EAR – Equivalent Annual Rate
Applies specifically to overdrafts and shows the compounded annual cost of the loan expressed as a percentage. It does not take into account any additional charges (eg, penalty fees) that may be applicable (see Compounding).
Earnings per Share – EPS
You can wake up now as we’ve reached one of the really crucial numbers that is worth noting. Earnings per share, or eps, is a mathematical calculation that takes a company’s net profits and divides it by the total number of the company’s shares in issue. The calculation establishes how much profit is available to each individual share of the company and is normally shown in pence. Taken in isolation, the number doesn’t mean very much. It becomes more meaningful when seen in context over a period of a few years. Looking at the eps over the last five years can give you a very good idea of whether a company’s earnings are growing, falling, or whether there was a temporary (or permanent) blip in profits. It is also useful in comparing one share with another, provided they are in the same industry sector. Earnings per share is one of the most vitally important measures investors use to decide whether they’re going to bite the bullet and invest their money in a company or not (see Corporate Earnings Growth, Price/Earnings Ratio, Price/EBITDA Ratio).
Earnings Yield
Yield is simply the return you get on the cash you invested. Earnings yield is the earnings per share of a company expressed as a percentage of the cost of each share in that company. It’s worked out by a slightly complicated mathematical equation that you needn’t bother with, and is usually higher than the dividend yield of a share. Why do investors want to know this number? Because it demonstrates how profitable a company is compared with the cost of buying its shares (see Dividend Yield, Earnings per Share, Yield).
Economist
A person who portentously studies and predicts the future of the state of our economy, the US economy, and any other economy that takes his or her fancy. Those that are gainfully (some might say ungainfully!) employed by the City are handsomely rewarded for their predictions. And the beauty of what they do, ie, forecast the future, is that it doesn’t matter a hoot if they get it wrong! In this scenario, they simply make the necessary alterations to their previous forecasts and go with the flow. Truthfully, crystal ball gazing for the various economies around the world is a pretty thankless task. It is hard for anybody to get it spot on, even the experts.
Economy
Every country in the world has one. An economy is basically like a giant employee that earns money, and its Treasury is like the household budget, with incomings and outgoings on a massive scale. Some are more prosperous than others (see Fiscal Policy, Monetary Policy).
Efficient Market Theory
There are those who argue that it’s useless to try and beat the stock market because share prices always reflect all relevant known information at any given time (see Random Walk Theory). The theory assumes that if information circulates freely and shares can be easily traded, then the market will operate efficiently, with supply and demand determining share prices. Nice theory. Pity it doesn’t seem to work!
Emerging Markets
This is the general term describing stock markets belonging to countries that, either for political or economic reasons, have not yet taken part on the world financial stage. Examples are the ‘tiger’ markets dotted around South-East Asia. Just like small companies, emerging stock markets react very strongly when investors pour large amounts of money into these tiny stock exchanges, thus forcing the prices of their small, illiquid companies sky-high. When the love affair is over, these same international big guys withdraw their money with equal vigour, and the erstwhile glamorous emerging markets are brutally dumped. In the bid to make investing in these countries seem more attractive, ‘emerging’ conveys the impression that they are hip and exciting places to put your hard-earned cash. That is, until they nosedive.
It is helpful if the brokers enthusing about these markets remember to place a high-risk tag on this type of investment. All too often, they get carried away in the euphoria of the moment. Russia is a good example. Only in 1998 the Russian market was up 100 per cent – ‘going to the moon’. Golly, were Russian bonds popular, just before Russia decided to default on its debt! Oops. Unfortunately the market retraced all its progress as the country teetered for a while on bankruptcy. The key thing to remember with emerging markets is, HIGH RISK, HIGH REWARD (see Risk/Reward Ratio).
Employee Share Option Plan – ESOP
There are those fortunate enough to work for a company that’s going places that gives its staff the opportunity to buy its shares. The company usually makes an offer too good to refuse, like one free share for every share the employee buys. Obviously the idea is that the employee should be incentivized to work with gusto and enthusiasm for the owner of the business, so they are usually obliged to hang on to the shares for a minimum period of time, after which they can sell them if they choose to. An ESOP is when the employee puts aside a small amount of money every month into a savings scheme to buy shares. Sometimes the employer contributes to this scheme.
There are other similar schemes that allow employees to buy shares in the company they work for. Save As You Earn is the most commonly used (see Save As You Earn, Share Options).
Endowment
An endowment is a life insurance policy that is invested into an investment fund. If you have one of these, in theory, you should get back a lump sum of money that has grown much larger over its lifetime (usually 10-25 years). The idea is that the insurance company you have the policy with will invest it wisely for you on your behalf. The good news is that they cough up whether or not you die – how considerate! The glitches though, are that they are expensive and inflexible. If the investment is not held for the whole duration (10-30 years) you can get badly penalized and there has been a lot of bad press surrounding this.
