Undated Bonds
What, a bond with no date on it? Shocking! In the wonderful world of bonds, most of them have a finite lifespan which varies from 1-30 years, and a pre-agreed date, called the maturity date, on which the bond issuer has to pay back the amount of money borrowed to the lender. A handful of bonds just never expire and pay the interest ad infinitum. Undated gilts are an example of this (see Bonds, Gilts, Longs, Maturity Date, Mediums, Shorts).
Underperform
When the returns of an investment are lower than the returns offered by the benchmark against which it is being compared (see Outperform).
Underweight
Fund managers distribute the cash in their funds over a wide variety of assets. If the shares held in a fund comprise a lower proportion (known as weighting) than that of the index or benchmark to which the fund is being compared, then it means that the fund is underweight in those shares.
Weighting can refer to shares, sectors and countries. Underweight, neutral and overweight sound more impressive than: ‘We don’t like the shares/We think the shares are okay, but nothing special/Fill your boots with these, they’re going to the moon!’ (see Neutral Weighting, Overweight).
Underwriting
Think very carefully before you underwrite something, because it’s not as if you can overwrite it, as with a computer, and blot it out as if it never happened. When you agree to underwrite someone’s finances or mortgage, to take an example, then you are promising to act as their guarantor, ie, to stand in their shoes and repay the loan, if for some reason they are unable to do so.
In the City, when a firm, usually an investment bank, agrees to underwrite the sale of a large wodge of shares in a company, it basically guarantees to buy from the company any shares that remain unsold after their sale to the public. This could be a privatization or an offer for sale, or it could be a company that already has shares trading on the market, but wants to release some more. Whatever the scenario, underwriting means taking a large amount of risk. Consequently the investment bank receives a big fat fee by way of compensation for the risk taken. If it’s a ‘hot’ issue and investors are scrambling to whisk away the shares, it’s just money for old rope, and the bankers are chuckling into their bonus packets. But if it’s a dog, oh dear, oh dear, that wipes the smile off their faces. The bank gets lumbered with a huge slug of unwanted and unsaleable shares, called an ‘overhang’, and the trouble is, everyone in the City knows it, so the traders mark the price of the shares down, which compounds the losses of the bank.
Unit Trust
A unit trust is a fund that contains the amassed money of lots and lots of individuals. This continually fluctuates in size, depending on how many people elect to pour money into it. The fund is managed by a professional, authorized fund management group that employs a team of fund managers who have the job of deciding how to invest the money. It’ll be no surprise to you that they charge a fee for doing so. Money invested in a unit trust is exchanged for its units. As more cash flows into the fund, the manager of the fund creates more units and invests the money as he or she thinks fit. The value of the assets in the fund is equal to the value of the units, plus or minus the spread (see Net Asset Value, Spread). Once fees have been deducted, any rise in the fund’s value or other returns (in financial-speak – capital growth or income) are handed pro rata to its investors.
Structurally, a unit trust is a legal trust governed by a trust deed. There are both authorized and unauthorized ones. Some unit trusts holding assets other than shares are unauthorized, for example, real estate unit trusts. The latter are not sold to the general public (see Collective Funds, Diversification, Drip Feeding, Investment Management Association – IMA, Investment Trust, Managed Funds, Open-End Investment Company – OEIC).
Unquoted Securities
Shares in a company that is not listed on any stock market. The only way owners can sell these is to persuade someone else to buy them. When a private investor is desperate to put his or her money into a small entrepreneurial company that might be the Microsoft of tomorrow, he or she might do so via the Enterprise Investment Scheme (EIS) or a Venture Capital Trust (VCT). This is pretty risky because there is a high failure rate for young, unproven companies with little or no track record. This type of investment is categorically not suitable for people who cannot afford to lose any money. It offers sexy tax breaks, but tax breaks alone do not make a future profitable business. Experts in the venture capital field are comfortable with the varying degrees of risk involved and anyone who wants to know more about this needs to consult a specialist with substantial experience in the field and a good track record (see Enterprise Investment Scheme, Tax – Capital Gains Tax, Venture Capital, Venture Capital Trust).
