AIM (Alternative Investment Market)
AIM is the London Stock Exchange's market for small, young and growing companies. It gives investors the opportunity to invest and trade in the shares of these companies on a market regulated by the Exchange.

Annuity
A fixed payment made to an investor, sometimes for a set period of years, sometimes in perpetuity, in return for a capital sum invested.

Ask price
The lowest price at which someone will sell a security at a given moment.

Basis point
A measurement for describing small fluctuations in financial instruments: one basis point is one-hundredth of one percent. (0.01%)

Bear market
A market in which prices are declining. A "bear" is a trader who expects that the market for a particular security will decline.

Bid price
The price at which a market maker indicates he or she is prepared to buy shares.

Blue chips
The common stock of high profile companies, usually with a consistent dividend payment record in during market ups and downs. These stocks are usually safe, but high-priced and tend to have low yields.

Bond
A certificate which is evidence of a debt on which the issuer promises to pay the holder a specified amount of interest for a specified length of time, and to repay the loan on its maturity. May be issued by corporations or governments. If a company goes into liquidation, bond holders will be paid before shareholders.

Bonus issue
Also called a scrip issue or capitalisation issue, a bonus issue is when the company gives to each shareholder, free of charge, a number of new shares for each share he or she already holds. After the bonus issue, the company's share price is likely to fall to reflect the number of new shares issued.

Book value
The theoretical cash value of a business which, after all debts are paid, belongs to the owners or shareholders of a company if the company is liquidated. Calculated by subtracting the company's liabilities and value of preferred shares from its assets, and then dividing what is left by the total number of common shares outstanding.

Call option
This is the right, but not the obligation, to purchase shares at a specified price at a specified date in the future. For this privilege, the buyer pays a premium which would be a fraction of the price of the underlying security. You are gambling that the share price will rise above the option price. If this happens you can buy the shares and sell them immediately for a profit.

If the share price does not rise above your option price, you do not exercise the option and it expires - all you have lost is the initial payment made to purchase the option.

Commodity
In City parlance, a commodity is any homogenous item which may be freely bought and sold. Commodities can be shares, furniture or houses, but the term typically refers to things like coffee, cocoa and soya beans (soft commodities) or gold, aluminium, platinium (hard commodities).

Commodities are typically bought and sold in the futures markets where producers combine with manufacturers and speculators to create a liquid market.

CREST
The settlement system for the securities industry introduced in July 1996.

Cum
This is the latin word meaning "with". Basically it describes any rights or privileges attached to owning a security. For example, a share bought or sold cum a benefit, confers that benefit on the purchaser.

Dematerialisation
With the introduction of CREST, the stock exchange's computerized settlement system, share certificates will no longer be issued to you as proof of ownership (unless you actually ask for them). Evidence of ownership of a share will be based on trading records.

Discount
If the share price of an investment trust is lower than the net asset value per share, the trust is said to be trading at a discount. The discount is shown as a percentage of the net asset value (see also Premium).

Dividend
The income from a share investment. Most companies pay dividends twice a year. The mid-year payment is known as the interim, and the end-of-year payment as the final. Dividends may be quoted gross - that is, before any deduction of tax in the hands of the shareholder - or net - after deduction of basic rate tax- which is how dividends are paid.

Dividend reinvestment scheme
A plan whereby shareholders' dividends can easily and cheaply be automatically reinvested in further shares.

Earnings per share (EPS)
Perhaps the single most important measure of how well (or otherwise) the board of directors are doing for the shareholders. This measure expresses how many pence the company is earning for every share held.

The calculation is 'pre-tax profit dividend by the number of shares in issue'. So, if a company makes £ 10 million and has 100 million shares in issue. It's 'earnings per share' is 10 pence. Earnings per share is more important than the overall reported profit figure! The reason is that 'eps' provides a more pure measure of profitability. Consider this, if a company doubles its profits and at the same time quadruples the number of shares in issue, ought you as a shareholder to be pleased. The answer is no, doubling profits is terrific, but suddenly the number of shares on the market has been multiplied by four. You have actually had the value of your investment halve in value. The above example although a little extreme is useful because many companies increase their profits at a spectacular rate by buying other companies and issuing new shares. So when looking at profits, look for 'eps' it'll serve you well!

