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Key investment terms Back  
Mercer Investment Consulting present an ‘investment dictionary’ of terms commonly used in investment management. Part one A-N.
Active Management: Approach to investment management, which relies on a manager’s ability to select an investment portfolio and to actively trade the portfolio so that, over time, it will outperform a particular market index or benchmark.

ADR - American Depository Receipt: A security issued in the US to represent shares of a foreign company.

Alpha: A. Statistical measure of the incremental return added by an investment manager through timing and stock selection.

B. When applied to shares on indication that the price is too high or too low, for example, a share with an alpha value greater than zero would be underpriced relative to other shares that are considered to have the same level of risk.

Alternative Investments: Investments which do not fit into the mainstream areas of equities, bonds and property and which normally form a small proportion of portfolios. Examples are venture capital natural resources, commodities and works of art.

Arbitrage: Purchase of one security while simultaneously selling another to give a risk-free profit.

Asset Allocation: Process of assigning investments across broad asset classes or sectors of assets. The sectors typically considered are domestic and international equities, bonds, property, cash and alternative investments.

Bear Market: Widespread decline in security prices.

Beta: Statistical measure of risk or volatility indicating the sensitivity of a security or portfolio to movements in the market index. For example, a security with a beta of 1 is expected to give the same return as the index. Higher beta stocks are more volatile. High tech high growth companies would have high betas. Low beta stocks (less than 1) are usually hose with higher yields or dividends and are considered to be defensive stocks.

Bid Price: Price at which a security or a unit in a pooled fund can be sold.

Bull Market: Period of sustained stock market growth.

Call Option: Right, but not the obligation, to buy an asset at a specified price on or before an agreed date.

Capitalisation: Total market value of securities issued by a company, industry or sector. It is calculated by multiplying the market price per share by the number of shares issued.

Chartist: Individual who studies charts of movements in financial and economic indicators in the hope of predicting changes in stock market prices.

Commercial Paper: Unsecured short-term debt issued by companies.

Contrarian: Investor who takes a position in the market contrary of the majority.

Convertible Bond: Bond that, under certain conditions, the owner can opt to convert into another security, such as, an ordinary share.

Coupon: Nominal interest rate payable (usually six-monthly) on a fixed interest stock.

Defensive Stock: One which is expected to be less volatile than the overall market.

Dividend Yield: Company’s dividend per share divided by its current share price.

Earnings Per Share (EPS): Company’s annual earnings divided by the average number of shares it’s issued.

Forward Contract: Contract to buy or sell an asset at an agreed price in the future.

Future (Contract): A contract to buy a security on a future date at a price that is fixed today. Futures are traded on an organized exchange and are marked to market daily.

Hedge Fund: Fund which makes money by speculatively hedging market indices, asset classes or currencies. The most famous hedge fund is George Soros’ Quantum Fund. (See

Junk Bond: Company bond which has been given a low rating by credit rating agencies. Junk bonds offer higher returns to
compensate for the increased risk.

Market Maker: Organisation which deals in securities. Market makers quote buying and selling prices for the shares in which they wish to deal.

Marked to Market: An arrangement whereby the profits or losses on a futures contract are settled up each day.

Money Market: Market for short-term loans and deposits.

NPV - Net Present Value: A project’s net contribution to wealth i.e. present value minus initial investment.

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