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CISI Unit 2 > Unit 2 (Glossary) > Flashcards

Unit 2 (Glossary) Flashcards

1
Q

Active Management

A

A type of investment approach employed to
generate returns in excess of an investment
benchmark index. Active management is
employed to exploit pricing anomalies in those
securities markets that are believed to be
subject to mispricing by utilising fundamental
analysis and/or technical analysis to assist in the
forecasting of future events and the timing of
purchases and sales of securities.

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2
Q

Acquisition

A

An acquisition is the term that is typically used
when one company buys another for cash,
or where the company being purchased is
significantly smaller than the predator company
that buys it. Rather than the two initial groups
of shareholders coming together in a merger
of their interests, the shareholders of the target
either accept cash and lose their involvement in
the new combination, or play a much reduced
role in the new combination

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3
Q

AIM

A

The London Stock Exchange’s (LSE’s) market
for smaller UK public limited companies (plcs).
AIM has less demanding admission requirements
and places less onerous continuing obligation
requirements upon those companies admitted
to the market than those applying for a full list
on the LSE.

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4
Q

Alpha

A

The return from a security or a portfolio in excess

of a risk-adjusted benchmark return.

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5
Q

Alternative Trading Systems (ATSs)

A

An ATS is a platform for trading that is not a

recognised stock exchange.

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6
Q

American Depositary Receipt (ADR)

A

An ADR is a security that represents securities of
a non-US company that trades in the US financial
markets.

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7
Q

Amortisation

A

The depreciation charge applied in company

accounts against capitalised intangible assets.

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8
Q

Annual General Meeting (AGM)

A

The annual meeting of directors and ordinary
shareholders of a company. All companies are
obliged to hold an AGM at which the shareholders
receive the company’s report and accounts and
have the opportunity to vote on the appointment
of the company’s directors and auditors and
the payment of a final dividend recommended
by the directors. Also referred to as an Annual
General Assembly in some jurisdictions.

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9
Q

Arbitrage

A

The process of deriving a risk-free profit by
simultaneously buying and selling the same
asset in two related markets where a pricing
anomaly exists.

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10
Q

Asset Allocation

A

The process of deciding on the division of a
portfolio’s assets between asset classes and
geographically before deciding upon which
particular securities to buy.

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11
Q

Auction

A

System used to issue securities where the
successful applicants pay the price that they
bid. Examples of its use include the UK Debt
Management Office (DMO) when it issues gilts.
Auctions are also used by the LSE to establish
prices, such as opening and closing auctions on
SETS.

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12
Q

Base Currency

A

The currency against which the value of a quoted
currency is expressed. The base currency is
currency X for the X/Y exchange rate.

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13
Q

Bear Market

A

A negative move in a securities market,
conventionally defined as a 20%+ decline. The
duration of the market move is immaterial.

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14
Q

Bearer Securities

A

Those whose ownership is evidenced by the
mere possession of a certificate. Ownership can,
therefore, pass from hand to hand without any
formalities.

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15
Q

Beta

A

The relationship between the returns on a stock
and returns on the market. Beta is a measure of
the systematic risk of a security or a portfolio in
comparison to the market as a whole.

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16
Q

Bonds

A

Securities issued by an organisation, such as a
government or corporation. Bonds pay regular
interest and repay their principal or face value at
maturity. One of the most common underlying
assets for derivative contracts.

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17
Q

Bonus Issue

A

The free issue of new ordinary shares to a
company’s ordinary shareholders, in proportion
to their existing shareholdings through the
conversion, or capitalisation, of the company’s
reserves. By proportionately reducing the market
value of each existing share, a bonus issue makes
the shares more marketable. Also known as a
capitalisation issue or scrip issue.

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18
Q

Broker-Dealer

A

An exchange member firm that can act in a dual
capacity both as a broker acting on behalf of
clients and as a dealer dealing in securities on
their own account.

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19
Q

Captive Insurance

A

The creation of a specialist insurance entity to
provide insurance to other companies within the
same group.

