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Last Updated: Monday, 17 May, 2004, 09:24 GMT 10:24 UK
Financial terms A - D

This is the highest rating given by investment bond agencies, indicating the bond is an incredibly safe investment. However, while you probably won't lose your money, you might not make much either. Lower risk tends to mean lower returns.

Above Base Rate (ABR)
A term used by some banks and building societies to describe the amount of interest they charge when your current account is overdrawn. If, for example, a bank has an ABR of 10% it means it will charge you 10% plus the base rate (say 6%) on your overdrawn balance.

Accidental Damage Cover
Insurance against damage to items. It does not cover you for loss or theft. Accidental Damage Cover is often taken out as an extra on top of standard home insurance policy. This is because home insurance, which covers against theft or damage by flood or fire, often doesn't protect against minor damage caused by kids, pets and overzealous DIY-ers.

Accumulation Units
Unit trusts or life assurance funds where interest or dividends are reinvested to increase the value of your investment, rather than paid out as income.

Acid Test Ratio
A common investment ratio that measures a company's solvency, and is used to determine its creditworthiness. The acid test ratio is determined by a formula - liquid assets/current liabilities = company solvency. This test is not foolproof, and can give a misleading impression of how well-off a company is; a supermarket might make lots of money, yet have a low ratio as it has such a high product turnover. A ratio of less than one is a sign of real danger.

Actively managed
An investment where the manager decides an investment strategy. The aim is to outperform a benchmark. For example, an actively managed stock market fund might aim to beat the performance of the FTSE All-Share. The opposite of active management is passive management, which uses computers to automatically replicate an index.

The accountant's accountant. Mathematically minded professionals who crunch numbers to solve long-term financial problems, such as pension returns.

Act of God
Less miraculous than it sounds. It is an insurance term that typically excuses insurers from paying out in the event of unforeseeable and unusual circumstances such as natural disasters.

Additional Voluntary Contributions (AVCs)
A pension product that allows you to make extra contributions to your company pension. AVCs are money-purchase schemes. That means their final value depends on how well the funds are invested over the term between investment and maturity. Free Standing AVCs run alongside a company scheme. They enable you to put additional sums into a pension scheme different from the one run by your employer.

Advisory Broker
A stockbroker who offers advice on which shares to buy and sell. Not surprisingly, this service usually comes at a cost.

Affinity Card
A credit card linked to a third party organisation, usually a charity or a sporting club. Every time you use the card, the card issuer makes a donation to this third party. A donation is usually made when the card is first used as well. Check the fine print on these cards as they often charge over the odds in interest.

All Risks
An insurance policy that covers against almost every eventuality - except those excluded in the fine print, of course.

Alternative Investment Market (AIM)
The Alternative Investment Market (AIM), was created on 19 June 1995 as a subsidiary of the FTSE All-Share index. Smaller and newer companies often float on this market first as the admittance rules are less stringent than for a full stock exchange listing. There are tax breaks involved with investing in this market which can be attractive to investors. However it is significantly higher risk and the shares are likely to be less liquid, so you might not be able to sell when you want.

Someone, usually a paid professional, who researches companies, markets or countries to discover their investment potential. They are typically employed by large investment banks and sell their work to other investors.

Annual Bonus
The annual return paid by with-profit investments.

Annual Report
An annual statement issued by companies that reveals the overall financial position and performance over the past year.

Annual Percentage Rate (APR)
The measure of how much a loan will cost in interest per year. It takes into account all charges, such as valuation fees on a mortgage or any annual charges on a credit card, so it is the best measure of the total cost of a loan.

A financial product that pays you an income until you die. You have to spend the bulk of your pension on an annuity by the age of 75.

Annuity (deferred)
An annuity that starts at a specific time in the future, usually on retirement.

Any Driver
A motor insurance policy that allows anyone to drive a nominated car. This policy will be more expensive than standard motor insurance.

The increase in price or value of an asset, such as a house or a share.

In strict terms it is anything that benefits its owner. In financial terms it can be either tangible, like stocks and property, or intangible, like goodwill or trademarks.

Arrangement Fee
Otherwise known as an application fee, it is a mortgage lender's charge that goes to cover the cost of processing a mortgage application. The fee will typically be a couple of hundred pounds and is usually non-refundable, even if your loan application is rejected. Thankfully, many mortgage lenders no longer charge arrangement fees.

