certificate in financial studies glossary

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© ifs School of Finance 2006

Glossary

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GLOSSARY

Actuary Professionals employed by insurance companies to mathematically

assess risks and probabilities.

Advance Another term for ‘loan’.

Aggregate A word that means the total, or sum, of a number of other things.

Annual Percentage The interest rate you will pay for a loan, adjusted to include

Rate any additional charges and to take account of payment timings.

Annuity A financial product that pays you a regular income, in return for a

lump sum paid by you to the product provider.

APR See Annual Percentage Rate.

ASU Policy An ‘Accident, Sickness and Unemployment’ policy that pays out if one

of those evens happens and you cannot work.

ATM Automatic Teller Machine – a ‘cash machine’.

BACS Bankers’ Automated Clearing System – a system by which banks can

settle up credits paid by their customers to customers of other banks

each day.

Bank of England The UK’s central bank, responsible for setting interest rates.

Banker’s draft A cheque drawn on a bank or building society, not on a personal

account. Thought of as being a very safe way to receive money, as the

risk of the cheque bouncing is almost completely removed.

Base rate The minimum rate at which banks will lend money. Most loans are

made at a margin above base rate, and deposits usually receive a rate

of interest below the base rate.

Benefit in kind Payment from an employer, made in some form other than cash (eg

luncheon vouchers).

Bid price The price at which you can sell units in a unit trust, shares in an OEIC,

or shares on the Stock Exchange.



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Certificate in Financial Studies/Diploma in Financial Studies


Bid-offer spread The difference between the buy and sell price for a particular unit

trust, OEIC or share quoted on the stock market.

Blue chip A company that is regarded as being substantial, soundly run, well

known and with a good reputation.

Bond An investment that takes the form of a tradable loan stock, issued bya company or government. Usually pays a fixed rate of interest. You

may also see the word ‘bond’ used to describe some investment

products offered by life companies.

Boom A time of great economic growth and prosperity.

Building society A mutual organisation (ie owned by its customers) providing many

services similar to those offered by banks. Originally set up to lend

money for house purchases, but now offering a wider range of services.

Cancellation period A period within which you can change your mind about an investment

you have just made, and get your money back. It only applies to certain

types of packaged investment, eg unit trusts and endowment policies.

Capital Gains Tax A tax you may have to pay when you make a profit, eg on the sale of

something for more than you paid for it.

Car insurance A policy which covers the risk or loss or damage to third parties and

to the car and car owner.

Cash card A plastic card issued by a bank, which let you draw money out from an

ATM or ‘cash machine’.

CHAPS Clearing House Automated Payments System – a system by which

banks settle up the amount of money transferred between their

customers’ accounts each day.

Charge card A plastic card that can be used to make payments and on which you

have to repay the full balance every month.

Closed ended funds Investment companies that have a set number of shares in issue

(contrast with OEICs, which can issue more shares to new investors).

Collective An investment product such as a unit trust or Open Ended Investmentinvestment scheme Company that lets many retail investors pool their money together.

Compensation A scheme, such as the UK’s Financial Services Compensation Scheme

scheme (‘FSCS’), set up to compensate investors, depositors or policyholders

if their product provider goes bust.

Comprehensive A car insurance policy that gives not only third party cover but also

car insurance protection against fire, theft and accidental damage.

Confidence The good feeling that people have about their economic future which

makes them want to spend money.




Glossary

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Consumer lifecycle The various stages of people’s lives during which their demands for

financial products differs.

Contract note A document that shows that you have bought or sold shares, a holding

in a collective investment or other investment. The contract note

should set out the time and date of the deal, and the full details

(including the amount of the holding bought or sold, the price and anycosts).

Contracting out A process where your rights to S2P, the Second State Pension, are

replaced with additional rights in an occupational or personal pension

scheme.

Cooling off period See Cancellation Period .

Coupon The nominal rate of interest a bond pays. The coupon will be set out

in the title of the bond (eg ABC plc 6% Loan Stock 2011).