Unsecured Loan Stock
It’s easy to get bewildered by all the different phrases that mean the same thing. Unsecured loan stock is just another way of describing a type of corporate bond. ‘Unsecured’ means that there is nothing secured against the loan as collateral, like a building or a plot of land. If the company were to go belly up, the person who lent it the money would be in a much worse position than someone who owned secured loan stock and could take control of the ‘security’, selling it to repay the loan. Because unsecured bonds are riskier than gilts and secured loan stock, they pay a better return to buyers to compensate for the extra risk involved (see AAA, Bonds, Corporate Bonds, Secured Loan Stock).
Usury
With the vast array of financial loans on offer, how can you protect yourself from being ripped off with unconscionably huge interest charges for the privilege of borrowing money, in other words, usury? You’ll be relieved to know that interest charged over and above 48 per cent per year on loans from all those credit card and HP companies, banks and building societies is deemed to be extortion. Thank goodness for that. I was beginning to think that the 100 per cent APR interest I’ve been paying Loanshark Enterprises Ltd for borrowing £10,000 was a bit excessive!
In the event that you need to borrow money, shop around, ask lots of questions and compare the answers. If you get fazed with all the percentages, like 13.6 per cent APR, etc, be explicit. Ask: ‘If I borrow a million pounds from you (well, we can dream can’t we?) how much will I have to pay you in total if I return the money over a one-, two-, three-, or five-year period?’
But beware, read the small print. Do not blithely assume that the institution you are borrowing from is going to be terribly understanding if you slip behind on your repayments. Make sure you understand the commitment involved. If you don’t like the sound of it, it’s best not to do it!
Utility Shares
These are shares in companies that offer essential services, like electricity, water and gas. This type of company is generally (though not always) fairly defensive and stable. The general opinion of investors is that no matter how awful the outlook for the economy might become, we will still need to use all these services and pay up for them. Utility shares tend to offer quite reasonable returns, in the form of dividend yields (see Defensive Shares, Yield).
Value Shares
These are shares that investors buy because they think they are cheap. Peter Lynch, that ace American investor who made the Magellan Fund famous, came up with a mathematical formula in order to apply some set criteria to the analysis of shares. This has now been immortalized in the investment world as the ‘Lynch Ratio’. It compares the price/earnings ratio of a share to the growth rate of its earnings per share. It’s a way of measuring whether a share is worth buying on the grounds of it being ‘good value’. Or cheap as chips, whatever (see Earnings per Share – EPS, Price/ Earnings Ratio – P/E, Growth Shares, Income Shares).
Vendor Placing
In the slick world of corporate finance, where companies change hands like so many pounds of new potatoes, there are situations when a company that owns another company decides to sell it. Say Chocco plc decides to sell Glue-it, one of its many exciting subsidiaries, to Woodfloor plc. Woodfloor hasn’t got the money to cough up for Glue-it. Instead, it issues new shares to pay for the deal. Chocco groans at the thought of being paid in Wood-floor’s dreary shares. It wants lovely cash in pocket, thank you very much. The new shares in Woodfloor plc are packaged up to look as attractive as possible and sold to institutional investors. The stockbroking firm, by foisting these new Woodfloor shares on to its valued clients, has now cleverly raised the money that Chocco wants for its disposal of glorious Glue-it shares. This process of fundraising is called a ‘vendor placing’. The stockbroking firm gets paid a nice plump fee for its invaluable work, Chocco gets cash payment for its disposal of Glue-it, and the institutions have been offered a ‘unique unmissable opportunity’ to invest in an exciting fast-growing company called Woodfloor and Glue-it Enterprises!
