Glossary - S

Save as You Earn (SAYE)
Employer-run schemes that allow employees to buy shares in the company.

Scaling down
When applicants for a new issue that has been oversubscribed receive a proportion of the number of shares for which they applied.

Scrip dividends
Shares offered in lieu of a cash dividend. Also known as scrips and enhanced scrip dividends.

Scrip issue
See capitalisation issue

SEATS
See Stock Exchange Automated Trading Services

SEC
See Securities and Exchange Commission

Secondary market
Exchange or over-the-counter market where securities trade after initial issuance.

Sector
Investment funds are grouped into a variety of sectors reflecting their investment strategy and objectives – for example, Global Growth, UK Equity Income and Specialist. Dividing funds into sectors makes it easier to make comparisons between similar funds.

Securities (security)
The general name given to stocks and shares of all types.

Securities Act of 1933
Requires:
1. The registration of securities with the SEC prior to public sale in the US
2. That adequate disclosure is made to allow potential investors to make informed decision on the investment

Securities and Exchange Commission (SEC)
US Federal agency charged with the administering of the Securities Act of 1933.

Securities house
General term for a bank or financial institution that conducts a securities investment business.

SEDOL
See Stock Exchange Daily Official List code

Self Invested Personal Pension (SIPP)
A form of personal pension that gives the holder control over how the fund is invested.

Sell short
Selling a security you don’t own but intend to buy later to cover the sale, in the hope that the price will go down and a profit will be made. You are short of that security until a purchase has been made.

Seller of protection
See buyer of risk

Seller of risk
See buyer of protection

SETS
See Stock Exchange Electronic Trading System

Settlement date
Date on which payment and the exchange of a security will occur. Note that different markets have their own conventions on the number of dates from trade date to settlement date.

Share(s)
Companies divide their capital into equal units called shares. Buying the shares gives you rights – a stake in the business – as well as the opportunity to profit and the risk of losing all or some of your initial investment.

Short position
Selling shares that you do not own in hope of being able to buy them back at a cheaper rate.

Short termism
Allegation made against fund managers. Occurs when they expect prices of shares in which they have invested to rise quickly and are not willing to exert influence on management to improve corporate performance.

Simple accrual swap
See accrual swap

Small-cap
A company with a small market value, traditionally less than £250 million. Compare large-cap.

Sovereign risk
The risk that a government will either default on its obligations or will impose regulations restricting the ability of issuers in that country to meet their obligations, such as foreign currency restrictions.

Specialist sector
Specific investment type. Identifies industry sectors of specific investment focus, for example Government bonds, commodity shares, smaller companies, index tracking and convertible bonds.

Speculative bond
See junk bond

Split rating
Situation where rating agencies have assigned different ratings to a particular issue or issuer.

Spread
The difference between the bid and the offer price.

Stag
Someone who applies for a new issue of shares with the intention of selling them at a profit as soon as secondary market dealings start.

Stamp Duty Reserve Tax (SDRT)
These are the UK government taxes charged on the purchases of shares. Often referred to as stamp duty.

Standard barrier option
A barrier option whose barrier is set out of the money relative to the strike. This means that the barrier level would be below the strike at the start of the option contract for a call and above it for a put.

These options cost less than standard options, because the price of a vanilla option takes the entire probability distribution of possible prices for the underlying into account, while the knock out frame removes many of these possible values.

The exact premium reduction is determined how likely the barrier event is to occur. The more likely the option is to be knocked out or the less likely it is to be knocked in, the greater the premium reduction and vice versa. The likelihood of the barrier event depends on how close the extinguishing trigger is to the spot forward level, the option’s maturity and its volatility.

Standard deviation
The square root of the variance.

Stock(s)
Generally used as another word for equities. Technically, this more accurately refers to fixed interest securities.

Stock exchange
A market where securities are bought and sold.

Stock Exchange Automated Trading Services (SEATS)
Allows sales and purchases to be matched electronically.

Stock Exchange Daily Official List code (SEDOL)
The identification number for investments on the London Stock Exchange.

Stock Exchange Electronic Trading System (SETS)
Order-driven electronic trading system employed to deal in FTSE 100 and ex-FTSE 100 equities.

Stock market
See stock exchange

Stock settlement
The warrant holder receives the underlying if the warrant can be exercised profitably at expiry.

Stock split
The division of a company’s outstanding common shares into a larger number of common shares. A three-for-one split by a company with one million shares outstanding would result in three million shares outstanding.