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20
Q

Central Bank

A

Central banks typically have responsibility for
setting a country’s or a region’s short-term
interest rate, controlling the money supply,
acting as banker and lender of last resort to the
banking system and managing the national debt.

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21
Q

Circuit Breaker

A

An automated suspension of trading on an
exchange when prices move by more than a
predetermined amount to enable market
participants to reflect and prevent panic buying
or selling.

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22
Q

Clean Price

A

The quoted price of a bond. The clean price
excludes accrued interest to be added or to be
deducted, as appropriate.

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23
Q

Closed-Ended

A

Organisations such as companies which are a
fixed size as determined by their share capital.
Commonly used to distinguish investment trusts
(closed-ended) from unit trusts and OEICs (openended

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24
Q

Collective Investment Scheme (CIS)

A

A CIS is essentially a way of investing money
with other people to participate in a wider range
of investments than those feasible for most
individual investors, and to share the costs of
doing so. Terminology varies by country, but
collective investments are often referred to as
investment funds, managed funds, mutual funds
or simply funds.

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25
Q

Commercial Paper (CP)

A

Money market instrument issued by large

corporates.

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26
Q

Commission

A

Charges for acting as agent or broker.

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27
Q

Commodity

A

Items including sugar, wheat, oil and copper.
Derivatives of commodities are traded on
exchanges (eg, oil futures on ICE Futures).

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28
Q

Consumer Prices Index (CPI)

A

Index that measures the movement of prices

faced by a typical consumer.

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29
Q

Convertible Bond

A

A bond which is convertible, usually at the
investor’s choice, into a certain number of the
issuing company’s shares.

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30
Q

Correlation

A

A statistical measure of how two securities move

in relation to each other.

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31
Q

Coupon

A

The regular amount of interest paid on a bond.

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32
Q

CREST

A

Electronic settlement system used to settle
transactions for shares, gilts and corporate
bonds, particularly on behalf of the LSE.

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33
Q

Cum-Dividend

A

The way a financial instrument is described when
the buyer will be entitled to the next dividend
(on a share) or coupon (on a bond).

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34
Q

Dark Pool

A

A dark pool is a form of alternative trading
system which provides little or no transparency
about the prices and trades executed within it.

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35
Q

Debt Management Office (DMO)

A

Agency responsible for issuing gilts on behalf of

the UK Treasury.

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36
Q

Dematerialised

A

System where securities are held electronically

without certificates.

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37
Q

Depreciation

A

Depreciation is accounting for the using up of
a tangible non-current asset like an industrial
machine. Over the expected useful life of the
asset (say, the next five years), a particular
percentage of the asset’s cost is allocated to the
income statement to represent the charge for
usage of the asset.

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38
Q

Derivatives

A

Instruments where the price or value is derived
from another underlying asset. Examples include
options, futures and swaps.

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39
Q

Dirty Price

A

The price of a bond inclusive of accrued interest
or exclusive of interest to be deducted, as
appropriate.

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40
Q

Diversification

A

Investment strategy that involves spreading risk

by investing in a range of investments.

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41
Q

Dividend

A

Distribution of profits by a company to

shareholders.

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42
Q

Dow Jones Industrial Average (DJIA)

A

Major share index in the US, based on the prices

of 30 major US-listed company shares.

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43
Q

Equities

A

Another name for shares.

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44
Q

Eurobond

A

An interest-bearing security that is issued
internationally. More precisely, a eurobond is
an international bond issue denominated in a
currency different from that of the financial
centre(s) in which the bond is issued. Most
eurobonds are issued in bearer form through
bank syndicates.

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45
Q

Euronext

A

European stock exchange network formed by
the merger of the Paris, Brussels, Amsterdam and
Lisbon exchanges.

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46
Q

Exchange Rate

A

The rate at which one currency can be exchanged

for another.

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47
Q

Ex-Dividend

A

The period during which the purchase of shares
or bonds (on which a dividend or coupon
payment has been declared) does not entitle
the new holder to this next dividend or interest
payment.

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48
Q

Exercise Price

A

The price at which the right conferred by a
warrant or an option can be exercised by the
holder against the writer.

