Financial Adviser
Someone who gives you advice on your investments, including pensions and life insurance. The term financial adviser (FA) covers a wide remit – accountants, lawyers, actuaries and insurance brokers can all be FAs. When you’re looking for one always check that they are properly authorized (see Financial Services Authority). Remember you’re letting someone gain an intimate knowledge of your affairs, so you have to be sure you can trust them. Obviously, FAs are not altruists. They make a living out of their profession. However, when you find the right adviser, he or she can be very helpful to you. Ah, you are thinking, but how do I go about finding the right one? And how do I suss out whether they’re any good or not? Read the entries for Adviser, Commission, Independent Financial Adviser, Stockbroker and Tied Financial Adviser for helpful hints.
Financial Expert
We all have a tendency to lean on other people’s opinions. I know, because I regularly ask my contacts in the City to enlighten me on what is happening on the financial scene. In fact, we rely very much (perhaps too much) on people who know more than us in the world of finance. But it’s not impossible to become pretty clued-up yourself. Try to find out as much as possible about the subject and take into consideration the wider scheme of things. It is important to question things, and I believe that asking the experts the right questions is half the battle. Do not get me wrong, there are many people in the financial world who are good at what they do. However, there are some who do not necessarily know a lot more than you do. Remember that investment opinions are, by their very nature, subjective. Financial expertise is mainly born of experience, which teaches us that stock market crashes are never the same each time, economic cycles never cosily repeat themselves, and heaven only knows where interest rates will be in 18 months from now. We all have an opinion on the subject and so do the experts.
One fact that we can be certain of is that the future is devilishly difficult to predict. Be aware that even the greatest experts are fallible (see Guru). So by all means, listen to what the experts are saying, and digest and process that information carefully. Then use your own counsel. Provided you exercise healthy caution and ask the right questions, then diversify your investments sensibly (see Diversification), any mistake as a result of following the advice of an expert or even just a friend won’t be fatal to your financial health.
Financial Information
Information is knowledge, and in the stock market, knowledge is power. It can mean the difference between making a fortune or really losing your shirt. If you can combine the information to which you have access with good sound common sense, you have every chance of investing your money wisely and well, whether it’s in the stock market or in a pension (much of which ends up being invested in the stock market anyway). The investment gurus without exception, whether they’re George Soros, Peter Lynch, Warren Buffett, or even yours truly, read voraciously on their subject (see Guru). They get to know everything they can possibly know as that is what gives them the edge. They know that the more knowledge they have, the more power it gives them to make good investment decisions. ‘But what do I read?’ you ask with a plaintive whimper in your voice, thinking, ‘Oh dear, this sounds like hard work.’ I hope that by reading this topic, it will give you a good kick-start into overcoming the first hurdle, the language of the money world. Here are just a few titles for absolute beginners to start dipping into:
The business section of your daily and weekend newspaper,
The Times, Daily Telegraph, Guardian, Independent, Daily Mail, etc
Business Age
Bloomberg Money
The Economist
Financial Times
Fortune
Investor’s Chronicle Shares
Wall Street Journal
Financial Instrument
Unlike the musical variety, this just describes anything like a share, bond, currency or commodity that can be freely traded in a market or which has been used to raise money.
Financial Journalism
An important corollary to financial information (see above). There is lots of this available to the enthusiastic reader, and like the curate’s egg, it’s good in parts. Remember that journalists are under terrific pressure to produce lots of copy to very tight deadlines. This means they don’t always get the chance to thoroughly research or fine-tune their stories. You also have to be aware that journalists usually, likely as not, have an individual bias. So check out the different slant on the same story covered in different papers. It’s important to read between the lines of the financial press as it’s not enough to take at face value what you are being told.
The second thing is to consider the implications of a particular news item. If the papers cover a story about instability in a tiny Middle Eastern country that just happens to be a massive oil exporter, ask yourself what will happen to the oil price. Then check what’s happening to the likes of Shell and BP on the stock market, as well as companies that rely on oil supplies, such as those involved in transport and energy, etc. Bad news can sometimes give you a window of opportunity to pick up shares in a company that you’ve been coveting for some time, but which have stubbornly refused to fall in price. Use the newspapers as a valuable source of information to give you clues as to what is most likely to happen next or over the longer term.