Venture Capital
Also called seed capital, it is not necessarily used for seedy purposes. This is money that investors, many of them specialists in taking ‘venture capital’ risk, use to back small, new companies that have a good idea and a sound business proposition. Seed capital is the first investment into a business (typically friends, family, business angels) to develop an idea or invention. Venture capital is the money used later on in the early stages of a company’s life, to hire more people, invest in factories, etc. At this early stage the company is often loss-making or has few clients. Whoever stumps up venture capital money for a business should be fully aware of the high risk they are taking with their money. Even the best ideas can go wrong, and whilst venture capitalists are fully cognizant of the risks involved, smaller, less experienced investors often aren’t. This type of investment is only suitable for people who really can afford to take a loss on the chin and not feel much worse off (see Private Equity).
Venture Capital Trust – VCT
Just like an investment trust, a VCT is actually a company in its own right, with shares that can be bought and sold on the Stock Exchange. The VCT invests the money raised from selling its own shares into fledgling companies (see Fledgling, Venture Capital). They offer good tax advantages: 40 per cent income tax relief, tax-free dividends from the VCT shares, and exemption from capital gains tax (CGT) if you make a profit when you sell the shares in the VCT (see Tax – Capital Gains Tax, Deferred Tax).
Saving tax is a great idea in principle. However, it is not a good enough reason to just nonchalantly throw money into a VCT. This is a highly specialized area of investment that needs detailed knowledge of the managers running the various VCTs on offer, and knowing each one’s track record in picking winners. Anyone even contemplating this type of investment needs sound, in-depth advice from a real expert in this field.
Volatility
The amount by which the price of an investment goes up or down, ie, fluctuates in value. The City loves to use the expression ‘beta’ or if it’s feeling really perky, ‘beta coefficient!’ This tells you how volatile an investment is in comparison to its market. The more extreme the up swings and downs, the more volatile a share or investment is said to be. The price of shares in smaller companies tends to show exaggerated up and down movements because it is not so easy to trade in them (see Beta, Illiquid, Liquid/Liquidity, Thin Market, Volume).
Volume
Quite simply, the amount of shares traded in a particular company on a particular day is described as its volume. All companies with stock market quoted shares have a record of how many of their shares changed hands on any given day. It is recorded daily in the financial press, and is also available on the more specialized financial information systems like Bloomberg and Reuters. It is crucially important for anyone who wants to start getting involved in stock market dealings to have a strong feel for what constitutes a heavily traded share. This is one that is likely to be easy to buy and sell. Small companies’ shares trade with low volumes (see Market Capitalization), and this exaggerates share price movements both on the upside and downside (see Beta, Illiquid, Liquid/Liquidity, Thin Market, Volatility).
Voting Shares
If you have ordinary shares in a company, the chances are that they are voting shares (though this is occasionally not the case). It may seem rather obvious, but these shares entitle their owners to vote on all things pertaining to the company at its Annual General Meetings (AGM) or Extraordinary General Meetings (EGM). AGMs take place once a year and it’s when all the directors of a company appear in front of their shareholders and tell them how things have been going and what the future holds, blah, blah, blah. Then they ask shareholders to vote, usually on boring stuff like reelection of directors and auditors. EGMs are often more urgent, and are held because of specific and unusual things happening within the company that immediately require shareholders’ votes. A takeover bid, or the company needing to raise more cash, are two examples (see ‘A’ Shares, Annual General Meeting, Extraordinary General Meeting).
Wall Street
The term Wall Street technically describes the location where most of the hot-shot American bankers and stockbrokers have their offices. But it is also used as slang to describe the US share market, which is huge. No, in fact it’s huger than huge; it’s vast. The American stock market makes up about 55 per cent, by value, of the world’s stock markets and is unquestionably the largest in the world. It’s valued at about 12 trillion dollars. The Japanese and UK stock markets follow behind, each about a fifth of its size. So it’s no wonder that the US market is what obsesses most financiers across the globe.