49
Q

Fiscal Years

A

These are the periods for reporting, alternatively
referred to as financial years. The term is
particularly used by the tax authorities for
periods of assessment for tax purposes.

50
Q

Fixed-Interest Security

A

A tradeable negotiable instrument, issued by a
borrower for a fixed term, during which a regular
and predetermined fixed rate of interest based
upon a nominal value is paid to the holder until it
is redeemed and the principal is repaid.

51
Q

Flipping

A

Typically used in the context of an initial public
offering (IPO), flipping is where the shares are
purchased with the intention of immediately
selling them at a higher price. Flipping is only
successful if the share price rises above the IPO
price.

52
Q

Floating-Rate Note (FRN)

A

A debt security issued with a coupon periodically
referenced to a benchmark interest rate, such as
LIBOR.

53
Q

Forex (FX)

A

Abbreviation for foreign exchange.

54
Q

Forward

A

A derivatives contract that creates a legally binding
obligation between two parties for one to buy
and the other to sell a pre-specified amount of an
asset, at a pre-specified price, on a pre-specified
future date. Forward contracts are commonly
entered into in the foreign exchange market. As
individually negotiated contracts, forwards are
not traded on a derivatives exchange.

55
Q

FTSE 100

A

Main UK share index of the 100 largest
listed company shares measured by market
capitalisation. Also referred to as the ‘Footsie’.

56
Q

Fund Manager

A

Firm or person that makes investment decisions

on behalf of clients.

57
Q

Future

A

An agreement to buy or sell an item at a future
date, at a price agreed today. Differs from a
forward in that it is a standardised contract
traded on an exchange.

58
Q

Greenshoe Option

A

An over-allotment option giving the underwriters
of an IPO the right to sell additional securities in
an offering, if demand for the securities is in
excess of the original amount offered. It is a
strategy that underwriters have developed which
enables them to smooth out price fluctuations if
demand surges on the one hand, and to help
support the IPO if there are adverse market
conditions.

59
Q

Grey Market Trading

A

Also known as ‘pre-release’, grey market trading is
the purchase and sale of an instrument before its
formal release into the market. A key example is
a depository bank selling an American depositary
receipt (ADR) in the three-month period up to its
creation.

60
Q

Gross Domestic Product (GDP)

A

A measure of a country’s output.

61
Q

Gross Redemption Yield (GRY)

A

The annual compound return from holding
a bond to maturity taking into account both
interest payments and any capital gain or loss at
maturity. Also referred to as the yield to maturity
(YTM). The GRY or YTM is the internal rate of
return on the bond based on its trading price.

62
Q

Harmonised Index of Consumer Prices (HICP)

A

The way the consumer prices index in the EU was

originally described.

63
Q

Hedging

A

A technique employed to reduce the impact of
adverse price movements on financial assets
held.

64
Q

Index-Linked Gilts

A

Gilts whose principal and interest payments are
linked to the retail prices index (RPI). An example
of an inflation-protected security.

65
Q

Inflation

A

A persistent increase in the general level of prices.
Usually established by reference to consumer
prices and the CPI.

66
Q

Initial Public Offering (IPO)

A

A new issue of ordinary shares that sees the
company gain a stock market listing for the first
time, whether made by an offer for sale, an offer
for subscription or a placing.

67
Q

Introduction

A

In the context of a listing or IPO, an introduction
is a company applying for, and gaining a listing
for its securities on a stock market, without
raising any funds.

68
Q

Investment Bank

A

Firms that specialise in advising companies on
mergers and acquisitions (M&A), and corporate
finance matters such as raising debt and equity.
The larger investment banks are also heavily
involved in trading financial instruments.

69
Q

Investment Trust

A

Despite the name, an investment trust
is a company, not a trust, which invests in a
diversified range of investments.

70
Q

Liquidity

A

Ease with which an item can be traded on the
market. Liquid markets are also described as
‘deep’.

71
Q

Liquidity Risk

A

The risk that an item, such as a financial instrument,

may be difficult to sell at a reasonable price.

