Investment Definitions and Terms to Know

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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Account Aggregation

A online financial tool that shows you the balances on all your accounts (current account, mortgage, credit card etc) in one place, even though you may have these accounts with different companies.


An actuary who wanted a more exciting life.

Accumulation Units

The designation given to unit trusts where income is re-invested and not paid out.


American Depositary Receipt. Americans are funny about directly holding foreign shares and prefer instead to trade a receipt from a US bank that holds the underlying shares. Normally the ratio is 1:1 (i.e. 1 ADR = 1 share), but sometimes it isn’t.

Additional Voluntary Contributions (AVCs)

Many try to enhance their company pension schemes by paying into one of these plans. Watch out for the hefty charges and dismal underperformance, though.

Adjusted Earnings

Companies don’t have to produce adjusted earnings, but can choose to do so to clarify their results if the statutory figures are distorted by exceptional items such as the profits from the disposal of part of their business.


A company in financial difficulty may be put into administration. An administrator will be appointed to run the company so that its debt can be paid off in an orderly fashion.

Advisory Stockbroker

A stockbroker that offers advice on which shares to buy and sell, but for a heft price. The Fool’s not particularly a fan, preferring execution-only stockbrokers instead.

Alternative Investment Market (AIM)

AIM opened in 1995 for small, growing companies and now plays hosts to over 1,000 firms. It’s less lightly regulated that the main market of the London Stock Exchange so shares listed on it tend to be higher risk and more difficult to buy and sell. Different tax rules can also apply to AIM shares. For example, some of them are exempted from Inheritance Tax.


An annual charge taken through the profit and loss account to allow for the fall in value of an asset. This term is often used in conjunction with an intangible asset.

Amortisation is like depreciation for intangible assets, spreading their cost over their useful life. Think of it as paying down a loan on a patent or copyright, instead of a building. This reflects the value an intangible asset provides over time, as its benefits wear out or become less relevant.


A financial professional who analyses securities to determine a “fair” or “intrinsic” value for those securities. The term is generally applied to almost any professional investor who does research of some kind.

Angel Investors

Angel investors are wealthy individuals who provide seed funding for startups in exchange for ownership equity, acting as fairy godmothers (or fathers) for promising young businesses. They take on the risk of financing untested ideas with the potential for high returns if the venture takes flight.

Annual Management Charges

The annual fee charged by the investment managers to the investors to cover the cost of running the fund.

Annual Percentage Rate (APR)

When you borrow money, this rate should always be quoted to you. It’s the percentage rate which your loan will cost you each year, including all charges.

Annual Report

A yearly statement of a public company’s operating and financial performance, punctuated by pictures of families enjoying the firm’s products and/or services.


Taking an item measured over a certain period and restating it on an annual basis. For instance, if it costs £10 million every month to run a factory, the annualised cost is £10 million x 12, or £120 million, since there are 12 months in a year. Simple.


The financial mechanism you purchase with your pension fund, which will provide you with a regular income in your retirement. It is really just a way of returning the capital you have accumulated in your pension fund back to you. When you die any surplus money stays with the annuity seller. Should you die very shortly after purchasing the annuity, this fact leads to a situation colloquially known as a ‘Bummer’.


Increase in the price (or value) of a share or other asset. Appreciation is one component of total return. Payment of an income, in the form, say, of a dividend, is another.


The process in which one bank rips off another one by selling it something at the wrong price. OK, that was a bit facetious, even if it’s pretty accurate. It’s the process by which small, local price differences in a share are exploited and thus evened out. For instance, Unilever trades on the stock exchanges in London and in Holland and any changes in price in one market – say, through an institution selling off a large chunk of shares in London – will also rapidly be reflected on the other market through arbitrage.

Australian-Type Mortgage

As it sounds, a type of mortgage common in Oz. Interest due is calculated daily as opposed to yearly, which can make a significant difference to the cost for 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.

Average Trade Price

The average trade price (ATP) is a straightforward concept that reflects the average price at which a security is bought and sold within a specific timeframe, typically a day. It’s essentially the total value of all trades for a security divided by the total number of trades executed during that period.

In contrast to volume-weighted average price (VWAP), ATP doesn’t consider trading volume. Every trade, regardless of size (number of shares), is weighted equally. This makes ATP a simpler metric to calculate, but it also means it may not provide as complete a picture of a security’s price movement within a day, particularly for heavily traded securities.

Investors use ATP to track their overall investment performance and to calculate capital gains tax. By comparing their own purchase price to the ATP over a specific period, they can gauge how their investment has fared relative to the average market price.



Bank for International Settlements. A club for central bankers where they can meet to tut-tut about any impending crisis and reminisce over how they made the last one worse.

Balance Sheet

An important financial report regularly issued by companies. It details, at a particular moment in time, exactly what the company owns and what it owes. It provides a breakdown of the capital structure of the company between debt and equity and analyses what its assets actually are.

Bank of England

Set up in 1694, the “Old Lady of Threadneedle Street” has responsibility for regulating the banking industry and since 1997 has set interest rates to help the government meet its inflation targets. The stock market, a notoriously short-term beast, hangs on the Bank’s interest rate pronouncements and then, by the next day, has forgotten all about them.


When a company owes more than it can pay, or when its debts exceed its assets, it’s bankrupt. Occasionally, this situation can exist for some time before a bank decides enough is enough and calls in its loans.

Basis Point

Interest rate movements are often expressed in basis points, which are equivalent to one-hundredth of a per cent. So 25 basis points equals 0.25%.


So you think that the market is headed south? You’re bracing yourself for a crash or correction? You feel that shares will soon be taking a tumble? Guess what – you’re a bear! Bears are investors with pessimistic outlooks, as opposed to Bulls.


A measure of share volatility. High beta stocks tend to exhibit greater price movement.

