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Glossary

Understanding investment terms.

At Lloyds Bank Private Banking, we pride ourselves on creating a one to one relationship with you. To help our customers invest with confidence, our literature uses plain English and avoids jargon wherever possible.

Of course, investment is a very specialist subject, so on occasion you may come upon words or expressions you are unfamiliar with or require clarification on, whether in our literature or generally.

This glossary is designed as a quick reference guide to the most common investment terms. We also hope that it will help you to understand our Lloyds Bank Private Banking literature.

The list is not exhaustive however. So, if ever you do come across a term you’re uncertain about which is not contained in this guide, please don’t hesitate to ask your Private Banking and Advice Manager.

 


Absolute Return Funds

These funds typically target a higher rate of return than cash investments, and aim to deliver positive returns regardless of market conditions; but this is not guaranteed. They tend to be classed as low-risk assets, usually demonstrating low volatility. Absolute return funds can invest in a wide range of assets and use different strategies. For example, they can use strategies that mean they can benefit when an asset price falls, as well as strategies that mean they can benefit if assets rise in value. They can also use derivatives, which are agreements to buy or sell assets in the future, or borrow money that is then used to generate returns.

Absolute return strategies

An approach to investing employed by some funds, which differs from the approach taken by traditional investment funds. Funds employing absolute return strategies don’t try to outperform a stock market but instead aim to deliver returns greater than a benchmark independent of traditional stock market indices such as cash over the medium term. These funds tend to invest in traditional assets such as equities and bonds, combined with specific investment instruments such as futures and options used to control and manage risk. An example of such a fund is an absolute return bond fund.

Active management

Where a fund manager is appointed to manage an investment on an ongoing basis in an attempt to outperform stock market indices by selecting appropriate investments. The opposite of passive management, where stocks are bought according to their statistical position on an index.

Asset allocation

The internal division of an investment fund or portfolio by asset class (e.g. equities, bonds, property and cash) or geographic regions (e.g. UK, Europe, US and Far East). Asset Allocation helps to diversify investment risks and depending on how funds and/or portfolios are invested will produce different levels of investment performance.

Asset classes

The type of asset your money is invested in. Bonds, equities or property for example. Every asset has its own individual characteristics so by investing in various types – or combinations of types – your portfolio can be positioned to suit your needs.

Bargain Date (Trade Date)

The month, day and year that an order is executed in the market. The bargain or trade date is when an order to purchase, sell or otherwise acquire a security is performed.

Basis points (BPS)

A basis point is one one-hundredth of a percent. If an interest rate goes up from 5.50% to 6.50%, it is said to have risen by 100 bps. So, with 100 bps in one percent, 50 bps is half a percent and 10,000 bps is 100 percent.

Bear market

A market in which prices across most or all market sectors are falling, with the result that the overall index value decreases over an extended period. The opposite of a bull market. A bear investor is someone who believes the market will demonstrate such a decline.

Benchmark

A target against which investment performance is measured, normally a market-based index or the average performance of similar investments. To beat the benchmark is to outperform.

Bid/offer spread

The difference between the price at which an asset can be bought (offer price) and sold (the bid price).

Blue chip

A large, relatively well-managed and stable company. Typically a long-established member of the FTSE 100 and a household name.

Bond (Fixed Income Investments)

Essentially an ‘I.O.U’ issued to an investor in return for the loan of their investment capital. Offered by governments, companies or local authorities as a way of raising funds without issuing extra shares, bonds usually promise to pay a fixed amount of interest on set dates usually twice yearly until maturity (see Coupon), when the loan is usually repaid in full depending on the creditworthiness and ongoing financial stability of the borrowing entity. As bonds can be traded on the stock market, their prices fluctuate, even though they may have a fixed repayment value at maturity.

Bonus issue

The unscheduled offer of free shares to existing investors. Sometimes referred to as a capitalisation or scrip issue. The share price will be adjusted so that the value of any holding remains unchanged.

Book cost

The original cost of an investment generally used to compare against the current market value.

Bottom up

Bottom up, or micro-level, analysis involves in-depth research of individual companies as opposed to wider index or region wide economics.

