FinanceTalking Financial Glossary

The CAC 40 is a benchmark French index.

The Cadbury Committee was set up in 1991 to look at the financial aspects of corporate governance. Its code of best practice was published in 1992 and now forms part of the Combined Code.

The smoothed annualised growth rate over a number of years. It shows the average growth and is useful where the actual growth in individual years is very different from the average. It is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

Earnings for the period adjusted to show an annualised equivalent.

An option to buy a fixed quantity of a commodity, currency, security, etc, at a particular date in the future, at a price set now. You would usually buy a call option in the expectation of a rising price.

Share capital is usually referred to as 'called up and fully paid', which means that the company has requested that the capital is paid and the shareholders have paid it in. Share capital is almost always fully paid.

Capital expenditure divided by sales. Demonstrates, for each ?1 spent on capital items, the number of ?'s generated by sales, e.g. a capex/sales ratio of 0.25 shows for every ?1 spent on capital items ?4 worth of sales are generated.

An abbreviation of 'capital expenditure' - the amount spent on capital equipment (non-current or fixed assets).

Capital expenditure divided by depreciation charge for the year. This can help demonstrate whether the company is in a capital investment phase, eg ratio >1, or is no longer investing in assets, eg ratio <1. In most sectors investors would expect this ratio to trend to 1.0 over the long term, as assets are replaced at the same rate as they wear out.

Money put in to a business, either by shareholder or banks. The capital is owed back to the investors by the company and the investors expect a return on their capital which compensates them for the risk they are taking.

The ability of a bank to meet the needs of their depositors and other creditors in terms of available funds. The Basle Accord requires banks to have minimum regulatory capital amounting to at least 8% of risk-weighted assets.

The UK Inland Revenue's form of depreciation - tax allowances on capital expenditure.

When a share price increases, the holder will make a capital gain. That is to say that the value of his or her investment has increased.

An asset for continuing use in the business, such as property, plant, machinery and office equipment. Also known as a fixed asset or a non-current asset.

A model for estimating the cost of equity. CAPM (pronounced capem) says that the cost of equity can be estimated by starting with the risk-free return and adding a premium for the additional risk in shares (the equity risk premium), which is higher or lower depending on the volatility of the particular share (this is known as ? or beta).

Firm plans usually approved by the board of directors, to spend sums of money on capital assets.

The capital employed in a company is broadly defined as the total of the shareholders funds (equity) and the debt.

Expenditure on capital assets (non-current or fixed assets).

An increase in the value of an asset between the time it was purchased and its sale. Capital gains are taxed in many countries by means of capital gains tax. Capital gains are only taxed when the gain has been realised.

A tax on the increase in the value of an asset between the time it was purchased and its sale. Capital gains are only taxed when the gain has been realised.

When a share price increases, the holder will make a capital gain. That is to say that the value of his or her investment has increased ? ie it has experienced capital growth.

Investment in capital assets - the amount spent on new capital equipment (non-current or fixed assets).

Capital ratios measure the amount of a bank's capital in relation to the amount of risk it is taking. The idea is that all banks must ensure that a reasonable proportion of their risk is covered by permanent capital. Banks must maintain a minimum total capital ratio of 8%. In effect, this means that 8% of the risk-weighted assets must be covered by permanent or near permanent capital. At least half of the regulatory capital must fall into tier 1, which takes into account just the pure equity capital so the tier 1 ratio must be at least 4%. The risk weighting process takes into account the relative risk of various types of lending. For example, a loan to the British Government would be given a risk weighting of 0% (not risky at all) whereas unsecured personal lending would be given a risk weighting of 100%. The higher the capital adequacy ratios a bank has, the greater the level of unexpected losses it can absorb before becoming insolvent ? so the less risky it should be.

Investment Trust Companies sometimes issue shares that have rights to the capital gains only of the underlying share portfolio. Investors in these shares are interested in capital growth and not income (dividends). Other shares might have rights to the income (income shares).

