HomeGlossary

Glossary

A
Absolute Returns
Target a fixed level of return (e.g. 10%), or positive investment returns, rather than investment returns which are compared to market indices.Accident:
An unforeseen and unintended event or occurrence causing damage/injury to an entity.Accident Benefit:
Provides for payment of an additional benefit equal to the sum assured in installments on permanent total disability and waiver of subsequent premiums payable under the policy.Active Management
Unlike passive management or index tracking this is a process whereby the active manager selects industry sectors in light of expected economic conditions and individual stocks on the basis of research into companies’ prospects.Advisory Management
Allows you to discuss and be advised on financial opportunities by your personal financial advisor. You make the buying and selling decisions regarding financial assets yourself based on the combination of your own ideas and the investment advice of your manager. No investment decision regarding your assets can be taken without your prior approval.Age Limits:
Stipulated minimum and maximum age limit stated by the company. Based on the age limit, the company will accept/reject applications or renew policies.Agent:
An insurance company representative licensed by the state that solicits, negotiates or effects contracts of insurance, and provides service to the policyholder on behalf of the insure.

Alpha
The expected return from a security or a portfolio based on the assumption that the return from the market is zero. Sometimes known as stock specific risk. The measure shows a manager’s ability to select securities which will perform independent of overall market movements.

Alternative Investments
Refers to investment in hedge funds and other non-traditional investment types such as private equity and venture capital.

Annuity Plans:
These plans provide for a ‘pension’ (or a mix of a lumpsum amount and a pension) to be paid to the policyholder or his spouse. In the event of the death of both the spouses during the policy period, a lumpsum amount is provided to the next of kin.

Annuitant:
The person receiving annuity benefits at fixed intervals of time. (Which is on a yearly / half yearly/ quarterly or monthly basis).

Arbitrage
To profit through the buying and selling of the same asset without risk, with no net outlay of capital. In reality, it requires the simultaneous buying and selling of the same asset and “earning” the difference.

Assets
Anything having commercial or exchange value that is owned by a business, institution or an individual. Can be divided into fixed or tangible assets (land and buildings, fixtures and fittings, equipment etc.), and current assets (money owed, investments and cash).

Asset Allocation
The process whereby one decides which type of assets to invest in and the proportion of total capital to be allocated to each class of asset.

 

B
Basis Point
Basis point is a hundredth of a percentage point and is used in currency and bond markets where large sums of money are moved. A small basis point movement can mean large profits for those involved in the transactions.Bear Market
This is a term used to describe the stockmarket when share prices are falling over a prolonged period.Benchmark
The performance of a financial instrument used as a reference to compare the performances of similar instruments. To measure performance in this way you need a benchmark relative to an index. The most suitable one is an index for the actual market in which the fund invests. This provides an objective tool for addressing the fund manager’s performance. Examples of index are the S&P 500, NASDAQ 100, or the Dow Jones Industrial Index.Beneficiaries
The “beneficiaries” are the persons or companies who may benefit from the assets held in a trust. Or the person to whom an inheritance passes after being named in a will.Best of breed
Products or services that exhibit the highest level of performance in their class.Beta
Used to measure the risk or volatility of a stock or portfolio relative to the specified benchmark. It represents the change in return for every 1% change in the index. Sometimes known as market specific risk.Bid Price
A price which the investor is willing to pay for the securities in the market. In the case of mutual funds, it is the price where the asset management company will buy from investors.Blue Chip
Large well established companies the shares of which are household names. These companies have proven track records and dividend payments and are often referred to as blue chip companies.

Bonds
Bonds are classified as any interest bearing or discounted government or corporate security that obligates the issuer to pay the bond holder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bondholders have an I.O.U. from the issuer, but no corporate ownership privileges as stockholders do.

Bottom-up Stock
Picking selection of stocks through fundamental analysis of each company and using this as a basis for portfolio construction.

Bull Market
This is a term used to describe the stock market when share prices are rising over a prolonged period.

