AAA – Triple A
In the medical world, a triple A is an Abdominal Aortic Aneurysm; seriously bad news. In the financial world, it is seriously good news. It’s a credit rating that is applied to top-quality bonds issued by governments and companies. Triple A status signals to investors that the issuer of the bonds is considered solid and safe and will almost certainly repay its financial obligations. The three main rating agencies responsible for grading these bonds are Moody’s, Standard & Poor’s and IBCA. On the whole, the City professionals set great store by the credit ratings given out by these agencies as only rarely do they get it completely wrong. Bonds are rated from AAA downwards. When an issuer’s credit rating is downgraded, it often unsettles investors as the downgrade immediately throws a cloud over the issuer’s financial health. This can lead to investors deciding to dump the downgraded bonds. If the issuer also has publicly quoted shares, the underlying shares may well also be adversely affected and go down in price. A credit downgrade results in the issuer having to pay more for its loans in the form of higher interest rates (see Bonds, Credit Rating).
Account
This is the stock market expression for the time period within which shares have to be paid for when purchased, or share certificates delivered to the stockbroker when they are sold (see Settlement).
Accountant
These scintillating specimens of sparkling soul and wit spend their time locked away in offices and actually enjoy compiling and poring over rows upon rows of numbers. One aspect of their professional working lives is to do the book-keeping for individuals and businesses. But they do get to do more exciting tasks, such as offering us advice on tax-planning and tax-efficient ways of using our money. It’s a thoroughly useful thing to have a good accountant. The way to go about finding one is to ask friends first if they know a reliable, trustworthy (with the emphasis on trustworthy) accountant. If not, then contact the Institute of Chartered Accountants for England & Wales: www.icaewfirms.co.uk.
Accounts
Do you have a bank account? If so, you already know what accounts are. The simplest forms of them are our bank statements. They show our financial incomings (salary, etc) and outgoings (usually a lot more than the incomings from spending too much at the sales). Company accounts are basically just the same, with bigger sums of money involved. Money flows in and out of a business; money it owes and money due to it. Whilst we attempt (often unsuccessfully) to save some money, a company looks to make profits and use those profits to expand the business and make itself more successful, as well as to pay dividends.
Every business has to produce accounts. Essentially, the numbers have to tally, accounting for all the money coming in, all the money spent, money stored in assets such as land, plant and machinery, and money owed to other businesses or people. All companies are obliged to publish their results once a year. The bigger the company, the more stringent the rules as to which numbers they have to publish. And if the company is listed on the main Stock Exchange, boy oh boy, they really have to jump through hoops to keep the regulators happy.These companies have to show in writing how they fared over the year in an annual report. The regulators insist these results are published within six months of the company’s financial year end.
The annual report has to contain at least the following:
chairman’s statement; profit and loss account; balance sheet; and cash-flow statement.
There is one major snag with accounts. Not just the fact that contemplating them is mind-bogglingly dull! The glossy annual report (that costs a fortune to produce in order to impress the shareholders) only represents a snapshot of the business at one moment in time. As it is issued a few months after the numbers came out, it is already out of date. It is easy to make excuses not to bother with accounts because they look so excruciatingly boring. However, dear reader, you have to jump this hurdle. It is important to get to grips with them and where better to start than picking up an annual report. If you are already a shareholder, you have probably seen one for your National Grid Transco or HBOS shares. Tempting though it might be to glance at the cover and hurl it in the wastepaper basket, don’t do it. Resist the temptation and instead, open it. Flick through the pages and accustom yourself to reading short little paragraphs. Look for the chairperson’s statement and read it. This is where you can glean some interesting information about the outlook for the company. At the very least you’ll get an idea of what it does to make its money.
Good information will, over the long term, help you to choose the right shares. If you can get comfortable with at least skimming through the annual report, it will provide a good foundation to enable you to decide whether or not you like the look of a company sufficiently to make an investment. The report gives you a feel for what the company produces, where its major sales are, and who are its most important customers. Remember to take note that it is the consolidated balance sheet and profit and loss of a company’s accounts that are relevant to you and not those of the parent company. Consolidated just means that the figures include all other businesses belonging to the company, adjusted for percentages (see Annual Report and Accounts, Balance Sheet, Minority Interests, Profit and Loss Account).
