Reverse Yield Gap
Gee. I’ll try not to addle your brain with this one! First thing’s first. Let’s start with the yield gap. In theory, shares should give a greater return than UK government bonds, ie, gilts, because they are more risky than gilts, which are effectively risk-free. Therefore shares should pay you more to compensate for that extra risk. And the difference between the return offered by gilts and the higher return offered by shares is called the yield gap. Don’t ask why!
Sometimes, when the government is desperate to raise cash, it offers a higher return on gilts than that offered by shares. The differential between returns on shares and those on gilts is then called the reverse yield gap (see Gilt/Equity Ratio).
Rights Issue
When a company decides to raise more cash in order to do sensible things (we hope) to help increase its profits, one of the methods by which it can raise cash is to have a rights issue. This means they write to their shareholders and say, ‘Hey guys, guess what? We really need some more money from you. But it’s for a very good cause. We’re going to expand our widget-producing capabilities… ‘ and as your eyes glaze over at the sheer tedium of it all, you notice a little word on the document: ‘discount’. It jolts you into feverish excitement. Ooh, you think, I’m going to get something cheaper than usual; yippee, this must be good news. What the company has done to lure you to part with more cash is to offer you new shares at a discount. The shares are offered in direct proportion to the amount you already own. You are given a certain time period in which to take up the offer, and if you choose not to partake of it, then you can sell your rights through a stockbroker. Only, if you do decide to sell the rights, be aware that your shareholding will be diluted, ie, made smaller in comparison with the new increased amount of shares the company will then have in issue. And shares have a tendency to fall in price (in the short term) on the news that there is going to be a rights issue (see Cum-Rights, Dilution, Ex-Rights, Nil-Paid Rights).
Risk
What we take just by getting out of bed every morning! Whenever you see the cute little caveat that ‘The value of your investments may go down as well as up’, you know you have departed from safe, but dull-as-ditchwater building society or bank deposit territory, and are about to embark on the exciting, but undoubtedly riskier terrain of shares, bonds, unit trusts, etc. Yes, you guessed it, the better the return you expect on your money, the riskier it is.
This is an unfailing rule of investment that all too many people forget when they get carried away in the euphoria of investing their hard-earned cash. There’s something about buying shares that sets people alight, as if they were at the Derby. I implore you to take a deep breath, hold back, and examine the sort of things you invest your money in as closely as you can. Try not to get too emotional and carried away with the thrill of it all. Successful investors, both large and small, never fall in love with their investments. They have a sense of detachment and are willing to bail out as soon as they see they have made a mistake. And remember a lot of it is common sense.
If you, like me, are of a cautious disposition by nature, then you’ll be looking for investments that are good, solid, safe bets over the long term. So buying shares or bonds in an obscure Venezuelan computer manufacturer is not likely to be your thing. Cautious investors tend to stick to familiar home ground, buying shares in well-known companies like, for example, those that populate the FTSE 100.
Risk Premium
When investors put their money into investments such as shares or corporate bonds which are not risk-free, they expect to get a better return than they would get if they were to put the money into the effectively risk-free world of gilts (UK government bonds). So if risk-free investments offer, say, 4 per cent, investors might expect 7 or 8 per cent on a less safe investment. In this instance, the amount of return investors expect above the risk-free rate of 4 per cent is 3 per cent, also known as the risk premium (see Bonds, Gilts, Risk, Risk/Reward Ratio, Shares).
Risk/Reward Ratio
Mega-important to read this and tattoo the concept on to your forehead. Somewhere along the line, people often forget that there is a mathematical rule about the risk/reward ratio. The higher the reward you want to get, ie, the more money you want to receive back on your original outlay, the higher the risk you are taking with your hard-earned cash. There is absolutely no escaping this golden rule, and I pity the poor person who, eternally optimistic, buys into the dream that he or she can make superior returns to what banks and building societies are offering, without higher risk (see Risk).
Rumour
Something the City thrives on. And which you, sensible, unflappable person that you are, will not respond to. I have found, from experience, that it is best to be highly allergic to rumours and gossip generated from the City. Investors should only respond if they can back it up with a profound conviction that the shares in question are worth buying or have to be sold. Otherwise it could just be a ramp or a bear raid being perpetrated by the traders, gleefully watching all the small, unsuspecting punters, ie, you and me, being railroaded in or out of shares. Of course, if it’s bad news and the company in which you own shares is about to hit the deck, you will be last in the queue to know about it. And if it’s potentially good news, well, the same applies – by the time you find out about it, the shares will have risen at least halfway to their target price (see Bear Raid, Ramp).
Running Yield
Another delightful bit of financial jargonese that sounds very complicated, but isn’t. So there’s no need to get fazed. It’s just the mathematical calculation that works out the return offered by a bond when its price on the market is higher or lower than its face value of £100. If the bond is selling at less than £100, the running yield will be higher than the nominal yield, ie, the return it offers when it is priced at £100, and vice versa. This is the actual, or real yield of the bond (see Bonds, Par Value, Redemption Yield, Yield).
Russell 2000
This is a popular index that measures the financial health of the 2000 smaller American companies that are next in size after the top 1000 listed on the US stock market (see Index).