72
Q

Listing

A

Companies whose securities are listed are

available to be traded on an exchange.

73
Q

London Interbank Offered Rate (LIBOR)

A

Benchmark money market interest rates
published for a number of different currencies
over a range of periods. LIBOR, which is the
rate at which funds in a particular currency and
for a particular maturity, are available to one
bank from other banks. LIBORs are gathered and
published on a daily basis.

74
Q

Long Position

A

The position following the purchase of a security

or buying a derivative

75
Q

Market Capitalisation

A

The total market value of a company’s shares or
other securities in issue. Market capitalisation is
calculated by multiplying the number of shares
or other securities a company has in issue by the
market price of those shares or securities.

76
Q

Market Maker

A

A stock exchange member firm registered to
quote prices and trade shares throughout the
trading day (such as the LSE’s mandatory quote
period).

77
Q

Maturity

A

Date when the principal on a bond is repaid.

78
Q

Merger

A

A merger is the term used when two companies
of similar size come together to form a single,
combined entity. This is typically achieved by a
share for share exchange.

79
Q

Monetary Policy Committee (MPC)

A

Committee run by the Bank of England that sets

UK interest rates.

80
Q

Multilateral Trading Facilities (MTFs)

A

Systems that bring together multiple parties
that are interested in buying and selling financial
instruments including shares, bonds and
derivatives.

81
Q

Net Redemption Yield (NRY)

A

Similar to the GRY in that it takes both the annual
coupons and the profit (or loss) made through to
maturity into account, however, the NRY looks
at the after-tax cash flows rather than the gross
cash flows. As a result, it is a useful measure for
tax-paying, long-term investors.

82
Q

Nominal Value

A

The amount on a bond that will be repaid on
maturity, sometimes known as the face or par
value. Also applied to shares in some jurisdictions
and representing the minimum that the shares
are issued for.

83
Q

Nominee

A

A nominee is the party holding legal ownership
of securities, such as shares, on behalf of another
beneficial owner.

84
Q

Offer Price

A

Bond and share prices are quoted as bid and
offer. The offer is the higher of the two prices and
is the one that would be paid by a buyer.

85
Q

Open-Ended

A

Type of investment, such as OEICs or unit trusts,

which can expand without limit.

86
Q

Option

A

A derivative giving the buyer the right, but not
the obligation, to buy or sell an asset in the
future.

87
Q

Ordinary Share

A

Alternatively referred to as common stock,
persons owning ordinary shares (ordinary
shareholders) are the owners of the company.
They tend to benefit when a company does
well from a combination of the value of the
shares increasing (capital gains) and the receipt
of income, in the form of variable dividends.

88
Q

Over-the-Counter (OTC)

A

Transactions between banks and their

counterparties not on a recognised exchange.

89
Q

Passive Management

A

In contrast to active management, passive
management is an investment approach that
does not aspire to create a return in excess of a
benchmark index. The approach often involves
tracking the benchmark index.

90
Q

Pre-Emption Rights

A

The rights accorded to ordinary shareholders
to subscribe for new ordinary shares issued
by the company in proportion to their current
shareholding.

91
Q

Preference Share

A

Shares which usually pay fixed dividends but do
not have voting rights. Preference shares have
preference over ordinary shares in relation to the
payment of dividends and in default situations.

92
Q

Premium

A

An excess amount being paid, such as the excess
paid for a convertible bond over the market value
of the underlying shares it can be converted into.
The term is also used for the amount of cash
paid by the holder of an option or warrant to the
writer in exchange for conferring a right.

93
Q

Producer Prices Indices (PPI)

A

A producer price index (PPI) is an inflation index
that measures price changes faced by producers,
rather than consumers. An increase or decrease
in the PPI is thought to be a precursor to an
increase or decrease in the CPI.

94
Q

Prospectus

A

A detailed document about a company that
is issuing securities. If it relates to an IPO, it
will include all of the information to enable
prospective investors to decide on the merit of
the company’s shares.

95
Q

Proxy

A

Appointee who votes on a shareholder’s behalf

at company meetings.

