Dictionary

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.

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.

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.

Bear Market
This is a term used to describe the stock market 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.

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.

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 investment.

Convertible
Fixed income securities which may be converted into equities at a predetermined future date.

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.

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.

Debt
A term used to group fixed income or bond instruments such as gilts, US Treasuries, notes, mortgage backed bonds, etc.Debt/Income Funds Specific 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. Deflation The opposite of inflation. Prices fall when more goods are available more than demand requires. Can be a response to the tightening of credit.

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.

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.

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”.

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

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.

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.

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.

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.

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.

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.

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).

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.

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.

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 risker 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.

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.

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.

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.

Quantitative Analysis
Analysis based on numerical data.

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.

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.

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.

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.

Yield Orientation
Defines the investor’s requirements with respect to investment returns. An investor favouring 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.