Say What?

The finance industry can seem like a daunting place where people speak with a language of their own:

  • Long before the use of greek terms like Alpha and Beta were used to describe COVID sub-variants, financiers used them to price financial instruments;
  • The zoological connotation of doves and hawks, bulls and bears;
  • The countless number of acronyms like ABS, CLOs and HODL

See below for some common terms to help cut through the cr@p and understand what they mean!

A

ABS

ABS is an acronym for Asset Backed Securities. These assets are typically loans or loan like products including credit card receivables, auto loan receivables, student loans or corporate loans.

  • ABS typically comprise hundreds of underlying assets (loans) which are pooled or grouped together.
  • They are typically split into tranches or layers with the least risky assets sitting in a ‘senior tranche‘ paying a low level of interest.
  • Riskier assets sitting in a ‘junior tranche‘ paying a higher interest rate.
  • These are typically created by investment banks and sold to institutional investors like hedge funds or pension funds.

APR

APR is an acronym for Annual Percentage Rate. It is the cost you pay each year to borrow money, including fees, expressed as a percentage.

  • The APR is a broader measure of the cost to you of borrowing money since it reflects not only the interest rate but also the fees that you have to pay to get the loan (such as a mortgage or credit card).

Alpha

Alpha is a term used to describe an investment strategy’s ability to beat the market or to describe the so called ‘excess return‘ of that strategy (the return in excess of the market).

  • The market in this context can be any observable market index.
  • For example, if the FTSE 100 Index (the index of the top 100 UK companies) returns 10% in a given year and a UK fund manager generates a return of 12%, the manager skill or “Alpha” would be 2%.

B

Beta

Beta is a risk measure and numeric value used to measure the volatility of an asset in relation to the market. Put more simply, it is the measure of how an asset’s price moves when the market increases or decreases.

  • The market (as noted above, can be any market index) is said to have a beta of 1.
  • A high beta asset with a value greater than 1.2 for example, will move significantly when the market rises or falls.
  • A low beta asset, or one whose value is less than 0.8, will be less sensitive to market rises or falls.
  • High beta assets are usually found in cyclical industries such as technology whilst low beta assets are usually found in more ‘defensive’ industries such as utilities.

Basis Point (Bips or Bps)

Basis points (sometimes shorted to ‘bps‘ or ‘bips‘) is a common unit of measurement typically used in fixed income markets to measure interest rates and other percentages. A basis point is 1/100th of 1%.

  • Basis points can also be used to refer to any other percentage term in finance. If a fund manager earned 4% on their portfolio in a given month they may say they are up 400 basis points (always articulating a higher number – such size queens).

Bear (person)

A bearish person is a definite pessimist and someone whose glass is half empty. They consistently call the market overvalued and expect a correction or fall in market prices, advising investors to sell their stocks and hold everything in cash.

  • Those who continually hold these bearish views for a long time can also be called ‘permanent-bears’ or ‘perma-bears’.
  • Any avid watchers of the US Office, will also recall that Jim Halpert advises bears eat beets (if you know, you know).

Bear Market

A bear market is a technical term to describe any financial market which has experienced a decline in prices greater than 20%.

  • Bear markets can last days, weeks or in the case of the Japanese equity market in the nineties – decades.

Bond

A bond is a fixed income security that represents a loan made by an investor to a borrower, typically a company (corporate bond) or government (sovereign bond). A bond can essentially be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments.

  • A bond will have a finite term e.g. 10 years and pay a set of known regular interest payments at regular intervals over the course of the loan, either quarterly or bi-annually. Hence the name ‘fixed income’.

Bull (person)

A bull is the opposite of a Bear and is the definite optimist whose glass is half full.

Bull Market

A bull market is a technical term to describe any financial market experiencing a sustained rise in values or prices.

C

Carry

Carry of an asset is the return obtained from holding it (if positive), or the cost of holding it (if negative).

  • For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation.  