Financial Manias
For some reason, every so often, lots of people get a bee in their bonnet about something or other. In France in the early nineteenth century, when the first giraffe was sent to France by Muhammad Ali of Egypt, Zarafa (Arabic for giraffe) mania took hold. People wore ridiculously high Zarafa hairstyles, got Zarafa flu and wore Zarafa ties – you get the picture. In the investment spectrum, oft-quoted examples are the South Sea Bubble and tulipomania. Do not ask me why lots of seemingly intelligent people get swept up into an irrational frenzy. It just happens. Apply this logic to stock markets, and there’s a very good chance that there will be a major panic at some time in the future. It helps to try to remain a detached observer of what goes on in financial markets, so you can spot what the crowd is doing, and decide if you think that they are right or wrong. Use the mass panic, fear and greed to serve your own investment decisions.
Financial Services Authority – FSA
The all-embracing huge regulator that protects investors and the general public as far as investment business goes. It has a pretty wide remit. It makes checks on a huge variety of financial services companies. The idea is to protect in ever-greater measure the individual investor like you and me, who is more vulnerable to being ripped off than the professionals. Of course the direct consequence of all this extra policing is that these financial firms now have to spend much more on compliance (see Compliance), hence for smaller investors, the cost of getting any advice at all, let alone good advice, just keeps going up and up. Check it out at: www.fsa.gov.uk.
Financial Services Compensation Scheme
This is the last resort for people who have had bad advice or been conned by a financial services firm. Let’s take the hideously nightmarish scenario that you have been cheated by dishonest fund managers to whom you entrusted your cash in the hope that they would increase it over a period of time. If the firm was authorized by the Financial Services Authority to do investment business (see above), then you may have some redress if you’ve already tried to get compensation from the firm and failed because they’ve gone bust. Contact them at: www.fscs.org.uk (see Independent Financial Adviser – IFA).
Fiscal Policy
The government decides how much it is going to extort, I mean extract, from us as far as taxes go. This is called fiscal policy. It then works out how to spend this money. Once it has cheerfully gone on a huge spending spree and realizes that there’s not enough money in the kitty to carry out any other plans, like propping up the valiant National Health Service and helping the poor and needy, it then borrows money from us in the form of gilts, which is part of its monetary policy (see Gilts, Monetary Policy).
Fixed Interest
Any investment that offers you a regular fixed payment at a predetermined rate (also known as a fixed rate of return) is known as a fixed interest security or bond. In the United Kingdom, the main bonds are gilts, company bonds and debentures (see AAA, Bonds, Corporate Bonds, Credit Rating, Debentures, Gilts, Loan Stock).
Fledgling
A young company that’s just been brought on to the stock market. Usually very small in size (see AIM, Ofex).
Floating Currency
When governments give up the fruitless task of trying to control their currency’s exchange rate against other currencies, it is called floating the currency. This means allowing the market to determine what the exchange rate should be. Most currencies are floating, but some are pegged to another currency. The Hong Kong dollar, for instance, is currently pegged to the US dollar.
Floating Rate Note
A banknote that you spot floating on top of a puddle and whisk away before anyone else has had time to claim it. Seriously, when companies borrow money in the form of bills, not bonds, they do so expressly to borrow for the short term. Instead of fixing the amount of money they will pay to the lender of the cash, they set criteria that offer flexibility and allow for the fact that interest rates might well fluctuate even over such a short period of time. Let’s take an example: the borrower agrees to pay the lender a margin of 2 per cent more than LIBOR (the London Interbank Offered Rate). LIBOR is the interest rate at which top-quality banks are prepared to lend to each other in the short-term money markets. Consequently the rate of interest paid to the lender will always ‘float’ above LIBOR by 2 per cent, whether the LIBOR rate goes up or down.
