Dawn Raid To Dictum Meum Pactum (Money)

Dawn Raid

Rather confusingly, dawn raids can occur at tea-time as well, which is a much more civilized time to conduct one of these, if you ask me. In City terms, this occurs when someone keen to get hold of a large chunk of a company’s shares, often with a view to making a bid for the whole company, dives in and buys up as many shares as he or she can in one fell swoop, rather than trying to stealthily and quietly build up a stake in the company over a period of weeks. The element of surprise is the key here. Anyone can buy a sizeable slug of a company’s shares without having to declare it to the Stock Exchange. Beyond a certain percentage the buyer has to inform the Takeover Panel (see City Code, Takeover Panel).

There are a couple of less jolly interpretations of this phrase. It can be when HM Revenue & Customs sends a swarm of its tax inspectors to investigate a business it suspects of tax fraud. And just occasionally, the UK Serious Fraud Office storms the epicentre of the Square Mile and claps handcuffs on naughty boys and girls who have done wrong.

Day Trader

Day traders are private individuals like you and me, who want to make big dosh and aren’t prepared to wait around for it. Impatient with the idea of a steady career path, they’ve probably jacked in a good job, with the express intention of making themselves a fortune as quickly as possible. How do they try to do this? Well, they act as principal, ie, buying and selling shares on their own account in the space of a few minutes, hours or days. Day traders are a relatively new phenomenon, seen mainly in the United States. About 70 per cent of these guys lose serious money and only a small handful of them make anything at all. What do you call a day trader who quit with £20m? Someone who started with £50m. I suspect you’ve gathered that it’s not a good idea to do this! (See Principal, Trader, Trading.)

Dead Cat Bounce

It is the charming phrase that City dealers use when the stock market plummets downwards and then pathetically bounces a tiny bit, only to sink flat on its back again.


Nothing seedy like drugs or dope, man. This merely describes the act of buying or selling shares. The people who are instructed to do the actual buying or selling are called dealers. They go into the market (metaphorically speaking, because all share dealing is now done over the telephone or by computer with the help of screens that display all the various prices on offer) and buy or sell shares at the best prevailing price at the time of dealing. Then they report the trade, or ‘bargain’, back to the stockbroker or fund manager who placed the order.


A business has a wide choice in the way it raises money. Selling shares in the business is one way. Another way is to borrow cash. A debenture is like a mortgage, only instead of you grovelling to the building society for a long-term loan, it’s a company grovelling to you. Just as you have to offer your house as collateral to the building society if anything should go wrong, so a business offers you its fixed assets in the shape of land or buildings, etc, which act as collateral against the debenture money you’re lending them. In the same way that you have to pay the building society interest for the privilege of borrowing money from it, so a company pays you interest for getting its mitts on your cash. Debentures can also be bonds. They are one of the more solid, safe types of loan you can make to a company in the world of finance (see AAA, Bonds, Credit Rating).


Goodie. People who actually owe you money for a change. For a company or a business, debtors are the people who owe them money.

Defensive Shares

These are shares that are perceived by investors to be immune from nasty, horrible things like recessions. Totally the opposite to cyclical shares, they are better equipped (allegedly) to weather stormy economic weather. What sort of shares are these? Well, food, drugs and healthcare are obvious examples. No matter what happens, we still need to eat, drink and take drugs, not the recreational variety, I hasten to add! The thing to be wary of is that whilst these types of shares all fall under the same umbrella of safe and defensive, some cope better with the vagaries of a turbulent economy than others. Investors tend to pile into these when they feel the economy is about to tip into a downturn and they want to batten down the hatches, investment-wise (see Cyclical Shares, Utility Shares).

Deferred Shares

Occasionally a company issues shares in which the dividend payment is deferred until some point in the future. Things like voting rights can also be deferred. These shares will be cheaper than the ordinary version to reflect the disadvantages of owning them. When they are no longer deferred, the price of the shares will rise to reflect that. There can be tax advantages in owning shares where the income stream, ie, dividends, is not received until some future date, thus delaying the need to pay tax on your dividend income.

Defined Benefits Scheme

A long-winded way of saying final salary pension (see Pension -Final Salary Pension).