With-profits endowments are the most common variety. Every year they should grow in value because of the cumulative effect of yearly bonuses. There’s also a terminal bonus as the policy expires, though hopefully you won’t! Typically, there is a catch. The final bonus is not guaranteed by any means. If the company’s investments perform abysmally you won’t get anything at all. Annual bonuses are guaranteed to continue even if you stop adding premiums to an endowment. Some people sell their endowment policies to raise cash. For this they need to consult a specialist in second-hand endowment sales (see With-Profits Policy).
Enterprise Investment Scheme – EIS
These are investments in small companies with assets no bigger than £15m for which the government gives you very generous tax breaks. Companies this small are usually held in private hands, ie, unquoted, or listed on the junior stock markets, such as OFEX and AIM. For those fortunate enough to have made loads of money on the sale of something that is liable to capital gains tax, if that money goes straight into an EIS, the payment of that tax is deferred. The catch with the tax breaks (and have you ever known the government to give away anything?) is that you have to keep your money in the investment for three years. This is an area needing specialist advice as these investments are higher risk than more plain vanilla ones. Of course that means the rewards can be higher, too (see Tax – Capital Gains Tax, Deferred Tax).
Equity
Not the trade union for luvvies. In business and City-speak, when you own a stake in anything, be it land, property or a business, you own equity. ‘Equities’ is the general term used to describe ordinary shares in a company (see Shares).
Equity Release
This is a way of releasing value in your home, particularly as people get older, in order to supplement any pension income. The idea behind it is to pre-sell part of your property while you’re still alive so as to get an income from it. For those considering these schemes, the key is to fully understand what you’re getting into and all the costs associated with them, as these can be extremely high (see Home Income Plan).
Escrow
When two people are squabbling over money and who it belongs to (what’s new?), and the money that’s being argued over is held in the safe hands of an independent third party, it is in an escrow account. Most often a lawyer sets up the escrow account.
Ethical Investments/Funds
Are you a keen smoker, drinker, gambler and fervent believer in the usefulness of pollution? Then perhaps ethical investing isn’t for you! As the term implies, it is the conscious choice of people to invest their money into investments such as shares or funds holding shares of companies that they deem to be ethically run, ie, they only put their money into ventures or funds that uphold certain moral criteria. So companies that make nasty things that kill people, such as armaments, ciggies or booze, are a no-no. Animal testing is also out. Alternatively, good things that help keep the environment clean, like manufacturers of catalytic converters (the gadgets that convert pollutant gases into less harmful ones), and things that save lives and products that help others (you get the picture) are deemed ethical. This is an increasingly popular strand of investment as people become ever more eco-friendly. For more info on ethical funds contact EIRIS, www.eiris.org.
Euro
This is the name given to the single currency that has replaced the various European currencies, such as the French franc, German mark and Irish punt. So far 11 countries have elected to be a part of the European Monetary Union or EMU. Their Central Banks will probably vanish, to be replaced by the European Central Bank. Britain (to date) has assiduously avoided participation. (See European Monetary Union, European Union.)
Eurobonds
These are bonds issued by companies in a European currency that is different from the currency of the country in which the company is based. They are issued on the Euromarket (see Euromarket below) and are not very easy for small private investors to get hold of. Often in bearer form, they are valuable, like bank notes, hence anonymous (see Bearer Securities).
Euromarket
It’s not really a market and it’s not European. It would be hard to find a more misleading word! It refers to securities (see Securities) that are issued and held outside their country of origin. Examples include UK sterling bonds held by investors in the United States, or Japanese yen on deposit in France.
Euronext LIFFE
The people at Euronext LIFFE are trading in the future. They buy and sell contracts that commit the owner to buy or sell a large quantity of a commodity, share index or some other financial instrument at some future date. This is unbelievably risky stuff, and for normal everyday folk, a complete no-no (see my edifying piece on Derivatives – Futures). It was one of the last open outcry financial markets in the United Kingdom, as depicted by those manic-looking barrow boys in brightly striped blazers behaving very badly and petulantly throwing bits of paper around. This has now been replaced by computerized electronic trading – boring! For more information on this ridiculously risky market, check out its website: www.euronext.com.
European Monetary Union – EMU
This describes the merger of all the European currencies into one currency Europe-wide called the euro. So far, the United Kingdom has not yet decided whether to join the party. Joining the EMU has far-reaching consequences: no more British pound, no more independent Bank of England. In theory, it’s a good thing to belong to this: benefits include belonging to a powerful single market and easier cross-border trading conditions. The same advantages apply to businesses as well as individuals. But to quote Orwell, ‘All animals are equal. Some animals are more equal than others’. At the time of writing it is hard to envisage how several countries with quite different economic prospects and profiles can all be squeezed comfortably under the aegis of one currency and a ‘one-size-fits-all’ interest rate policy (see Euro, European Union).
