Gearing (US Leverage)
The Americans call this leverage. Leverage and gearing both mean the same thing: borrowings. The amount of gearing depends on how much money you’ve borrowed. Just as you might have a mortgage that represents 90 per cent of the cost of your house, in the same way a company can be 90 per cent geared. Before the bank blithely lends you a very large wodge of money to buy your house, it actually takes the precaution of looking at your cash flow to decide how much you can afford to borrow. It then takes a good look at what you’re planning to buy to be sure that if, in a worst case scenario, you default on payment, the bank can sell the house (or whatever) to pay off the mortgage or loan. In a similar way, when a company is looking to borrow a large amount of cash, the bank will analyse its gearing ratio (amongst other things) to suss out how much debt the company’s finances can cope with:
Net ^tow^s ^ 100 _ Gearing Ratio (%)
Shareholders Funds °
The bank also makes jolly sure that the company’s cash flow covers its interest and debt repayments and ensures that repayments are not too lumpy, ie, not paid back all at once, but evenly spread. And it goes without saying that the prospects for that particular company as well as for its industry sector play an important part in the bank’s decision whether to hand over the lolly or not. As an investor, be aware of the importance of gearing. For most companies, some gearing is desirable. However, whether high gearing is risky or not depends hugely on all sorts of factors, including the individual circumstances of a company, the industry it’s operating in, and the competence of the management.
Gilt-Edged
Means really good quality. It is the term used to describe UK government bonds and other IOUs that are supposed to be default-proof. Let me stress that gilt-edged is meant to denote good quality, but there are occasional exceptions to this, like the Russian government’s bond default in 1998. Note that this was the first time that Russia had EVER defaulted on any loan in the post-Czarist regime, so even though investors cheerfully regarded buying Russian bonds as a pretty safe bet, they were proved wrong (see AAA, Bonds, Credit Rating, Gilts).
Gilt/Equity Ratio
This is a usually pretty incomprehensible graph that measures the ‘risk-free’ returns offered by UK government bonds, also called gilts, against the dividend yield on shares (see Dividend Yield). It enables investors to determine whether shares are cheap or expensive in comparison with the ‘risk-free’ returns offered by gilts. Why do they bother with this? Well, history tells us that gilts have offered a return of between one-and-a half and three times the dividend yield of shares. But this is slightly misleading as it excludes the capital returns we get from holding shares over the long term. The rough guide is that (in theory at least) if this ratio drops below two, shares are likely to go up. However, if this number is two-and-a-half or three, shares could be set for a fall. Don’t ask me why, but it is a ratio that will get a stockbroker’s knickers in a twist if he feels he is on to something good.
Gilts
The general term used to describe government bonds, generally deemed to be effectively risk-free investments. Redeemable/ dated, irredeemable/undated all refer to the lifespan of the bond (see Longs, Mediums and Shorts). They all share one characteristic though, and that is that they offer lenders interest on the loan in the form of twice-yearly paid coupons. The returns, in the form of interest payments, are also called ‘yield’ (see Bonds, Coupon, Gilt-Edged, Yield).
Gold
Gold is a commodity, just like pork bellies or soya beans. The only difference is that it’s a lot harder to get at, necessitating digging it out of the ground. Pigs are easier to access, generally speaking. So while gold is merely a commodity, it does have scarcity value, and therefore people like to own it on the basis that it’s a lot prettier to hang a bar of gold around your neck than a pig’s trotter. In the past, investors have used gold as a hedge against inflation and some still do. Gold shares were staggeringly popular in the 1970s when the oil price shock sent inflation spiralling upwards. Since high inflation has fallen over the years, central banks have been steadily reducing their gold reserves. Now the spectre of deflation looms and the arguments for owning gold are less convincing. I wouldn’t rule out stashing away the odd ingot here and there, but only as a very small percentage of my investment portfolio. As Gray Jolliffe puts it, ‘The gold is nice. Frankincense and myrrh we’ve got plenty of!’
Golden Handcuffs
When the top brass of a company deems you to be such a valuable and indispensable member of the team that they cannot contemplate losing you, they show just how keen they are to hang on to you by securing you to your desk with a pair of golden handcuffs. The fact that the handcuffs are made of real gold shows how much they esteem you. The truth is even better. The bosses offer you large wodges of money to stay on board, kind of buying your loyalty. Naturally they’re wily about it. They’re not quite daft enough to give you all the money in one go (which is a great pity really). They offer you a starting wodge to whet your appetite, then they promise you more wodges in segments over a pretty long period of time, so you feel sufficiently incentivized to stay on.
Golden Handshake
You get this if you’ve been a valuable and esteemed member of the team, and the management of a company is gutted to see you go. Actually in reality, this is a glorified sacking. It’s the pay-off you get, if your employment contract was negotiated well enough, when the bosses decide to terminate the contract earlier than planned. They then smile sadly, shake your hand and bid you adieu, or hold a wild boozy party to hail your departure, and slip you a wodge of money, bar of gold or something like it to show their appreciation of your ‘inestimably valuable contribution to the company’.
Golden Hello
You’ve probably guessed by now that the lucky few who are lured away from existing employers (who on earth does this actually happen to?) are given a warm smile and a hello with bells on in the shape of lots of lovely lolly to tear themselves away from their already highly paid jobs and jump ship for even more pay, benefits, etc. Oh, to be so popular!