Ex coupon
A stock or bond sold without the right of receipt of the next due interest payment.

Ex-dividend
Also abbreviated as ex div, this is a share sold without the right to receive the declared dividend payment which is marked as due to those shareholders who are on the share register at a pre-announced date. The stock market authorities usually specify the date on which a share will begin trading ex div. The share price invariably drops when the share goes ex dividend, taking the known income of the dividend out of the share price.

Execution only service
This service is designed for investors who do not require advice but who do need a stockbroker to buy and sell shares for them, (or an IFA to, say, purchase unit trusts). There is no element of advice or management in this service and so the costs of transacting business are generally lower than with the other services. A number of private client stockbrokers are specialists in this area and offer low cost execution of orders efficiently and quickly. Their clients know exactly what they want to do, and simply require an effective "no frills" service. Many other brokers also provide "execution-only" facilities in addition to discretionary and advisory services.

Exposure
The amount of a portfolio invested in a particular area. For example, if half of the value of your portfolio is invested overseas, you are said to have a 50% overseas exposure. Currency exposure is the amount of a portfolio which is vulnerable to Exchange Rate fluctuations in a specific currency. For example if a trust is 50 % invested in the USA, and has no hedging, it is 50% exposed to the dollar. Trusts use hedging to reduce their currency exposure if they expect adverse exchange rate movements.

Final dividend
This is the dividend paid by a company to its shareholders out of profits at the end of the financial year. A motion to pay a final dividend must be approved at the shareholder's Annual General Meeting (AGM) - where they have the option of accepting the dividend recommended by the directors or of reducing it - they cannot vote to increase it!

Financial Times Stock Exchange Actuaries All-Share Index (The All-Share)
A broadly based index covering 908 UK industrial, commercial and financial companies, including investment trusts.

Fully invested
If all the money in a trust is invested, rather than having some held in cash form, the trust is said to be fully invested.

Futures
Contracts to buy something in the future at a price agreed upon in advance. Commodities currency and bonds are all traded on the futures market.

Gap
When the market opens above or below the previous day's close (although some prefer to use highs and lows for this purpose), the price on a bar chart will show a "gap". This may then be "closed" if the market trades at prices between the opening level and the previous day's close.

Gearing
Gearing is strictly-speaking 'the percentage of borrowing relative to assets'. So, in simple terms, if you own a home worth £100,000 and you have a mortgage outstanding of £50,000, your 'gearing' is 50%.

In the sphere of collective investments, Investment Trusts can borrow money (Gear up) whereas unit trusts are not permitted to.

Split Capital Investment Trusts have structural gearing, because they contain different classes of share with different entitlements.

Gearing (called leverage in the U.S.) needs to be managed carefully - it can at best, enhance investment returns -and at worst increase losses.

Geographical spread
The distribution of the investments in an investment trust's portfolio over different parts of the world, either by country or by larger area.

Head and shoulders
This is a term used in technical analysis by chartists to describe a particular pattern of price movement. The pattern is said to resemble a person's head and shoulders - a level period followed by a sharp rise, maintained briefly, before falling back to another plateau.

Chartists believe that a head and shoulders formation heralds a significant fall in the price of a security.

LIFFE
The London International Financial Futures and Options Exchange (LIFFE) was first established in September 1982 to trade in financial futures. Ten years later it took over the London Traded Options Market. LIFFE is now the world's largest financial futures market outside Chicago and is the largest market, for example, in Bund (German government bond) futures - more than twice the size of domestic German Bund future trading. LIFFE trades futures contracts in several government bonds, including Gilts.

Limit order
An order to buy or sell a security at a specific price. The order can be executed by the broker only at that price or a more advantageous one.

Load
An additional charge added to mutual funds to cover administration charges. It is usually a percentage of the money initially invested in the fund (front-end loading) but can also be levied as a back-end load when the fund is redeemed.