Defined Contributions Scheme

A long-winded way of saying money purchase pension (see Pension – Money Purchase Pension).


The opposite of inflation, where wages and prices keep going up. Instead, wages and prices fall. Economists wail that falling prices are just as corrosive and bad for the economy as rising prices. They say deflation is usually a disaster for the ‘man in the street’. The reason? A company would argue, ‘Why should we employ someone to make a car that we can only sell in the future for 90 per cent of the cost of making it today?’ So deflation can bring mass unemployment and only people with lots of cash benefit from this scenario.

Dematerialized Shareholding

Oh no, my shares in Star Fleet plc have dematerialized! Now I’ll never get them back. Relax. They haven’t evaporated into thin air. In the good old days, the only proof of share ownership that people had was a physical share certificate, a bit of paper that said, for example, that you owned 500 shares in Star Fleet plc. The up-to-date way of storing them is in an electronic system called CREST (see CREST). The good news is that for all of you fretting that you might forget about your shares, or worse still, they might evaporate, indeed, dematerialize, you can still ask your stockbroker for a share certificate when you buy them.


It’s when a company sells off a part of its business. There are several reasons why it might do this. Maybe to raise cash for the parent company, or perhaps to enhance shareholder value because the individual parts of the business are worth more than the whole. Another reason for chopping off a part of itself is if there is no synergy between the bit being jettisoned and the core business.

What actually happens is that the single company splits into two entities, which then lead two separate existences. Shareholders in the original single company should typically get proportionate shares in each of the new enterprises.


By now a fair few of you have received cash windfalls as a result of demutualizations, so you probably know what it is. It is when a financial organization that is owned and run purely for the benefit of its members, such as a building society, is transformed into a bank, which is floated on the Stock Exchange and is then owned by its shareholders, who may or may not be beneficiaries of its services.

Deposit Account

This is where you deposit money into a bank or building society and expect to leave it there for a longish length of time in the hope of getting better interest than if it stays languishing in your current account earning diddly rates of interest. A good way of finding out who is offering the most attractive rates of interest is to visit the Moneyfacts website, which is used by professional advisers and will tell you everything on offer by the whole gamut of financial institutions: www.moneyfacts.co.uk.

Depositary Receipts

There are lots of companies that want to gain access to international investors who might otherwise be put off by the tricky conditions of the local stock market in which the shares are listed. How do they get round this? Here’s an example. A Korean power company wants to gain access to the global share market to raise funds. It is difficult for foreign investors to buy and sell shares in the local Korean stock market. Solution? The Korean company creates a large chunk of its own shares that it then hands over to an investment bank whose job it is to make those shares internationally marketable. The bank creates a subsidiary that transforms those locally traded shares into depositary shares or receipts. There are various ways it can do this, but it might package 50 locally traded shares into one depositary share for example. These are then issued and traded on a major stock market, such as that of the United States or the United Kingdom. The point about these is that they offer investors an uncomplicated way of participating in more obscure or exotic stock markets. They have their own dynamic and often trade at a premium to the locally traded shares in the same company, simply because investors prefer the easy route of being able to buy shares in, say, KEPCO (Korea Electricity Power Company) in a mainstream stock market. Depositary shares can be American or Global, depending on how they are structured when they are created (see American Depositary Receipts – ADR).


What exactly is it? Well, when you buy a brand new car, it pretty much loses a large chunk of its value as soon as it leaves the showroom (unless it’s a very fancy, scarce, limited-edition Jag – sigh!). In the same way, when a company buys tangible things for its business, like computers, they’re worth less and less, ie, lose value, over time. These falls in value are accounted for in a company’s accounts by way of depreciation. A simple example: if a company has bought a machine that makes squidgets for £100,000 and this squidget-making machine is expected to last for ten years, then the company spreads the cost of the machine evenly over ten years in its accounts (see Amortization, Tangible Assets). Currencies, too, can depreciate. When inflation erodes the value of the local currency it is called domestic depreciation.

Derivatives – Options, Contracts For Difference, Futures, Warrants

What is a derivative? Surprise! Derivatives derive from something. They are bits of paper, just like shares. They derive from things like shares, bonds, commodities, etc.