Cash Equities

Cash equities is a term used principally in the investment banking world to refer to trading in physical stocks (shares) on behalf of institutional investors.

  • It is used to mark the difference between physical trading of stocks versus the trading of equities derivatives such as options, futures or swaps. 

CFD

CFDs is an acronym which stands for ‘Contracts for Difference‘. CFDs are a derivative product offered widely by most retail brokers in the UK and they allow you to speculate on the price movements of most financial markets such as equities, FX and commodities.

CLO

CLO is an acronym for ‘Collateralised Loan Obligation‘. Similar to ABS, this is a fixed income security and the collective term for a group of financial assets backed by cashflows.

  • Unlike an ABS, which may be backed by a wide range of assets, a CLO, as the name may suggest, is backed exclusively by loans.

Compounding

Compounding, referred to by Albert Einstein as the 8th wonder of the world, is the process whereby interest is credited to an existing amount as well as to interest already received. Compounding thus can be thought of as interest on interest.

Correlation

Correlation is another risk measure and numeric value used to describe the relationship between two assets and how these assets move in relation to each other.

  • A correlation of 0 means there is no correlation, a correlation of +1 means the assets are positively correlated and a correlation of -1 means the assets are negatively correlated.
  • Holding assets which are uncorrelated or which exhibit lower correlations to each other can help to diversify and reduce your risk.

Correction

A correction or market correction is a technical term to describe the level of downward decline in market prices.

  • A correction is a decline of 10% or greater in the price of a security, asset, or a financial market. Corrections can last anywhere from days to months, or even longer.
  • While damaging in the short term, a correction can be positive, adjusting overvalued asset prices and providing buying opportunities.

D

Delta

Delta is a risk measure used when assessing derivatives, typically options. It measures the change of an options price given a $1 change in its underlying security.

  • For example, if a call option has a delta value of +0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal.

Derivative

A derivative is a broad term used to describe financial contracts, set between two or more parties, that derive their value from an underlying asset, group of assets, or benchmark.

  • The main types of derivatives include futures, options and swaps.

Drawdown

Drawdown refers to how much an investment or trading account is down from the peak before it recovers back to the peak.

  • Individuals usually refer to drawdown following a market correction.

Dove

Dove is a term used by financial analysts and news outlets to categorise policy makers and advisors within a central bank’s committee by their probable voting decision on interest rates.

  • Doves tend to vote for looser monetary policy, keeping interest rates low with the aim of boosting economic growth.
  • This should increase spending, benefitting the economy and increasing employment, but it could come with the risk of rising inflation.
  • A dove is the opposite of a Hawk.

E

ETF

ETF stands for ‘Exchange Traded Fund‘. ETFs can be bought and sold like any listed ordinary share or equity security.

  • It is a fund which typically (passively) tracks an index, such as the FTSE 100 or S&P 500 and which is listed on an exchange such as the London Stock Exchange or New York Stock Exchange.

Equity

An equity is one of several terms used to describe a share of a company. Other terms used interchangeably include ‘shares’, ‘ordinary shares’ and ‘stocks’. Equity represents ownership of a company and entitles you as the equity holder (or shareholder or stockholder) to participate in the growth of that company.

  • Equities are usually listed on an exchange and can be bought and sold by investors. Equities typically offer a return in two ways – capital growth (growth on your investment from an increase in share prices) or through income (from dividends).

F

Fallen Angel

Fallen angel is a term used to describe a former investment grade bond issuer (a company or country) who has been subsequently down graded to sub-investment grade or Junk status.

  • An issuer is typically downgraded if rating agencies feel an issuer is less likely to meet its financial obligations. Sub-investment grade bonds pay higher interest rates to reflect the higher credit risk of default by the issuer.

Fund

A fund is a broad term used to describe the pooling of investor money to then invest in securities in line with a clear investment objective or mandate with the aim of achieving a gain.

There are many different types of funds including mutual funds, index funds, ETFs, investment trusts, hedge funds etc.

