Managed Funds
Also called investment funds. Hopefully by now you’re wised up to the fact that a fund contains the amalgamated money of lots of individuals. Managed funds are looked after by professionals called fund managers, who’ve been trained in the art of managing money so that it brings superior returns to the overall market (at least that’s the theory). Being ‘actively managed’ they are the opposite of tracker funds. The money is spread over a widely diversified spectrum of investments, which includes shares, bonds, property and cash, hence reducing risk.
The other big advantage of these funds is that because such enormous sums of money are under management, they have huge economies of scale and can buy and sell shares at a tiny fraction of the costs to us as individuals (see Active Management, Diversification, Investment Management Association, Investment Trust, Tracker Funds, Unit Trust).
Management
Generally, the term applies to the bods who actually run a company, manage the employees and make earth-shattering decisions about where it is heading in terms of strategy and future direction. All directors are part of management, but not all of the management are directors. All sorts of fancy titles abound, such as chairperson and chief executive, managing director, executive director, director, etc. The proud bearer of a title is usually in charge of a specific area of the business. The exception is in the City, where directorships are doled out like candy to placate very successful salespeople who want to be in charge, but can’t be because someone else is. This has given City firms, stockbrokers and the like, the celebrated reputation of having more chiefs than Indians (see Board of Directors).
Management Buy Out – MBO
When the directors or managers of a business buy up all or part of the company they are running. Often this happens because a large company wants to get rid of a part of its business and the directors of that division say, ‘Hey, we’ll buy it and run it ourselves!’ It doesn’t necessarily mean that the part is no good; it just might not fit in with the overall strategy of the bigger company any more (see Buy In Management Buy Out – BIMBO).
Margin
Means several things: see Spread. Margin also means the minimum collateral required to be put up by investors who are brave enough to dabble in options and futures. A third meaning is the amount of profit made by a company making widgets – this is the profit margin. Fourth and finally: margin is the percentage over and above the cost of money – ie, London Interbank Offered Rate or the base rate – charged to a borrower by a lender (see Floating Rate Note).
Margin Call
You only need to know this in theory because you are sensible and you’re not going to put up margin to fool around with futures, are you? The reason is that if things go wrong, and your trade goes against you, the broker, who already has a small amount of your money, will come banging on your door and ask for more (ie, he’ll ‘call’ for more ‘margin’). Why? Because he wants to be sure that you’re going to cough up for your futures contract. He doesn’t really sympathize too much with the fact that you’re already losing money big-time. He just wants concrete reassurance (in the form of cash) that you can cover your losses. The very thought of how much you can lose on this form of gambling gives me the heebie-jeebies (see Derivatives – Futures).
Margin Trading
This is borrowing money to invest in the stock market. In my topics this is a complete no-no, the same as ‘margin call’. While you make more profits on your investment than the cost of borrowing the money you are okay; however, if you make losses, it could be a bottomless pit. Margin trading can get you into deep trouble and you may end up reading my definition of Bankrupt.
Marketable Securities
Marketable securities are things you can enthusiastically buy and then flog in the stock market, etc when you’ve changed your mind and decided that owning Widgets plc shares or bonds was a hideous mistake. It goes without saying that you can’t do this with non-marketable ones (see Non-Marketable Securities).
Market Capitalization
Multiply the number of shares in a company by its current share price and you arrive at its market capitalization. This is its total stock market value. Obviously this changes day to day as the share price fluctuates.
Market Influences
These are intangible things that affect investment markets and prices. Other grand-sounding names are market psychology and market sentiment. But surely, you say, it’s just supply and demand that affects prices? You are absolutely right. But there are also other factors that affect the supply and demand for different shares and bonds, etc. Some of them make sense; others are more difficult to fathom. There are company-specific factors, such as a new product that’s about to burst on to the shelves and make the company a fortune, or a new boss who’s a red-hot manager and expected to turn an ailing business around. Then there are things that are general to the market, otherwise known as market sentiment, such as the outlook for interest rates or economic growth. Don’t forget the constant rumours that fly around the dealing rooms of the City. Of course, the tricky bit is establishing if they are true or false!
Gauging whether it is the right time to invest is very difficult. There is always a good reason not to. At any time there could be an unexpected financial shock that severely shakes confidence and causes stock markets to fall out of bed. The trick is to remain unfazed by these things. If you’ve got the right shares and investments, then short-term financial nasties won’t really make a dent in their value over the long term. And as for market timing, well, there aren’t too many people who get it spot on. I’ve given up trying to predict the optimum moment to buy a share or a fund and come to the conclusion that if an investment looks sound and solid, with good long-term growth prospects, it is best to bite the bullet and buy. What about market psychology? If you follow the market closely enough, you’ll start to see patterns repeated; when the euphoria and buoyancy of the market is overdone, or the doom and gloom has bottomed (see Financial Manias).
All the above offer valuable clues to the state of the stock market at any given time. Ultimately, the only thing that really matters is whether the shares or funds you are thinking of buying are intrinsically any good. All the best timing and psychology in the world won’t rescue your money if it’s tied up in dogs (see Dog).