Business Insurance:
A policy, which primarily provides coverage of benefits to a business as contrasted to an individual. It is issued to indemnify a business for the loss of services of a key employee or a partner who becomes disabled

 

C

 
Cancelable: 
A contract of health insurance that may be cancelled during the policy term by the insurer or insured.Capital Gain:The difference between an asset’s purchased price and selling price, when the difference is positive. A capital loss would be when the difference between an asset’s purchase price and selling price is negative.Capital growth
An increase in the value of shares or assets in a fund. An investor looking for capital growth means that all dividends and interest are automatically reinvested into the fund.Coinsurance:
1) A provision under which an insured who carries less than the stipulated percentage of insurance to value, will receive a loss payment that is limited to the same ratio which the amount of insurance bears to the amount required.
2) A policy provision frequently found in medical insurance, by which the insured person and the insurer share the covered losses under a policy in a specified ratio, i.e., 80 per cent by the insurer and 20 per cent by the insured.Compensation: Wages, salaries, tips, professional fees bonuses and other amounts one receive for providing services.Compound Interest:It is the interest computed on the principal amount plus interest accrued during the previous period of investmentConvertible
Fixed income securities which may be converted into equities at a predetermined future date

Convertible Whole Life Policy:
A mix of ‘whole life policy’ and ‘endowment policy’, it provides for very low insurance premiums with maximum risk cover while the life assured is just beginning his working career, and the possibility of converting the policy to an ‘endowment’ policy after five years of commencement.

Cooling off period:
The 15-day period during which a new policyholder can cancel an insurance/assurance policy. This is referred to in the cancellation notice, which is sent to people entering into long-term policies. The 15-day period starts from receipt of the cancellation notice.

Corporate security
An I.O.U issued by a public company. In return for borrowing your money, the company pays a fixed income (coupon) for a specified period and guarantees to return the original capital on a predetermined future date.

Corpus

The money available with an investment scheme for investment. If already invested, then Corpus is the total value of the investment portfolio.

Cover

Another word for insurance, it refers to the amount of insurance.

Coverage:
The scope of protection provided under a contract of insurance; any of several risks covered by a policy.

Coupon
The interest rate on a security that the issuer promises to pay to the holder until maturity which is expressed as an annual percentage of face value.

Credit rating
Formal evaluation by a rating agency of companies or government’s credit history and capability to repay the full face value and interest payments on a bond. Rating agencies such as Standard & Poor’s, Moody’s etc. typically assign letter grade scales where AAA is the highest rating descending through AA and A, followed by BBB, BB, B, CCC, CC, etc. Bonds with a rating above BB are considered to be investment grade.

Correlation
Statistical measure of the degree to which the movements of two variables are related. A correlation of 1 between two different shares means that they have moved completely in line with each other (albeit at perhaps a different magnitude). A correlation of -1 between two shares means that they have moved completely in opposition to each other. A correlation of 0 means that the shares show no relationship in the way that they move relative to each other.

Currency Swap
A transaction between two parties that involves the exchange of interest payments in one currency for interest payments in another currency. Unlike an interest rate swap, a currency swap must involve the initial exchange and final re-exchange of principal between two parties at a specific exchange rate.

Current Yield
The annual interest on a bond divided by the market price. It is the actual rate of return as opposed to the coupon rate.

 

D
Dealer

A brokerage firm that buys or sells a security for its own account, and at its own risk, then charges the customer a mark-up or mark-down.

Debt
A term used to group fixed income or bond instruments such as gilts, US Treasuries, notes, mortgage backed bonds, etc.Debt/Income FundsSpecific to Mutual Fund: Funds that invest in income bearing instruments such as corporate debentures, PSU bonds, gilts, treasury bills, certificates of deposit and commercial papers. Although these funds are less volatile, the underlying investments carry a credit risk. Comparatively, these funds are the least risky and are preferred by risk-averse investors.Deferred Annuity,An annuity plan where the first annuity payment becomes payable after chosen period that generally exceeds one year.DeflationThe opposite of inflation. Prices fall when more goods are available more than demand requires. Can be a response to the tightening of credit.

Deferment Period:
Period between the date of subscription to an insurance-cum-pension policy and the time at which the first installment of pension is received. Such policies generally prescribe a minimum and maximum limit on the deferment period.

Deferred annuity:
An annuity contract that is purchased either with a single tax-deferred premium or with periodic tax-deferred premiums over time. Payments begin at a predetermined point in time, such as retirement.

Depreciation:
A decrease in the value of property over a period of time due to wear and tear or obsolescence. Depreciation is used to determine the actual cash value of property at time of loss.

Derivative
Financial instrument that derive their value from the price of an underlying security. This is the generic term given to futures contracts and options, both of which can be used to reduce risk in an institutional fund or, in the case of options, even in a large private portfolio.

Directional Investing
Investment which is partly or entirely on the long side and, therefore, is expected to have higher correlation to market direction.

