Board of Directors
The people who sit at rather grand mahogany dining tables in wide, comfortable chairs. These are the bods who are elected by the shareholders to run a company and make decisions with regard to whom they employ, corporate policy and what the business should do strategically. Posh titles include chairperson, chief executive, chief operating officer, finance director, director (see Management).
Bonds
Just as you and I sometimes need to grit our teeth and borrow money, the government, local authorities and companies need to, too. Only they don’t grit their teeth, they borrow money with cheerful abandon. How do they do it? Well, one way is by issuing bonds. These are bits of paper that are IOUs that promise to pay us back at some point in the future. Aren’t we the lucky ones? And if the promise of being paid back isn’t enough, they even deign to pay interest on the money they’ve borrowed. The exceptions to this are zero coupon bonds, which do not pay interest (see Zero Coupon Bonds). In City-speak, bonds are also frequently known as fixed interest securities and sometimes, stocks.
The UK government issues gilts (see Gilts). Companies issue corporate bonds (see Corporate Bonds). To make it easy for private investors and institutions to buy and sell bonds, bond units are generally sold with a face value of £100 (see Par Value).
Confusingly, this is not necessarily the price you pay for them on the bond market. When bond prices go up, the return, or yield you get on them, automatically goes down (see Yield). When bond prices fall, the return goes up. It’s an incontrovertible rule, like the law of gravity.
The outlook for inflation (which is the big enemy of bonds) affects the price of a bond, as well as interest rates and the quality of the borrower (see AAA, Credit Rating). Most individuals have indirect exposure to bonds through their pension and life insurance funds. These big funds invest in a huge cross-section of bonds.
One of the things that makes bonds different from shares is that they pay predetermined rates of return, which are not linked to the profits or losses of the borrower. The bondholder doesn’t benefit from the profitability of the borrower, as a shareholder would from increased dividends. On the flip side, however, he or she is usually insulated from the borrower’s losses.
Bonus Issue
This describes freebie shares given to existing shareholders. Sounds great, but don’t get too excited. You might get more shares, but before you genuflect in sheer pitiful gratitude to the management at receiving something for nothing, don’t kid yourself for one minute that there is such a thing as a free lunch, or a free share for that matter. No, bonus shares are simply the company’s way of issuing new shares with money from its reserves. The fancy jargon for this is ‘capitalizing its reserves’, hence the reason why this is also called a capitalization issue. When a company issues these bonus shares, it is in direct proportion to the number of shares you already own. A 1 for 5 bonus would mean one extra new share in addition to the five old ones. The number of shares in issue is automatically increased by that proportion and the price of the shares may drop to reflect the increase in their number. Theoretically a bonus issue should improve the liquidity or tradability of the company’s shares. Only this doesn’t necessarily happen because the shares are still owned by the same shareholders, who might not sell their shares at all. A bonus issue is not quite the same as a share split (see Scrip Issue, Share Split).
Book Value
Incalculable. What? The value of this topic. On a more serious note: everything that a company owns has a value recorded in its accounts. This is called the book value and is the value attributed to those assets registered in the accounts at the year end. Needless to say, the values recorded do not always tally with what the assets are actually worth on the open market. The numbers should show the value of the assets as adjusted for use and age (see Depreciation, Net Book Value). Sometimes, especially with things like property or land, the assets are worth much more than stated in the topics. Other times, for example when an industry collapses, a company’s stock is worth much less.
Boom/Bust
A boom is a period of marvellous economic growth and prosperity, when money is abundant. People are inundated with credit and it’s usually accompanied by a property and stock market boom. A bust – a very painful economic contraction – historically frequently follows this and there is a collapse in asset prices; property and share prices are again the main ones to do the collapsing, and the economy dives into recession. The banks do a tyre-screeching U-turn. From throwing money at people by the bucket load and seducing them with absurdly good terms for borrowing money, they put the screws on and credit is remarkably hard to come by. Most of us have been through at least one of these economic cycles and it’s a bit like being at the most amazing party of your lifetime, which is followed by a really horrible hangover. Let’s hope that governments have learnt their lesson and endeavour to manage the economy in a more gradualist, sensible manner.
Bottom Up
No, not bottoms up! This describes the very focused approach of serious, high-minded investors who place the most emphasis on the fortunes of individual companies when making their investment decisions. Obviously they do keep an eye on the economic outlook for a country as well. However, their main consideration is the analysis of individual companies to ascertain whether or not to invest money into them, otherwise known as ‘stock picking’. It’s kind of like cherry picking in that they only pick juicy-looking companies (see Top Down).
Bourse
A French word that means Stock Exchange. It’s been adopted by a lot of the other European Stock Exchanges.
Budget – Government/Personal
The budget of a country is just like our own household budgets, only it’s done on a much grander scale. Just as the UK government makes plans for the future, so do we. We try not to spend beyond our means, setting ourselves budgets along the lines of ‘I earn £x thousand, so I shouldn’t spend more than £y thousand’. Of course we almost always do spend beyond our means. What do you suppose credit was invented for? Similarly, the government decides what it wants to do for the country, and then it works out how much this is going to cost. It then casts around looking for means to raise the money through taxes and borrowing. And where does the government go when it needs to raise cash? Why, no surprises there. It borrows it from us, of course, in the form of gilts (see Fiscal Policy, Gilts, Monetary Policy).
Bull
A bull is an irrepressible optimist who believes the share market is on its way up. ‘To the moon!’ in City-speak. Generally a bull is someone who is stuffed to the gills with shares that he would like to unload on to someone else (see Bear).
Bulldog Bond
A foreign company wants to borrow money. It can issue its bonds denominated in sterling to make them easier to flog to UK investors. These are called Bulldog Bonds (see Bonds).
Bull Market
This is when everyone in the world is a mega-fan of shares. People relentlessly keep pouring their hard-earned cash into them and nobody thinks for one minute that the market could ever go down. It is a world of optimism, and everybody feels good and buoyantly confident about life. The corollary to this is that they spend loads of money and borrow it too. It tends to happen when interest rates are low and everyone is flush with cash. Valuations of shares get more and more out of kilter with reality and everyone makes up wonderful justifications to explain why shares are so ridiculously overvalued. Phrases like ‘New Paradigm’ and ‘Benign Goldilocks Economy’ are sprayed around in abundance, especially in the financial press. People are usually too busy enjoying all the extra cash to notice the bolt from the blue that usually puts a stop to all the optimism and heralds the dawn of a bear market. Will there be another bear market in the future? Chances are there will be. Why? Because markets go up and they go down. Of course, we can look to history as much as we like, but the bottom line is that none of us know what the future holds. If a bear market takes hold, we have no idea when it might happen, how bad it will be, or how long it will last (see Bear Market).
Buy In Management Buy Out – BIMBO
Who are you calling a bimbo? A Buy In Management Buy Out is when the management of a company buys the company they are working for with the help of new management brought in from outside (see Management Buy Out – MBO).