Credit card A plastic card that provides you with revolving credit up to a certain

limit, and which also acts as a method of payment.

Credit Reference These are businesses which hold data on people’s financial status,

Agencies including any history of bad debts.

Credit union A financial co-operative organisation, which is owned by its members.

It offers them savings and loan facilities and is usually very ‘local’ – so

it is usually in good touch with the needs of its community (see

www.abcul.org for further information).

Critical Illness Insurance that pays you a lump sum if you are diagnosed with one of

Insurance (CII) a list of named illnesses.

Cross-selling A practice by which, having sold a customer one product, a provider

can then make sales of other related products.

Current account A type of bank account aimed at transactional needs, usually with a

cheque book.

Customer profile The various characteristics of an individual customer.

Debit Card A plastic card that allows you to transfer money from your current

account to other people.

Deflation A general decrease in the level of prices.

De-mutualisation The process where a building society is converted to a bank, or a

mutual life company is turned into a proprietary one (one owned by

shareholders).

De-regulation The process of freeing up markets by which providers have been

allowed to sell a wider range or products

Deposit A sum of money placed by a customer with a bank.



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Disclosure Requiring financial service providers to make their accounts and details

of the performance of their products availalbe in the public domain.

Distribution deals Agreements made by financial services providers with other companies

and organisations, eg supermarkets or airport authorities whereby

these organisations market, sell or make available the provider’s

financial services.

Diversification The practice of spreading investments across a range of different

holdings, so as to reduce the potential impact of any one of them

doing particularly badly.

Dividend Income paid out by a company to its shareholders, often at twice-

yearly intervals; interim dividends part way through the company’s

financial (accounting) year and a final dividend after the year-end, when

the full year’s profits are known. Dividends usually take the form of

cash and therefore provide income to the shareholder – but they can

also be paid by way of more shares.

Electronic banking The provision of banking services over the Internet.

Endowment An insurance product that provides an element of investment as well

as protection.

Endowment A mortgage where the loan is intended to be paid off by the

mortgage proceeds of an endowment policy.

Equity This has two meanings:

(a) an equity is another name for the shares of a company quotedon the Stock Exchange;

(b) it also refers to the difference between the value of a property

and the amount of money still outstanding on the mortgage. It

shows by how much the property’s value exceeds the owner’s

debt to the mortgage lender.

Ethical investment A philosophy where you try to invest your money in companies that

make a positive contribution in terms of social and environmental

issues – or at least, which don’t do any damage.

Euro A unit of currency introduced on 1 January 1999, which replaced thehome currencies of 12 European countries.

European Central The central bank of the euro-zone countries

Bank

Euro-zone The group of 12 European countries which have adopted the euro

as their currency.

Exchange rate The price of one country’s currency in terms of another’s.

Final salary scheme A type of occupational pension that pays you an income related tohow much your salary is in your last year of employment.




Glossary

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Financial advisers People who are trained in financial services and give advice to potential

and existing customers. They may be independent of any particular

company or may be tied to one or several (multi-tied).

Financial The UK’s official ombudsman for the finance industry, which settles

Ombudsman consumer complaints if they can’t be sorted out direct with the product

Service provider.

Financial regulation The system by which financial service providers are monitored by

a body which attempts to make them operate prudently and to stop

them from exploiting customers.

Financial Services The UK regulator for financial services.

Authority

Financial service Companies like banks, building societies and insurance companies

providers that sell financial services.

Fit and Proper The test regulators apply to decide whether to give a business

authorisation to carry on financial services.

Fixed interest Paying the same rate of interest year-in, year-out, until maturity of the

deposit/loan.

Flotation When a company first sells its share capital on the stock market, so as

to raise money.

FSA See Financial Services Authority .

Fund See collective investment scheme.

Gilt A bond (see ‘bond’) issued by the UK government.

Gross Before tax is deducted.

Guarantee A promise to be responsible for someone else’s debt or other

obligation, if they fail to repay the debt or carry out the obligation.