96
Q

Real Estate Investment Trust (REIT)

A

An investment trust that specialises in investing

in commercial property.

97
Q

Redemption

A

The repayment of principal to the holder of a

redeemable security.

98
Q

Registrar

A

The official who maintains the share register on

behalf of a company

99
Q

Reinsurance

A

Insurance purchased by an insurer against the
risks that it may have to pay out on the policies it
has underwritten. Effectively enables insurers to
transfer some of their risks to other insurers.

100
Q

Repo

A

The sale and repurchase of securities between
two parties: both the sale and the repurchase
agreement are made at the same time, with the
purchase price and date fixed in advance.

101
Q

Retail Prices Index (RPI)

A

The RPI is a historic measure of inflation faced by
consumers. It has subsequently been superseded
by the Consumer Prices Index (CPI), but is still
used for some purposes, such as the calculation
of the uplift for some index-linked gilts.

102
Q

Rights Issue

A

The issue of new ordinary shares to a company’s
shareholders, in proportion to each shareholder’s
existing holding. The issue is made in accordance
with the shareholders’ pre-emptive rights and the
new shares are usually offered at a discounted
price to that prevailing in the market. This means
that the rights have a value, and can be traded
‘nil-paid’.

103
Q

Scrip Issue

A

Another term for a bonus or capitalisation issue.

104
Q

Share Buyback

A

The purchase and, typically, the cancellation by

a company of a proportion of its ordinary shares.

105
Q

Share Capital

A

The nominal value of a company’s equity or
ordinary shares. A company’s authorised
share capital is the nominal value of equity
the company may issue, while the issued share
capital is that which the company has issued. The
term share capital is often extended to include a
company’s preference shares.

106
Q

Short Position

A

The position following the sale of a security not

owned, or selling a derivative.

107
Q

Special Purpose Vehicle (SPV)

A

Bankruptcy-remote, off-balance-sheet vehicle set
up for a particular purpose such as buying assets
from the originator and issuing asset-backed
securities (ABSs)

108
Q

Special Resolution

A

Proposal put to shareholders requiring 75% of

the votes cast in order to be accepted

109
Q

Stock Split

A

A method by which a company can reduce the
market price of its shares to make them more
marketable without capitalising its reserves. A
share split simply entails the company reducing
the nominal value of each of its shares in issue
while maintaining the overall nominal value of its
share capital. A share split should have the same
impact on a company’s share price as a bonus
issue.

110
Q

Swap

A

An over-the-counter (OTC) derivative whereby
two parties exchange a series of periodic
payments based on a notional principal amount
over an agreed term. Swaps can take a number
of forms including interest rate swaps, currency
swaps, credit default swaps (CDSs) and equity
swaps.

111
Q

Takeover

A

A takeover is the term used when one company
(the predator) takes over another company (the
target) by buying the majority of the target
company’s shares. Takeovers can be friendly
(where the directors of the target support the
takeover bid), or hostile (where the directors of
the target do not support the takeover bid).

112
Q

Treasury Bills (T-bills)

A

Short-term (often three months) borrowings of
the government. Issued at a discount to the
nominal value at which they will mature. Traded
in the money market.

113
Q

Two-Way Price

A

Prices quoted by a market maker at which they

are willing to buy (bid) and sell (offer).

114
Q

Underwriting

A

When financial institutions, such as banks,
insurers and asset managers, agree to buy
securities being issued (for example, in an IPO) if
demand is otherwise insufficient.

115
Q

Unit Trust

A

A vehicle whereby money from investors is
pooled together and invested collectively on
their behalf. Unit trusts are open-ended vehicles.

116
Q

Yield

A

Income from an investment expressed as a

percentage of the current price.

117
Q

Yield Curve

A

The depiction of the relationship between the
yields and the maturity of bonds of the same
type.

118
Q

Zero Coupon Bonds (ZCBs)

A

Bonds issued at a discount to their nominal
value that do not pay a coupon but which are
redeemed at par on a pre-specified future date.

CISI Unit 2 (11 decks)

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