Glossary - A

Abandon
The choice made by a holder of a covered warrant to allow it to expire without exercise.

Absolute percentage growth
Expresses the growth of a fund’s value as a percentage over the specified period. A negative figure would indicate a decline.

Accrual swap
An interest rate swap under which a counterparty pays a vanilla floating reference rate, usually three or six month LIBOR, and receives LIBOR plus a significant spread. Interest payments to this counterparty will only accrue on days when rates stay within a certain range dictated by preset upper and lower boundaries.

A binary accrual swap is a contract in which any breach of the range boundaries cancels all further potential for accrual. A simple accrual swap is constructed from a conventional interest rate swap plus a short binary strangle with a maturity equal to the LIBOR fixings.

Versions are available where the upper and lower ranges step up or down over the life of the swap, and where the holder can reset or cancel the range at specified times.

Accumulation unit
Units in a unit trust that do not pay income to the investor, but redistribute dividend income from the underlying investments back into the capital value of the units instead.

Actively managed funds
Funds in which the fund manager uses his or her professional judgment to decide what to buy and sell, with the aim of outperforming the relevant benchmark. Contrasts with index funds.

Administration charge
The management charge made by your broker for looking after your nominee portfolio or account.

ADR
See American depositary receipt

Adviser
A person who is qualified to discuss your financial affairs in detail, listen to your needs and make appropriate recommendations.

Aggregation
See bulking

AGM
See Annual General Meeting

AIM
See Alternative Investment Market

All or nothing
When placing a trade above normal market size via a personal telephone service, you may be asked whether you want to trade ‘all or nothing’ or ‘as many as possible’. All or nothing means that a broker will endeavour to trade your entire instruction. If this is not possible, your order will not be executed.

Allotment
The number of shares received on application for a new issue or privatisation. This may be less than the number applied for, but never more.

Allotment letter
See letter of allotment

Alpha
A measure of the risk adjusted performance of an investment fund. The alpha will be positive where the average return on the investment is greater than expected and negative where it is less than expected.

Alternative Investment Market (AIM)
The London Stock Exchange’s market for growing and smaller companies. Created in 1995, it enables companies to attain a listing that is both more affordable and doesn’t require them to meet the stringent criteria for full quotation.

American depositary receipt (ADR)
An ADR is effectively a bearer document that allows American investors to own shares in foreign corporations. They are tradable receipts that show that the underlying shares are held on deposits by a bank in the corporation’s home country. The bank collects dividends, pays local taxes and converts them to dollars for distribution to shareholders.

American option
An option which the holder can exercise at any time until expiry.

American style warrant
Allows the holder to exercise the covered warrant at any time on or before the expiry date.

Analyst
An expert in evaluating financial investments such as equities, bonds and Government stocks; undertaking investment research; and making recommendations to institutional and retail investors to buy, sell or hold. Most analysts specialise in a single industry or business sector.

Annual General Meeting (AGM)
The meeting that a company normally holds with its shareholders after announcing its annual results to approve the accounts, reappoint directors, auditors, etc.

Annual report and accounts
A statement of the financial condition of the company and its activities over the past financial year. Includes the company’s profit and loss account, balance sheet, notes and statement of cash flow. All publicly listed companies are obliged to make these available to shareholders. They can be obtained from the company’s website, by writing to the company’s head office or via the broker who holds your nominee account.

Annual management charge
A charge levied by the fund manager to cover the cost of the fund’s investment management and administration, usually for unit trusts and OEICs.

Annuity
An income guaranteed for life paid in return for handing over a lump sum. An annuity is bought at retirement by holders of most personal pension plans and members of money purchase company schemes.

Arbitrage
The simultaneous purchase and sale of identical or equivalent financial instruments in order to benefit from a discrepancy in their price relationship. A person or institution engaging in arbitrage is known as an arbitrageur.

ARCH
See autoregressive conditional heteroskedacity

As many as possible
When placing a trade above normal market size via a broker you may be asked whether you want to trade ‘all or nothing’ or ‘as many as possible’. As many as possible means that the broker will endeavour to trade as many as he or she can, up to the amount you have specified.

Ask price
The price at which the holder of the shares is willing to sell. Also known as the ask, asking price or offer price. Opposite to bid price.

Asset swaps
Interest or cross-currency swaps under which a specific interest or currency flow is exchanged for another – for example, a fixed for floating interest rate swap.

At best
An order placed with a stockbroker to buy or sell shares at the best price in the market at the time of dealing for the number of shares being traded.

At par
Used to indicate that the price of the instrument is equal to its nominal value.

At the money
A covered warrant is at the money when the strike price is the same, or very close to, the price of the underlying asset. It applies to both call warrants and put warrants.

Authorised unit trust
A unit trust authorised by the Financial Services Authority to operate in the UK.

Autocorrelation
The correlation between changes in a single variable over different time periods. If a price is negatively autocorrelated, a move down in one period would suggest a move up in the next, and vice versa. If it were positively autocorrelated, a move down would suggest a move down in the following period as well, and vice versa.

Autoregressive conditional heteroskedacity (ARCH)
A non linear stochastic process used in certain options pricing models, where the variance is time-varying and conditional upon the past variance.

ARCH processes have frequency distributions which have high peaks at the mean and fat tails, much like factual distributions. They are used commonly in modeling financial time series that exhibit time-varying volatility clustering – i.e. periods of swings followed by periods of relative calm. The generalised ARCH (GARCH) model is the most widely used.

Average strike option
An average strike option is a type of Asian option. Similar to a standard option, except that the strike price is taken to be the arithmetic average of the price of the underlying asset during the life of the option.