Stockbroker
The agent that buys and sells shares on your behalf and earns commission on the value of the transaction. Also known as a broker.

Stop order
An order to buy or sell shares when the share price rises to/above or falls to/below a specified stop price. When buying, a stop order is used to make an investment, but only when an upward trend in the share price has been established. When selling, a stop order is used as protection from a sudden fall in the share price, or to lock-in profits already made, and is also known as a stop loss order.

Stop price
The price at which a stop order is triggered. For purchases, the stop price acts as a minimum price you will pay if an investment is made. For sales, the stop price acts as the maximum price you will receive if a holding is sold.

Straddle position
A long straddle position involves the purchase of a call option and a put option written on the same underlying and with the same strike price and maturity. This trading strategy is appropriate when the option holder is expecting a large movement in the underlying asset price, but does not know in which direction that move will be. It is a volatility play.

Strangle
A long strangle position involves the purchase of a call and put option written on the same underlying with the same maturity but with different strikes. The call option has a strike price that is higher than the put option on that strike price. A strangle is a similar trading strategy to a straddle, but is cheaper to put in place. The further apart the two strike prices are, the lower the downside risk, but the further the asset price has to move for a profit to be realised.

Street name
Where a security is held in the name of a custodian and not the beneficial owner.

Strike price
The price at which the investor may buy or sell the underlying during (if American style) or at the end (if European style) of the expiry period. It is known when the warrant is issued. Also referred to as expiry price and exercise price.

Striking price
The price at which the underlying security can be bought or sold.

Structured note
A package of a conventional interest rate swap and a derivative embedded in it.

Substitution
The terms of the swap may allow the substitution of the reference obligation during the life of the swap.

Swap
Traditionally, the exchange of one security for another to change the maturities of a bond portfolio or the quality of the issues in a stock or bond portfolio, or because investment objectives have changed.

Currency swaps involve the purchase or sale of a currency in the spot market against the simultaneous purchase or sale of the same amount of the currency in the forward market.

An interest rate swap is an arrangement in which two parties agree to exchange periodic interest payments, at agreed intervals, over an agreed period, but without any principal being paid. The most common and simple deal involves one party paying a fixed rate of interest and the other paying a floating rate.

Swap rate
The yield to maturity of a swap. The price of the swap which, when used both as a fixed rate payment and an internal rate of return, will equate the present value of the two payment streams.

On a vanilla interest rate swap, the bid swap rate is the fixed rate a market maker will pay to receive LIBOR and the offer is the fixed rate a market taker must pay to receive LIBOR. Swap rates are mathematically equal to the weighted average of all relevant FRAs, and so are determined by the term structure of interest rates, credit and transaction costs.

In currency markets, the swap rate is the forward points on a currency rate – the adjustment to the spot exchange rate that has to be made to compensate for interest rate parity differences between spot and forward foreign exchange rates. Also known as the forward exchange margin.

Swaption
The option to enter into a swap contract. The simplest swaption is an option to pay or receive fixed rate in an interest rate swap, of which there are two types.

A payer swaption gives the buyer the right, but not the obligation, to enter into an interest rate swap paying fixed and receiving floating. It is also called a put swaption as it is similar to a put on a fixed rate instrument. The buyer benefits as interest rates rise, as the option will become more valuable. If rates rise above the fixed rate payable under swaption, then the holder can exercise it and swap an existing floating rate liability into an advantageous fixed rate.

The payer swaption is similar to a cap in that it provides an interest rate ceiling, but it has to be exercised to provide the fixed rate. Once exercised, the holder is locked into paying a fixed rate, unlike the cap holder who can still benefit if rates fall. Also, while caps tend to reference the short end of a yield curve, the payer swaption tends to reference the two to ten year part of the curve.

A receivers swaption is an option giving the holder the right to receive fixed rate under an interest rate swap. As it is analogous to having a call option on a fixed rate bond, it is also known as a call swaption. A receiver swaption behaves like a floor.

Syndicate
A group of investment banks and banks who agree to purchase a new issue of securities from the issuer for resale to the investing public.

Systematic risk
The risk that derivatives permit the transmission of risk across previously unrelated markets, thus making it more likely that a large shock in one will be transmitted to others. The term is also used for the risk supposedly inherent in the concentration of derivatives business at a small number of large financial institutions. If one of these were to fail, the whole financial system would be threatened.