Brokerage

A fee charged by an agent, or agent’s company, to facilitate transactions between buyers and sellers. The brokerage fee is charged for services such as sales and purchases of securities.

Bull market

A market where confidence is high and prices are rising across the majority or all market sectors and are expected to continue to increase over the medium term. The opposite of a bear market. A bull investor is someone who believes the market will demonstrate such growth.

Capital Gains Tax (CGT)

CGT is a tax levied on the capital gains, or profits, which are made when an investor sells an asset. The most common capital gains are realised from the sale of stocks, bonds, precious metals and property. Investors may have an annual CGT allowance, up to which any such gains are tax-free. It may also be possible to offset any such gains against previous losses made on the sale of other assets, subject to certain HMRC rules.

Collective investment

Term used to describe unit trusts, investment trusts, and Open Ended Investment Company (OEIC ) funds – funds where investor capital is pooled to increase individual buying power and risk is spread through diversification.

Concentrated portfolio

A portfolio whose performance outcome is influenced by a smaller number of constituents on account of larger-than-average exposures to these constituents compared to more diversified or index-linked portfolios with a wider range of constituents, each with a relatively smaller individual proportion of the overall portfolio.

Convertible bond

Fixed interest securities that may be converted into securities of a different asset class, usually equity, at some future date and/or contingent upon certain conditions being met at some future date.

Corporate bond (see also Bond)

A bond issued by a company.

Correlation

Correlation refers to the tendency of different stocks, sectors and even asset classes to move in closely-linked ways over periods of time. A high level of positive correlation between two assets implies that both are moving up or down synchronously. Similarly, a high level of negative correlation implies that the two are moving in opposite directions to each other. Low correlation implies that movements in the price of one are not related – neither positively nor negatively – to the movements in the price of the other.

Coupon

The amount of interest regularly paid by a bond (per £100 nominal of stock). Usually paid twice a year.

Cyclical

Economies usually go through periods of stronger, more widespread activity (growth) and weaker, more localised activity (contraction) called economic cycles. Sectors and stocks on the market that are particularly susceptible to changes in the economic cycle are referred to as ‘cyclical’.


Deflation

An economic term referring to a prolonged period of weak demand, when the average price of goods and services falls. The opposite of Inflation.

Derivatives

Contracts such as futures, options and warrants that permit the holder to buy or sell a particular security or commodity at a set date in the future and at a specified price.

Dilution adjustment

Applied to offset the cost of creating or redeeming shares in Open Ended Investment Company (OEIC ) funds. Added to fund capital, the adjustment ensures that market cost, including stamp duty, does not reduce the share value for those who remain invested.

Diversification

By investing in a number of companies, assets, funds, markets or regions, you can spread risk and increase the opportunities for growth and income.

Dividend

The income from a share-based investment. Many companies will pay dividends from their profits twice a year. The mid-year payment is known as the interim dividend, and the end-of-year payment is called the final dividend. Dividends may be quoted gross (before tax has been deducted) or net (after tax has been deducted) but they are paid net for nil-rate, lower-rate and basic rate tax payers. For higher rate tax payers an additional tax charge is due.

Dividend yield

A company’s total annual dividend payment per share is divided by the price per share. The resulting value is often expressed as a percentage or ‘dividend yield’.

Equities

Shares in a company that represent a proportional stake in the company’s economic interests i.e. its assets, liabilities, profits and losses. Shareholders are effectively the owners of the company.

Ex-dividend

The period immediately before an investment pays out its income. If equities are purchased ex-dividend, the buyer is not eligible for the next dividend payment. Share prices drop the first day they trade ex-dividend to reflect this.

Fixed interest rate

A rate of interest fixed at a stated percentage until a specific date.

Fixed interest securities

See ‘Bond (Fixed Income Investments)’.

Financial Conduct Authority (FCA)

The FCA regulates the conduct of the financial services industry in the UK. It aims to protect consumers, ensure the financial industry remains stable and promote healthy competition between financial services providers.

FTSE 100 or Footsie

An index that tracks the share price of the 100 largest companies listed on the London Stock Exchange by market value.

FTSE indices

A series of stock market indices jointly operated by the independent FTSE Group, originally a collaboration between the Financial Times and the London Stock Exchange.