Acid Test
Accounting-speak. Also called the quick ratio, this is a rough guide that measures the ability of a company to pay off its debts if an emergency struck and it had to pay them all in one go. It’s one of those infernal calculations that looks harder than it actually is:
Current Assets minus Stock * -j ^ .
-—-T. , .- = Acid Test
Current Liabilities
By stripping out stocks from the calculation, it gives a more accurate picture of just how much ‘real’ money is in the kitty to pay off debts. A number greater than one is normally good. But be aware: this could mean that the company is sitting on a pile of cash that is not being put to work effectively. Anything less than one, say half or below, might mean that the company is looking decidedly sickly and poised to go up the creek. However, it depends on the industry the company operates in. A supermarket retailer will have a very low acid test ratio because it has such a high level of stock. Don’t confuse the acid test with the similar, but different, current ratio (see Current Ratio, Ratios).
Active Management
It’s fun to imagine the bosses of a company exercising vigorously to keep in tip-top shape. In fact, active management describes collective funds managed by a fund manager who actively tries to beat a benchmark index, for example the FTSE 100. No easy task. In fact, surprisingly difficult. One of the main contentions of investors in recent years has been how badly many of these funds have performed against a relevant benchmark. Of course, this is partly explained by the fact that funds have operating costs that an index doesn’t have. A lot of investors are so disillusioned that they feel it’s just as well to invest in tracker funds that do not involve active fund management, but which merely track the index, on the basis that these are much cheaper to get into and seem to do about the same as the more expensive, actively managed ones. However, there is still a strong case for going with actively managed funds that have a consistently long-term good or, if you’re really fortunate, stellar performance record
Actuary
Pity the poor person who has to calculate the statistical probability of people dropping off the perch, and then worse still, calculate as accurately as possible the cost of insuring them. Other goodies that they have to suss out include the probability of illness, car accidents, how likely you are to crash when flying your own aeroplane, etc. Yeuch, what a job! Still that’s what actuaries actually do.
‘A’ Day
Financial industry jargon for 6 April 2006, which is the start of the new tax year and the date when major new pensions legislation comes into force.
Adviser – Dealing Service, Portfolio Management
If you are lucky enough to have lots of money, but little knowledge in the field of stock market investment, it would be useful to get advice either from a good stockbroker, a portfolio manager, or both, who will offer you advice (for a fee naturally!) as to how you should invest your money. Obviously, you should practise great discretion before you enter into such a level of trust with anyone, especially when it means handing over your hard-earned (or inherited) cash to a complete and utter stranger. You should be checking out the following:
Are they authorized to give advice?
How long have they been in the business?
And what’s their track record over one, three and five years, or even longer, say ten years?
Don’t fall for smooth sales patter
AER – Annual Equivalent Rate
One of many TLAs (three-letter acronyms) the financial services companies love to use! This number, expressed as a percentage, tells you what interest rate you’d get on your savings if it was paid and compounded once a year, excluding bonuses. This is the number most adverts highlight for savings products so it means you can make comparisons more easily on what return you can expect, that is, yield, over time (see Compounding, Yield).
Agency Broker
In the stock market, there are two types of broker. Those who are pure agency brokers, only buying and selling shares on behalf of their clients and who do not take shares on their own ‘topic’. Then there are those brokers who also act as principal, stumping up their own money to buy and sell shares, that is, they act as market-makers as well as agency brokers. If you want to be certain of getting impartial advice or dealing, it is often better to stick to a pure agency broker (see Association of Private Client Investment Managers and Stockbrokers, Market-Maker, Single Capacity).
Agreed Bid
When the head honchos of a company that is being gobbled up by another one, agree to the transaction with the head honchos of the gobbler.
Agreed Merger
When two companies decide to jump into bed together amicably and form one company out of two.
Allotment
Not the patch where you grow your organic vegetables. Allotment is the amount allocated to you when you subscribe for shares in a company that is newly brought to the market. If it’s a good new issue you will invariably get far fewer shares than you wanted and feel aggrieved. If it turns out to be a mega-flop, you will get the full amount you subscribed for. Wonder why that is?