Money spent by a company is either regarded as an expense or an asset (something which will bring future benefit, or whose benefit will last for more than one year). Capitalisation usually refers to a cost being treated as an asset (rather than an expense).

The issue of new shares to existing shareholders free of charge. Also known as a bonus issue or scrip issue. This is a process for converting money from the company's reserves (retained profit) into issued capital.

Expenditure added in to assets in the balance sheet (as opposed to deducted from profits).

A model for estimating the cost of equity. CAPM (pronounced capem) says that the cost of equity can be estimated by starting with the risk-free return and adding a premium for the additional risk in shares (the equity risk premium), which is higher or lower depending on the volatility of the particular share (this is known as ? or beta).

The cash income and expenditure (as opposed to the earned income and incurred expenses) of a business which is often analysed into its various components.

Shows cash inflows and outflows during the year (as opposed to the earned income and incurred expenses, which are recorded in the income statement).

Current cost accounting. A method of accounting in which the assets of the business are stated at current rather than historical values. Current cost accounting usually involves adjusting for inflation. The method is used rarely.

Current cost of supplies ? a concept in the large integrated oil companies ? the profit is restated to take account of the current cost of oil supplies in businesses such as refining.

Collateralised debt obligations. A kind of asset backed security and structured product. CDOs gain exposure to the credit of a portfolio of assets (such as mortgages) and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order ? ie the equity tranche loses first and the AAA tranche loses last. The interest rate varies accordingly ? with the AAA tranche carrying the lowest rate of interest.

A CDO of CDOs simply takes rated tranches of a number of CDOs and redraws them into a new CDO.

A bank that provides banking and financial services for the government of a country and its commercial banking system as well as implementing the government's monetary policy. The central bank of the UK is the Bank of England, in the USA it is the Federal Reserve Bank of the USA, in Germany - the Bundesbank, in France - Banque de France, and Japan - the Central Bank of Japan.

Constant Exchange Rates. When companies are reporting results, they will often show additional information in which they restate the prior year figures using the exchange rates that were in force during the current reporting year. The idea is to strip out the effect of changing currency rates and show comparatives on a like for like basis.

Contracts for Difference. CFDs are very similar to spread bets, but classify as investments rather than gambling.

Capital Gains Tax. A UK tax on the increase in the value of an asset between the time it was purchased and its sale. Capital gains are only taxed when the gain has been realised.

The nearest US equivalent to a UK administration order. A part of the US Bankruptcy Reform Act 1978 that enables a business having financial difficulties to reorganise and to be protected from its creditors while it does so.

An investment analyst who records past movements of the share prices, and other statistics of individual companies using charts and graphs. Chartists then use the graphs to predict the future share movements. Chartists are generally known as technical analysts.

A notional information barrier between parts of a business, often preventing the flow of price-sensitive information from one side to another.

A KPI for the telecoms industry - the percentage of subscribers to a service that discontinue their subscription to that service in a given time period. Telecoms companies will try to minimise their churn rate.

The practice by a broker of encouraging investors to change investments frequently in order to enable the broker to earn excessive commissions.

The financial district of London. Many of the banks, the money markets, the foreign exchange markets, the commodity and metal exchanges, the insurance market, the stock exchange, and the offices of the representatives of foreign financial institutions have historically been situated in the City. Often referred to as The Square Mile.

The City Code on Takeovers and Mergers. A code of conduct applying to takeover bids, which was first laid down in 1968 and is administered by the Panel on Takeovers and Mergers. The Code reflects the European Takeovers Directive.

Under UKLA rules, a Class 1 transaction is a transaction outside the normal course of business (usually an acquisition or disposal) that accounts for more than 25% of the size of the existing company. Companies must publish a circular to shareholders for Class 1 transactions and need shareholder approval before proceeding.

An arrangement whereby a company can offer new shares to new investors but allow existing investors to claw back their proportion if they wish, thereby avoiding dilution of their stake.