Flotation
When a company’s shares are sold for the first time on the stock market it is called a flotation or an IPO (Initial Public Offering, to the uninitiated!). All companies that get listed on the Stock Exchange have to be public limited companies, ie, plcs, although not all plcs are listed on the Stock Exchange.
Footsie – FTSE 100
It’s an index that is pretty much regarded as the benchmark of the UK stock market. It follows the fortunes of the United Kingdom’s top 100 listed companies. The FTSE 100 makes up a sizeable chunk of the total UK stock market. As the fortunes of these companies change, and they grow bigger or smaller, they are plucked out of the index or groomed for entry, and this is decided by a committee that meets every three months (see Index).
Front-End Loading
It’s when you pay upfront charges for an investment product; often to pay commission to the adviser. When you buy an investment, be it a unit trust, pension or life assurance policy, you pay commission. Dear me, did you think all those salespeople selling these things are altruists who give you advice out of the kindness of their own hearts? Much of the time, their commission on flogging, I mean, advising you on your pension is given to them in your first instalment of payment(s). This is front-end loading.
So, in the case of an insurance policy or pension, if you change your mind and decide to cancel your policy within a couple of years of taking it out, you won’t get much back, because most of it will have been absorbed as commission. But you can do something about this! If you ask the right questions you can get salespeople to rebate some of the commission, or spread out payments over a period of time. It means that if you change your mind and want to exit the investment, you won’t take such a severe financial hit (see Commission, Independent Financial Adviser).
Front-end loading can also apply to the interest you have to pay on a mortgage or HP contract. Here you pay a high percentage of the interest on the money you’ve borrowed in the first period of the loan. As time goes by, interest repayments dwindle and the lion’s share of the repayments becomes capital, ie, the lump sum of money lent to you (see Mortgage). Before you get too excited, though, the overall amount you pay remains the same!
Front Running
This is when a stockbroker takes advantage of any juicy ‘price-sensitive’ information he might be privy to, and buys or sells the shares for himself before letting his clients know. Terribly naughty, strictly forbidden and totally unethical and wrong. This probably still happens, but not as often as some curmudgeonly cynics like to think (see Inside Information, Insider Dealing).
Fundamentals/Fundamental Analysis
When a stock market crashes, City analysts tend to nod their heads sagely and remark, ‘The market had lost sight of the fundamentals.’ Looking at the fundamentals of a business means evaluating the quality of the assets owned by the company, its products, the outlook for those products, the efficiency with which the company is run, the quality of its management, how it compares with its competitors, the future outlook for the industry it is operating in, etc. This fundamental analysis helps to establish the true value of a business (or what the value should be) on the stock market. A real bugbear of mine is the ridiculously short-term nature of these assessments. If a company does badly in one quarter, analysts do a U-turn faster than you can say ‘Fundamentals!’ and yesterday’s sexy, growth story can easily become a dog for years on end (see Analyst, Technical Analysis).
Fund Management
Also called asset management. People who do the job of managing the collective money of thousands of small investors are called fund managers. As fund management groups, they also manage the lolly of the huge pension and life assurance funds. In the end, though, it’s all the money belonging to individuals like you and me. They are the undisputed big players in the stock markets (see Active Management, Collective Funds, Institutional Investors, Investment Trust, Managed Funds, Unit Trust).
Fund of Funds
Also called an umbrella fund, this invests its money in other funds, which in turn invest their money directly into shares, bonds and other investments. The term ‘umbrella’ just describes the legal framework of authorization, which encompasses all the sub-funds that it is invested in. Smaller investors find this sort of fund appealing because it achieves maximum diversification of risk. Realistically, they cannot do this for themselves because, with smaller amounts of money, the costs of doing so are too invidious to justify it. The disadvantage of this type of fund is that the investor pays two sets of annual management fees (see Asset Allocation, Collective Funds, Diversification, Front-End Loading, Managed Funds, Multi-Manager Funds, Unit Trust).