Bid-Offer Spread

The difference between the bid price (at which the holder can sell shares) and the offer price (at which the purchaser 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. This marked the end of single capacity, in which jobbers bought and sold shares for their own account and stockbrokers acted as agents only. Afterwards brokers could hold and trade shares and many of them were wise enough to do so at the time of the 1987 crash. This was followed in 1996 by the introduction of CREST and then in 1997 by a computer-driven trading system (called SETS) to cut out the middlemen in share trading, who match buyers and sellers.

Black Swan Event

In the realm of probability and risk assessment, a black swan event describes a high-impact incident that is both extremely difficult to predict beforehand and possesses significant repercussions. These events often lie outside the realm of normal expectations, challenging established models and forecasts. While the consequences, positive or negative, can be substantial, the defining characteristic of a black swan event is its inherent rarity and fundamental unknowability. The discovery of black swans in Australia, previously thought to be exclusively white, serves as a classic metaphor for this concept.

Blue Chip

A share in a large, safe, prestigious company. GlaxoSmithKline and Royal Dutch Shell are examples. Many of the shares making up the FTSE 100 are blue chips.


A bond is essentially a loan which you, the investor or ‘bondholder’, agree to give to a company (or a government) for a fixed period. In return, the company pays you a fixed rate of interest. At the end of the bond’s term, you then get your original investment back. In the meantime, you can sell your bond on to someone else if you wish. If interest rates generally are going up, the price of the bond will fall. Effectively, this offers new buyers a higher return on their money. Conversely, if rates are falling, bond prices rise, but the holder will still get the same interest income. 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. Company bonds offer higher interest rates, with the riskiest companies’ (or governments’) bonds offering the highest of all and being called junk bonds.

Bonus issue: Or, in the USA, a stock split. Whenever a company believes that the price per share of its stock has risen to a point where investors may wrongly perceive it as “expensive”, they will split the stock, reducing the price but increasing the number of shares outstanding. For instance, if Huge Fruit Plc trades at £60 a share with three million shares outstanding and decides to split its stock two-for-one, this means that each share will now trade at £30 but there will be six million shares outstanding.

Book Value

What the accountant says a business is worth. It often bears no relationship to what the owners (shareholders) think the business is worth. It is calculated by adding retained profits to the initial share capital and is a purely arithmetic calculation. It can be grossly distorted by inflation. It is 100% accurate and often totally useless as a way of valuing a business.


One who sells financial products. Be it in insurance, pensions or shares, most brokers work under compensation structures that are at direct odds with the greatest good of their clients.


Male sibling. See debtor.


Are your glasses rose-colored? Do you see nothing but blue skies ahead for the stock market or a particular security? Then you’re a bull — an optimistic investor — as opposed to a Bear.

Building Society

A mutual organisation, owned by the people saving with and borrowing from it. Many of the largest converted to banks, listed on the stock exchange and then ran into a whole heap of trouble.


CAC 40

French index of — wait for it — the forty largest French companies.


A business’s cash or property, or an investor’s pile of cash. Capital can also be intangible, like patents or copyrights, which give a company exclusive rights to produce something for a certain period. The value of these intangible assets is spread out over their useful life through a process called amortization, similar to how depreciation allocates the cost of a building over time.

Capital Employed

The total value of all the assets being used by the business to make money. Usually calculated as total assets less current liabilities. See Return on Capital Employed.

Capital Expenditure

What the company has to spend to stay in business and grow. If everyone else is using computers while you are using typewriters you probably haven’t spent enough.

Capital Gains Tax (CGT)

You bought a share and later sold it. If you made a profit, that’s your capital gain. If you lost money, it’s a capital loss. If you make enough of a capital gain outside your tax-sheltered accounts (PEPs, ISAs), you’ll be liable for capital gains tax (CGT).


Capitalism is an economic system where private individuals and businesses own the means of production, like factories and land. Their goal is to make a profit by selling goods and services in a market where prices are influenced by supply and demand. Think of it as a giant marketplace where businesses compete to offer what consumers want, and prices adjust based on how much of something is available and how much people desire it.

Cash Flow

The term cash flow gets used rather vaguely. Operating cash flow is the cash generated by the business after changes in working capital. Free cash flow is this figure less what you have to pay the taxman and the bank for the money you borrowed. Net cash flow is how much the piggy bank has changed at the end of the year.

Chief Executive

The Chief Executive is the highest executive officer in a company, rather like the captain of a ship. He or she is accountable to the company’s Board of Directors and is frequently a member of that Board. The Chief Executive participates in setting strategy with the Board and other officers and is responsible for the tactics in meeting the company’s goals.


Churning is the unconscious or conscious over-trading by an Advisory Stockbroker in a customer’s account. Stockbrokers are paid on a commission on the consideration of a trade. The consideration is the number of shares traded multiplied by the price. As commissions have stabilised the only way brokers can make more money is to trade more shares. There is therefore a natural temptation to trade for the sake of it. It’s illegal, but hard to prove.

The City

London’s financial district, which encompasses the square 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 Islington.

Close Period

Typically the time between the end of an accounting period and the day a company announces its results for that period. During this time, when the company is calculating its results, it does not normally communicate with investors and directors are not able to buy or sell their shares.


The way a stockbroker or an Independent Financial Adviser is often compensated. When he or she makes a transaction for a customer, the customer pays a commission. In the Fool’s opinion this is a Bad Thing, as it sets up a situation where the customer’s and the broker’s interests are directly at odds. The good news is that from the end of 2012, commission-based investment sales will be outlawed.


Commodities are the basic building blocks of our economy – essential raw materials like metals, oil, agricultural products, and even energy sources. They are generally interchangeable (a barrel of oil is a barrel of oil regardless of producer) and traded on exchanges where their price fluctuates based on global supply and demand. These fundamental resources are then transformed into the things we use every day, from furniture to gasoline to the clothes on our backs.