Save As You Earn – SAYE
The lucky employee contributes money to the scheme over a number of years, which can be topped up by the employer. When the time’s up, he or she gets a tax-free bonus (whoopee!) and can buy shares in the company at a pre-agreed fixed price. Anyone who is offered this option usually finds they’re on to a good thing, unless the company they work for is about to go up the creek, in which case, being a shareholder isn’t such a hot idea. This is similar to an Employee Share Option Plan, but not exactly the same (see Employee Share Option Plan – ESOP).
Scrip Issue
Yippee. Freebie shares to add to your existing shareholding. There are two types: 1) Scrip shares given when a company pays dividends to shareholders in the form of shares instead of cash. 2) Scrip is also another name for a bonus issue (see Bonus Issue).
Secondary Market
When shares and bonds have been issued and are already being traded publicly on the stock market, it is known as ‘secondary market’ dealings. The original issue of shares or bonds takes place in the ‘primary market’ (see Primary Market).
Sector
The UK stock market is made up of roughly 3,000 companies. To make it easier for the professionals and everybody else to follow the fortunes of these companies, they are grouped into types, or sectors. The different sectors are analysed avidly and continuously by City analysts and the financial press. There are at least 40 of them covered in the Financial Times, so if you’re planning to follow the stock market more closely, make sure you familiarize yourself with these. You’ll need a dose of the water sector after starting at alcoholic beverages (always a good place to begin!), by which time you’ll be in transports of delight perusing transport shares. This sector grouping helps the City professionals and you to make comparisons between the companies, ie, suss out what’s a good share to buy and hold, as well as what to avoid like the plague.
Secured Loan Stock
When you lend money to a company, if it’s in the form of secured loan stock, you can sleep sounder at night. Loan stock (a bond), remember, just describes the bit of paper, the IOU these people give you in return for borrowing your cash. That magical word ‘secured’ conveys a comfortable, secure feeling, doesn’t it? For once in the financial world, it’s justified. This type of loan is secured against some valuable asset of the company, like a building, land or bars of gold. In the event of a worst case scenario, should the company have the misfortune to go belly up, secured loan stock will be repaid before unsecured loan stock (see Bonds, Corporate Bonds, Shares for a list of how debt repayments are prioritized in the event of a bankruptcy, Subordinated Loan Stock, Unsecured Loan Stock).
Securities
This is a pretty confusing word that describes a large number of things that are not necessarily secure, in the peace-of-mind sense. It is the general word that is used to describe the whole gamut of financial assets, such as shares, bonds, debentures, gilts, unit trusts, etc. Just for your information, insurance policies are not included (see Bearer Securities, Financial Instrument, Marketable Securities, Registered Securities, Non-Marketable Securities).
Settlement
On buying shares from a stockbroker, amazingly enough, you are expected to pay for them. And when you sell shares, you might be lucky and get some money back! Settlement is the dreary, but necessary administration and paperwork that smoothly ensures you cough up for shares bought, or receive a nice big cheque for shares sold (see Account, Contract Note, CREST, Nominee Account).
Share Buy-Back
This is very popular with people who own shares. It’s when a company that is awash with cash, having no means of spending it on decent investments, magnanimously returns the money back to its shareholders. How does it do it? You’ve probably guessed already. They buy back shares in the stock market, ie, effectively from you! The value of the remaining shares in the public domain should then go up in price.
Share Capital
The actual money raised by a company, which in return dishes out shares to the people who have parted with this cash. In dreary accounting jargon, share capital is the total nominal value of the shares that have been issued. Say Bloggins plc has issued 100 shares with a nominal value of £1 each; the share capital will show up in the accounts as £100. Couldn’t be easier could it? (see Called-Up Share Capital, Capital and Reserves, Nominal Value).
Share Exchange
Ooh, can I swap my Fly by Night plc shares for your Solid Gold ones? No, you can’t! In this context, it means selling shares you already own and being given shares in a unit trust instead. There are some unit trust managers who magnanimously convert your existing shareholdings into units of their funds. Obviously this is only a useful service if it means you can get rid of some ‘iffy’ shares that you were unwittingly sucked into and swap them for units in a stellar performing fund.
Shareholder
Anyone who owns shares in a company.
Shareholder Perks
My ears prick up at anything that sounds like a perk. Perk? Perk? Sounds good to me. Perks are basically freebies, goodies or discounts that you are entitled to if you become a shareholder in a company. Naturally there is a catch. You’ll have to partake of the goodies within the company, eg, spending Boots vouchers in Boots stores. Still, can’t complain. They’re tax-free and add some spice to your shareholding. The only thing to remember is that it’s not a good enough reason to own shares in a grotty company, just because it offers perks.
Shareholders’ Funds
Accounting jargon. These are the funds that technically belong to the shareholders of a company, who will no doubt mop their brows in relief. Shareholders’ funds always show up as a plus on a company’s balance sheet. Don’t get intimidated by all the fancy names, like Share Premium Account, Revaluation Reserve and Capital Reserve, etc. They are all just part of shareholders’ funds.