A member of the bankers clearing house which enables the passage and clearance of cheques. A term commonly used for the high street banks.

A centralised and computerised system for settling indebtedness between members.

The close period is the period after the year end, half year end or quarter end before the results for that period are announced. During this period, directors and other senior employees are prohibited from dealing in the company's shares (on the basis that they are already likely to be aware of the results which are as yet unpublished and could impact the share price).

A fund set up by an investment company that issues a fixed number of shares to its investors.

The price for a security from the last transaction at the end of a trading session, often determined by a closing auction.

Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default. Also called security.

A code of conduct containing best corporate governance practices. UK listed companies must report on their compliance with the Combined Code and explain any areas of non-compliance (known as a 'comply or explain' regime).

A measure of general insurance underwriting profitability, the COR compares claims, costs and expenses to premiums. If the costs are higher than the premiums (ie the ratio is more than 100%) then the underwriting is unprofitable. The company may still be profitable if investment income covers the shortfall. If the costs are lower than the premiums then the underwriting is profitable without having to rely on investment income. It is called the Combined Ratio because it combines the loss ratio (claims as a % of premiums) and expense ratio (expenses as a % of premiums).

A UK bank, licensed under the Banking Act 1987 to provide a range of financial services, to the general public and to firms. The main activities are usually operating cheque current accounts, receiving deposits, taking in and paying out notes and coin, and making loans.

Short-term tradable chunks of loan, like bonds but for overdraft facilities rather than for long term debt.

A broker who deals in commodities (raw materials such as grain, cocoa, wool, cotton, oil or metals etc).

A trading platform on which commodities (raw materials such as grain, cocoa, wool, cotton, oil or metals etc) are traded.

A market in which commodities (raw materials such as grain, cocoa, wool, cotton, oil or metals etc) are traded.

The US name for ordinary shares.

A corporate enterprise that has a legal identity separate from that of its shareholders. The shareholders participate in the success of the enterprise since the profits belong to them (although the amount actually paid out to shareholders as opposed to reinvested on their behalf is determined by the board of directors).

The UK body which is responsible for competition policy.

Department within an organisation responsible for ensuring compliance with regulations.

The smoothed annualised growth rate over a number of years. It shows the average growth and is useful where the actual growth in individual years is very different from the average. It is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

The interest earned on a sum of money, assuming that you leave past years' interest in the same account and therefore earn interest on the interest as well as on the original amount invested.

A diversified group of companies.

The shares of conglomerates often trade at a discount to the combined value of the portfolio companies ? ie at a discount. This discount is said to reflect a number of factors, including the cost of realising the value by selling portfolio companies, the on-going cost of the management team and negative sentiment towards conglomerates generally. Many investors believe that they can diversify their portfolios themselves and don't need management to do it for them.

Analysts forecast company profits as part of the process of valuation. The average (arithmetic mean) of the forecasts for a particular company is known as the consensus forecast. (Note that although the term implies that an agreement has been reached as to the likely level of profits, this is in fact not the case).

Consideration usually refers to the price paid for something, such as an acquisition.

The accounts of the holding company and its subsidiaries added together. Often referred to as the group accounts.

When companies are reporting results, they will often show additional information in which they restate the prior year figures using the exchange rates that were in force during the current reporting year. The idea is to strip out the effect of changing currency rates and show comparatives on a like for like basis. These results may be referred to as constant currency results.

A potential liability that is not sufficiently certain to be included in a company's balance sheet, but which is disclosed in a note to the accounts. An example would be a court case pending against the company, the outcome of which is uncertain.

Contribution normally refers to profit. For example product contribution is the profit after all the expenses that can be allocated to particular products ? ie after cost of sales, distribution, advertising and marketing etc ? which allows us to compare the profitability of each product.

An interest in a company that gives a person control of it. To have a controlling interest, a shareholder would normally need to own or control more than half of the ordinary shares.

A conventional fund manager (as opposed to a hedge fund manager) agrees to have his or her fund's performance measured against a benchmark index. A hedge fund manager's performance, on the other hand, is measured on an absolute basis.