People are made bankrupt when they cannot afford to meet the monetary demands of their creditors. Bankruptcy lets you make a fresh start, subject to restrictions, and shares out your assets fairly among your creditors. A court makes a bankruptcy order after a petition has been presented by the debtor or their creditors. If you are made bankrupt, creditors must make their claims to your trustee - you no longer control your assets. You can keep basic items needed to live and for your work, but might have to sell your home to pay your debts. In some future financial dealings, you will have to say you are bankrupt. You will be discharged as a bankrupt after a couple of years or when your debts are paid. Companies are never bankrupt, but they can be forced into, or declare,

Bankers Draft
This is a cheque issued by your bank or building society on your behalf. This means it is guaranteed by them, making it as good as cash.

Banking Ombudsman
An industry-sponsored independent arbitrator who assesses public complaints against banks. The ombudsman's office can award up to 100,000 in damages. Its decision is binding on the 60 banks that subscribe to the scheme, though the public does not have to accept its decision.

Base Rate
More correctly called the Repo (repurchase transaction) rate, this is the borrowing and lending rate set by the Bank of England. It directly determines our savings and mortgage rates. The Bank of England uses the rate to influence economic activity. If it needs to stimulate activity it cuts the rate to encourage borrowing and spending. If it wants to slow the economy it increases the rate, discouraging borrowing and spending.

Basic Rate Tax
The standard rate of tax paid by the majority of people. For the tax year 2004-2005 the rate has been set at 22% and covers income from 2,021 to 31,400. People earning less than this will pay lower rate tax, while those earning more than the upper limit will also pay higher rate tax.

Basis point
Most widely used in the description of interest rate moves. One basis point is one hundredth of a percentage point. A 50 basis point rise is therefore a rise of half of one per cent.

An investor who believes
that a share, or a stock market, will lose value. The opposite of a bear is a bull.

Bear Market
A prolonged period of falling share prices.

A standard against which we can compare the performance of an investment. For example a UK stock market fund's benchmark would typically be the performance of the FTSE All-Share.

Bid Price
The highest price at which someone is willing to buy an asset. It is therefore the price you will get when you sell your asset. It is most commonly used when talking about share prices. The price at which someone is willing to sell is called the offer price.

Bid-offer Spread
The difference between the buying and selling price of an investment such as a share or unit trust. The spread is determined by the cost of transferring ownership of the asset (including things like stamp duty) and market forces.

Blue chip
In casinos, the highest value betting chip is blue. Blue chip companies are therefore those companies which are most highly valued and regarded

A bond is effectively an IOU for a company's debt. Government bonds are called
gilts. The investor lends money to the company or government, which in turn promises to repay the debt, along with interest, on an agreed date.

Bottom Feeding
Nothing to do with biting behinds! Bottom feeding actually means buying an investment when the price is low or near the bottom of its range. The bottom feeder hopes the price will then rise.

A term used by fund managers to describe an investment strategy driven by research on individual companies. Otherwise known as stock picking, it involves buying shares based on the individual merits of a company rather than sector or country expectations. The opposite of bottom-up management is top-down management.

Bounced Cheque
A cheque that a bank refuses to honour. Your cheque will bounce if you don't have enough money in your account to cover the payment. If your cheque bounces expect to pay as much as 30 in penalty fees.

Anyone who sells financial products. A stockbroker sells stock, an insurance broker sells insurance and so on.

A stock market phenomenon caused by rapid buying of shares. Bubbles are driven by market fear that failure to buy immediately will mean paying a higher price at a later date. They are characterised by rapid share price growth, such as in dot.com shares during 1998-1999. Bubbles tend to burst.

Building Insurance
An insurance policy that covers the cost of rebuilding your home if it is destroyed. Most mortgage lenders demand that building insurance is taken out as a condition of your loan.

Building Society
A mutual institution owned by its customers. Building societies claim to be able to offer customers
better value because they return all profits to their members in the form of cheaper loans and better savings rates. The number of building societies has fallen from more than 2,000 in 1900 to fewer than 70 today, as members have voted to sell their ownership to the stock market or merge with other mutuals.

Building Societies' Ombudsman
An industry-sponsored independent arbitrator who assesses public complaints against building societies. The ombudsman's office can award up to 100,000 in damages. Its decision is binding on the building societies that subscribe to the scheme, though the public does not have to accept its decision.

An investor or commentator who thinks the market is about to rise is called a bull. Bullish news is good news, which will tend to make the market rise. The opposite of a bull is a

Bull Market
A prolonged period of share price growth.

Buy-to-let mortgage
A specialist loan for those wishing to buy a property for the purpose of renting it. Loan amounts tend to be calculated as a percentage of predicted rental income. Interest rates are typically higher than standard mortgages and mortgage lenders tend to demand larger deposits.

Call Option
A contract that gives you the right - but not the obligation - to buy a share at an agreed price and date in the future. It is essentially a gamble that an asset will increase in value by more than the amount you paid for the option - if it does that you have made money.