Common Stock

US term for shares. The UK primarily uses the term shares to refer to units of ownership in a company, especially when talking about individual listed companies. “Stocks” is still understood but less common.

Compound Interest

The investor’s best friend. It’s a snowball effect which can multiply your many times over your investing lifetime. See the Miracle of Compound Returns.
Conditional trading: When a company decides to float its shares on the stock market it may decide to perform this in two distinct stages. Once the offer price has been confirmed, and before the shares are officially admitted to the Stock Exchange, they can be unofficially traded. This is known as conditional trading, as the shares are being traded on the condition that they will be officially admitted to the Stock Exchange.


Someone who borrows your watch and tells you the time in return for a fee.

Consumer Price Index (CPI)

The Consumer Price Index, or CPI, acts as a virtual shopping basket for a typical consumer. By tracking the price changes of this basket over time, the CPI measures inflation or deflation. Essentially, it tells us how much more (or less) you’d need to spend today to buy the same amount of stuff you bought yesterday.

Contracts for Differences (CFDs)

A way of betting on shares, indices, exchange rates or commodities. These are high-risk products that allow you to make geared bets on short-term price movements, both up and down.


A piece of software that gets downloaded into your computer when you register with a web site. It can provide the website with details of how you use the site.

Cookie Cruncher

Something that knows what a cookie is and eats it.

Cookie Monster

Something that eats Cookie Crunchers, naughty children, stray dogs and day traders. Cookie Monsters also like honey.

Corporate Action

A general term covering anything that a company does that may affect its shareholders. Examples include a share split or a share buyback.


A corporation is a legal entity separate from its owners (shareholders). It can own property, sue and be sued, and has limited liability, meaning shareholders’ personal assets are generally protected from debts incurred by the corporation. This structure allows corporations to raise capital by issuing stock and facilitates growth while managing risk.


A decline, usually short and steep, in the prevailing price of shares traded in the market or an individual share. Any time that commentators cannot find a reason for an individual stock or the entire market falling, they call it a correction. It sounds better than a “Crash”.


Introduced in 1996, this is a computerised system to settle up share purchases. No more bits of paper passing hands any more.


Someone you owe money to, like the Inland Revenue. See debtor.


“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. This is as opposed to ex-dividend. If restrictions on entitlement to dividends didn’t exist, people would simply buy shares the day before the dividend was due, collect it and then sell them the day after.

Current Ratio

A measure of whether a company is able to meet its short-term liabilities. The higher the ratio, the more secure the company should be. The Current Ratio is calculated by dividing the total of Current Assets by Current Liabilities. You can find these figures in the company’s balance sheet.


Not a bicycle missing a wheel, but a description of a company, such as a steel maker, that is ultra-sensitive to the business cycle. Some investors enjoy buying and selling cyclicals according to which way they think the cycle is going next. Like any form of market-timing, this is a tricky exercise to get right.



German index of major companies, broadly equivalent to the Dow Jones Industrial Average.

Day Trader

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.


A long-term loan, similar to a bond.

Defensive Share

A company that is less exposed to the vagaries of the economic cycle is called a defensive share. Typically, these would be pharmaceutical companies or food retailers. The theory goes that even in times of depression we’ll still be buying similar amounts of drugs and food.


Opposite of inflation. A rise in the value of money.


People, or businesses, that owe you money. Usually, it is your biggest client… or your brother.


The process building societies or other mutual organisations go through when they convert to banks and thus go from being owned by their members (in a building society, the borrowers and savers) to being a public limited company owned by shareholders.


Depreciation is an accounting concept that recognizes that tangible assets, like buildings or machinery, lose value over time due to wear and tear, or even simply becoming outdated. Instead of treating the entire purchase price of the asset as an expense in the year it’s bought, depreciation spreads that cost out over the asset’s estimated useful life. This provides a more accurate picture of a business’s financial health and affects how much tax they owe. It’s like paying down a loan on the asset, bit by bit, with each year reflecting how much value it has used up.


While shares are actual assets, derivatives represent contracts to buy or sell a particular security at a given point in the future for a particular price. Options, warrants and futures are derivatives. They can be used to lessen investment risk, but often their main attraction is that they are highly geared and can thus offer spectacular profits… and spectacular losses.

Dilution Levy

Bid-offer spreads are not allowed for OEICs. Instead, they have a dilution levy which is supposed to cover the cost for the hassle of someone buying into or selling out of an OEIC. The money goes into the OEIC’s fund itself, not the pockets of the company running it.


These people form the Board of Directors and are legally responsible for running a company. If they transgress they can go to jail. If they run the business properly they can make themselves, and you as a shareholder, very rich.

Discount Rate

This is the rate applied to a future cash flow in order to determine its current value. For instance, applying a discount rate of 8%, a payment of £100 in 10 years’ time is currently worth 100/(1.08^10), or £46.32. The flip side of this is that if we have £46.32 now and it grows at 8%, then in ten years’ time it will be worth £100. The discount rate is often based on long-term interest rates (see Redemption Yield).


A distribution from a company to a shareholder in the form of cash, shares, or other assets. The most common kind of dividend is a distribution of earnings.

Dividend Cover

A figure showing how many times dividends are covered by profits. For example, if a company’s earnings per share was 10p and it paid a dividend of 2p, its dividend cover would be 5 (10p/2p). Generally speaking, the higher the number for dividend cover, the safer the dividend should be.

Dividend Yield

The dividend divided by the current share price, expressed as a percentage. Different companies have different policies on the size of their dividend payouts.

Dow Jones Industrial Average

The most commonly quoted measure of the US stock market. It contains 30 companies chosen by editors of Dow Jones & Company that reflect the landscape of corporate America.



The amount a company says it added to shareholders’ funds after all the costs of delivering a product or service have been accounted for. See Earnings Per Share.

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 the shares should trade.


Horrible acronym standing for Earnings Before Interest, Tax, Depreciation and Amortisation.