Usually refers to loans which may be converted into shares at a later date. Bonds too can be convertible. Typically, the lender will receive interest for the duration of the loan and will then either convert the loan principle to shares or demand repayment, depending on which option is the most profitable.

Usually refers to bonds which may be converted into shares at a later date. Typically, the lender will receive interest for the duration of the loan and will then either convert the loan principle to shares or demand repayment, depending on which option is the most profitable.

Usually refers to loans which may be converted into shares at a later date. Typically, the lender will receive interest for the duration of the loan and will then either convert the loan principle to shares or demand repayment, depending on which option is the most profitable.

Usually refers to loans which may be converted into shares at a later date. Typically, the lender will receive interest for the duration of the loan and will then either convert the loan principle to shares or demand repayment, depending on which option is the most profitable.

Convertible securities are those that can be converted in to another type of security, usually at the holder's option within a given period of time.

Convertible securities are those that can be converted in to another type of security, usually at the holder's option within a given period of time. See also convertible bond.

Combined Operating Ratio - a measure of general insurance underwriting profitability, the COR compares claims, costs and expenses to premiums. If the costs are higher than the premiums (ie the ratio is more than 100%) then the underwriting is unprofitable. The company may still be profitable if investment income covers the shortfall. If the costs are lower than the premiums then the underwriting is profitable without having to rely on investment income. It is called the Combined Ratio because it combines the loss ratio (claims as a % of premiums) and expense ratio (expenses as a % of premiums).

Refers to the tier 1 capital of a bank for regulatory purposes. Tier 1 or core capital is broadly equity capital or shareholders funds and must amount to at least 50% of the total regulatory capital.

A certificate representing a chunk of loan issued by a company to an investor (lender). Interest payments on bonds are made twice a year. Bonds which are traded are often referred to as fixed interest securities because the interest is paid at fixed six-monthly intervals.

In the UK companies must retain a stockbroking firm to help with UKLA rule compliance. Corporate brokers also offer investor relations advice and support. The AIM equivalent (in terms of regulatory assistance) is a Nominated Adviser (Nomad).

A department of a stockbroking firm or investment bank which advises clients on their obligations under the UKLA Rules and on iInvestor relations.

Corporate financiers advise companies on capital raising, mergers and acquisitions, bid defences, IPOs etc. A few corporate finance organisations are independent (and may be referred to as corporate finance boutiques), but most belong to investment banks.

Corporate financiers advise companies on capital raising, mergers and acquisitions, bid defences, IPOs etc. A few corporate finance organisations are independent (and may be referred to as corporate finance boutiques), but most belong to investment banks.

Corporate Governance refers to the way that companies are governed and controlled - board structure, the accountability of directors and auditors, internal controls, standards of financial reporting etc.

Someone who buys a substantial proportion of another company with the object of either taking it over or of forcing the management of the target company to take certain steps to improve the company's image sufficiently for the share price to rise and the raider to make a profit on the shares.

Refers to a company's social, ethical and environmental policies. Often shortened to CSR.

A corporate (or credit) spread is the extra interest a lender requires to compensate them for risk. The spread is measured in basis points (hundredths of a percent) over the relevant Government bond yield. The higher the perceived risk, the wider the spread.

A tax on the profits, capital gains and other income of companies.

Companies can be financed by lenders (debt) or shareholders (equity). Cost of capital refers to the cost of these forms of capital. See also weighted average cost of capital (WACC).

The cost of debt to a company is the interest rate it is charged by the lender, less tax relief. For example, if a company pays interest at 7% and the tax rate is 30%, the after tax cost of debt is 4.9%.

Shareholders expect a reasonable return for the level of risk that they take on an investment. If they do not receive their expected return, they may well sell their shares. So theoretically, to keep shareholders happy, companies must produce returns that meet or exceed shareholder expectations. The return expected by the shareholder is often referred to as the cost of equity. See also CAPM.