White Knight
The management of an ailing company that is vulnerable to a hostile takeover will frantically cast around looking for a white knight, a friendly potential partner with whom they can forge an alliance, in order to make themselves a less juicy morsel for the ‘bad guys’ to get their teeth into. Otherwise they run the danger of being open to attack by asset strippers who could chop up the company and sell various parts of it. In the event of such a dismembering, jobs are inevitably lost. It goes without saying that most of the original management is usually unceremoniously booted out as soon as the raiders take over (see Asset Stripper, Poison Pill).
Window Dressing
Some companies massage their accounts to make them look better than they really are for the year-end results. Frankly, anyone who is not an aficionado of reading accounts would find it jolly difficult to know for sure whether a company had indulged in this practice. Simple things, like a company collecting as many debts owed to it as possible and stretching its own repayments out as far as possible into the future, can significantly enhance its cash flow and current assets.
With-Profits Policy
A ‘with-profits ‘ policy is a type of financial product sold and run by life companies and it’s available via several investment vehicles. These include ‘endowments’, ‘investment bonds’ and ‘pensions’. The principle behind ‘with-profits’ is that it’s sold to investors as ‘low risk’ because the cash is spread between shares, bonds and property. In theory, each year the insurance company that’s running the plan announces a bonus, which is added to your policy and can’t be taken back. The company doesn’t give all the growth of the investments back to the policy-holder – it holds money back in good years so it has reserves to pay bonuses in not-so-good years.
There’s been and continues to be a lot of bad press surrounding ‘with-profits’ investments as they’ve been heavily flogged as ‘low-risk’. However, because stock market performance in recent years has been poor, and because the life companies have had to reduce their exposure to shares in order to keep their balance sheets strong, these have proved to be anything but! Added to this list of woes, anyone who tries to get out of a ‘with-profits’ policy is slapped with exorbitant penalties, which may be applied after a period of falling stock market conditions. Finally, hard on the heels of the life companies is the Consumer Association, which strongly advocates that the way in which these bonuses are calculated should be made crystal clear, and is critical of the excessively high charges for ‘with-profits’ products (see Endowment, Pension).
Writer
Back to the colourful world of options. A ‘writer’ of a call option gives someone else the right, but not the obligation, to buy shares from him at a pre-set price within a defined period of time in the future. If he writes a put option, the writer is giving someone else the right, but not the obligation to sell him or her shares at a preset price, etc. The options writer acts like a bookie in that he is willing to accept bets from others on the future price of shares. Writers invariably have tons of money. Well, they need it, because they are taking pretty big risks that might mean losing everything. An options writer could lose his shirt and underpants if the underlying share price moves against him. In my topics, this type of writing is a complete no-no for individuals (see Derivatives -Options, Naked Option, Principal).
Yearling Bonds
These are a special kind of horse. Ah yes, I wondered if your eyes were still wide open after heroically reaching this far outer recess of the topic. You are so alert and raring to go with your new financial prowess that you know it has absolutely nothing whatsoever to do with gee-gees. Cast your mind back to local authority bonds. Yes, I know it is desperately boring, but local authorities need to raise cash too, not just you and me. And when they do, they borrow money in two ways, via yearling bonds and local authority bonds (see Bonds, Local Authority Bonds). Unlike local authority bonds, the yearling variety IS tradable on the stock market. Just like shares, they can be bought and sold through a stockbroker.
Yellow Book
The gospel according to the London Stock Exchange. Anybody who has aspirations to get his or her company listed on the main stock market has to fulfil the lengthy requirements of this tome. A million rules and regulations to get the company’s shares quoted in the first place and then a whole lot more so it can stay there. It involves a lot of regulatory rigmarole and jumping through hoops, which explains why some entrepreneurs, rather than subject themselves to all the hassle of a full stock market listing, just don’t bother at all and keep their company private.
Yellow Strip
A rather exotic little bar in Soho. If only the truth were as exciting. A yellow strip is a highlighter that flashes up on City monitors and screens that display ‘real-time’ share prices. From this, everyone knows which market-maker is offering and bidding the most competitive prices for a particular share at any given moment in time. In City-speak, it’s called the ‘touch’ price.