Discretionary Mandate
Your personal investment advisor makes all investment service decisions regarding your investment portfolio. He will have regular meetings with you to discuss your current financial circumstances, your financial objectives etc., so as to establish your investment profile. On the basis of this investment profile he will make investment decisions regarding your portfolio.

Discretionary Manager
The manager weighs up fundamental, technical and other analysis to attain an investment decision. They are less quantitative in focus than Systematic Managers.

Distressed Securities
A term referring to the shares, bonds, trade debt, etc. of companies that are troubled or may be in the process of restructuring, or have filed for bankruptcy protection.

Distribution
The payment of a “dividend” to unit-holders of an investment fund on the basis of the income and realized capital gains accruing to an investment fund.

Diversification
The spreading of risk by investing across a number of securities and markets within an investment portfolio.

Diversified Fund

A type of mutual fund having most of its corpus (assets) invested in many types of asset classes and securities.

Dividend

Specific to Mutual Fund Income distributed by the Scheme on the Units.

Double/Triple Cover Plans: 
These offer to the beneficiaries’ double/triple the sum assured on death of life assured during the term of the policy. On survival to the date of the maturity, the basic sum assured is paid to the assured. These are low-premium plans, most useful for situations such as housing.

 

E
Earnings Per Share (EPS)

Earnings returned on initial investment amount. It reflects a company’s profitability in the form of profit allocated to each outstanding share of common stock.

Efficient Frontier
A curve which describes the optimal combination of a portfolio of assets to achieve given levels of return, with the least amount of risk.Estate PlanningA financial plan to ensure transfer / distribution of both physical and financial assets to your heirs after your death.EMI (Equated Monthly Instalments)The periodical (monthly) repayment of interest and principal of a loan by a borrower.Earned IncomeAll wages, salaries, tips, professional fees and amounts received for providing services are earned compensation.

Embezzlement:
Fraudulent use or taking of another’s property or money which has been entrusted to one’s care.

Endowment Policy:
The assured has to pay an annual premium, which is determined on the basis of the insured’s age at entry and the term of the policy. The insured amount is payable either at the end of specified number of years or upon the death of the insured person, whichever is earlier.

Equities
Ownership of a corporation represented by shares and assets that are a claim on the corporation’s earnings and assets. Common stock entitles the shareholder to vote in the election of directors or and other matters taken up at shareholder meetings. Preferred stock generally does not confer voting rights but it has a prior claim on assets and earnings.

Eurobond
An international bond denominated in a currency not native to the country in which it is issued. The Euro-bond market is an important source of capital for multinational companies and foreign governments, including third world governments.

Estate planning
Trusts can provide a viable solution for those seeking the flexible devolution of wealth. In certain circumstances, trusts assist with restrictive inheritance laws which might otherwise prevail.

Event-Driven
Strategies that focus on the actual or anticipated occurrence of an event such as a merger, corporate restructuring or bankruptcy. The key to the profitability of such investments is the ability to understand the likelihood of an event being completed as well as the time frame in which it will occur. The correlation to traditional markets is usually not particularly high. Typical strategies include, merger arbitrage, distressed securities arbitrage and most strategies which include the term “special situations”.

Excess And Surplus Insurance:
1) Insurance to cover losses above a certain amount, with losses below that amount usually covered by a regular policy.
(2) Insurance to cover an unusual or one-time risk, e.g., damage to a musician’s hands or the multiple perils of a convention, for which coverage is unavailable in the normal market. Exclusions: Specific conditions or circumstances for which the policy will not provide benefits.

 

F

Facultative Reinsurance:
A type of reinsurance in which the reinsurer can accept or reject any risk presented by an insurance company seeking reinsurance.

Family Insurance:
A life insurance policy providing insurance on all or several family members in one contract, generally whole life insurance on the principal breadwinner and small amounts of term insurance on the other spouse and children, including those born after the policy is issued.

Fiduciary:
A person who holds something in trust for another.

Financial Planning

A process of setting objectives, assessing assets and resources, estimating future financial needs, and making plans to achieve monetary goals.

Fire Insurance:
Coverage for losses caused by fire and lightning, plus resultant damage caused by smoke and water. Flood insurance Coverage against loss resulting from the flood peril, available at low cost under a programme developed by the Central government.

Fixed Assets

Long term physical assets like real estate, jewellery, furniture etc. which are illiquid in the short term. It is difficult to be converted into cash on an immediate basis or short time period like the current or upcoming fiscal year.

Fund Manager

Individuals or investment companies responsible for making decisions to any portfolio investment to maximize benefits.