Enterprise Value

The sum total of the market value of a company’s debt and equity. It represents an open market valuation of the business or enterprise that supports it. In other words, how much a company is actually worth. It has no direction relation to book value. Commonly shortened to EV and divided by EBITDA to give a valuation ratio favoured by high-powered City types.


EPIC stands for Exchange Price Information Code. It is a three or four character code, unique to every company listed on the London Stock Exchange, used as a shorthand method of identifying a company. They are sometimes referred to as Symbols or Tickers.


Unit trusts hold a collection of shares and therefore receive a constant stream of dividend payments. This income is normally only paid out to investors twice a year. When a new investor buys into the fund part of his purchase is represented by accrued dividends. At his or her first distribution payment, part of the sum will represent the return of capital equal to the accrued dividends. This amount is regarded as capital, not income, and is called an equalisation payment. Easy.


A concept that comes from “equitable claims.” Equities are essentially shares of stock. Because they represent a proportional share in the business, they are equitable claims on the business itself.


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. These shares have “xd” next to their price listings in the papers.

Exceptional Items

These are features in the profit and loss statement that are not expected to occur regularly. They are typically profits or losses recorded by selling businesses, or charges incurred in closing activities down. They make interpreting of accounts, especially earnings per share, more difficult. It is one reason why companies also produce adjusted figures to show the underlying performance of the company.

Exchange-Traded Funds (ETFs)

An exchange-traded fund (ETF) fund that tracks an index but that can be bought and sold via a broker.

Execution-only Stockbroker

Stockbrokers who offer fewer of the services championed by advisory stockbrokers, but charge cheaper transaction fees. Basically, you tell them to buy or sell a particular share and they get on and do it with no frills and no hassles. Often they hold your shares in a nominee account. Execution-only brokers are ideal for do-it-yourself investors. They are called discount brokers in the USA.

Exit Charge

sales charge paid for redeeming a unit trust or other investment. See Front-End Loading.


Fair Value

The theoretical price at which a company is “fairly valued,” meaning that it would not be reasonable to assume that the shares will rise. Fair value at any given point is derived from a number of qualitative and quantitative aspects of the business.

Final Salary Scheme

Most occupational pension schemes still calculate the pension as a percentage of final salary (maximum 40/60ths), also known as a defined benefit scheme, although are changing more and more to money purchase schemes.

Financial Ombudsman Service

Got a complaint about a financial product that you’ve been unable to resolve with the company that supplied it? Then give these people a try.

Financial Services Authority (FSA)

The regulator for the financial services industry. Check out their web site here.

Fixed Asset

Something solid a company owns that hurts your shin if you fall over it; like a factory. See Intangible Asset.


See New Issue.

Flying Freehold

A term used to describe that part of a freehold property which is built above land which is not part of the property freehold, e.g. a bedroom built over a common access passageway.

Flying Trapeze

Circus act involving high levels of skill, courage and sequins.


Most Excellent One who exhibits a high degree of Foolishness. Also, a user of The Motley Fool websites. Always spelled with a capital ‘F’


The state of being wry, contrary, canny and capable of looking after your own investments. Fools believe in shares as the long-term path to wealth creation and believe in buying and holding good companies for the long haul based on their fundamental financial and business strengths. Also see Wisdom.

Free Float

The proportion of company’s shares that are available to buy and sell. Some public companies have one or two shareholders who hold 50% or even more of its shares.

Front-End Loading

A sales charge paid when many types of investment are purchased. In extreme cases, it can amount to the whole of the first two years’ contributions. Have a very good reason indeed to buy an investment product with heavy front-end loading charges. See Mis-Selling.

FT 30

For many years, the FT 30 was the index most often quoted in relation to the London Stock Exchange. It was originally conceived as being the UK equivalent to the Dow Jones Industrial Average, but is little quoted now.

FTSE All-Share Index

An index containing the 600-700 largest companies on the London Stock Exchange. Like the FTSE 100 and FTSE 250, the index is named for the Financial Times (FT) and the London Stock Exchange (SE), who are its joint owners.

FTSE 100

The FTSE 100 is an index containing the 100 largest companies by market capitalisation on the London Stock Exchange. Came into being in 1984 and largely superseded the FT 30.

FTSE 250

The FTSE 250 is an index, created in 1992, containing the next 250 largest companies by market capitalisation on the London Stock Exchange after those in the FTSE 100. Together with those in the FTSE 100, the companies in this index make up the FTSE 350.

Fund Sector

The category, by geography or industry, in which the fund will invest.

Fundamental Analysis

An investing method that involves looking at a company’s accounts to see whether it is appropriately valued.


A type of derivative that allows you to bid for the right to pay a future value on either an index option or a commodity. Futures are generally a high-risk investment.



“Mind the…” No, nothing to do with the tube at Embankment station, this is an acronym for Generally Accepted Accounting Principles, employed in the accounts you’ll see in company reports.


Global Depositary Receipt. Similar to an ADR but used for international stocks traded in London as well.


Buy a house for £200,000 with a deposit of £20,000 and the rest as a mortgage. Six months later, sell it for £240,000 and you’ve made 200% profit on your original investment: that’s gearing. Of course, it can work the other way too: see negative equity. 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 by homeowners to allow them to buy a home.


The difference between what a company pays for another company and the book value of that company. In the unlikely event of the book value being higher than the purchase price, then you get Badwill.


When the government needs to borrow money, it sells you these. They are government bonds and as a rule the interest is paid gross (i.e. free of tax). They are very safe and their US equivalent is the Treasury bill, or “T-Bill”. See risk-free rate of return.


A process designed to smooth out price fluctuations after a company has issued new shares. The investment bank involved will actually sell more shares than it has initially contracted to. If the market is strong, and the shares are taken, the bank will go the company and ask for the additional shares to be issued to satisfy the demand. However, if appetite for the issue is weak the bank will buy the shares back as if they have effectively never been issued.