The economic system where companies and individuals are allowed to compete in an open market for their personal financial gain. Margaret Thatcher was a devout believer in this system, as she proved when she privatised the utility companies in the 1980s.

Also known as invested capital, this is the total of a company's debt, stock and earnings. The total value of a listed company (also known as market cap or market capitalisation) can be calculated by multiplying the number of shares outstanding by the current price per share.

Capital Gains Tax (CGT)
The government's way of getting a slice of your financial good fortune by taxing you on the increased value of your assets. For the tax year 2004-2005 CGT kicks in when you have made more than 8,200 in taxable gains. Some assets, including your main home, are exempt from CGT.

Capped Rate Mortgage
A mortgage that has a pre-determined maximum interest rate, typically fixed for three to five years. The interest rate can fall with the market but cannot rise above the so-called cap. These loans typically come with a penalty for early repayment.

Cat Mark
Nothing to do with your tabby. It stands for Cost, Access and Terms and is a government stamp of approval for simple good value personal finance products. So far individual savings schemes (Isas) and credit cards have been given the Cat mark treatment and the government is promising more in the future.

Central Bank
In England, we have the Bank of England. In America, they have the Federal Reserve Bank. These institutions act as watchdogs, keeping an eye on how much currency there is in circulation and trying to make sure the economy does not slip into either inflation or recession by raising or lowering the interest rates as they see fit.

Charge Card
Like a credit card but you have to pay the balance in full at the end of each credit period.

City (The)
A strip of very expensive London real estate that is home to the London Stock Exchange and most of the country's biggest financial institutions. Financial journalists like to say things like: "The City responded well to the news...", when they are describing the reactions of these institutions to financial information.

The majority of personal finance products pay a commission to the person who sells them to an investor. Everything from pensions, life insurance, endowments and unit trusts are sold on a commission basis. Independent Financial Advisers (IFAs) are compelled by law to tell you how much commission they are making whenever they sell you a product.

Things like orange juice, oil, sugar and pork bellies (honestly). Basically naturally occurring goods that are traded.

The final stage of the property buying process. The completion date, which must be agreed by banks and solicitors for both parties, is typically two weeks to a month after contracts have been exchanged. On this day the money will be deposited with the seller and then it is just a matter of picking up, or handing over, the keys.

This is when a company decides to reduce the number of shares it has in issue. It might offer one new share for every 10 shares held. If you originally had 1,000 shares worth 1 each, you could end up with 100 shares each worth 10.

Contents insurance
Cover for household possessions. As a rule it covers anything that can be moved, and often covers items when they are outside of the house, such as a camera you have taken on holiday.

The legal work carried out during the sale of a property. This should include a local authority search to check that there are no factors that will affect the future value of your home, such as subsidence or planned development.

Council Tax
A tax imposed by local government. It is calculated on the value of your property and charged in bands.

Credit Card
A plastic card that entitles you to a flexible personal loan up to a pre-set limit. At the end of every month you will be given the option to pay the money back in full or pay a minimum instalment on the amount you owe. You will typically pay interest of anywhere between 10% and 25% on outstanding balances, though some cards offer better short-term deals.

Credit Reference Agency
A company which collects and stores information used by lenders to determine an individual's credit risk. You have the right to see this information, for a small fee.

Something that happens in cycles. Cyclical industries and stocks are affected by varying stages of the economy, especially variations in interest rates.

Dead Cat Bounce
A temporary increase in the value of a stock following a dramatic decline. So called because even if a dead cat bounces off the floor after a fall, it's still dead!

Debit Card
A plastic card that allows you to pay for goods and services directly from your current account - effectively an electronic cheque.

This is when a company splits into two or more companies. The number of shares you get in each new company reflects their value compared with the value of the old company. If the market thinks the move will benefit shareholders, the new companies might be worth more in total than the old business.

The sale of a mutual company by its members to a non-mutual company or to the stock market. Mutual companies, such as
building societies, some life insurance companies and friendly societies, are those that are owned by their customers.

Securities whose value is based on another underlying investment. The main derivatives are options, futures and warrants. They can be attractive investments as they can offer very large profits for a relatively small amount of money. Derivatives are basically a bet on which way the underlying investment will go, therefore money can be made whether the market goes up or down. They are not suitable for everyone though, as they tend to be high risk and losses can be considerable - remember Nick Leeson?

Discount Mortgage
A mortgage that offers a short-term discount on its standard variable rate. These types of mortgages typically carry a penalty for early repayment.

As an ordinary shareholder in a company you become a part-owner. This means you are entitled to a share in the company's profits. This share of profits is called a dividend. The size of the dividend depends on the profits being made by the company and their policy about profit distribution. Not all shares qualify for a dividend. For example, ex-dividend shares don't pay dividends.


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