Future

A contract under which the owner agrees to buy or sell a fixed quantity of an asset at a fixed price at a fixed date in the future. The contract is transferable and can therefore be traded like a security.

German Bunds

Bonds issued by Germany's federal government.

Gross Domestic Product (GDP)

The total market value of all the goods and services produced in a country in a year.

Gilts

Gilts refers to gilt-edged stocks or bonds that are issued by the UK Government. As gilt-edged stocks are only issued by the UK Government, gilts can be regarded by investors as a low risk way of investing their money as it is unlikely that the Government will miss interest payments or be unable to repay the principal amount at maturity.

Gross interest rate

The interest rate paid before tax has been deducted.

Growth approach

A style of investment that concentrates on companies with a history of good growth and/or strong earnings potential.

High Yield (sub-investment grade)

Bonds that are issued by companies exhibiting what the market considers a higher risk of default than usual but also greater potential for returns.

Holdings

The assets or units held within an investment.

Illiquid

A description of a security deemed difficult to trade in the market. It cannot be turned into cash quickly and is therefore considered illiquid.

Income units

Units in a unit trust, in respect of which income earned by the unit trust is paid to the investor rather than automatically reinvested.

Income yield

By dividing the gross income of an investment by the market value you can calculate the gross income yield from an investment.

Index tracker

A type of fund that aims to replicate the performance of a particular stock market index by buying all or a representative proportion of the stocks within that index.

Inflation

The devaluation of currency over time, where it costs more money to buy the same goods.

ISA (Individual Savings Account)

A vehicle that allows individuals to take returns from shares, unit and investment trusts or cash deposits and some life assurance policies more tax efficiently.

Investment portfolio

The collection of investments that you hold. Your portfolio is dictated by the investment profile you choose and will incorporate the range of funds and asset classes that best suit your preferred aims and objectives.

Investment profile

The investment philosophy that best expresses your investment objective. It forms the basis for the management of your investments in the Investment Portfolio Service.

Investment style

The investment approach adopted by an individual fund manager or investment house, hence the term ‘house style’. There are many investment styles including:

- value, where managers seek sound but undervalued companies;
- growth, where managers seek companies with the right pre‑conditions for growth, (see Growth Approach) and;
- momentum, where managers seek to exploit the tendency for share prices to continue to move in a particular direction in the short-term.

Investment trust

A close-ended collective investment fund pooling investor capital across a number of shares. As it is listed on a UK stock exchange, the share price of an  investment trust is subject to normal market forces and as such can move independently of the value of the trust’s underlying assets.


Liquidity

The ease with which an asset or security can be bought or sold in the market without affecting its price.


Manager of managers

An investment approach that seeks to select the most suitable investment managers, with a range of complementary investment styles to suit the objectives of the fund. Managers are continually monitored and replaced when appropriate. This approach aims to diversify risk and optimise returns by providing access to a wide spectrum of managers – some of which are not normally available to individuals.

Market Value (Capitalisation)

The value of a company calculated by multiplying the total number of shares issued by the current market price of one share.

Mid price

An average share value calculated by finding the intermediate point between the quoted buying and selling prices.

Mutual

An organisation with no shareholders, such as a building society. Mutuals are owned by their policy owners or members.

Net interest rate

The interest payable after tax has been deducted.

Non-cyclical stocks

Shares in companies that are not particularly susceptible to significant changes in the economy, for instance food and clothing.

OEIC (Open Ended Investment Company)

A collective investment that pools investor capital for increased buying power. The fund is divided into shares the value of which rises and falls in line with the value of the underlying assets. One of the main differences between OEIC s and unit trusts is that OEIC s quote a single price rather than a bid/offer spread.

Order Types

At Best – An order to fill a transaction at the most desirable price available, and as quickly as possible.

Cash – In your SOFA this is a buy or sell order for a cash value. e.g. a BUY order for £10.000.00.

Limit Order (in your SOFA a ‘Price Order’) – An order to buy or sell a security when its price reaches a particular point. This type of order ensures a greater probability of achieving a predetermined entry or exit price, limiting the investor’s loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the order becomes a market order. Also referred to as a “stop” and/or “stop-loss order.”