The cost:income ratio (or efficiency ratio) measures operating costs as a percentage of operating income. The ratio, which will vary across the bank, should be as low as possible (but not so low that it compromises customer service). Banks hope to reduce their cost income ratio as the business grows thanks to economies of scale. The idea is that additional revenue from existing or new customers has a relatively low cost associated with it and so is increasingly profitable. This is sometimes described as 'positive jaws' between income and expense growth ? ie income grows faster than expenses, creating bigger profits.

The interest rate/payments on a bond.

Usually refers to debt covenants - clauses written into loan agreements which give the lender additional security. For example, an agreement that if gearing exceeds a certain level, the loan will revert to a demand basis.

The security provided by insurance against a specified risk. Could also refer to dividend cover or interest cover.

Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller. The seller agrees to pay the buyer in the event of a default. If the bond is in default, the protection seller either takes delivery of the defaulted bond for the par value (physical settlement) or pays the protection buyer the difference between the par value and recovery value of the bond (cash settlement). Credit default swaps are like an insurance policy, as they can be used by debt owners to hedge against credit loss. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used to speculate on changes in credit spread.

A customer going bust and therefore being unable to repay the bank is an example of a credit event.

An assessment of the credit-worthiness of a firm.

An agency that specialises in making an assessment of the credit-worthiness of companies.

Amounts owed by the company at a point in time - sometimes called accounts payable or payables.

CREST is the Central Securities Depository for the UK, Republic of Ireland, Isle of Man and Jersey equities and UK gilts. It operates a settlement system, allowing trades that have been agreed to be settled. CREST allows shareholders and bondholders to hold assets in electronic, form, rather than holding physical share certificates. CREST also assists in the payments of dividends to shareholders.

Corporate Social Responsibility. Usually refers to a company's social, ethical and environmental policies.

Children's Trust Funds. A scheme set up by the Government to encourage people to save. Parents are given a small amount of money to invest for each new child at birth.

Convertible unsecured loan stock. Refers to unsecured loans which may be converted into shares at a later date.

A share is described as ex-dividend when a potential purchaser will no longer be entitled to receive the company's current dividend, the right to which remains with the vendor. Cum-dividend has exactly the opposite sense, meaning that the dividend or other benefits belong to the buyer rather than the seller. The price of a share that has gone ex-dividend will usually fall by the amount of the dividend, while one that is cum-dividend will usually rise by this amount.

A share is described as ex-dividend when a potential purchaser will no longer be entitled to receive the company's current dividend, the right to which remains with the vendor. Cum-dividend has exactly the opposite sense, meaning that the dividend or other benefits belong to the buyer rather than the seller. The price of a share that has gone ex-dividend will usually fall by the amount of the dividend, while one that is cum-dividend will usually rise by this amount.

A type of preference share that entitles the owner to receive any dividends not paid in previous years before any further dividends can be paid to ordinary shareholders.

A contract to buy or sell a fixed quantity of a currency, for delivery on a fixed date in the future at a price that is fixed now.

A contract that commits two parties to exchange, over an agreed period, streams of interest payments denominated in different currencies and, at the end of the period, the principal amounts.

An asset for consumption or conversion into cash, usually within one year. Inventories and trade receivables are classified as current assets.

An amount of money owed (liability) which will fall due within one year. May also be called a creditor due within one year or a short term payable.

The ratio of current assets to the current liabilities of an organisation ? it shows whether the company could afford to pay off its short term liabilities from its short term assets ? ie provides evidence of liquidity.

A method of accounting in which the assets of the business are stated at current rather than historical values. Current cost accounting usually involves adjusting for inflation. The method is now rarely used.

Custodians hold bonds and shares on behalf of fund managers and their clients. They also collect and remit interest income from bonds and dividends from shares.

Custodians hold bonds and shares on behalf of fund managers and their clients. They also collect and remit interest income from bonds and dividends from shares.

Shares are described as cyclical if they move up and down with the economic cycle.