Franchise Insurance:
A form of insurance in which individual policies are issued to the employees of a common employer or the members of an association under an arrangement by which the employer or association agrees to collect the premium and remit them to the insurer.
Fixed-Income Security
A fixed-income security pays a fixed rate of return on a specific date. Bonds and preferred stocks are fixed-income securities.Forward Contract
Purchase or sale of a specific quantity of a commodity, security, foreign currency or other financial instrument at the current or spot price, with delivery and settlement at a specified future date. Fund of Funds
A fund whose portfolio is made up of allocations to other funds.

 

G

Government Securities

As defined under Section 2(b) of the Securities Contract (Regulation) Act, 1956, Government Security means a security created and issued, whether before or after the commencement of the Act, by the Central Government and/or a State Government and having one of the forms specified in clause (2) of Section 2 of the Public Debt Act, 1944 (18 of 1944) including any amendments thereto or any replacement or re-enactment thereof/clarification and guidelines in the form of notes or circulars etc. issued from time to time; Treasury Bills, such other instruments as may be declared by Government of India and/or SEBI and/or RBI and/or any other regulatory authority to be securities; and rights or interest in the securities.

Grace Period: 
Policy holders are expected to pay premium on due dates. A period is 15-30 days is allowed as grace to make payment of premium; such period is referred to days of grace.

amount payable on the deferred date under Jeevan Dhara Life of Life Insurance Corporation of India. An annuity of 1% of the GIVE is payable per month after the deferment period. And the entire GIVE is payable on death after deferment period.

Gratuity

A compensation voluntarily given by an organization to an employee as an acknowledgement of services rendered for a minimum specified time period. It is payable when an employee completes 5 or more years of full-time service with the organization.

Gross Insurance Value Element (GIVE):
The amount payable on the deferred date under Jeevan Dhara Life of Life Insurance Corporation of India. An annuity of 1% of the GIVE is payable per month after the deferment period. And the entire GIVE is payable on death after deferment period.

Group Life Insurance:
Life insurance usually without medical examination, on a group of people under a master policy. It is typically issued to an employer for the benefit of employees, or to members of an association, for example a professional membership group. The individual members of the group hold certificates as evidence of their insurance.

Growth Fund

A mutual fund whose primary investment objective is long-term growth of capital. It invests principally in common stocks with significant growth potential. Growth Stocks of companies that have shown or are expected to show rapid earnings and revenue growth. Growth stocks have relatively more risk than other conventional forms of investment.

Guaranteed Insurance Sum (GIS):
A lump sum purchase price is given to purchase future pensions under the Jeevan Akshay Plan of Life Insurance Corporation of India. This amount is referred to as GIS. The monthly pension that is payable one month after payment of first premium is calculated on the basis of the age at entry.

Guaranteed Policies: 
These are policies where the payment stays fixed.

Guarantee period:
Period during which the level of interest specified under a fixed annuity is guaranteed.

Guaranteed death benefit:
Basic death benefits guaranteed under variable annuity contracts.

 
Government Debt
Bonds and other debt issued by government or governmental organisations and agencies.Governing Law
The trustee’s powers and responsibilities are set out in the trust deed as agreed with you. In addition, the law which governs the trust may impose further duties and obligations on the trustee.We can help you to select an appropriate jurisdiction for the establishment of the trust. A trust may be relocated if circumstances require a change of jurisdiction. Some jurisdictions provide that trusts established under their laws will not be set aside under the forced heir ship provisions of another country.Gross Exposure
A portfolio’s stated exposure when its long and short positions are added together, i.e. “long positions” and “short positions”. See Net Exposure.Growth Style
Investment focused on growth stocks, i.e. those stocks which have exhibited strong earnings or growth or are expected to show this in the future.Guaranteed Bonds
Bond on which the principle and interest are guaranteed by a firm other than the issuer. Guaranteed securities may also include preferred or common stock when dividends are guaranteed.Guaranteed Equity Funds
Limit your exposure to falls in the stock market whilst providing a percentage of the gains. The fund manager buys derivatives to guarantee a certain rise in the index and to limit the percentage of any fall in prices.