Gross Profit

Gross Profit is calculated as “sales less all costs directly attributable to those sales”. These costs might include, for example, raw materials and manufacturing labour.


The payment of any form of income (interest or dividend payout) without the prior deduction of tax. Errol Flynn knew all about ‘gross’: “My problem is reconciling my gross habits with my net income.” Also, see net profit.


An increase in the capital value of an asset.


Hedge Fund

A fund, usually marketed to the ultra-wealthy, that attempts to make money out of small inefficiencies in the financial markets such as the difference between the price of a share in London and New York.



The return from an investment on a sustainable basis.

Independent Financial Adviser (IFA)

A financial adviser who is not employed by a particular company to market their products. They may currently be paid by commission*, which in the Fool’s view can generate a conflict of interest, or else by agreed fee.

* The Financial Services Authority (FSA) has stated that financial advisors (independent or otherwise) will be banned from receiving commission as from the end of 2012.


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. See FTSE 100, FTSE ASI, FTSE 250, FT 30.


Something which increases at the rate of inflation is index-linked. Some gilts are index-linked and the old age pension is index-linked.

Index Tracker

A fund follows a given stock market index such as the FTSE 100 or the FTSE-All Share Index. The Fool likes them, as they charge much less than other funds and consequently tend to do better in the long run.

Individual Savings Account (ISA)

ISAs started in April 1999 and replaced PEPs and TESSAs. ISAs are schemes to protect your investments (shares, bonds, cash or insurance funds) from tax. Think of them as a tax-free wrapper.


Inflation is the fall in the value of money.

Initial Charges

The fees payable to the fund manager at the time a fund is purchased. Ostensibly, this is to cover the spread.

Initial Commission

Another name for initial charges.

Initial Public Offering (IPO)

The US name for a company’s first sale of shares to the public. In the UK we call it a New Issue.

Insider Dealing

This is when you buy or sell a share and at the same time possess privileged information that would move the price if it were widely known. It’s illegal, but is also widespread and there are few prosecutions for it.


Institutional investors include pension funds, unit trusts and insurance companies. These are the big players in the stock market as they have a lot of money to invest and as major shareholders they often have a say in company decisions.

Intangible Asset

An asset in thin air that someone thinks is valuable. Typically this could be a brand name, the rights to a process or a publishing title. See Fixed Asset.

Internal Rate of Return

This is the interest rate which, when used as the discount rate for a series of cash flows, gives a net present value of zero. In other words, if we assume that we invest some money now (giving us an initial negative cash flow figure) and get some cash flows back in the future (giving us positive cash flow figures), it is the overall rate of growth on the investment.

Investment Club

Group of investors which meets regularly to discuss which shares to buy and sell out of a common fund. Investment clubs are increasingly popular.

Investment Fund

A pooled collection of funds, owned by one or more investors, that is managed as one entity by one or more managers. The legal structure of the fund can take many forms and can include Unit Trusts, Investment Trusts and Open Ended Investment Company.

Investment Trust

An investment trust is a public limited company that makes investments into a variety of other companies. Notwithstanding several important differences to unit trusts, these are also pooled stock market investment funds. Unlike unit trusts they can take on debt that can amplify the underlying movements. See Gearing.


See Individual Savings Account.


The Irish stock market index.



A slang expression for a Market Maker.

Junior market

Often used to describe a lesser regulated stock exchange, such as the Alternative Investment Market in the UK.


Kicking The Tyres

Performing due diligence on a company before investing in it.


Large Cap

See Market Capitalisation.


The US term for gearing.


This is not a typographical error but the name of the futures market in London. It (nearly) stands for “London International Financial Futures and Options Exchange”. See Futures.


A performance measure, most often used in the retail trade, to measure the underlying growth in the business, by eliminating growth arising from the opening of new outlets or closure of old ones. It can also be used to strip out the effect of acquisitions or disposals.

Limit Order

When you place an order with a broker to buy or sell a share you can either instruct them to deal at the best price they can get (known as “at best”). Alternatively you can place a limit order to buy (or sell) only if you can get below (or above) a certain price.

Listed Company

A Public Limited Company (plc), listed on a Stock Exchange.


The easier it is to turn an asset into cash, the more liquid it is. Shares are very liquid as they can be sold any weekday at any brokerage. Works of art and homes are not nearly as liquid because you need to find an interested buyer. Since every buyer needs a seller and vice versa, penny shares, which are very thinly traded, are more illiquid than larger capitalisation shares.

Loan Note

A fancy financial term for an IOU. It is a transferable debt that can be sold by the lender.

London Inter Bank Offer Rate (LIBOR)

The rate at which big banks lend to each other.

London Stock Exchange

Where the action happens. The London Stock Exchange is located in the City and is not only by far the most significant stock exchange in the UK, but the largest in Europe. See Alternative Investment Market.



1. Borrowing money to use specifically for buying securities of any kind in a brokerage account.

2. A measure of profitability of a company, like profit margin, operating margin or gross margin.

Market Capitalisation

The total market value of all of a firm’s outstanding shares. Market capitalisation is calculated by multiplying a firm’s share price by the number of shares outstanding. Large cap, medium cap, small cap refer to shares in decreasing order of market capitalisation.

Market Maker

A market maker is someone who undertakes to always make a two-way price in a share. In other words at all times they will display a price at which they are prepared to buy and a price they are prepared to sell. In reality they reflect underlying demand for the shares and are not at liberty to simply make whatever price they like.

Medium Cap

See Market capitalisation.


Profits due to the outside shareholders of a subsidiary company. It is also that element of a company’s balance sheet that is funded by outside equity interests.


Selling a financial product to a customer which is not in their best interests. Mis-Selling often happens because of the commission-based payment structure under which Independent Financial Advisers operate.

