Share Options
The owners of these are rubbing their hands with glee (well usually anyway!). Directors of companies are ever increasingly being given the chance to participate in the wealth creation of the companies they work for. The lucky devils are offered shares in the future at today’s prices, and they are often on to a winner. The top dogs in these companies obviously get the main chunk of goodies like this on offer, but smaller offerings are not to be sniffed at, as they have a knack of growing over the years into a rather nice little nest-egg (see Employee Share Option Scheme – ESOP, Save As You Earn).
Share Premium Account
When a company issues its shares, each share will have a notional value that is called the nominal value (see Nominal Value) and is often 10p, 50p or £1. Of course, the shares are normally issued for a price far and above the notional value. So to take an example, if Bloggins plc (I do like Bloggins, it sounds such a trustworthy, dependable sort of company!) issues shares with a nominal value of £1, but actually sells them to you and me at £2, that surplus pound is known as the share premium, and is popped into a little drawer called the ‘share premium account’, which shows up in a company’s balance sheet (see Accounts). It’s all in the same pot, ie, funds that belong to the shareholder, also unsurprisingly known as shareholders’ funds or share capital.
Shares
Usually called common stock in the United States. Other words describing shares are ‘equities’ and ‘securities’. When you buy an ordinary share, you are buying a stake in a business. Whether you own one or a million shares in, say, Sainsbury’s, you own part of that company. Owning shares in a company gives you the right to attend its Annual General Meeting, vote, and ask awkward questions if you feel the directors or chairperson are not running the business in the right way. If the company does well, your shares will increase in value over time and you will also benefit from steadily increasing dividends. Unfortunately, the converse is also true. In a worst case scenario, if a company goes belly up, ordinary shareholders are at the bottom of the pile when it comes to being paid out by the receivers (see Liquidation, Receiver).
There are all kinds of shares that span the spectrum of risk. In fact, in the event of a company going bust, there is an order of payout to shareholders depending on the type of shares they hold. It’s worked out by priority percentages and is different for each case. The order of payout is as follows:
1. mortgages and debentures secured on specific assets;
2. debentures secured on the general assets of a company;
3. unsecured debentures and loan stock (loan stock equals bonds);
4. preference shares;
5. ordinary shares.
Small test for the reader. What is a blue chip stake?
(A) a new dish by Gordon Ramsay;
(B) making kids eat their food by dyeing their vegetables; or
(C) a holding in a solid British company? Correct answer (C).
Share Split
This is when a company takes each share and splits them into more than one. So let’s use an easy example. Shares in Bloggins plc are each trading at £10 on the stock market. They have a nominal (face) value of £1. A five-for-one split will result in the shares being worth about £2 on the stock market (sometimes they trade a little higher on positive feedback from investors who perceive the shares to be more tradable). And the face value of each share is now a fifth of the original, ie, 20p. This is not the same as a bonus issue (see Bonus Issue).
Shell Company
By now you know that much City-speak is kind of close to what you think it is, but slightly misleading. A shell company hasn’t got much to do with shells, the seaside variety anyway. We’re talking shell as in not a lot inside. Once thriving publicly quoted companies that have had to sell off all their assets and end up being corporate ghosts, often stay listed on the stock market. Though they are no longer attractive to buy for their growth prospects, some entrepreneurs use them to reverse their successful businesses into the empty shell company. Why do they do this? In order to avoid having to go through the whole aggro of obtaining a listing on the stock market from scratch, and all the legalities and expenses involved. They park their business into the shell company and hey presto, the shell is brought to life as a flourishing concern.
Short
Highly unusually, City wide-boys love to boast about their short positions. Shorting is when the fearless trader puts his neck on the line and sells shares or other assets he doesn’t own, in the evangelical belief that their price is going down in the near future and he can buy them back cheaper. Not for the fainthearted. I would steer really clear of this kind of out-and-out gambling. The way I see it, when the professionals do it on their firm’s behalf, if they balls it up and lose a few million, they can always make it back on another deal the following day or week (or get the heave-ho!). Unfortunately if YOU sell shares you don’t own and the market turns against you, you are well and truly stuffed (see Bear, Bear Squeeze, Day Trader, Derivatives, Long, Market-Maker, Square, Trader).
Shorts
Also known as short-dated gilts, these are UK government bonds that have a maximum lifespan of up to five years (see Gilts, Longs, Mediums).
Short-Term Investment
How long is a piece of string? I mean, short term could be three minutes to a stocky, rugby-playing City trader, and three years to someone else. I buy with a view to the longer term, more like five years. The only way I would suddenly become more short term is if I felt the goal posts had changed and I had made a hideous investment mistake. Short-termism can infect anybody, even the gurus of investment, like George Soros and Warren Buffett.
Single Capacity
A City firm that only has one function, like pure agency stock-broking or market-making. It does not do both (see Dual Capacity).
Slump
As you may have already skilfully surmised, a slump, in economic terms, is not good news. It is a gradual decay of economic activity. Lower spending leads to lower investment, which leads to lower spending. In other words, a vicious downward spiral. Most of us have not seen one of these and we can only hope we never will. The last real slump was the Great Depression in the 1930s.