 

H
Homeowners’ insurance policy:
The typical homeowners insurance policy covers the house, the garage and other structures on the property, as well as personal possessions inside the house such as furniture, appliances and clothing, against a wide variety of perils including windstorms, fire and theft. The extent of the perils covered depends on the type of policy. An all-risk policy offers the broadest coverage. This covers all perils except those specifically excluded in the policy

 

I

 
Income
The net total of the flow of payments received in a given time period.Index
An index is a specified basket or portfolio of shares and shows how these share prices are moving in order to give an indication of market trends. Indexes measure the ups and downs of stocks, bonds and commodities markets, reflecting the market prices and the number of shares outstanding for the companies in the index. Every major world stock market is represented by at least one index.NASDAQ
A computerized system that provides price quotations for securities traded over the counter as well as for many New York Stock Exchange listed securities. It is market value weighted; options and futures are not traded on this index.Dow Jones Industrial Average
Price-weighted average of 30 actively traded blue chip stocks. Standard and Poor’s 500: Consists of 500 stocks chosen for market size, liquidity and industry group representation. It is market-value weighted- stock price times no. of shares outstanding.FTSE 100
The index which covers the top 100 companies on the UK stock exchange measured by market capitalization (the number of shares times the share value).CAC40
The CAC40 index is calculated from a sample of 40 stocks listed on the monthly Settlement market.Index Fund
An investment fund that seeks to match the portfolio composition of a particular index, i.e. CAC40, NASDAQ.Index Tracking
The investment manager uses a computer model to select stocks to simulate the performance of a specific stock market index. Also referred to as passive management and is the opposite of active management.Inflation
An increase in the general level of prices over a prolonged period of time, which forces down the real value or purchasing power of money. There are various measures of inflation, the most common being the Retail Price Index (the main measure of consumer inflation).Indemnity:
Legal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.Insurable Interest:
A condition in which the person applying for insurance and the person who is to receive the policy benefit will suffer an emotional or financial loss, if any untouched event occurs. Without insurable interest, an insurance contract is invalid.Insurability:
All conditions pertaining to individuals that affect their health, susceptibility to injury and life expectancy of an individual’s risk profile.

Insurance:
Social device for minimizing risk of uncertainty regarding loss by spreading the risk over a large enough number of similar exposures to predict the individual chance of loss.

Insured:
The person whose life is covered by a policy of insurance.

Insurance pool:
A group of insurance companies that pool assets, enabling them to provide an amount of insurance substantially more than can be provided by individual companies to ensure large risks such as nuclear power stations. Pools may be formed voluntarily or mandated by the state to cover risks that can’t obtain coverage in the voluntary market such as coastal properties subject to hurricanes.

Interest Rate
The premium borrowers charge for lending their money. Interest rate risks The uncertainty of returns on investments due to the changes in market rates of interest.

Investment Funds
(also known as Mutual Funds.) An investment fund makes investments on behalf of the investors in that fund The money from the individual investors is pooled and invested in stocks, bonds, options and commodities or money market securities. The types of investments chosen are determined by the objective of the investment fund. These funds offer the investors the advantages of diversification and professional management.

 

 

J

 

Joint Life Endowment Assurance Plans:
The sum assured (plus any accrued bonuses) under this type of policy is payable on the end of the endowment term or on the first death of the two lives assured, whichever is earlier. Typically (though not a necessity) taken out by a couple, a variation is available for couples only. In this case, the sum assured will be payable on first death and then again on the second death (along with all vested bonuses) if both deaths occur during the term of the policy. If one or both lives survive to the maturity date, the sum assured along with all vested bonuses will be payable on maturity date. Premiums during this plan cease on the first death or the expiry of the selected term, whichever is earlier. Another variation provides for annuity to both/surviving spouse, or a lumpsum amount to the legal heirs.

 

K

 

Keyman Insurance Policy:
A life insurance policy taken by a person on the life of another person who is or was his employee/connected to his business in any manner whatsoever

 

L

 
Lapsed Policy:
A policy, which has terminated and is no longer in force due to non-payment of the premium due.Large Cap. Stocks
Shares with a large market capitalization relative to the general market of which they form a part, e.g. General Electric in the US and Vodafone in the UK.Letter of Wishes
In administering a discretionary trust, HSBC asks for guidance from the settlor, usually in the form of a letter of wishes addressed to the trust company. However this letter does not form part of the trust deed and is not legally binding on the trustee.Leverage
Usually means to borrow money. Known in Britain as ‘gearing’. It is normally stated as a multiple or percentage, three times is 300% gearing. Can also be achieved by buying securities on margin or by using derivatives such as futures and options.Liquidity
The ability to convert an investment into cash with minimum capital loss. A stock, bond or commodity that has a great many units outstanding has liquidity and investors are therefore more inclined to seek out liquid investments so that their trading activity will not influence the market price. Investment funds are thought to be highly liquid as they allow for purchases and redemption’s on a daily basis.Long-Only Strategy
(Also referred to as Traditional Investing). The typical form of investing practiced by most investment managers.Long/Short
Such strategies invest in bond or equity markets by combining long positions with short positions to reduce, but not necessarily eliminate, exposure to the market. These strategies are, therefore, somewhat directional and their returns may typically exhibit higher correlations with traditional markets than the returns of Relative Value or Event-Driven strategies.Limited Payment Life Policy:
Premiums need to be paid only for a certain number of years or until death if it occurs within this period. Proceeds of the policy are granted to the beneficiaries whenever death of the policyholder occurs. Again, this policy can also be of the ‘with profits’ or ‘without profits’ type.

