an underlying share or commodity at a set
price within a set amount of time. A European option can be exercised
only on a specific date; an American option may be exercised at any time
up to a specified date.
Paid-Up Value
If you stop paying into your AVC or PPP but leave the money where it is,
this is the amount of money which will be left to grow in the investment
fund. In the first years of the plan, this is generally much less than the
amount you have put in.
Penny Shares
A share with very low market capitalisation (often a few million pounds)
trading in multiples of just a few pence. They are very volatile, subject to
extreme price fluctuations
PI Professional Indemnity
Poison Pill
A defence mechanism making a target company less attractive to any
potential unwanted bidder.
Price/Earnings Ratio (P/E)
A measure of a share’s price in relation to it’s trailing twelve months
earning per share. Often, the higher the sustainable growth rate of a
company, the higher its price-to-earnings ratio.
Primary Period
The initial period of the lease, generally less than the normal working life
of the asset, during which time the lessor expects to recover the capital
cost of the asset, his funding costs and profit.
Purchasing Power Parity
Under a floating rate mechanism, the purchasing power between any two
currencies will be affected by the exchange rate differences which in turn
reflects the long-term differences in their inflation rates. In order to
maintain parity, one currency would have to depreciate against the
others.
Revolving Credit Facility (RCF)
A binding agreement with a bank under which a customer may. At any
time during a specified period, borrow money up to a specified limit
repaying and borrowing as often as the customer wishes.
Residual Value
Amount received for the equipment when it is disposed of.
Rights Issue
When a public company creates new shares. Existing shareholders are
generally offered the right to purchase a certain number of shares at a
discount to the market value. In the USA a rights issue is a form of
secondary offering.
Roll-over
Describes the practise in the Euro-currency loan market where the
interest rate is variable and fixed only at certain specified intervals.
RPI
Retail Price Index - a weighted average of the prices of final goods and
services purchased by consumers which is used to indicate the rate of
inflation.
RUF
Revolving Underwriting Facility. RUF is an undertaking by a single bank
to issue eurocommercial paper on behalf of a borrower as required during
a specified period and to provide back-up finance should it ever prove
impracticable to market the paper.
Sale and Leaseback
An arrangement where the lessor acquires an asset already owned by the
lessee and leases it back to him.
Sales Aid
A lease designed to encourage business by offering a package deal which
includes lease finance.
Schedule (to the Lease)
The document used to record the drawdown of the particular piece or
pieces of equipment to be leased.
Scrip-dividend
This is where you take your dividend in the form of more shares instead
of tax.
Securities
A blanket term to refer to any kind of financial asset which can be traded.
Security & Exchange Commission (SEC)
US agency which ensures the U.S. stock market is a free and open
market. All companies with stock registered in the US must comply with
SEC rules and regulations, which include filing quarterly reports on how
well the company is doing.
Securities & Futures Authority (SFA)
Regulatory body for Stockbrokers
Securities & Investments Board (SIB)
Now called the Financial Services Authority
SIPP
Self Invested Pension Plan. Like a PPP, but the plan holder calls the
shots in terms of which investments fill the plan.
Smoothing
Hedging technique, involving a calculated distribution of fixed and
variable rate debt to reduce exposure to movements in rates.
SNIF
Syndicated Note Issuance Facility
Spot Rate
Rate given today.
Spread
This is the difference between the buy and the sell value.
Spread Betting
A bet whose result is quantified on the basis of “the more you are right
the more you will win, the more you are wrong the more you will lose”.
The bookmaker sets the level at which the punter can wager (the spread).
Punter can go high or low. His profit is then measured by the amount that
he is right or wrong multiplied by his selected stake. The bookmaker sets
a level against which the punter bets. Spread betting began in 1963,
sports spread betting begain in 1993, now holds 60% of the market.
Spread betters can bet on financial indexes.
Standby Facility
A line of credit for short term emergency finance.
Stocks
Another word for share, but there is also “treasury stock
Straight
Fixed rate bond.
Sundry Credit
See House Credit.
Swap
A set of two linked exchanged transactions. Swaps may be of interest
rates or of currencies or both.
SWIFT
Society for Worldbank Interbank Financial Telecommunications.
Term Insurance
Life insurance plan where you pay low annual payments (premiums) that
will increase as you get older.
Tertiary Period
An agreed period for a further extension of a lease beyond the secondary
period.
TLF
Transferable Loan Facility: a form of securitisation by means of which
portions of medium-term loan facility can readily be traded between
lenders.
Trade Bill
Bill of Exchange, drawn by the seller and accepted for payment by the
buyer which can be sold (at a discount) to obtain funds prior to maturity.
Tranche
An individual drawing under a loan.
Unit Trusts
Instead of issuing shares, Unit Trusts issue units. They are only bought
and sold from the trust, not on an exchange, and you don’t own the trust.,
nor can you vote. There is no limit to the number of units issued, and so
it is called “open ended”. A good way into the Stock Market , as Unit
Trusts buy shares in other companies just like Investment Trusts.
Warrant
Usually associated with debt, giving the holder the right to subscribe to
another bond or to purchase a certain number of certain shares in the
future.
White Knight
Person, or company, coming to the rescue of another company which is
subject to an unwelcome bid approach.
Whole of Life Insurance
This will cover you until you die, whenever that will be unlike Term Life
Insurance. Premiums are revised every 10 years or so.
Withholding Tax
A tax levied in the remittler’s country on certain categories of overseas
payment.
With Profits Insurance
Insurance policies which have both an insurance cover element and an
investment element. Endowments are a form of with profits policy.
Yield
Yield is the dividend per share as a percentage of the value of the share.
Glossary of Terms with Lloyds TSB Group Website
Glossary from The Fools Website