H

Hawks

Hawks is a term used, typically by financial analysts and news outlets to categorise policy makers and advisors within a central bank’s committee by their probable voting decision on interest rates.

  • Hawks tend to vote for tighter monetary policy – meaning higher interest rates – with the aim of keeping inflation in check.
  • This often comes at the expense of economic growth, as higher interest rates discourage borrowing and encourage saving.
  • A hawk is the opposite of a Dove.

HODL

HODL is a term commonly used by cryptocurrency investors that refuse to sell their cryptocurrency regardless of the price increasing or decreasing. It is more frequently used during a correction or bear market when people refuse to sell their coins despite the price drop. 

  • HODL was later retrofitted to be an acronym (backronym) for “Hold On for Dear Life” and refers to not selling, even during strong market volatility and poor market performance.

HWM

HWM is an acronym for ‘High Water Mark’ which is the highest peak in value that an investment fund or account has reached. This term is often used in the context of fund manager compensation, which is performance-based i.e. which charges performance fees for deemed outperformance or Alpha.

  • The high water mark ensures the manager does not get paid large sums for poor performance.
  • If a manager loses money over a period, they must get the fund above the high-water mark before receiving a performance fee.
  • Performance fees are rarely charged on ETFs and mutual funds, this is usually a point more for hedge fund investors.

I

Investment Grade

Investment-grade refers to a credit rating that is issued by a rating agency in relation to a corporate or sovereign bond. Bonds that are believed to have a lower risk of default receive higher or investment grade ratings by the credit rating agencies.

  • These bonds tend to be issued at lower yields to reflect the lower perceived credit risk i.e. the greater likelihood the issuer will be in a position to repay the borrowed amount once the bond reaches maturity.

Index Fund

An Index fund is a type of mutual fund which, similar to an ETF, tracks a market index. The fund manager does not have any discretion over portfolio constitution – the portfolio must track the underlying index.

  • The key difference with an ETF is that it is not listed on an exchange and so it cannot offer the same intraday trading availability of an ETF.

Investment Trust

An investment trust is a type of fund prevalent in the United Kingdom and also sometimes referred to as a ‘closed ended fund‘. At its simplest is just another type of fund in that it’s a type of pooled investment, however, a key differentiator is that an investment trust is a quoted company and listed on the Stock Exchange, typically the London Stock Exchange.

  • Investment trusts issue a set number of shares to investors, meaning you may only invest when the trust is launched or if someone wants to sell.
  • This close-ended structure gives managers freedom to pursue their investment objectives, without being pressured to add investments when new money flows in and offload them when investors decide to exit.

IPO

An initial public offering (IPO) refers to the process by which a privately owned company lists its shares on a stock exchange, making them available for purchase by the public.

ISIN

ISIN, which is an acronym for International Securities Identification Number and is a 12-digit alphanumeric code that uniquely identifies a specific security.

  • It is an international standard and begins with two letters representing the country of registration, for example, Vodafone’s stock ISIN is GB00BH4HKS39.
  • ISINs are also used for the share classes of ETFs and Mutual Funds. 

J

Junk

Junk is a colloquial term used to describe sub-investment grade bonds i.e. those which the rating agencies deem are lower credit quality relative to investment grade bonds. Junk bonds can also be called high-yield bonds or sub-investment grade.

  • These bonds tend to be issued at higher yields to reflect the higher perceived credit risk i.e. the greater likelihood the issuer will not be in a position to repay the borrowed amount once the bond reaches maturity (in one word – default).

L

Leverage

Leverage, simply, is the use of borrowed money to acquire an asset. In an investment context, leverage is usually obtained through the use of financial instruments called derivatives. Unlike equities and bonds, derivatives typically only require a small deposit along with regular maintenance payments (otherwise called margin payments).