Smaller Companies
In stock market terms, a smaller company is anything that doesn’t belong to the FTSE 100, ie, the top 100 UK companies. Smaller companies have an upside and a downside. On the upside, they offer the chance for tremendous growth and excitement if they do well. On the downside, if things go wrong, the investor who has shares in them can sometimes get pretty unstuck. Why? Because the information flow on this sort of company is not as good as that for the larger, more well-known companies such as BP or Tesco, say. And they are more volatile, because the liquidity (ie, tradabil-ity) in them is not so good. Chances are if things go wrong, you will not be the only person with the bright idea of selling the shares. So when a whole bunch of people try to sell shares that are not usually heavily traded, the effect is exaggerated on the downside; in other words, the price goes down sharply! It’s the same on the way up of course (see Alternative Investment Market, Beta, Illiquid, Liquid, Ofex, Thin Market, Volatility).
South Sea Bubble
A mass of investors (or should we say speculators) got very excited about the prospects for a South American mining scheme. The herd fell fervently in love with the concept, and pretty soon everyone was frenziedly buying shares in the company behind the mining scheme, bidding them ever higher and higher. All purely on the expectation of what might be the richest mineral deposit in the world, or some such tale. Other companies were created to tap into similar unproven mining schemes and the ever-optimistic herd kept buying shares in these wretched unproven companies, purely on hype and hot air (does this sound familiar?). Then the inevitable happened and the unsuspecting public became a whole lot more suspecting and started to suck their money out of the venture, causing the bubble to burst. Confidence collapsed, and there was a spectacular denouement with an awful lot of people losing an awful lot of money, many of whom became bankrupt (see Financial Manias).
Spot Rate
Ardent chocolate lovers will ruefully watch this in the mirror. However, in a financial sense, it is just the current (spot) price of something you want to buy immediately. Could be dollars, soya beans or bars of gold. It’s mainly used in the currency and commodity markets among the professional traders.
Spread
‘Spread ‘em wide!’ is the popular cry among City traders, and not for the reasons that you might think. Other expressions meaning the same thing are ‘bid/offer spread’ and ‘margin’. It is the differential between the price at which a share (or a similar financial asset) is bought and that at which it is sold. The market-maker who buys shares from stockbrokers on our behalf does so at a bid price, which is lower than the offer price at which he is willing to part with them. This difference is his profit or ‘turn’ in City-speak. It’s usually expressed in terms of a percentage. Say the market-maker is offering Grisly plc shares at £1, and will buy them back at 95p; the five pence difference is a 5 per cent spread (see Bid, Offer). It’s rather like getting foreign money when you go on your hols -there’s a price at which you can buy the currency and another at which you can sell it.
Shares with a wide spread indicate that they are not very actively traded. This usually applies to smaller companies with valuations lower than £100m. It is a general rule that as the size of the company gets bigger, and the more frequently and heavily its shares are traded, the spread gets narrower. By the time you reach the multi-billion pound blue chips, in which millions of shares change hands daily, they are so actively traded that the spreads between the buy and the sell price are wafer thin. When writing about shares, the financial press quote their mid-market prices (see Illiquid, Liquid/Liquidity, Mid-Market Price, Volatility).
Spread Betting
At last, a word that sounds just like what it is! Spread betting is just that; you can now bet on the movement of any financial instrument in a defined range, such as whether a stock market index, a commodity, like gold, or a share, will go up or down and this can be given any time parameter. If you are lucky and this goes right, you will win loads of cash. If not, you lose the lot! Profits can be huge, but (and there’s always a but!) if things go against you, your losses are potentially massive. The advantage of this type of gambling, from a trader’s point of view, is that the outlay of money is relatively small, so he doesn’t have to buy the underlying instrument to take a punt on its future movement. At the time of writing all profits from spread betting are free from capital gains tax (see Derivatives, Tax – Capital Gains Tax, Trader).
Square
If a City trader tells you they’re square, they’re not referring to their dull-as-ditchwater personality. They’re just telling you that they’re neither the proud owner of shares in Bloggins plc (or a similar financial asset), nor have they gone short, ie, sold shares that they don’t own.Their ‘position’ on their trading topic is neutral, or level (see Long, Short).
Stag
I can just feel the anti-hunting lobby breathing flames down my neck at the thought that financiers are cruel to animals. However, before they get too righteous, maybe they’ve done a bit of stagging. Basically, whenever there is a new company brought to the stock market, be it in the form of a new issue or a government privatization, if it looks like a ‘hot’ one, some people send in more than one application for the same shares, hoping to get a bigger allocation of them than if they’d applied just once. This is known as ‘stagging’ the new issue, and the perpetrators are known as stags. As soon as they know how many shares they’ve got, stags sell them, hoping to make a quick buck as trading in the shares begins. It used to be just a slightly naughty thing to do. It’s now illegal and ranks up there with insider trading as a thoroughly wicked misdemeanour. The financial authorities tread very hard on the toes of those people whom they discover to have indulged in this – shall we say -’entrepreneurial’ activity.
Stagflation
An economic cross between inflation and stagnation. So it’s a period of rising prices and economic sluggishness, which is not particularly cheery for anybody (see Inflation).