Market capitalization
The value of a company as determined by multiplying the number of shares in issue by the price of the shares.

Market makers
Those who trade in the market as principals, and create a market in a specific stock by continually quoting prices at which they will buy or sell on demand. They take positions in the stocks and so bear the risks involved.

Market price
There are two prices quoted by dealers to stockbrokers: the higher or offer price at which they will sell you shares and the lower or bid price at which they will buy your shares. The difference between the two is known as the 'spread' or 'turn' (see Mid-market price).

Mid-market price
A price between the offer and bid price at which shares are bought and sold. The mid-market price is used to calculate investment trust performance statistics. It is also the price used in most newspapers' share tables.

Nominee accounts
Nominee accounts are those set up by advisers for the purpose of administering assets held on behalf of their clients. There is no requirement for these nominee companies to be authorised under the Financial Services Act, so strictly speaking funds held in nominee accounts would not be covered by the Investor Compensation Scheme (ICS). In practice however, the investment adviser would almost certainly be responsible. If you are considering investing with an investment adviser who intends to hold investments, like shares, for you in a nominee account, you should find out: What is the formal relationship between the investment adviser (usually a stockbroker) and the nominee company?

In short, if the investment adviser takes responsibility for the nominee account (check the wording of the documentation), the Investors Compensation scheme will cover you.

Many private investors have been setting up nominee accounts with stockbrokers following the introduction of the Crest system for share settlement. If you're in this position, you need to be sure that by transferring your shares into a nominee account, you'll still be receiving the sort of service you expect. Proshare, the private investors pressure group has produced guidelines of best practice which it'd like to see stockbrokers adopting. For example, does your broker ensure that your voting rights and perks are safeguarded? Do you receive dividends promply and are you receiving Reports & Accounts for the companies your invest in?

Nominee company
A company formed by a bank or other organisation for the purpose of holding shares on behalf of the beneficial owner. The nominee company carries out all the paperwork and other chores associated with the documentation of shareholding and arranges for necessary transfers when a share is sold.

OFEX
OFEX is an unregulated trading facility established by the stockbroking firm JP Jenkins in which shares of smaller companies may be bought and sold. Private investors beware - while there can be great investment opportunities in OFEX stocks, risks are much higher than in regulated stockmarkets.

A number of companies on the old Unlisted Securities Market did not transfer to the Alternative Investment Market when it was launched. Their shares on now traded through OFEX. In addition, company shares which were once traded under the Stock Exchange rule 4.2 are now traded through OFEX. Rather than move up to AIM, several of these companies' shares are now traded through OFEX. As a market-place it is subject to very little regulation and beware that the spread between buying and selling prices may be much larger than in the Stock Exchange and AIM.

Options
An option is a contract giving the right to sell or buy a commodity, financial instrument or index, at a specified price for a certain period. In other words, like futures, options are derivatives which allow you to put down a small stake and give yourself exposure to a much larger investment. Like futures, they can be used to minimise or maximise risk. There is one key difference between options and futures. If you buy a futures contract, you have agreed to take delivery of a commodity (say 10 kilos of Sugar) at a given date in the future. You have no alternative (unless of course you sell the contract on to somebody else).

With an option, you are not bound to take delivery. If you choose, you may decided against taking delivery and let the option 'lapse'.

Options can, and are extended beyond the commodity markets. Companies have often in the past given their top managers 'executive share options'. These enable the managers to purchase shares in the business in the future at a price fixed now. Options in this context are used as an incentive to provoke the managers into performing better.

Option contracts have intrinsic value. This has led them to be bought and sold on exchanges such as the London International Financial Futures Exchange (LIFFE).

Overweight
A portfolio is said to be overweight or underweight in a particular world market if its holding in that market represents a higher or lower percentage of its total portfolio than the capitalization. In other words, if the Japanese market represents 25% of the world total, and a certain trust has 30% of its portfolio invested in the Japanese market, it is overweight in Japan. Basic sector weightings are calculated by reference to the percentage each accounts for in the total market index. If the trust's holdings in a particular sector are less than that sector's percentage of the index, the trust is underweight is in that sector.