Life Assured:
The person whose life is insured by an individual life policy is called life assured.

Liability insurance:
Insurance for what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person.

Loyalty Additions:
The loyalty addition is given upon the maturity of the policy, and not before. It’s a small percentage of the sum assured. Broadly speaking, loyalty addition is the difference between the performance, of the insurance company and the guaranteed additions. It is LIC’s effort to further share its surplus after valuation with the policyholders, as LIC is a non-profit organization.

 

M

 
Margin
a. Using money borrowed from a broker to purchase securities.
b. The difference in the purchase and sale price of a security.Margin Trading
Trading on the basis of providing only part of the cost of such trade by way of cash payment whilst funding the balance by way of a loan from the broker to the investor. Such trading is riskier than the usual practice of fully funded stock and share trading can be expensive.Market Neutral
See Relative Value.Marketability
The speed and ease with which a particular security may be bought and sold.Market Capitalization
Value of a company as determined by the market price of its issued and outstanding common stock. It is calculated by multiplying the number of outstanding shares by the current market price of a share. Often used as a key indicator/ criterion of how investor’s value a company’s future prospects.Maturity
Another word for redemption when the investment period ends and, in the case of bonds, the nominal capital is repaid.Money Market Funds
Money market funds invest in money market paper and debt securities with short term maturities. Securities include government securities, securities issued by banks and large corporations. These category’s of funds are traditionally known as the least risky of all the mutual funds. However, they generally generate much lower rates of interest than other forms of investment funds.Maximum Drawdown
The worst peak to trough that an investor could have incurred over any time period.

 

N

 
Net Asset Value
The NAV, or Net Asset Value, of a fund is used to calculate the value of an investment funds share. It is derived by aggregating the value of a funds total assets (securities, cash and accrued earnings), deducting liabilities and dividing by the number of shares outstanding. The NAV is the same as the share price (except in cases where funds are loaded).Net Exposure
A portfolio’s actual exposure when its long and short positions are calculated together; e.g. long positions minus short positions. See Gross Exposure.Net Worth
Amount by which assets exceed liabilities. For an individual, net worth is the total value of all possessions. Such as property, stocks, bonds, and other securities minus all outstanding debts such as mortgage and revolving-credit loan.Non-Directional Investing
The absolute return approach seeking investment returns irrespective of underlying market performance.

 

O

 
Open architecture
Selecting the best products and services that meet a client’s needs, whether offered by HSBC or another financial organization.Option
An agreement, that provides the option but not the obligation, to buy or sell a specified amount of a security at an agreed price at a specific future date.

 

P

 
Pooling effect
The economies of scale achieved when individual investors aggregate their monies for the purpose of achieving a common aim.Portfolio
Combined holding of more than one stock, bond, commodity, cash equivalent or other asset by an investor. The purpose of a portfolio is to reduce risk by means of diversification.Portfolio Optimization
Reconciling risk and return in selecting the securities to be included, such as determining which portfolio of stocks offers the best return for a given level of expected risk.Portfolio Risk
Portfolio risk is the sum of two components : market risk (systematic risk) and asset-specific risk (unsystematic risk). The typical common stock contains about one-third market risk and two-thirds asset specific risk. On the other hand, the typically diversified growth fund contains about 85 percent market risk and only about 15 percent market specific risk. As a result 85 percent of the volatility of the fund’s share price results from movements in the stock market.Portfolio Turnover Ratio
This is essentially a measure of the trading activity of an investment fund. It gives an indication of how frequently securities are bought and sold. It is calculated by taking the lesser of purchases and sales of securities and dividing by a fund’s average net assets. The reciprocal of the turnover ratio can be used to approximate the fund’s average securities holding period i.e. a fund with an 80 percent turnover ratio holds its investments an average of 1.25 years.( 1 / 0.80 = 1.25 ).Preference Shares
These are similar to bonds in that they pay a fixed rate of interest, although payment depends on company profits. Preference shares are first in the pecking order of pay outs when an investment fund is wound up.Price Earnings Ratio (PE)
The market price of a share divided by the company’s earnings(profits) per share in its latest 12 month trading period.Prime Broker
Usually undertakes the back office functions of clearing, settlement and custody for a hedge fund, plus it often undertakes the execution of the shorting and leveraging activities.