Stale Bull
The optimist who buys shares and is very excited and, along with a whole bunch of other people, feels very excited and positive about them. But at one point the music stops, the champagne goes flat, and everyone looks at each other and says ‘Who’s the next muggins who’ll buy these shares off us?’ (see Bull).
Stepped Preference Shares
These are similar to preference shares in that they pay a predetermined dividend to their owners. What distinguishes the ‘stepped preference’ variety from straightforward preference shares is that each dividend payment is stepped, rising at regular intervals each year. Other ‘prefs’ just pay a fixed, unchanged dividend over their lifetime. Like preference shares, they rank before ordinary shareholders in the unfortunate event of a company going belly up (see Preference Shares, Shares).
Stockbroker
(Q) ‘What do you call 100 stockbrokers at the bottom of the ocean?’ (A) ‘A good start!’
You and I cannot just go into the stock market and pick up 100 shares in Vodafone. We have to employ the services of a stockbroker (or broker, which means the same thing). In the City, the broker acts as an agent between buyer and seller. He passes share orders on to professional dealers who then actually transact the business. There are all kinds of stockbrokers. Private client stockbrokers offer their services to individuals like you and me. Institutional stockbrokers do the same for pensions funds, insurance companies and asset management groups that invest money on behalf of, yes you guessed it, individuals like you and me. If all the broker does is buy and sell shares for you with price limits set to your liking, then there is not much that can go wrong. If, however, you want a stockbroker to manage your money on a discretionary basis, then you will need to take special care (see Agency Brokers, Adviser, Association of Private Client Investment Managers and Stockbrokers, Discretionary Dealing, Execution Only).
Stock Exchange
Stocks and shares used to be traded in a physical ‘marketplace’, an actual floor where the buying and selling of shares was transacted by a bunch of top-hatted gentlemen (there weren’t any women, needless to say). Well, that’s all gone, and nowadays the ‘market’ is an electronic one, and transactions are all done over the telephone and via computer links. The London Stock Exchange is now a metaphor for share business transacted in the City of London, rather than in a specific spot.
Stock Index Future
This is a wild bet on the future movement of a stock market index. As it is an out-and-out gamble that carries a potentially unlimited loss if things go wrong, a la Nick Leeson, you, dear reader, are going to steer well clear, aren’t you? (see Derivatives – Futures, Index).
Stock Market
Just as in your local market, people buy and sell fruit and veg, in the stock market people buy and sell stakes in companies. It is the general term describing the electronic marketplace where all financial assets that are in the public domain, such as shares or bonds, are sold (see Stock Exchange).
Stocks
Stocks: wooden things into which you lock bad advisers. You then pelt them with rotten eggs and tomatoes in revenge for those ropy investments they sucked you into. Well, we can all dream, can’t we?
‘Stocks’ is one of those confusing words. In the United States, common stock stands for ordinary shares in a company. Although in the past ‘stocks’ described UK bonds, the word is not often used nowadays by the UK investment community (see Bonds, Shares).
Then there’s the accounting jargon. Stocks are things owned by a company that will hopefully get converted to cash. Examples are raw materials, work-in-progress or unsold tins of baked beans sitting in a company’s warehouse.
Stop-Loss Order
When you buy shares or other financial instruments, particularly if they do not fall into the solid, safe as houses variety, it might be wise to put a stop-loss order on them. Say you bought Squidgets plc shares at £1 each. But there is a little nagging part of you that is secretly regretting this purchase. What if the shares turn out to be a dog? You can limit your losses, should everything go horribly wrong, by instructing your stockbroker to set a limit on the price of your shares, let’s say 85p. If the shares start to fall and the share price hits 85p, they will automatically be sold. So in a worst case scenario, you’ll only lose 15 per cent of your money. You can also do this in reverse, ie, instruct your stockbroker to sell your shares if they reach a target price of your choosing, say £3 (see At Limit).
Straddle
We’re in options territory again, so if you’re fascinated, read on. In financial-speak, this is a rather fancy way of trying to be on the winning side, whatever happens. Like an each way bet on a horse. You simultaneously buy the right, but not the obligation, to both buy or sell an asset (usually shares) at a fixed date in the future. If the shares move up or down very sharply, the money you make on the winning side of the deal will exceed the money you paid for the straddle (See Call Option, Derivatives – Options, Put Option).
Strike Price
Subordinated Loan Stock
Lenders who own this type of debt are taking a pretty high risk with their money. It is near the bottom of the dung heap as far as payouts go in the event of a company going bust. Almost all lenders to the business must get paid out before subordinated loan stockholders get a brass farthing. By now you have probably gathered that it’s better for the health of your wealth to steer clear! (see Mezzanine Finance).
Swap
While this can mean the swapping of anything for something else, in a financial context it frequently describes a borrower changing, ie, swapping, his debt from fixed interest rates to variable rates or vice versa (see Fixed Interest, Floating Rate Note).
Syndication
City-speak. The posh way of describing what happens when a group of investment banks get together to sell and distribute a large issue of shares or bonds to their clients (see Investment Bank).