Monetary Policy Committee (MPC)

The division of the Bank of England that meets at the start of each month to decide what to do with interest rates.

Money Laundering

Money laundering involves illegally obtained funds being disguised as legitimate investments. This can artificially inflate a company’s stock price or mask underlying financial problems. Investors should be wary of companies involved in money laundering schemes, as they risk losing their investment if the illegal activity is exposed.

Money Purchase Scheme

Pension schemes where you build up a pot of cash, out of which your pension will be generated. This pot of cash has to be used to buy an annuity.

Mutual Society

An organisation set up and owned by its members and run for their benefit. Building societies, friendly societies and some life insurers are examples of mutual societies. See Demutualisation.


Nasdaq National Market

A national US stock market where trades are made exclusively via computers. The second largest market in the country, the Nasdaq is home to many high-tech firms.

Negative Equity

Bought a house for £200,000 and now it’s only worth £160,000? Bad luck – that’s £40,000 of negative equity you’re sitting on there. See Gearing.

Net Asset Value

Also known as Shareholder’s Funds. This is the sum of all a company’s assets less all its liabilities. In principle it is the money that would be left if a company sold all its assets and paid all its debts. An investment trust regularly publishes its Net Asset Value in order to demonstrate the latest value of its investments.

Net Income

Net income is a company’s bottom line. It represents the company’s true profit after all expenses, including operating costs, taxes, and interest payments, have been subtracted from its revenue. In simpler terms, it’s the cold, hard cash left over after the bills are paid, indicating a company’s financial health and potential for future growth.

Net Profit

Usually enough to support the Chairman’s gross habits. What’s left for the shareholder after everyone else has taken their cut.

New Issue

The first time a company is floated on the stock market. Selling your company, or a part of it, to outside investors is a way to raise money for expansion plans. Also known as an Initial Public Offering, or IPO.

New York Stock Exchange (NYSE)

The largest and oldest stock exchange in the United States, this Wall Street haunt is the one frequently featured on television, with hundreds of traders on the floor staring up at screens and answering phones, ready to trade stocks upon command from their firms.

Nil Paid

Shares on which no payment has yet been made but which are being dealt in on a stockmarket. These shares usually arise from a new issue or a rights issue. Because the price at which a rights issue is made is at a discount to the market price of the existing shares, the rights issue shares have a value in their own right.

Nominee Account

A type of account in which execution-only stockbrokers tend to hold shares belonging to clients, to make buying and selling of those shares easier. Among other things, though, it does mean that any shareholder perks are unlikely to be enjoyed by the investor.

Normal Market Size

This is maximum number of shares in a company that a market maker is obliged to deal in at the prices that they are quoting.


Occupational Pension Scheme

Contribute to your firm’s pension scheme and get a maximum of 40/60ths of your final salary. Few, very few, get this much, though. Your occupational pension may well not be enough for your retirement. See Final Salary Scheme and Money Purchase Scheme.


See Open Ended Investment Company.

Online Investing

The same as offline investing, except using the extraordinary resources of the Internet to help you out. Simply reading this sentence puts you far ahead of the pack in the process of becoming an online investor.

Open Ended Investment Company

Open Ended Investments Companies are replacing unit trusts and indeed many unit trusts are already converting to them. Ostensibly, they will be simpler for investors to understand and the charges will be lower as there will not be a bid-offer spread between the buying and selling prices. In practice this is replaced by a “Dilution levy”. Plus ça change….
Operating Profit: Operating Profit is gross profit less all other expenses except for interest and tax. Consequently, it is also known as profit before interest and tax. In Wisespeak it is also known as EBIT, or Earnings Before Interest and Tax.


Contracts that give a person the right to buy or sell an underlying share or commodity at a set price within a set amount of time. The majority of options expire worthless. See Derivatives.

Ordinary share

Most of the shares traded on the London Stock Exchange are ordinary shares. Owning them entitles you to dividends but in the event of the company being wound up these shares come at the bottom of the pile, after bonds and preference shares.

Orphan assets

Assets that are no longer required by life assurers to satisfy their future liabilities to policyholders and shareholders. Some life companies which have been going for many years have accumulated surplus funds, the precise ownership of which may be obscure and can be a matter of contention. Others may suffer the reverse problem, in which case they go bust.


Partial Offer

A form of takeover where a bidder only offers to buy a certain percentage of a company’s shares.

Penny Share

A share of very low market capitalisation (often a few million pounds) trading in multiples of just a few pence. Penny shares tend to be very volatile, subject to extreme price fluctuations on the flimsiest of rumours, and are far riskier than larger shares. See Liquidity.

Personal Equity Plan (PEP)

Started in 1987. Up to April 1999 you were able to put up to £9,000 per year into equity-based investments in one of these and allow it to grow tax free. Any PEPs that were still in existence in 2008 were automatically converted into ISAs.

Phillips Curve

The Phillips curve depicts a trade-off between unemployment and inflation. Like a teeter-totter, low unemployment might cause prices to rise as companies compete for workers, while high unemployment can lead to lower inflation (or even deflation) as wages stagnate. However, this relationship isn’t perfect – the teeter-totter can get stuck! While a helpful concept, the Phillips curve isn’t a guaranteed rule.


Permanent Interest Bearing Shares. These are a form of bond, which are issued by building societies.


An issue of new shares, by a company, direct to investors to raise additional funds. It is often used to pay for the acquisition of another business.


A collection of securities that provides a balance across several sections of the market. This provides maximum exposure to high returns while minimising risk.

Preference Shares

Shares issued by companies that have additional rights, normally in terms of dividends.

Price/Earnings Ratio (P/E)

P/E Ratio is a measure of a share’s price in relation to its last twelve months’ earnings per share. Often, the higher the sustainable growth rate of a company, the higher its price-to-earnings ratio.

Price To Book

Price to book ratio is used to value a business. It is calculated by dividing the market capitalisation of a company by its shareholders’ funds.