Primary Market
Used for the flotation’s of new companies and for the further raising of capital under a – rights issue – an issue to raise addition capital, which is offered to existing shareholders at a discount.

Probate
Trusts eliminate time-consuming and often expensive formalities to obtain probate and ensure the release of assets on death, particularly when such assets are located in many countries. Another advantage that trusts have over other probate arrangements is that they allow uninterrupted management of the assets.

Professional Advisers
We always recommend that you seek independent advice to ensure that tax and estate planning proposals are appropriate for your requirements. In our capacity as trustee, HSBC does not offer tax or legal advice but works very closely with your own professional advisers. Alternatively, in certain locations, you may choose to appoint HSBC independent tax consultants to provide such advice.

Protector
Clients may choose to appoint a protector to their trust. The role of the protector is to assist and sometimes supervise the trustee. These powers are set out in the trust deed. The protector is normally a close family friend or adviser of the settlor.

 

Q

 
Qualitative Analysis
Analysis based on non-numerical data.Quantitative Analysis
Analysis based on numerical data.

 

R

 
Redemption Price
The price at which a fund buys back its shares from selling shareholders.Reference Currency
The base currency in which an investment is made and is used as a unit of account for the fund.Relative Value
A term covering strategies that invest in bonds and/or equities but are not dependent on the general direction of underlying markets. This is typically a conservative approach in which the manager is seeking to exploit market inefficiencies by exploiting pricing disparities between related instruments. The focus can be very quantitative, focusing on stock selection techniques. See fuller explanation in this paper. Such strategies should have low correlation to general market movement. Typical strategies in this category include equity market neutral, fixed income arbitrage, convertible bond arbitrage and mortgage backed securities arbitrage.Return
The amount by which your investment increases as a result of interest or dividend income and capital growth.

Risk
A measure of the probability of losing or not gaining value. Risk is differentiated from uncertainty, which is not measurable.

Liquidity Risk
Possibility that an investor will not be able to buy or sell a commodity or security quickly enough because buying or selling opportunities are limited.
Default Risk
The uncertainty that some or all of the investment may not be returned.

Systematic Risk
That part of a security’s risk that is common to all securities of the same general class (stocks and bonds) and thus cannot be eliminated by diversification. Also known as market risk, it is the amount of return caused by volatility and is measured by the beta coefficient.

Specific or Non-Market Risk
Specific risk is measured by the alpha coefficient. It is a mathematical estimate of the amount of return expected from an investment’s inherent values, such as the rate of growth in earnings per share.

 

S

 
Secondary Market
Market where shares are bought and sold on the Stock Exchange after their initial flotation on the primary market.Settlor
The settlor is the person who establishes the trust by transferring assets to the trustee to hold under the terms of the trust deed.Sharpe Ratio
A measure of the return above the risk free rate per return unit of return, usually calculated as the annualised rate of return minus the rate of return on a “risk free” investment divided by the annualised monthly standard deviation. The higher the value the better the risk adjusted returns of that fund manager and an indication of the manager’s ability at controlling volatility whilst delivering investment returns.Short Selling
Selling a security that the seller does not own but is committed to eventually repurchasing. It is used to capitalize on an expected decline in the security’s price.Small Cap. Stocks
Shares whose market capitalisation is noticeably smaller than the average for their particular market.Sovereign Debt
Bonds issued by (or guaranteed by) a government.Sovereign risk
A trust can be an effective defence against the consequences of political or social unrest following war or other major change in a country. If political instability or uncertain future prospects damage personal wealth, trusts may be a reassuring solution.Special Situations
See Event-Driven.Spread
The difference in price or yield between two instruments.Spot Market
Refers to the market for immediate delivery. Spot market deliveries generally are required by the same or the next business day and are generally over-the-counter.

Standard & Poor’s 500
Broad based measure of changes in stock market conditions based on the average performance of 500 widely held common stocks/shares.

