Glossary - C

Calculation agent
Normally one of the two counterparties to the transaction who is responsible for determining the recovery value of the reference obligation.

Call bonds 
The right to redeem outstanding bonds before their scheduled maturity.   

Call covered warrant
A covered warrant that gives the holder the right, but not the obligation, to buy the underlying asset at a future date and specified price.

Call option
Gives the buyer the right to buy shares in the underlying security at a fixed price before a specified expiry date.

Call payment
The payment which falls due in respect of any partly paid shares, such as rights issues. The company calls in payment from the holders of the shares.

Cap
A ceiling, or a maximum rate of interest under a loan. Opposite of a floor.

Capital
1. Financial assets, or the financial value of assets such as cash.
2. The factories, machinery and equipment owned by a business.

Capital appreciation
The growth of the earnings on an investment’s principal.

Capital gains
The profit made when any asset is sold.

Capital gains tax (CGT)
The tax levied on the gains earned above the CGT allowance on sale, transfer or disposal of securities or other specified assets in a given tax year. CGT is payable at a rate equivalent to the taxpayer’s highest rate of income tax.

Capital growth
The increase in an investment’s capital value excluding all income.

Capital loss
The loss made when any asset is sold.

Capitalisation issue
A means by which a company increases the number of its shares in circulation without raising more capital from existing shareholders. Additional shares are issued to existing shareholders in proportion to their holdings without payment. So if two new shares are issued for every one held, it is known as a two for one capitalisation issue. Also known as a scrip issue or bonus issue.

Cash bonus
An extra dividend paid out of exceptional profits in addition to normal dividends.

Cash dividend
A cash payment per share held, which is paid to shareholders net of tax. This tax is currently set at 10% for UK equities. Higher rate taxpayers are still liable for the balance of tax.

Cash fund
These are highly liquid funds that invest most of their assets in cash or near-cash instruments traded on the money market, such as bank deposits, certificates of deposit, very short-term bonds or floating rate notes. Also known as a money market fund.

Cash offer
A proposal to acquire shares in a target company by offering cash for stock. Usually occurs during a company takeover.

Cash settlement
Payment for deals the day after dealing.

CAT standards
Usually used with reference to ISAs, these are standards introduced by the Government that specify minimum requirements for Charges, Access and Terms. However, they are voluntary, don’t guarantee the performance of the fund or investment, and don’t apply to all types of ISAs.

Certificate
A legal document holding information on the holder and the number and type of shares held by the named person on the document.

Chargeable event
A transaction that leads to a chargeable gain and the issuing of a chargeable event certificate. For example, the sale of an investment bond with a life company that results in a gain will be classed as a chargeable event.

Chinese walls
Artificial barriers to the flow of information set up in large firms to prevent the movement of sensitive information across departments.

Chooser option
An option that is neither a call nor put until, at a predetermined date known as the choose or choice date, or at any time during a preset chooser period, the holder of the chooser may trade it in for either a call or put option.

Closing price
The last price quoted for a tradable instrument at the close of business or trading session.

Closing purchase
A transaction in which a writer purchases an option with the same terms as an option which he or she has previously sold, thus terminating his or her liability as a writer.

Collar
The simultaneous purchase of a cap and sale of a floor at different strike prices as a premium reduction strategy. The premium from the sale of the floor reduces the overall cost of purchasing the cap. If the premium raised by the sale of the floor exactly matches the cost of the cap, the strategy is referred to as a zero-cost collar.

Collective investment
A generic term for authorised unit trusts, insurance and pension funds, OEICs and investment trusts.

Commission
The charge made by a broker for buying and selling securities on a client’s behalf. Varies from broker to broker.

Committee on Uniform Securities Identification Procedures (CUSIP)
Committee that assigns identification numbers and codes to all securities. 

Commodity
A raw material traded on a commodities market, such as gold and silver.  Commodities are used in the production of goods. 

Common stocks
Securities that represent an ownership interest in a corporation, usually US.

Compliance oversight
Person appointed within an authorised firm to be responsible for ensuring compliance with the rules.

Compliance team
The team entrusted with ensuring that a financial institution is compliant with the Financial Services and Markets Act 2000.

Compound option
The right to buy or sell for a pre-agreed amount, at a set future date, a second option of predetermined specification. This second option is known as the underlying option or back option. The option to buy or sell the underlying options is known as the front option.

The compound option purchaser pays an initial premium, known as the front premium. If they choose to exercise the right to buy the underlying option, they pay an exercise premium, known as the back premium. The sum of these two premiums is greater than the premium that would have had to have been paid for the underlying option at the outset.

Compound options can be used to lock in the forward volatility curve, but most are often used to hedge contingent exposures such as tender contracts.

Compulsory acquisition
During a takeover, once 90% of acceptances have been received, the bidding company has the right to purchase the remaining 10% of shares in issue at the offer price with or without the permission of their owners.

Conduct of Business Rules
Rules established by the Financial Services and Markets Act 2000 that dictate how firms conduct their business, particularly in terms of their relationship with their clients.

Consideration
The value of the number of shares multiplied by the price before any other charges have been levied.

Consolidation
The combining of two or more forms to an entirely new entity. For example, you can consolidate multiple pension funds by transferring the funds into a single plan.

Contingent premium option
A path dependant option for which no upfront premium is payable. In a simple version, the premium is paid at expiry, but only if the option expires in the money. Even if the option is in the money, but not deeply enough to recoup the premium, the option still has to be exercised and the premium paid. If the option expires at the money or out of the money, no premium is paid.