P E ratio
This is a measurement of how highly a share is valued. in other words 'its rating'. It's a useful measure of comparison, since not all companies pay out the same proportion of their profits in dividends. Yet the money they retain in the company didn't vanish, it goes into 'the reserves' and it continues to belong to the shareholders. It's being retained in the business because the directors believe they can get a worthwhile return on it. So analysts like to be able to compare the share price with the earnings of the company.

The Price/Earnings Ratio (P.E. Ratio) is calculated by dividing the company's market capitalisation (its value) by its earnings. Put another way, the company's share price can be divided by its earnings per share to reach the same result.

Generally speaking, the stockmarket is prepared to put a higher price earnings ratio on a company which has the potential for above-average growth in profits and dividends than on a company which is only managing sluggish growth.

The P.E. ratio is also an often quoted term when talking about buying and selling businesses. To highlight the point above, a poorly managed business with poor prospects say in textiles may make £ 1 million a year, but be sold for just £ 4 million because it's 'on a low rating' - (this is a P.E. of 4 !). Conversely another business (say an Internet company) may be thought to have great prospects. It too might be making £ 1 million a year, but because analysts have high hopes for the future, the business could be sold for (say) £ 30 million. (This is a P.E of 30).

The higher the rating, the more highly valued the company - watch you don't overpay although there is some truth in the expression 'you have to pay highly for quality'

Premium
If the share price of an investment trust is higher than the net asset value, the trust is said to stand at a premium. The premium is shown as a percentage of the share price. It is rare for an investment trust to be at a premium (see Discount).

Put option
The right to sell stock at an agreed price at or before a stated future time. Contrast this will call options.

Quoted investments
Investments which have an official listing on one of the world's recognised stock markets. Also known as listed investments.

Rally
A swift rise in the price of a market or an individual stock.

Reaction
A dip in the price of a security following a rally.

Registrar
An organization that has been appointed by a company to take responsibility for maintaining its share register and to communicate with the company's shareholders. Companies could and sometimes do manage their own share registers but essentially it's a specialist job.

Some of the best known registrars used by large FTSE companies and others include: Lloyds Bank Registrars and Royal Bank of Scotland.

Resistance
The ceiling on the price of a security according to technical analysis: a notional level above which the security price is unlikely to rise.

Rights issue
A method of raising additional capital by an issue of new shares through the offer to existing shareholders of a preferential right to take them up in proportion to their current shareholdings at a price fixed by the directors.

Savings scheme
A facility to enable purchases of investment trust company shares to be made easily and cheaply by the investment of regular (usually monthly) sums of money or by occasional lump sum contributions.

Scrip issue
The issue by a company of new shares which, because they become fully paid up immediately on issue out of the company's existing reserves, do not require any payment from the shareholders as in a rights issue. This has the effect of making the company's shares more marketable because of the increased number now available and their lower market price. A scrip issue is made to existing shareholders in proportion to their current shareholdings. Therefore, although the number of shares held by each shareholder increases, his or her proportion of the company's capital after the scrip issue is unchanged and the value of the total holding remains the same.

Securities and Futures Authority (SFA)
The Securities & Futures Authority (SFA) is the self-regulatory organization (SRO) for firms dealing or arranging deals in stocks and shares, financial and commodity futures, options on securities and on foreign exchange.

Your stockbroker should be a member of the Securities & Futures Authority (SFA) otherwise he's breaking the law!

Securities and Investments Board (SIB)
The Financial Services Authority (FSA) is the City's chief consumer watchdog. Up until October 1997, it was known as the Securities & Investments Board.

This is the first step in the establishment of a new super-regulator holding out the promise of greater investor protection.

SETS
The Stock Exchange Electronic Trading Service (SETS) is the formal name for the electronic trading order book introduced at the time of Big ang 2 in October 1997.