  • This process frees up money to be invested elsewhere to increase return. Whilst leverage can amplify investment gains it can also magnify losses if an investment falls.
  • Leverage has a negative connotation given its association with hedge funds, but many of us use leverage every day. We use leverage in the form of a mortgage when we acquire a property or use leverage when we use our credit cards.

M

Mutual Fund

Mutual funds are pools of money collected from many investors for the purpose of investing in assets such as stocks, bonds, or other securities. Mutual funds are (mutually) owned by a group of investors and managed by a professional fund manager.

  • Mutual funds are ‘open ended’ funds meaning investors may subscribe (enter) or redeem (exit) at any available dealing point.
  • Mutual funds are typically actively managed by a fund manager to a specific investment mandate or objective and so unlike an ETF or index fund, they will not track an index.

N

NAV

NAV is an acronym referring to Net Asset Value. The term Net Asset Value is commonly used in relation to mutual funds and is used to determine the value of the assets held. It is defined as the value of a fund’s assets minus the value of its liabilities and operating expenses.

  • Many mutual funds are required to calculate their NAV at least once every business day and it usually reflects the price at which investors may subscribe (buy or enter) or redeem (sell or exit) from the fund.

S

Share Classes (Funds)

Funds, including mutual, index and ETFs often offer several different share classes to investors. Each class invests in the same portfolio of securities and has the same investment objectives. However, their fees and expenses differ, which impact their performance. Other parameters, such as treatment of income or currencies may differ as well.

  • In a UK context, ‘I’ classes tend to denote those reserved for institutional investors which have lower fees to reflect the expected large amounts they may allocate or invest.
  • Conversely, ‘R’ classes are used to denote those intended for retail investors. 
  • Share classes may also have differing capital treatments denoted by the inclusion of ‘Acc’ which is short for ‘Accumulation’ and which will reinvest any income back into the fund.
  • Conversely, shares which include ‘Dist’ or ‘Inc’ in their name denote ‘Distributing’ or ‘Income’ shares which will pay income out in the form of a dividend.
  • Shares may also differ in that some may be currency hedged to specific currencies such as USD, EUR or GBP

Sub-Investment Grade

Refer to Junk.

T

Ticker

A tickeris an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. In short, ticker symbols are arrangements of symbols or characters representing specific assets or securities listed on a stock exchange or traded publicly.

  • For example, TSLA is the ticker of Tesla, MSFT is the ticker of Microsoft, NFLX is the ticker of Netflix. 

Tranche

Tranche is a French word meaning slice or portion. It is usually used when referring to how certain financial instruments such as CLOs or ABS are structured. These instruments are divided into different sections, called tranches.

  • Each tranche carries different degrees of risk and offers different yields.
  • Those investing in less risky tranches and having greater credit protection by being in line for payment first are referred to as senior tranches whilst riskier tranches getting paid afterwards are referred to as junior tranches. 

V

Volatility

Volatility is a measure of how much the price of any particular asset has moved up or down over time and how large an asset’s price swings around the mean price—it is a statistical measure of its dispersion of returns.

  • Generally, the more volatile an asset is, the more it will be considered riskier because the price is expected to be less predictable.
  • For example, cryptocurrencies tend to be very volatile, experiencing large price swings on a daily and weekly basis. Utility stocks of water and energy companies however tend to exhibit significantly less price volatility and so can be deemed less risky investments as compared to crypto currencies. 

W

Waterfalls

Popular wisdom by TLC is that one should not go chasing them however in finance, waterfalls tend to refer to the order of cashflow payments in financial instruments such as CLOs or ABS. It dictates the priority of payments whereby those investing in senior tranches are paid first before those in junior tranches are paid.

Y

Yield

A yield is the income earned from an investment, most often in the form of interest (in the case a bond or loan) or dividend payments (in the case of shares).

  • Yield will usually be expressed as a percentage of either the value of the original investment, or of its current market value.
  • For example, if a company pays out 5p a year per share in dividends and the share price is £1, then the dividend yield is 5%.