Golden Parachute
‘Look out for number one!’ is the common cry of incompetent bosses who’ve messed things up at their company and are now facing the unwelcome prospect of being booted off the board as a predator prowls round threatening to take it over. The incompetents, having already anticipated the disaster of their own demise, have by now made sure that they’ll get paid lots of money in compensation for being unceremoniously sacked in the event of a takeover.
Goodwill
Why does the stock market ascribe a value to a company over and above the assets that it owns? Because the company’s ability to generate profits from those assets also derives from intangible things like customer loyalty. A restaurant, for example, will have a regular clientele. When it is sold, the fact that it has existing customers makes the restaurant more valuable to the buyer than just the table and chairs. This added value is called goodwill and is listed under ‘intangible assets’ in a company’s balance sheet. It’s what a business builds up over the years by being reliable with its customers and damned good at what it does. It is difficult to place an absolute value on goodwill because it is intangible (see Accounts, Intangible Assets).
Grey Market
I’m not sure why this is called the grey market, as opposed to green or blue. It is when bold market-makers start to trade in shares, etc, ie, ‘make a market’ in them, when they are not yet officially listed on the stock market (see Market-Maker, Trader).
Gross Domestic Product – GDP
Measures the output of the economy. Domestic product is all the goods and services we produce minus net property income from overseas. Net property income from overseas is the income from assets owned by UK residents in other countries (foreign shares, for example) minus income from UK assets held by foreign residents. It doesn’t really give us a terribly reliable idea of the health of the economy because the numbers used from different sources are not comparable.
Gross National Product – GNP
Measures the output of the economy. National product is all the goods and services we produce plus net property income from overseas (see Gross Domestic Product for explanation). This number doesn’t really give us a terribly reliable idea of the health of the economy because the numbers used from different sources are not comparable.
Group of Ten
The bods who control the purse strings of the ten richest non-communist countries (finance ministers and top treasury officials if you really want their official titles) belong to a club called the Group of Ten. They get together as and when they feel it’s necessary, usually to marshal financial support for one of its members that’s hit a glitch. The ten are: Belgium, Canada, France, Germany, Great Britain, Italy, Japan, The Netherlands, Sweden and the United States.
Growth Funds
Funds that are invested in shares, which a fund manager expects to offer fast, good growth prospects in terms of earnings per share, dividend and capital growth of the shares (see Collective Funds, Distribution Funds, Growth Shares, Investment Trust, Income Funds, Managed Funds, Unit Trust).
Growth Shares
These are shares of companies listed on the Stock Exchange that are bought by investors anticipating that they will show good growth in profits. This in turn will lead to the shares going up, ie, capital appreciation of the shares. Because they are often very fast-growing businesses, they rarely offer much income by way of dividends as the company tends to plough profits back into itself in order to keep growing at the same rate. It’s important to note that this type of share trades at very toppy (City slang for too high!) valuations because investor expectations are so high. Consequently there is little room for manoeuvre. If the company fails to fulfil growth expectations, shareholders are liable to dump the shares. The reason is that an awful lot of good news is anticipated and included in the share price in advance. The City says, ‘It is better to travel than to arrive.’ Of course, good growth shares just keep on travelling but those that disappoint tend to arrive at their destination rather suddenly and brutally! (See Income Shares, Value Shares.)
Guaranteed Equity Bonds – GEB
Guarantees aren’t always as enticing as they seem to be at first glance. Insurance companies and building societies offer guaranteed equity bonds, or GEBs. Basically they promise you the upside of investing in the stock market without the risk. You get stock market exposure, but your capital is safe because it will be returned to you at the end of the bond’s life, together with any money made on the performance of the stock market. Sounds too good to be true? The disadvantages: you are locked in for a long time, so it’s inflexible and you are also not guaranteed to get any return from the bond. Often, you won’t benefit from the full extent of a rising stock market index, because the provider has to use some of that increase to cover its costs for offering you the capital protection in the first place. Oh, and it’s non-marketable, so you cannot offload it on to someone else.
Guaranteed Growth Bonds – GGB
Similar to guaranteed income bonds (see Guaranteed Income Bonds below), only instead of paying out a regular fixed return, or income, over the life of the bond, you get it all in one hit as a lump sum at the end of the bond’s life.
Guaranteed Income Bonds – GIB
These are bonds offered to investors by insurance companies that offer a set rate of income, also known as return or yield (see Yield).
A GIB is non-marketable, hence can’t be flogged to anyone else, and inflexible because you are locked in for the length of the bond’s life. However, the capital will be repaid at the end. GIBs look good when interest rates are falling, because you’re locked into a higher return than the market, but they look less attractive when interest rates rise.
Guru
You are more likely to get fiscal enlightenment from financial gurus than the spiritual variety. A financial guru is someone whom everybody worships, believing him to be so awesomely clever, that he or she can predict what the stock market is going to do next. Financial gurus include Warren Buffett, George Soros and Peter Lynch. They have reached almost saint-like status, as people hang on to their every utterance in the hope that just listening to them will somehow miraculously improve their wealth. True, these guys are very smart and undoubtedly people whose opinions are to be respected. But a word of caution. Even the best of them makes mistakes. They, just like us, are fallible. The only difference is that, given the size of the funds they are managing, they can afford to lose the odd million here or there, whereas you and I can’t! (See Financial Information.)