Standard Deviation
See Volatility. A measure of dispersion of a set of data from its average. The higher the value, the more the overall data varies from its average. A fund with an annualised return of 10% and an annualised standard deviation of 5% indicates that over the performance period, returns in any 12 month period have been between 5% and 15% about 2/3rds of the time.

Stock Market
General term referring to the organised trading of securities through various exchanges and over the counter. The market place where common shares, preferred shares, bonds, convertibles and other securities change hands.

Stock Picking/Stock Selection
See Bottom Up Stock Picking.

Systematic Manager
These managers are very quantitative in focus. The output from their quantitative models will determine the positioning of their portfolios.

 

T

 
Tactical Trading
Strategies focusing on speculation on the direction of market prices of instruments using securities or derivatives. Instruments used may include all or some of currencies, commodities, equities and/or bonds. Managers typically fall into one of the systematic or discretionary categories. This can be the most volatile category of hedge fund, particularly as many managers are often simultaneously long and short in their portfolios whilst also utilizing leverage. The correlation of returns with traditional markets is normally low. Commodity Trading Advisers (CTAs) and global macro managers would typically fall into this category.Taxation
Trusts can assist in maximising tax efficiency, reducing and controlling the impact of personal taxes. Trust A trust is an arrangement whereby a person (the settlor) transfers the legal ownership of assets (the trust fund) to another person (the trustee) who then manages and holds the assets for the benefit of others (the beneficiaries) who may include the settlor.Term insurance:
A form of life insurance that covers the insured person for a certain period of time, the ‘term’ selected by the policyholder. It pays benefit to a designated beneficiary only when the insured dies within that specified period which can be 1, 5, 10 or even 20 years. Term life policies are renewable but premiums increase with age.Travel insurance:
Insurance to cover problems associated with traveling, generally including trip cancellation due to illness, lost luggage and other incidents.Top-Down Investing
As opposed to bottom-up or stock selection-based investing, this is an approach which looks at the trends in the economy and deciding which countries, markets or industries will benefit before selecting individual companies in which to invest.

Total Return
Total return is the full amount that an investment earns over a specific period of time. Total return can be cumulative or annualized. If it is cumulative it is an indicator of how much your investment grew in total for the entire period. If it is annualized it is an indicator of the average annual return over the period of years described. Total return measures the return of a fund taking into account the changes in the N.A.V. (Net Asset Value), the redistribution of dividends and the compounding factor over time.

Trust
An equitable obligation whereby an individual (the settlor), transfers assets to a trustee, wherein the trustee becomes the legal owner and safeguards the aforementioned assets for the benefit of the beneficiaries.

Trustee
The choice of trustee is very important as the trustee is the legal owner of the trust assets. HSBC’s trust services act as a corporate trustee to ensure continuity of administration.Trust Deed
The trust deed is a document which sets out the powers and duties of the trustee and defines the beneficiaries and the trust assets. The deed may contain specific provisions as to beneficiaries’ entitlements or it may leave this to the trustee’s discretion, in which case the trust is called a discretionary trust.

 

U

 
Unit Price
The price of units of a fund which are quoted on the stock exchange or traded over-the-counter. The price is governed by supply and demand in the market, while the issue and redemption prices per unit are determined by the fund management company on the basis of the net asset value.Underwriting:
Examining, accepting, or rejecting insurance risks and classifying the ones that are accepted, in order to charge appropriate premiums for them.

 

 

V
Volatility
(Also known as Standard Deviation). Often defined as the Standard Deviation of the return on total investment. It is the degree of uncertainty of returns on an asset.Vesting Age:
The age at which the receipt of pension starts in an insurance-cum-pension plan.

 

 

W

Whole Life Policy:
Premiums are paid throughout the lifetime of life assured. This can be ‘with profits’ or ‘without profits’ (A ‘with profit’ policy is eligible for various bonuses declared by LIC every year, while a ‘without profits’ policy does not have this privilege)With-Profit policy:
Policies entitled to bonus, which is paid at the time of claim-death or maturity one with-profit policies.Without-Profit policy:
These policies are not entitled to participate in bonus announced by the insurer.

 

Y

 
Yield
The annual dividend or income on an investment expressed as a percentage of a purchase price.Yield Orientation
Defines the investors requirements with respect to investment returns. An investor favoring growth will opt for reinvestment whilst an investor preferring a regular income will opt for distribution. Income Distribution – dividends and interest are paid out. Continual Reinvestment – Dividends and interest are automatically reinvested.