In short it's a computer-driven trading system which initially handled trades for more than 100 leading companies traded on the London Stock Exchange. The Exchange aims to extend the coverage of the system to the next 250 biggest companies by mid-1998.

The system is anonymous. Orders to buy or sell shares are matched automatically by computers. Retail Service Providers (RSPs) are the new name for market makers in the electronic age - their role is not identical.

Deals of fewer than 1,000 shares (or 500 if the share price is over £5) are excluded from the order book. So are deals for longer than the standard settlement time - five days - which covers the vast majority of deals done using share certificates.

Share certificate
This is a legal document which can be used as proof of ownership of a shareholding. But with 30,000 plus share transactions a day going through the London stockmarket in the early 1990's, a lot of paper was being generated. A more efficient way of handling share settlements is to do it electronically as happens in many other countries. And so in London, the Crest system has been launched. Between now and April 1997, this new electronic system will run alongside the old paper-based system. Even after then private investors who are attached to share certificates will be able to keep them and deal by using them, although this could turn out to be an expensive pursuit if stockbrokers charge them more for processing paper.

Many share certificates from privatisation issues have the old Talisman transfer form printed on the back. This will be redundant by April 1997 or sooner.

When you sell shares, you may also find the stockbroker keen to see the certificate because Stock Exchange penalties for false trades are getting worse. In summary share certificates are not quite extinct, but they almost certainly will be one day.

Share dealing
The world's stockmarkets are the biggest second-hand business you will ever come across! Stockmarkets exist to allow companies to raise capital through the issue of new shares to fund business investment. The success of such fund raising activities depends very much on the liquidity of the market, that is how easily the players in the market find it to put up the money for the company's equity or shares.

The only important measure of liquidity is the second-hand market - how easy is it to sell shares once you have bought them. Nobody really wants to be stuck without the ability to realize their cash once more.

There has been a plethora of new issues - companies coming to the stockmarket in the last two decades. The biggest companies coming to the market have been the privatisation issues carried out by the Conservative government but even taking these issues into consideration, the buying and selling of "second-hand" shares is a much larger part of day-to-day market activity.

You may buy shares in the hope of receiving a regular income from them in the form of dividend payments or you may be hoping that the share price will rise in value to give you some capital gain. Most people invest in shares or equities looking for a mixture of the two, some income and some capital gain.

Short selling
A risky and speculative practice involving the sale of a security that the seller doesn't possess. The seller is effectively betting that the price of the security is going to fall and that they will be able to buy the security back at a lower price. The profit they make is the difference between the initial selling price and the subsequent purchase price.

Stamp duty
Stamp duty is a government tax levied on certain legal transactions including share dealing (and the purchase of property). Stamp duty on share dealing is levied at a rate of 0.5%

Tax credit
Companies, including investment trusts, are required to deduct tax when paying a dividend. The company pays over the tax it has deducted to the Inland Revenue as Advance Corporation Tax (ACT) and issues the investor with a voucher showing the amount of tax which has been deducted. The investor records the gross amount in his tax return and receives credit against his total tax bill for the tax which the company has paid on his behalf.

Technical analysis
An attempt to predict market and security behaviour by studying the past history of price movements and trading volumes. The techinques are graphically and statistically based and are concerned with the mathematics and collective psychology of the market.

Underweight
A portfolio is said to be overweight or underweight in a particular world market if its holding in that market represents a higher or lower percentage of its total portfolio than the capitalization. In other words, if the Japanese market represents 25% of the world total, and a certain trust has 30% of its portfolio invested in the Japanese market, it is overweight in Japan. Basic sector weightings are calculated by reference to the percentage each accounts for in the total market index. If the trust's holdings in a particular sector are less than that sector's percentage of the index, the trust is underweight in that sector.

Volatility
How quickly the price of a security changes over time. A high volatility indicates a rapid change in price.

Volume
The number of shares bought and sold on a stock exchange. A useful measure of the popularity of a share on a given day.

Yield
The yield on an investment trust (or any other share) indicates the size of the income return on the share in relation to the price you have to pay for it. It is calculated by dividing the current share price by the annual gross dividend.