Guarantor Someone who undertakes to repay a loan if the borrower cannot or

does not repay it.

HM Revenue The new name for the Inland Revenue. The governement department

and Customs that collects various taxes.

IFA See Independent Financial Adviser .

IHT See Inheritance Tax .

Illiquid An investment that cannot easily be turned into cash.

Independent A professional whose job is to make recommendations as to suitable

Financial Adviser financial products, from a wide range of providers.

Index A figure published to show how a particular stock market is performing.



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Individual Savings A tax ‘wrapper’ which allows investors to hold certain investments,

Account without paying income tax on the income or capital gains tax on the

growth.

Inflation A rise in the general level of prices in a country.

Inheritance Tax A tax that may be paid on the ‘estate’ (the assets after debts havebeen paid off) left by someone when they die.

Inland Revenue The department of the government that collects most of the different

taxes payable in the UK.

Insurance Products that give financial protection against certain events.

Insurance Bond An investment product offered by life companies (see also

‘endowment’).

Integration The process by which individual companies come together to form

larger companies

Interest The ‘price’ of money – paid by a customer on a bank loan, and received

by a customer on many kinds of bank deposit.

Interest rate The price charged by a lender of money to a borrower, or paid by a

deposit-taking institution to a depositor.

Investment trust A listed company that holds other investments.

ISA See Individual Savings Account.

Joint account An account held by more than one person.

Key Features A document that sets out only the key points of a collective investment

scheme.

Know your customer This is one of the Conduct of Business Rules that financial providers

must abide by. It means that they must be sure of the identity of a

person before opening up an account and selling financial products

to that person.

Liability What you may owe to someone else – usually a money amount, but itcould be an obligation to do a certain thing.

Listed The description of a share that has its price quoted on a stock exchange

and can be traded there.

Loan insurance An insurance policy that will, if you fall ill or are made redundant, pay

your monthly loan repayments on a specific loan.

Loan to value The amount that a mortgage lender will lend you, in relation to the

amount the property is worth.




Glossary

G 7

Loss leader A term used for a product or service on which the provider expects

to make a loss, but on which it also expects to attract other business

(or otherwise give it some competitive advantage) that will help it

make a profit overall.

LTV See Loan to Value.

Margin The ‘turn’ a bank makes on the difference between what it will lend

at and what it will pay for deposits.

Market segments Groups of customers sharing distinct features in terms of, eg, age,

income or lifestyle.

Market share The ratio of a company’s sales, to the total sales in a defined area, eg a

country or region.

Maturity date The date on which a financial product (usually an insurance policy or

a ‘bond’) reaches the end of its term.

Medical insurance Insurance that pays for medical bills only (it does not give you a lump

sum or regular income to spend as you wish).

Mergers A type of integration whereby two or more firms come together to

form one.

Mid price A price half-way between the offer price and the bid price for an

investment.

Monetary Policy The Committee of the Bank of England which is responsible for

Committee (MPC) achieving the government’s inflation target by setting sterling interest

rates.

Mortgage A loan secured against a specific asset – usually a property. Mortgage

loans are most commonly used to help people finance buying their

homes.

Mortgage Insurance which protects the lender if the borrower cannot

Indemnity repay a mortgage loan, and the property turns out not to be worth

enough to pay the loan off.

Multi-tied advisers These are financial advisers who are connected with a number of financial services providers, but who do not offer advice or

recommendations on all the products/providers in the market.

Mutual An institution (usually a building society or a life company) that is

owned by its customers, not by separate shareholders.

National Insurance A form of tax levied on earnings.

Contributions

National Savings A government department that offers a wide range of savings schemes,

and Investment and through which the government borrows retain funds from thepublic.



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NAV See Net Asset Value.

Negative equity The phrase used to describe the situation you are in if your mortgage

loan is bigger than the value of your property.

Net After tax is deducted.

Net Asset Value The total value of all the assets of a fund, after deducting any liabilities

(debts) it has.