Allotment Letter
The official letter that tells you how many shares you have been allocated from a company’s new share issue (see Allotment).
Alpha
Beta, gamma, delta. You’re probably thinking this is all Greek to you. Don’t get fazed. Alpha is just another way of describing a very large, top-quality, or ‘blue chip’ company, whose shares are regularly traded on the stock market in ‘size’ (that is, big size).
Alternative Investment Market -AIM
The alternative stock market for dynamic, young, thrusting companies that want to get into the big league, that is, the main stock market, but do not as yet have the track record to make the leap to the big time. The rules and regulations for getting listed onto the main Stock Exchange are very rigorous and strict, so the AIM suits these smaller, young companies. It is important that budding entrepreneurs should have stock market access to raise money for their often fast-growing and cash-guzzling companies. However, from your point of view, as a potential investor, you should be aware that there is quite a lot more risk attached to buying shares in these companies, compared with solid, safe, seemingly boring blue chips. It can be a rollercoaster ride. If things go well, AIM shares will shoot up dramatically. If things aren’t going so well, analysts and investors tend to be ruthless and dump them wholesale. Information flow is also not as good as that for companies with shares listed on the main stock market, so the private investor is often the last to know what’s going on. Since the liquidity (the ease with which you can buy or sell) in many AIM shares is often not great in the first place, when things go wrong there is often a double whammy effect. A whole bunch of people try to dump difficult-to-sell shares all at once, and you find yourself saddled with them (see Illiquid, Liquid, Nominated Adviser – Nomad).
American Depositary Receipts -ADR
Americans who want to buy shares in non-American companies buy them in a package called an American Depositary Receipt or ADR. Each ADR is traded in the United States as though it is an American share and pays dividends in dollars, regardless of the country of origin of the shares (see Depositary Receipts).
Amortization
In accounting-speak, this is another word for depreciation. However, there is a difference in the way the words are used. You can amortize both tangible and intangible things, like a loan or a lease, whereas you can only depreciate tangible assets
Analyst
City analysts research companies, usually those that are listed on the Stock Exchange. Rather like the local GP who gives you a regular check up with numerous tests and much prodding to find out the exact state of your health, an analyst gets to know the management of a company, making company visits and doing lots of financial calculations to ascertain the health or otherwise of the business. Writing heavy tomes that offer a detailed analysis of companies, they spend a lot of their time being nice to institutions (the big boys of investing), paving the way for their stockbroking sales teams to move in and do the deals. They also spend a lot of time grovelling to these institutions when their diagnoses for companies turn out to be wrong! (see Fundamentals/Fundamental Analysis, Institutional Investors, Technical Analysis). Alternatively, this is the person to whom you turn when the value of your share portfolio halves and you become a gibbering wreck.
Angel
In the business context, angels are the people who put money into young businesses that are still at the fledgling stage. These are usually private investors who back an idea that they think will be a goer. Of course, it goes without saying that there is a high-risk tag attached to this kind of investment (see Risk, Risk/Reward Ratio).
In a showbiz context, angels are the heroes of the theatrical and musical world (or completely foolhardy, depending on your viewpoint), who finance creative people and new productions. If you backed Cameron Mackintosh in the early days, you’re laughing. But for every wunderkind like Cameron, there are many more duds and non-starters, so beware. It’s high-risk, high-reward stuff. However, if you really love great British theatre and want some involvement in it, you can contact the Society of London Theatre, www.officiallondontheatre.co.uk. These guys will send you information warning you of the risks involved, and if you’re still gung-ho about it, will put you on their mailing list as a potential theatrical investor.
Annual General Meeting – AGM
As a general rule, all companies are obliged to hold one of these once a year, soon after announcing their end of year results. For the larger, Stock Exchange listed ones it’s usually a big shindig where the chairperson, chief executive and directors of a company make themselves available to their shareholders and are obliged to give them a nice little summary of just how wonderfully or abysmally they’ve done over the previous financial year, and the reasons why. If the attendees are really lucky, they might even get a clear idea of the prospects of the company for the current financial year. It’s a great opportunity for investors, both great and small (you can attend an AGM even if you only have one share in the company) to ask pointed questions about things they’re not happy with or unsure about (see Accounts, Extraordinary General Meeting).