Price To Sales

Price to sales ratio is another ratio used to value a business. It is most often used where a company is yet to make profits. It is calculated by dividing the market capitalisation of a company by its latest annual sales.

Private Equity

Also known as venture capital. Private equity groups buy other business. They put up a fraction of the cost themselves and the balance is usually funded by debt.

Profit and Loss Statement

The most important of the three key financial statements contained within the annual report to equity investors. It explains how the balance sheet has changed over the year and gives a figure for the profits reported. It does not necessarily reflect the cash has company has made or lost during the year. Also known as Profit and Loss account, P&L.

Profit Before Interest and Tax (PBIT)

As for operating profit, but adding in any income from associates and deducting charges for head office, exploration, research and development.


A prospectus must be issued by any company before it issues shares to the public. This gives some background to the company and details about its business and financial state.


A charge made against the assets of a company for some cost which will be incurred in the future, but has yet to be paid out. This could be taxes for next year, or the future cost of cleaning up old industrial sites.

Public Limited Company (plc)

As opposed to private, a company is public after it issues partial ownership of itself, in the form of shares, to the public. Only plcs can be listed on the London Stock Exchange or the Alternative Investment Market.


Quarterly reporting

In the US, every three months a company is required to file a report providing investors with juicy details on how the company is doing. It’s becoming increasing fashionable in the UK, especially among larger companies.



When a company is unable to pay its debts it may be put into receivership. A receiver is appointed to run the business and they will sell its assets in order to pay off its debts.

Red Herring

The slang term for a pathfinder prospectus prepared for a US issue and used in pre-marketing. It contains all the details of the issue except the price. The front page is covered in red ink, warning potential investors of all sorts of dire consequences if they were to invest in this company.

Redemption Yield

This figure generally refers to gilts, but it can be calculated for any type of bond. Strictly speaking, it represents the internal rate of return on a bond, bought at a specified price and held until maturity. Basically, this means that its the interest rate that you are getting if you buy a bond at the current price and hold it until it redeems in however many years’ time. The redemption yield on gilts is often used to provide a figure for the fundamental, risk-free, interest rate on money for a particular period. Current redemption yields can be found in the Companies and Markets section of the Financial Times, under the heading “UK Gilts Prices”.

Relative Strength

A measure of how a share is performing relative to other shares in the market. A value of less than 1.0 implies the stock performed weaker than the market and vice versa. Here’s the formula: Relative Strength = (Current Price/ Year-Ago Price) / (Current Index Value/ Year-Ago Index Value)

Return on Capital Employed

Often shortened to ROCE. This ratio is a measure of how effectively the company is using its capital. The formula looks like this: Profit before interest and tax (PBIT) / (total assets – current liabilities)

Retained Earnings

Retained earnings are the profits left in the business each year, if any, after all charges have been paid and dividends declared. This number is added, or subtracted if it is a loss, to shareholders’ funds at the end of the year.


The money a company collects from a customer for a product or service. See Earnings.

Reverse Takeover

When a small company notionally buys a bigger one. Although it is the small company doing the buying it is the shareholders of the larger company that end up controlling the enlarged entity. It’s a complex process that is mainly used by corporate advisors as an excuse to charge higher fees.

Rights Issue

When a public company creates new shares. Existing shareholders are generally offered the right to purchase a certain number at a discount to the market value. In the USA, a rights issue is a form of secondary offering.


Something it often pays to take, as long as you fully understand what you’re getting into. See Risk-Free Rate of Return.

Risk-Free Rate of Return

The interest rate you get on gilts. Because the British Government is reckoned to be one of the least likely entities in the world to default on a loan, this rate of interest is reckoned to be about as close to risk-free as you can get. The equity risk premium is the average amount by which share returns are higher than gilt returns.


Scrip Dividend

Instead of paying a dividend out in cash, some companies will issue with new shares of the same value instead. This is known as a scrip dividend.


The London Stock Exchange’s system for trading in mid-size and smaller companies. SEAQ stands for Stock Exchange Automated Quotation. Larger companies are traded on the SETS system.

Sector Rotation

A trick used by brokers to make us trade more. The brokers try to anticipate which parts of the economy will do best in the next few months and consequently advise you to shift funds from one sector to another. The net effect is that everyone tries (unsuccessfully) to outguess each other and you end up paying more in charges.


A “security” is just a blanket way to refer to any kind of financial asset that can be traded.

Securities & Exchange Commission (SEC)

The United States agency charged with ensuring that the U.S. stock market is a free and open market. All companies with stock registered in the United States must comply with SEC rules and regulations, which include filing quarterly reports on how well the company is doing.


The Stock Exchange Electronic Trading Service (SETS) is the formal name for the electronic trading order system introduced on the London Stock Exchange in October 1997.


A security that represents part-ownership of a company.


If you buy even one share in a company, you can proudly call yourself a shareholder. As a shareholder you get an invitation to the company’s annual meeting, and you have the right to vote on the members of the Board of Directors and other company matters.

Share Buyback

A share buyback is when a company buys back its own shares from the market. This effectively reduces the number of outstanding shares and increases the value of the shares that are left in the market. A company will repurchase its own shares if it thinks they may be undervalued or if it has surplus cash that could not be invested better elsewhere.

Share Split

See Bonus Issue

Shell company

A company listed on the Stock Exchange that does have any business operations. It usually just owns some cash, so such companies are also referred to as cash shells.


“Going short” or “shorting” is betting that the price of a security will fall by selling shares that you do not own. If the price falls you can then buy the shares at the lower price, close the position, and pocket the difference. The risk in shorting is that there is no limit to how high a share price can rise, and therefore no limit to how much you can lose if you have to buy back at a higher price to close the transaction.


Self Invested Personal Pension. Like an ordinary pension but the plan holder, i.e. you, calls the shots in terms of which investments fill the plan.