A derivative is basically a contract between two people to buy or sell an asset (it could be shares, gold, pork bellies, etc) in the future at a price fixed now. It derives from things like shares, gold, etc, and its price is linked to the price of the underlying financial instrument. Different derivatives are traded in different ways. They can allow investors to gear up, ie, put up a small amount of money to gain exposure to a much bigger slice of the action. In theory you can make large profits on a small outlay, but the reality is that it is similar to having a flutter on the horses. There are only a few types of derivative. Once we cut through the jargon, they are straightforward. Here are the main ones:


Why use options? Suppose you think a share is going to go up or down and you want to make money on that idea. But you do not want to put much money into it. Options allow you to put a bet on your idea. If you get it wrong, you will only lose the amount of money you put upfront. If you get it right, you make a nice profit. There are two types of options – traditional and traded:

Traditional Options

Let’s say you like the look of Vodafone shares. You believe they are going to go through the roof in the next few months. However, you do not want to spend a large amount of money buying the shares in case you are wrong. You could buy a ‘call’ option in them. This gives you the right, but not the obligation, to buy Vodafone shares at a fixed price and within a defined period of time in the future. You pay a ‘premium’ to buy the ‘call’ just as you might pay an insurance premium. In a worst case scenario, if the shares fall out of bed (City-speak for going down sharply!) you do not have to take up your option. You can let it lapse and the only money you lose is the ‘call’ money or ‘premium’. The opposite of a ‘call’ is a ‘put’ option. This gives you the right, but not the obligation, to sell shares at a fixed price sometime in the future.

Buying traditional options is not so bad on the risk front, because you only stand to lose the money paid up for them in the first place. However, they are not tradable. This type of option is available in a large variety of shares. It can also be used to ‘hedge’: suppose you own a large holding of GlaxoSmithKline shares. You are worried that the stock market is going to fall sharply. You could buy a ‘put’ option to lock in the prevailing high price of those shares. This is known as ‘hedging’. If you are correct and the shares do drop sharply, you have the right to sell your shares at the high price you fixed several months ago. Rather like a punt on the gee-gees, though, these options can often turn out to be useless!

Traded Options

Exactly the same as traditional options but with one important difference. You can buy and sell the options themselves, just like shares. The choice of these is limited to a handful of very widely traded major shares. But the same principles apply. If you get it wrong buying these, you will still only lose your initial outlay of money. The added frisson of excitement comes from making money with them if your idea goes right.

How do you buy and sell options? You call a stockbroker who deals in options. He buys the option for you from an options trader who ‘writes’ the option and is effectively like a bookmaker (see Writer). The options trader takes a view and offers odds to the punter (you).

Contracts For Difference – CFD

These are another type of derivative. Basically a CFD is a contract between two people who agree to settle the difference (plus or minus) on an underlying asset at some time in the future. With these you are betting on the movement of the price of a share rather than the share itself. CFDs allow you to mirror the performance of the underlying share without actually owning them. They are structured so you can trade them on ‘margin’, which means investors only pay a relatively small amount of money in order to own a much larger chunk of the shares. The risks and rewards are high and these, just like futures and spread betting, are categorically not for anyone who’s green around the gills when it comes to investing. Here’s an example: you pay £10,000 to own £100,000 worth of Bloggins plc shares. If things go well and the shares rocket, you’re singing ‘We’re in the money’ and quaffing champagne. If the company goes bust you are committed to pay out the full £100,000. Ugh!

At the moment, the vast majority of CFDs traded apply to UK and US shares. They are becoming more and more popular with investors because they are cheaper and more flexible than getting into options. Another advantage of CFDs is that the folks who trade in these don’t have to pay stamp duty on any purchases (see Financial Services Authority, Margin, Margin Call, Risk/Reward Ratio, Spread Betting, Tax – Stamp Duty).

CFDs are not technically the same as options, but similar in that you can make money from falling share prices as well as rising ones. Unlike options you do qualify for any dividends paid. Fund managers are increasingly starting to use them to hedge shares they own as well as ones they don’t (see Hedging, Short).