European Union – EU
This is the ongoing process of merging all elected European Union members under one umbrella, like the United States of America. Power in the EU is shared by the Council of Ministers (representatives of all Member States), the European Commission (which was a civil service, but now sees itself as a government) and the Parliament, whose members are directly elected, but with modest powers. The latter are called Members of European Parliament, or MEPs for short. The European Commission, based in Brussels, along with the Council of Ministers and MEPs, is making decisions on the harmonization of taxes, economic and social policy, even defence and foreign policy. The MEPs argue with the Commission and the Council of Ministers as to who should make all the decisions about really crucial stuff, you know, like the standard size of bread rolls and the height of chandeliers suspended from ceilings. There are worries that the EU seems intent on centralizing power, which could lead to much more bureaucracy in the future (see Euro, European Monetary Union).
Ex-All
Ex-all means that any buyer of shares, when they are quoted ‘xa’, is not entitled to receive the dividend, rights or any other things that have simultaneously just been announced (see Cum-Rights).
Ex-Capitalization
When you buy shares that are quoted ex-capitalization, it means you are not entitled to get the freebie shares (called capitalization or bonus shares) that the company has just issued to its existing shareholders. The financial press symbolize the term as ‘xc’, which is to be found next to the printed share price details (see Bonus Issue, Cum-Capitalization).
Exceptional Profit/Loss
This item appears in the profit and loss statement of a company’s accounts. It is a one-off exceptionally large profit or loss that stems from the company’s everyday business. It is shown before the tax line because the government wants to tax the profit, and is included in the company’s ‘operating profit’. However, to highlight the fact that it isn’t likely to happen again, it is shown as a separate item (see Extraordinary Profit/Loss, Accounts).
Exchange Traded Funds – ETF
These are basically just the same as tracker funds, only with one key difference. They are actually quoted as shares; this means you can actually buy and sell ETFs on the stock market and benefit from ‘real-time’ pricing. They are a very cost-effective way of gaining exposure to various stock markets as you are effectively buying into one or more ‘tracker’ funds. A fly in the ointment is that you often have to pay an extra charge to hold these within an ISA. Barclays Bank is currently the undisputed market leader in these financial instruments, offering by far the biggest range of ETFs that cover several worldwide indices via its iShare range. Check out its website: www.iShares.net (see Diversification, Index, Individual Savings Account – ISA, Real-Time, Tracker Funds).
Ex-Dividend
When you buy shares that have gone ‘ex-dividend’ you are not entitled to receive the forthcoming dividend payment that the company is about to make. The financial press symbolize the term as ‘xd’ and it is found next to the printed share price details (see Cum-Dividend).
Execution Only
Sounds a bit violent, but it isn’t! This is basically for those of you who know exactly which shares you want to buy or sell, and for how much. You ring up your stockbroker or just go on to the internet and say, ‘Hi, I’m John Smith and I’d like to sell 1,000 HBOS shares at a limit of £10. Thank you very much.’ And guess what? The broker goes ahead and executes the deal at the price you requested. If he can’t do so, he’ll get back to you and let you know, so you can alter your limit if necessary. The key is that you are in charge with this type of stockbroking service, not the broker. I like to deal in shares this way. Obviously, the less initiated will probably want advice (see Adviser – Dealing Service, Portfolio Management).
Exercise Price
Also called the strike price. In the finance world, buying an option means buying the right to buy or sell an asset at a fixed price at some point in the future. At the time of the option’s purchase, the price you fix to buy or sell that asset for in the future is its ‘exercise’ or ‘strike’ price (see Derivatives – Options).
Ex-Rights
When companies need to raise more cash they can borrow money. A popular alternative is to offer investors extra shares that they can buy at a discounted price. This is called a rights issue. When this happens, obviously the original shares continue to be traded on the stock market. They usually drop in value to reflect the imminent arrival of more shares on the market, which have been sold at a lower value. Anyone who subsequently buys the shares ‘ex-rights’ will not be entitled to the discounted offer. It is only when the shares are sold ‘cum-rights’ that the new investor can take up his or her entitlement to the extra discounted shares. The financial press symbolize ex-rights as ‘xr’ and it’s found next to the printed share price details (see Cum-Rights, Rights Issue).
Extraordinary General Meeting – EGM
When a company holds a meeting for its shareholders other than its regular, once a year Annual General Meeting (AGM) it is called an Extraordinary General Meeting or EGM. The meeting might be called because they’re planning on making a big acquisition, or are themselves the target of another company. The company must consult its shareholders before deciding what to do. Shareholders vote at the meeting or in advance on a proxy form if they cannot attend (see Annual General Meeting, Proxy).
Extraordinary Profit/Loss
Like exceptional profit/loss, this pops up in a company’s profit and loss account. However, it is different from an ‘exceptional’ item in that it is a one-off (usually large) profit or loss made by a company, which has not been incurred as part of its day-to-day activities. An example might be selling a subsidiary at a large profit. It is shown before the tax line, but after the ‘operating profit’ because it doesn’t derive from the company’s operations (see Accounts, Exceptional Profit/Loss).