Yield
The amount of money or return you get back on your original investment. It’s often worked out on an annual basis to make it easy to compare the returns of different investments.
There are all sorts of fancy names and ways of expressing it, but don’t get fazed. The easiest example is the return we get from building societies. If the building society pays you £6 every year per £100 you deposit with them, the annual yield is 6 per cent. So far, so good. But then of course the government lops off tax at source, so in fact, you don’t get the gross yield of 6 per cent. You only get approximately 80 per cent of that 6 per cent, called the net yield, and if you are a higher-rate tax payer, you’ll get an even lower return. Your ‘real return’, therefore, is this net yield (see Real Return). And then there are other considerations, such as inflation, etc, which also erode returns.
When we enter the domain of shares, return or yield is measured by the amount of money the company coughs up to its shareholders in the form of dividends. An easy example is a share trading on the stock market at £1, which pays an annual dividend of 5p. In this case, the shares yield 5 per cent.
Then we enter the realm of bonds, which by now you know are just IOUs issued by governments and companies to raise cash for their needs. Investors work out the returns on bonds using some pretty horrific maths calculations. The simplest measurement of a bond’s returns is income yield (see Bonds, Dividend Yield, Income Yield, High-Yield Shares, Redemption Yield, Running Yield, Yield Curve).
Yield Curve
This is a graph that plots the income stream, ie, returns, of government bonds against time. The City boys use it to try to suss out which bonds they would be better off buying. A key factor is the outlook for inflation, which is the enemy of bonds. At the long end, ie, 30 years, bonds might offer a 5 per cent yield: this reflects investors’ views on the outlook for inflation. At the short end (up to five years) bonds could be yielding 7 per cent, reflecting government or Bank of England policy on the economy. In between the long and the short end of the graph, the curve moves around. This reflects the supply of bonds on the market, or events expected by the market to affect the income offered by bonds, ie, interest rates (see Bonds, Gilts, Yield).
Zero Coupon Bonds
These are bonds that do not pay any interest. So why, you ask, would anyone want to buy such a bond? Ah, say the experts, whilst you don’t get any income from the bond (in the form of interest payments) during its lifetime, you do get a nice lump sum when it reaches the end of its life (also known as its maturity date). This lump sum is the difference between the price at which the bond was issued, say £50, and the par (face) value of £100 that you get back when it matures. It’s why the return from ‘zeros’ is taxed as a capital gain, not income, so the holder is only clobbered for capital gains tax (CGT) if he or she exceeds his/her CGT allowance. Some people use these as a tax-efficient way to minimize their income tax bill.
Zero Dividend Preference Shares
Just like preference shares, but with one important difference (see Preference Shares). While a bog-standard preference share pays a fixed dividend to the shareholder, a ‘zero pref’ doesn’t. In principle, this is similar to a zero coupon bond because it offers a predetermined sum of money on a specific date, so the holder knows exactly how much he or she is going to receive in the end (jargonese – capital return at redemption) with no nasty surprises. However, it’s not clear cut whether you get that money because this depends on the performance of the fund it’s invested in. As with zero coupon bonds, ‘zero prefs’ fall under the capital gains tax (CGT) banner, so the same tax-efficient tag applies (see Zero Coupon Bonds). As a result of the ‘split capital’ investment trust debacle, this type of financial instrument has received a lot of bad press, and as it’s such a complicated type of investment, it needs really specialized expert advice.
Zero Growth
In life there are lots of doom and gloom merchants; you know the sort, the ones who’re always warning us that the end of the world is nigh. Well, they also take great delight in portentously warning us that there will come a time in the imminent future when there will be no room for further economic growth. Economies, they warn, will just stop growing. This is hard for most of us scurrying about our daily lives to take on board. The difficulty is that if we worry every minute about the ghastly possibilities of the future, it’s impossible to enjoy the moment. So we don’t. What? We don’t worry about zero growth.