NICs See National Insurance Contributions.

OEIC Open Ended Investment Company, a type of collective investment

scheme, or ‘fund’.

Offer Price The price at which you can buy units in a unit trust, shares in an OEIC,

or shares on the Stock Exchange.

Office of Fair A Government Department that oversees consumer affairs. Among

Trading other things, it is responsible for enforcing the Consumer Credit Act

1974.

Ombudsman A body responsible for settling disputes between product providers

and customers.

Online banking An Internet website set up by a bank or building society whereby

customers can access and manage their accounts online from their

PCs.

Open-ended Term used to describe collective investment schemes that can issue

more shares or units to new investors, or destroy them if people are

disinvesting.

Pension An arrangement that pays you an income on retirement.

Permanent Health Insurance that pays you a regular income if you become invalided, and

Insurance (PHI) cannot work.

Personal allowance The amount of income you are allowed to earn before you become

liable for income tax.

Polarisation The practice by which financial advisers used to be either tied to a

particular organisation or are independent. This practice has been

reformed.

Policy A contract between an insurance company and its customer.

Portfolio A collection of investments held for one investor.

Product The ongoing process by which a firm changes the features if its

development product so that they meet customers’ changing needs and becomemore competitive in comparison with the products offered by

other similar companies.




Glossary

G 9

Quoted See Listed .

Regulator A government supervisory department that oversees financial

institutions and products.

Repayment A mortgage loan whereby the monthly repayments cover both

mortgage interest and capital so that, by the end of the mortgage period, theloan has been completely repaid.

Repayment vehicle A scheme like a life assurance policy, pension or ISA into which a

mortgage borrower pays which will mature at the end of the mortgage

period and will repay the capital owing.

Retail Price Index An index that measures the rate of inflation in the UK.

Risk averse A customer who does not like to take risks and who chooses safer

customer investment options.

Risk-based Putting resources in those areas which have the greatest risk.

approach to

regulation

Risk/reward The situation whereby someone who takes a higher risk has the

relationship potential to earn a higher reward, but also runs the risk of losing more.

RPI See Retail Price Index .

Savings accounts Methods by which private individuals can save their surplus funds.

S2P See Second State Pension.

Scheme Particulars A detailed document that sets out all the relevant information on a

collective investment scheme.

Second State An additional pension payable to some people because of the amount

Pension they have earned, and the NICs they have paid, over their working

lives.

Shares Also known as ‘equities’: an investment that represents part-ownership

in a company.

Sharia The legal system used by Muslims. Among other things, Sharia law

prohibits the earning and charging of interest – so financial products

aimed at being ‘Sharia compliant’ need to be structured accordingly.

Socio-economic Something that involves or relates to both social and economic factors.

Social factors are those that relate to how individuals interact with

each other, and with the larger group to which they belong. Economic

factors are those relating to wealth and resources.

Stock Exchange A formal market place for the trading of shares and other investments.

Stock market See Index .

index



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Store card A type of credit card provided by large retailers.

Term deposit A savings account where your money is tied up for a set period –

say a month or three months. You have to wait until the end of the

‘term’ to get your money back. The interest rate is fixed for the

term.

Third party car Insurance cover against injury to third parties.

insurance

Time deposit Another name for a term deposit (see above).

Tied agent A financial adviser who will only recommend products offered by

one product provider.

Unit trust A type of collective investment scheme, or ‘fund’.

Variable rate Where the rate of interest earned on a deposit, or payable on a loan,

varies in accordance with changes in market rates.

Whole of life policy A life policy which does not have a specified end-date – it keeps running

for the whole of your life, unless you encash it earlier.

Will A legal document which sets out what you would like to happen to

your belongings when you die.

With-profit policy A type of life policy which aims to give holders an investment return

related to the performance of investments in the stock, bond and

property markets, whilst smoothing some of the peaks and troughs of

these kinds of investments.

Yield The annual income you get from an investment, usually expressed as

a percentage of the investment’s value.

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