Market – An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. In your SOFA ‘Market’ is a buy or sell order for a nominal share or unit e.g. SELL order for 1,000 units.

OTC (Over The Counter)

OTC trading is trading done directly between two parties without the supervision of a formal exchange, such as the London Stock Exchange.

Over-weight

Where a portfolio has a higher proportion of capital invested in a particular stock, sector or region than its benchmark, usually as a reflection of the portfolio manager’s positive outlook for that stock, sector or region’s future performance because the portfolio manager believes that the particular asset will outperform others in the portfolio. The opposite of Under-weight.


Prudential Regulation Authority (PRA)

The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms and works alongside the Financial Conduct Authority (FCA) creating a “twin peaks” regulatory structure in the UK. The PRA’s role is defined in terms of two statutory objectives to promote the safety and soundness of these firms and, specifically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders.

Qualitative approach

A research philosophy used to evaluate a company’s investment potential by focusing on cultural and organisational attributes as opposed to statistical financial analysis. Common measures include strength of management or capacity to generate profits.

Quantitative approach

A research philosophy used to evaluate a company’s investment potential by analysing numerical data such as financial results and share price history.

Recession

Technically, a recession is declared after two consecutive quarters of negative Gross Domestic Product (GD P) growth. In a less quantitative context, it can be assumed to mean a sustained and widespread slowing or reversal of economic growth.


Sectors

Investment funds are divided into sectors containing funds of the same type to make them easier to compare. One example is the Micropal UK All Companies sector. Sectors also refer to the specific industry in which companies operate. Lloyds Bank plc trades within the Banking sector for example. Other sectors include Oil & Gas and Pharmaceuticals for instance.

Securities/Stocks

A general term used to describe equities, shares, bonds or options.

Settlement

The transfer of stocks from a seller to a buyer. Settlement day is the date the process is completed, with the seller having received the proceeds of the sale.

Share

Also known as an equity in Britain or a stock in America. An investor essentially buys a share in a company in return for a slice of the profits, paid as a dividend. Shares can be traded on stock markets and are generally an accepted vehicle for achieving capital growth, albeit one inherently more risky than bonds or cash.

Statement of Financial Affairs (SOFA)

The periodic statement provided to all Lloyds Bank Private Banking Investment Portfolio Service clients.

Strategic asset allocation

The longer-term (average) asset allocation of an investment portfolio among different kinds of assets such as absolute return strategies, bonds, property, equities and commodities that is designed to meet the aims and objectives of an investor.

Tactical asset allocation

The short-term actual asset allocation of an investment portfolio among different kinds of assets which varies from the strategic asset allocation to take advantage of investment opportunities in the marketplace. Tactical asset allocation amendments can be made to an investment portfolio at any time.

Taper relief

A reduction in capital gains tax payable on the disposal of an asset. The amount of this relief depends on how long you have held the asset and to what extent it can be justified as business or non-business related.

Tax year

The period from 6 April to 5 April the following calendar year.

Top-down

Top down, or macro-level, analysis is the observation of large-scale economic factors such as those affecting an entire region, country or sector.

Tracker fund

See ‘Index Tracker’.

Trust

A legal arrangement where assets are placed under the control of a trustee for the benefit of individuals (called beneficiaries).

Trustee

The person or organisation managing the assets in a trust.

Turnover

A company’s income during the stated financial period before overheads, tax and expenses have been deducted.

Under-weight

Where a portfolio has a lower proportion of its capital invested in a particular stock, sector or region than its benchmark, usually a reflection of a less positive outlook for the future performance of that stock, sector or region because the portfolio manager believes that the particular asset will underperform others in the portfolio. The opposite of Over-weight.

Unit trusts

A collective investment that pools investor capital to increase their buying power and provide diversification. The fund is divided into units the value of which rises and falls in line with the value of the underlying assets.

Universe of funds

A universe is a collection of funds displaying similar characteristics. Performance is measured by comparing their value with that of equivalent assets within the same universe.

US Treasuries

Bonds issued by the US federal government.


Yield

The annual dividend or income on an investment expressed as a percentage of the purchase price.