Market-Maker
Used to be known as jobbers (see Jobber). They buy and sell shares using their own capital (or in most cases the capital of the financial conglomerate they work for). This is called risk capital. The only way market-makers can make money is to accurately anticipate the direction of the shares (or other investments such as bonds) that they are dealing in. They go ‘short’ – sell shares they do not own – if they think the shares are about to take a tumble or ‘long’ – buy shares for the topic – if they think the shares are going up. These people are traders and by definition, their time horizons are short (see Trader, Trading). Whereas most of us are looking to build up an investment portfolio for the long-term (meaning three to five years), they see three to five minutes as long term. A market-maker has to be able to react in a nanosecond to good or bad news. Their eyes are always darting around, absorbing all the financial news on the various information services, which include SEAQ, Bloomberg, Reuters, Sky News, CNN, CNBC, etc, and their ears are straining to listen for hot gossip on their numerous telephones. This might explain why most of them have the attention span of a gnat.
Maturity Date
By now you have no doubt that a bond is basically an IOU, issued by a government, company or local authority to a lender. Nearly all bonds (see Bonds) have a finite lifespan, ie, the issuer sets the day on which it will repay the debt at the start of the bond’s life. The day on which the bond expires and the bondholder is due to be paid back in full is called the maturity date. It is also known as the redemption date, so-called because it is the date on which the lender redeems his or her loan. There are a few bonds that are irredeemable, such as undated War Loans. The actual amount paid back to the lender is the par (or face) value of the bond, which is usually £100 (see Par Value). Insurance policies also ‘mature’ on the day they are fully paid up.
Mediums
Also known as medium-dated gilts, these are UK government bonds that have a lifespan of 5 to 15 years (see Bonds, Gilts, Longs, Maturity Date, Shorts).
Mergers & Acquisitions – M&A
If companies didn’t like getting into bed with other companies and acquiring (as well as disposing of) them, what would happen to those sleek, pinstriped, lean and hungry corporate financiers who spend their days and nights schmoozing with company directors and poring over company accounts and legal documents in order to make sure that the transactions they’re setting up for their clients will run smoothly? An M & A team (a sub-division of the corporate finance department in an investment bank) works on deals regardless of whether transactions happen or not. They get paid on results, so only earn lucrative fees when the deal they’re working on comes to fruition (see Corporate Finance, Due Diligence, Investment Bank).
Mezzanine Finance
Imagine a company is like a cake. The shareholders’ funds are the sponge, the borrowings are the icing, and the mezzanine debt is the marzipan in the middle. Mezzanine then, is halfway between debt and equity. It is always subordinated to ordinary debt, ie, ranking behind ordinary debt if a company goes belly up.
Investment banks typically provide this sort of financing to smaller companies that are not yet floated on the stock market or that are still growing at a rapid rate. It helps them to expand sufficiently to gain a stock market listing. Mezzanine finance carries a high-risk tag, which is why investment banks get the lion’s share of the rewards for having provided it, when the company succeeds in gaining a stock market quote. Unsurprisingly, the same investment bank’s corporate finance department is usually retained to organize this and gets paid big fat fees for doing so.
Mezzanine finance can also sometimes be provided as part of a large restructuring package when a company decides to (or is forced to) redesign its whole financial make-up. This kind of financing is very costly for the company because it has to pay through the nose to be given the privilege of getting (or continuing to get) the cash. About one in five mezzanine investments works out the way the bankers planned them to, so the stars have to cover the losses from the dogs!
Mid-Market Price
When stockbrokers buy and sell shares on the stock market, the market-maker’s ‘bid’ is the price he’s willing to pay for them, and his ‘offer’ is what he’ll sell them for. The average of the two is the mid-market price, and it’s the number you see when you look at share prices in the newspapers (see Bid, Offer, Spread).
Minority Interests
It’s tempting to think that they are a small segment of unfairly treated members of society being protected by Islington Council, but you’d be wrong. It’s just a way in which companies treat, for accounting purposes, the fact that they often own a majority stake in other companies, but not 100 per cent of them.
If you are cruising through the annual report and accounts of a company with minority interests, you will see that the small percentage of those other companies not owned by the group is put aside as ‘attributable minority interests’ in a separate section of the accounts, called the parent company’s balance sheet. The importance of this is to ensure that the company’s overall assets are not overstated.
Monetary Policy
The government borrows cash from others and us in the form of gilts. The Bank of England is responsible for setting UK interest rates and printing banknotes. All the above fall under the aegis of monetary policy (see Bank of England, Base Rate, Fiscal Policy, Gilts, Interest Rate).
Money Market
This is the market in which banks and institutions lend money to each other. Because the big cheeses put very large sums of money on deposit overnight or for short periods of time, they get much better rates of interest than we, as individuals, do. You and I can only access the money markets through unit trusts (see Unit Trust).
Money Supply
Otherwise known as M0, M1, M2, M3 and M4, this is not to be confused with Great Britain’s motorways. It is the total amount of money in general circulation in the country as printed by the UK government. It includes sterling deposits with commercial banks. The numbers; 0, 1, 2, 3 and 4 refer to different ways in which the amount of money in the financial system is measured.