Small Cap

See Market capitalisation.


See Bid-Offer Spread.


After a company issues new shares the investment banks who handled the process may buy and sell shares in the following weeks in order to stablise the share price. This process, believe it or not, is known as stabilisation.


A short-term trader who subscribes for new issues in the hope of selling them immediately they are listed for a quick profit.


Stakeholders are any group that can affect a company’s success, either directly or indirectly. This includes employees, customers, suppliers, and even the community. Understanding their needs and concerns helps investors assess potential risks and opportunities, as a happy workforce, loyal customer base, and strong community ties can all contribute to a company’s long-term profitability.

Stamp Duty

Stamp duty is a tax you pay on buying shares (0.5%) or buying properties.

Standard and Poor’s 500 Stock Index (S&P 500)

The S&P 500 is an index of 500 of the biggest and bestest companies in American industry.

Stock Exchange

A place where stocks and shares are bought and sold. The London Stock Exchange serves this function in the UK.

Stock Overhang

When a large seller is known to be trying to offload a large chunk of shares it is said to be overhanging the market. This often depresses the share price of the company concerned until all the shares have been sold.

Stock Split

US name for a bonus issue.


The same as a share and used more commonly in the USA. A share of stock (confusing, yes — just use the two interchangeably, everyone else does) represents a proportional ownership stake in a corporation. Investors purchase stock as a way to own a part of a publicly traded business.


Woody Allen described a stockbroker as someone who invests your money until it has all gone. Normally it is a middleman who buys and sells shares on your behalf and earns commission on the transactions. Considered by many to be the fifth-oldest profession after prostitutes, pimps, tax collectors and accountants.

Stop Loss

A trading system whereby people will automatically decide to sell their shares if they fall by a set amount.


A company in which between 50% and 100% of the shares are held by another company is deemed to be a subsidiary. It is normal practice to assume that the parent controls the subsidiary. It is important for accounting and analysis, because 100% of the revenue and profits down to the pre-tax level are ascribed to the parent company. The amount of profit due to the other shareholders is deducted at a line called minorities.


An abbreviation for a company’s name which is used as shorthand by share quote reporting services and various online sites.



When one company buys another. Takeovers can either be friendly, where the target company is happy to be bought, or hostile, when the approach is not welcomed.


It pays for the hospitals, roads, police and much more. Stop whinging.

Tax relief

A saving of tax arising from the right to deduct particular types of payments or losses from taxable income or gains. This includes payments for specific purposes that are statutorily allowable, as well as the general right to deduct losses from gains for capital gains tax purposes, or business losses from other income for income tax purposes.

Technical Analysis

The strategy of studying price charts and other market data, such as trading volumes, to predict future price movements. If you ask us, it’s a little bit dubious.

Tender Offer

When a company wishes to buy back its shares it might do so via a tender offer. Shareholders say what price they are willing to sell their shares for and the company accepts the best offers it receives.


Tax Exempt Special Savings Account. In 1999, it was replaced by the Individual Savings Account.

Total Return

What investors are most interested in. The total amount of growth in value – in whatever form – that something provides. For shares, this is made up from price rises and dividends.


The government’s finance department.



What occurs in the office the day after a particularly heavy office party the night before. This is also what many professionally managed investments do, as compared to the index.


The stockbrokers who help a company come public in a New Issue. They underwrite (vouch for) the stock. When a company has been brought public, the shares have been underwritten.

Unit Trust

Your money is invested with thousands of others in one pooled fund. Presiding over the fund is a manager or managers responsible for achieving the fund’s stated investment objective. Most unit trusts underperform the index and have high charges.



The determination of a fair value for a security. If you don’t use some reasonable method, then you have what is technically called a “guess” or a “hope.”


Market volatility is the degree by which a share price tends to move. The more the price jumps about, the more volatile the share.


The number of shares that have been traded in any defined period. It can give some indication of the validity of associated price movements. If only a few shares are traded a sharp price movement may not be very meaningful. Heavy trading in a share may signify a major development.

Volume-Weighted Average Price (VWAP)

The Volume-Weighted Average Price (VWAP) serves as a crucial metric in technical analysis, representing the average price at which a security trades throughout a trading session. It incorporates both price and volume data to provide a more nuanced understanding of a security’s performance compared to a simple arithmetic average price.


Wall Street

Also known as “The Street” in US cocktail-party patter, this is the main drag in New York City’s financial district.


A certificate, usually issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price, usually above the current market price, for an extended period, anywhere from a few years to forever.


A widget is universal catch-all name to describe things that factories make and, hopefully, sell for a profit. They are solid things that hurt if you drop them on your toe. Things like fridges.


The state of being Wise. For example, the financial services establishment who seek to sell you inherently underperforming investments that are hobbled by heavy charges.


See Wisdom.

Working Capital

The amount of money tied up in a company just to keep it running. This usually means stocks of widgets it has made but not yet sold, debtors, creditors and cash in the bank.


XD or X Div

An abbreviation for ex-dividend.



The annual income provided by a fund expressed as a percentage. Normally calculated by dividing the current price of the fund into the dividend income. See also Dividend Yield.

Yield Curve

A graph illustrating the projected yield from government securities (including gilts) over the next 10 years or so. It stretches from overnight money to the 10-year bond. In a normal market, money costs more in the future, but when an economy is approaching a recession it is common to see short term costing more than long term money. The yield curve shows you this and also shows how your mortgage might be affected.

Yield Gap

Also often expressed as the yield ratio. It is the difference between yields on 10-year bonds and dividends on the All Share Index. Typically, bonds yield twice as much as equities because they have no growth. The yield gap is watched closely by many “value investors”.



A dance performed by joyous Fools at midnight on the night of the full moon closest to April Fool’s Day. Also, a town in the Southern Philippines, bordering the Sulu Sea and renowned for piracy.