These are the wonder toys of the financial markets. What is a ‘future’? The purchaser of a futures contract commits himself to take delivery of or deliver a fixed quantity of a commodity, currency, etc, at a fixed price on some future date. The futures contract is tradable, ie, the owner can offload it on to someone else if he so chooses. Why a futures contract is so dangerous is that for a relatively small outlay of cash upfront, it commits the owner to a potentially unlimited loss if the market goes against him, because he has to honour the contract regardless. The only way to wriggle out of this obligation is if the owner of the futures contract sells it on to some other mug who thinks he is the mug and buys it from him. Otherwise, when the contract expires, the lucky owner will get physical delivery of 1 ton of oil or soya beans!

Firms can use futures to lower, or hedge risk. Example: your bacon factory needs a regular supply of pork bellies over the whole year. Problem is, the price of pork bellies changes depending on supply. Solution: you fix the price now at which you will pay for pork bellies in the future. This guarantees your future supply of them, the price you will pay and hopefully irons out the highs and lows of pork belly prices during the year.

Nowadays, futures are being used more and more by speculators, who, just like our home-grown Nick Leeson, think they know better than anyone else what the future moves of a stock market, commodity, currency, etc will be. This use of futures increasingly affects stock market movements, hence the value of your pension or share portfolio.

Play with futures and you are either deranged, drunk or seriously rich! If you are even contemplating ‘investing’ in them (author snorts with derision), take two aspirin and lie down (see Euronext LIFFE).


The more cynical might think there ought to be a lot more of these issued for the arrest of nefarious City types. Warrants, though, are just bits of paper that give you a long-term option to buy shares in a company at a fixed date and price in the future. They are different from options in that they usually have a lifespan of a number of years, whereas options only last for months. You can buy and sell warrants just like shares.

Covered Warrants

The principle behind covered warrants is just the same as for options and warrants, ie, for a small outlay of cash you can ‘gear up’. By buying these you have the right, but not the obligation, to buy or sell securities at a fixed price on or before a future date. They are usually used by investors who want to ‘hedge’, ie, protect what they already own, and apply to a broader range of financial instruments than just shares. You can buy these for indices, commodities, currencies, a basket of shares, etc. They are listed on the London Stock Exchange, therefore are actually tradable in their own right and settled in the same way as ordinary shares. Unlike options and warrants, however, these cannot be sold ‘short’, ie, you have to have bought a covered warrant before you can sell it. This makes them less risky than traded options, contracts for difference and futures. They also differ from options in that they have a longer lifespan, generally 3-24 months, as opposed to an option’s life, which is usually 3-9 months.

Note: for any of the above sophisticated investments, if you are deemed as a ‘private client’ you are entitled to compensation if you are mis-sold or given bad advice on them. Anyone deemed to be an ‘expert client’ by the regulatory authority (ie, someone who already knows what he or she is doing) is not entitled to any compensation if things go horribly wrong.


Devaluation is the word that describes the lowering of the value of one currency against other currencies. This can happen either because the traders in the currency markets reckon that the currency is overvalued, or because the government, for economic reasons, wants to make its currency cheaper. History shows that governments always seem to orchestrate a devaluation to get their country out of trouble. A devaluation is often accompanied by the country’s central bank printing lots of extra money, which is pushed into the financial system to avert a credit crunch and businesses going bust (see Central Bank, Inflation). This is not good news for the economy, as it is highly inflationary. The corollary to printing lots of notes is that each unit of the currency is worth less, and so devaluation is a logical word to describe it, isn’t it?

Dictum Meum Pactum

Something that seems to be ever rarer in the smooth-talking financial world. Latin for ‘My word is my bond’, this was the City’s modus operandi in the good old days. A verbal agreement and a handshake was enough to seal a deal. Giving your word used to mean something. The whole of the City operated on trust, and because it was a comparatively small ‘club’, anyone who welched on a deal was ostracized and people would refuse to deal with him.

Today it’s a different story. The City is too vast and populated with too many people to operate on such a genteel level. These days, every conversation is tape-recorded and there are swarms of lawyers and compliance officers to make sure everybody is keeping their word and being honourable and truthful. (Can you hear me quietly choking over my double decaff cappuccino?)

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