Monopolies & Mergers Commission – MMC
The late Screaming Lord Sutch strongly objected to the MMC on the grounds that it was a monopoly! It’s a government body that checks out any company that looks as if it might be operating a monopoly against the public interest. This includes M&A deals and takeovers (see Mergers & Acquisitions – M&A, Takeover). The Monopolies & Mergers Commission checks to see whether the newly merged group will have an unfair monopoly in its line of business. Not all deals are referred to the MMC. There are set criteria that determine whether an MMC ruling is necessary or not.
Mortgage
A loan, usually from a bank or similar financial institution, to you or me for the purchase of a house. The lender will want the original capital paid back, ie, the loan itself, and interest for agreeing to lend you that lovely lolly over the lifetime of the loan. And of course, if you don’t cough up, the lender will probably take your house away!
Every mortgage has just these two elements to it. The lump sum of capital borrowed and the interest paid on it, which has to be repaid to the lender over an agreed period of time. Most mortgages have a 25-year life, but in today’s age of relatively low interest rates, there is an increasing trend towards more flexible mortgages, which have a longer or shorter lifespan, let you take a payment holiday, pay off lump sums in one go or pay more in some months than others, depending on how flush you are feeling. Some lenders calculate interest payable on a daily or monthly, rather than yearly rate, which can save you a lot of money. The most straightforward type of mortgage is the repayment variety – which is a daft description because all mortgages have to be repaid! Still, here goes:
Repayment Mortgage
You pay back the interest on the loan and the loan capital over the life of the mortgage. In the early years, the repayment constitutes mainly interest and not much capital – at this point you own two bricks and a window. In the later years, it will comprise more capital and less interest – you now own five bricks, a door and some roof tiles! The size of the (usually monthly) payments will vary as interest rates go up and down unless of course, you have locked in the level of interest that you pay for a period, in which case the payments will stay unchanged during that time.
Offset Mortgage
In effect this is a repayment mortgage with one important difference. Here’s an example of how it works: suppose you have a £100,000 mortgage and you’ve got £20,000 in a savings account somewhere else. This type of mortgage combines the two accounts into one, ie, it amalgamates your savings and borrowings. As the £20,000 in savings is used to ‘offset’ your £100,000 mortgage, it means you only pay interest on £80,000 of the mortgage so it reduces your monthly mortgage repayments. Meanwhile you’re effectively earning tax-free interest on your savings, as normally any returns on savings are taxed at source (see Composite Interest Rate). This type of mortgage is becoming increasingly popular as it’s good news for those with savings as well as a mortgage.
Endowment Mortgage
If you apply for one of these, relax. The lender won’t examine your vital statistics beforehand! It may seem complicated, but in fact an endowment mortgage is very straightforward. It is just like a repayment mortgage, but with one key difference. Instead of paying back the capital straight to the lender bit by bit, the borrower regularly puts this money aside into a life assurance policy called an endowment. The money in this endowment policy is invested in a fund (finance-speak – an investment plan), which ought to grow sufficiently over the long term to pay off the capital on the agreed date. Should you have the audacity to shuffle off this mortal coil before your mortgage is repaid, this type of mortgage theoretically ensures that the debt is repaid in full. Comforting thought! Of course there is a slight glitch. The money in the endowment ‘investment plan’ may not grow sufficiently. If you’ve already got this type of mortgage, it would be prudent to ask the people who supplied you with it, whether it is on track to pay off the debt. Regrettably, due to poor performance on many of these policies, most of us are better off with a straightforward repayment mortgage (see Endowment).
Other Types of Mortgage
Pension-linked and ISA mortgages all work on the same principles as an endowment mortgage, albeit they are different products. You pay the lender back the interest, while the capital is set aside into an investment plan, which is invested over the long term by you or your financial adviser. Hopefully it grows enough to pay off the ‘capital’ part of your mortgage in full. As with endowment mortgages, there is no guarantee that the contents of the investment plan will be enough to pay off this capital fully when it’s time to pay the lender back. One final point; these types of mortgage don’t offer life cover, so borrowers with families need to make sure they make provisions to protect their dependants in the event of their untimely demise.
My conclusion? There are a huge variety of mortgages on offer. It pays to consult a good specialist mortgage adviser for help on what’s a pretty long- term commitment (see Independent Financial Adviser). The most crucial thing is to get him or her to explain very clearly the advantages and disadvantages of each type of mortgage. It’s so much hassle to change things once you have signed on the dotted line that it’s far better to think it over carefully and get it right first time round.
Mortgage-Backed Securities
Bonds that have been issued to investors to provide the money to lend to home-buyers.
MSCI World Index – Morgan Stanley Capital International
It’s like a super-duper FTSE 100 index, only instead of tracking the fortunes of the top 100 UK companies, it does the equivalent globally, giving the biggest stock markets the most weighting. Of course, this means that the United States and Japan are the dominant forces in the index. It’s useful for investors who want to have international stock market exposure outside the UK.