For the option holder to benefit, the option has to expire at the money, out of the money, or deeply enough in the money to recoup the contingent premium. The premium is more expensive than a conventional option premium because it is paid only if the option expires in the money, and is not guaranteed.

The premium can be approximated by dividing a conventional premium by the probability of the option expiring in the money – that is, its delta – adjusted for the time value of money. Also known as the pay later option. Contingent premium options are constructed from the purchase of a vanilla option and the simultaneous sale of a binary option.

Contract
An agreement incorporating conditions between you and the service provider.

Contract for difference (CFD)
An agreement between a client and a provider to exchange the difference between the opening and the closing value of the contract.

Contract note
Confirmation from the stockbroker of the bargain. Includes the full title of the stock, price, commission, stamp duty and the time of the bargain. It must be retained for tax purposes.

Contrarian
Investment decisions which are not based on the general market view (market consensus) and may be actively opposed to it.

Contributions
Payments made into a pension, SIPP or ISA.

Conversion
In relation to shares, this means the conversion of one class of shares into a different class of shares.

Conversion ratio
The number of warrants that must be held and exercised to buy or sell a single unit of the asset e.g. one share. A higher conversion ratio will produce a lower warrant price.

Convertible
A fixed interest investment that can be exchanged for a predetermined number of ordinary shares in the underlying company at the individual's discretion. Conversion terms normally run for a fixed period, giving the right to convert into the company's ordinary shares within a predetermined time at a predetermined rate.

Convertible bond
A bond containing a provision that permits conversion of the principal into the issuer’s common stock at a fixed exchange ratio.

Convexity
In a fixed income instrument, convexity is a measure of the way duration changes as interest rates change. An instrument is said to have positive convexity if its value increases by more than duration predicts when interest rates rise. An instrument for which the opposite is true is said to have negative convexity.

For options, convexity is a measure of the way delta (or, more generally, any of the first order derivatives or Greeks) changes as the underlying changes. In this context it is more commonly known as gamma.

Corporate action
An activity initiated by a company that affects the nature and/or quantity of stock that you hold as a shareholder. A rights issue is a common type of corporate action.

Corporate bonds
Debt obligations issued by corporations as an alternative to offering equity ownership by issuing stock. Most corporate bonds pay half-yearly interest and promise to return their principal when they reach maturity. Maturities range from one to 30 years.

Correlation
A measure of the degree to which changes in two variables are related. The standard measure of correlation is the correlation coefficient, a number between -1 and one that indicates the strength and direction of a linear relationship between two variables. A correlation coefficient of -1 indicates that they are perfectly negatively correlated. A correlation coefficient of one means that they are perfectly correlated.

Counterparty
The other participant, including companies, in a swap or contract.

Coupon
Interest rate on a debt security expressed as an annual percentage of face value. Interest is normally paid to the investor semi-annually or annually until redemption.

Covariance
A measure of how two random variables behave in relation to each other. It differs from correlation in that it incorporates measurements of the magnitude of the variations, as opposed to the correlation coefficient which is dimensionless. The correlation coefficient between two random variables is equal to the covariance between them divided by the product of their standard deviations.

Covenant
Promise in the trust indenture or other formal debt agreement that certain acts or financial ratios will be performed or maintained. Alternatively, the promise to refrain from certain actions such as disposal of assets.

Covered warrant 
A derivative issued by a financial institution. It gives the holder the right, but not the obligation, to buy (call covered warrant) or sell (put covered warrant) an underlying asset – which could be a share, bond or index – at a specified strike price during or at the end of a specified time period.

Credit default swap
A bilateral financial contract in which the seller of risk pays a periodic fee on the notional amount of a specific issue, or reference obligation, in return for a payment, should there be a default on the reference obligation.

Credit linked note
A bond or debt security on which the return is linked to a credit default swap embedded in the credit linked note. Often used in cases where the investor cannot buy derivatives outright.

Credit risk
The possibility that a borrower or issuer will be unable to service or redeem a debt on time.

Credit spread
The interest margin over the relevant benchmark representing the additional interest paid by the issuer to account for the incremental risk of the issuer over the risk-free rate.

CREST
An electronic means of settling share transactions and registering investors on companies’ lists of shareholders. The effect of CREST is that ownership of company stock is treated much like money in a bank account, with information held and transactions booked electronically.

Cum
Meaning “with”, this indicates that the buyer of a security is entitled to participate in whatever forthcoming event is specified – for example, cum cap. Opposite of ex.

Cum rights
Around the time of a rights issue, the company’s shares are described as cum-rights or ex-rights. Cum-rights means that anyone who buys shares in the company will be entitled to subscribe for the new shares; but on and after the date of the new issue, shares become ex-rights, and the right to subscribe to the new shares stays with the seller.

Cumulative performance analysis
Usually in relation to funds, this is the calculation of the total performance return to date by adding each year’s performance to the previous year.

Current liability
Money owed to the company and due to be paid within a year, such as accounts payable. Current liabilities are found on the company’s balance sheet.

Current yield
The annual interest on a bond divided by the current market price.

CUSIP
See Committee on Uniform Securities Identification Procedures

Cyclical
Stocks that move with the economy, gaining if the economy booms and losing if the economy weakens.

Cylinder
The simultaneous purchase of a put option and sale of a call option at different strike prices. This strategy enables the purchaser to hedge the downside at reduced cost at the expense of forging upside beyond a certain level, since the purchase of the put is financed by the selling of a call.