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  Glossary (listed alphabetically)
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48 Hour Rule The requirement that a company seeking a listing should submit any documents required in their final form to the Stock Exchange 48 hours prior to the hearing of the application to obtain a listing.
A Day 29 April 1988, the date when the Financial Services Act 1986 was enforced.
AA See Against Actual.
ADP See Alternative Delivery Procedure.
ADRs See American Depository Receipts.
AGM See Annual General Meeting.
AIM See Alternative Investment Market.
AMPS See Auction Market Preferred Stock.
APT See Automated Pit Trading.
ASB Accounting Standards Board.
Abandon The choice made by the holder of an option to allow an option to expire without exercise.
Abstracts Statements issued by the Urgent Issues Task Force. Companies must follow the requirements of Abstracts when preparing their accounts.
Accounting Standards Statements issued by the Accounting Standards Board, requiring the adoption of certain accounting principles and methods when preparing accounts in the UK. There are currently two forms of Accounting Standards in the UK - Financial Reporting Standards (FRSs) and Statements of Standard Accounting Practice (SSAPs). The only difference between these is that SSAPs were issued prior to 1990. Since that date, the name has been changed to FRS.
Accounting Standards Board The body responsible for issuing Accounting Standards in the United Kingdom. See also Financial Reporting Review Panel, Urgent Issues Task Force and Financial Reporting Council.
Accruals
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1. One of the fundamental accounting concepts, also known as the matching concept. Revenue and costs are credited or charged to the profit and loss account for the year in which they are earned or incurred, not when any cash is received or paid. For example, if a sale is made on credit this year, but the cash is only received next year, the sale is treated as income in this year.
2. Amounts owed to third parties for which the company has not yet been invoiced. This is shown in the balance sheet of a company as part of creditors. For example, where a company has not been invoiced by a telephone company for its telephone bill for the last three months of the year, it will show in its accounts an accrual for the estimated amount of the bill.
Accrued Interest See Interest Accrual.
Acid Test Ratio An accounting ratio, usually defined as current assets (with the exception of stocks) divided by creditors falling due within one year. It is designed to test the short term solvency of a company, in a way similar to the current ratio and its interpretation is similar to the current ratio. It is also known as the quick ratio.
Acting in Concert For the purpose of the Companies Act 1985, this is when two or more people have an agreement to acquire interests in shares. For the purpose of the Blue Book, it is when two or more investors cooperate to obtain or consolidate control of a company.
Active Fund Management Fund managers who aim to manage a portfolio such that it outperforms the market are undertaking active fund management. They aim to achieve outperformance either by selecting specific stocks which they expect to do well, or by timing their purchases of shares, i.e. aiming to buy shares just before the market rises and sell shares just before the market falls (market timing). Fees charged by active fund managers are higher than those charged by passive fund managers.
Advance Corporation Tax Also known as ACT. Corporation tax liabilities are normally payable nine months after the end of the chargeable accounting period to which they relate. However, where a company pays a dividend to shareholders it is obliged to pay some corporation tax in advance of this date. The amount of ACT payable is calculated as the net dividend paid by the company multiplied by the fraction 20/80 or 25%. Having paid the ACT, the company is then allowed to deduct the ACT from its mainstream corporation tax liability, thereby reducing the amount payable after the year end.
Advising
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The act of giving advice on investments; an activity included in the definition of investment business and thus normally requiring authorisation under the Financial Services Act 1986.
Against Actual The term used on the LIFFE commodity market for an Exchange for Physical.
Agency Brokers Brokers who only act as agents and do not deal as principals or as market makers.
Agency Cross A trade between two customers of a broker executed through the office of the broker who acts as agent in the middle, with the two customers acting as principals. It will usually be carried out at the mid-market price for the stock in question. The broker will charge both customers commission.
Agent A person acting on behalf of somebody else who is the principal to the trade when completing the trade. A common example is when a broker dealer buys or sells shares on behalf of a customer with a market maker.
Allocation Often in open outcry markets the trader who has effected a bargain is not the owner of the trade, having initiated it on behalf of another firm. Allocation refers to the process of allocating, or ‘giving up’ the trade within the trade registration system (TRS) to the originating firm, so that the trade ends up in the appropriate firm’s account.
Alternative Delivery Procedure Used on the International Petroleum Exchange (IPE). This is where the long and short sides of a transaction agree to deliver either a different specification of the product from that stipulated in the contract specification, or to a different location from those included in the contract specification, or both. ADPs are not covered by the London Clearing House guarantee.
Alternative Investment Market Also known as AIM. A market for issuing and trading shares on the London Stock Exchange. It is designed to be a lightly regulated market with very low regulatory costs for companies, while giving the company the ability to raise capital and investors the ability to trade their shares. It is attractive for smaller companies for whom an ‘official listing’ would be both expensive and cumbersome. As a lightly regulated market, it involves more risk for investors than the listed companies market.
American Depository Receipts
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Certificates issued in the USA representing the right to ownership of shares in a UK (or other foreign) company. A bank will buy shares in a UK company and issue receipts into the USA in respect of those shares. Typically, one ADR will represent the right to say eight or ten shares in a company. Although the shares are UK-based, the ADR will trade in US dollars. The bank will receive payment of dividends in sterling, but will convert this into dollars to pay to ADR holders. ADRs have the right to vote but are not allowed to participate in rights issues. The purpose of ADRs is to give US investors a convenient way to invest in UK or other foreign companies. Global Depository Receipts (GDRs) and International Depository Receipts (IDRs) operate worldwide on the same basis.
American Style Option An option where the holder has the right to exercise up to and including the expiry date. Contrast with a European style option, where the holder has the right to exercise the option on the expiry date only.
Annual General Meeting Also known as the AGM. All companies are required to hold an annual general meeting at least once every 15 months. Shareholders must be given 21 days notice of the meeting and this may only be waived if all shareholders agree.
Annual Report and Accounts All limited companies are required by law to prepare an annual report each year, containing their financial statements, directors’ report and auditor’s report. The annual report of a listed company must also contain a five year summary of results. The annual report must be sent to shareholders and to the Registrar of Companies, a civil servant whose role it is to maintain records of companies. Once sent to the Registrar, the annual report becomes a public document, available for anyone to view.
Appointed Representative A person conducting investment business, but exempt from the need to seek authorisation. The responsibility to control these persons, typically self-employed individuals, is borne by an authorised person. The more formal name for a Tied Agent. See Polarisation.
Arbitrage
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The purchase (or sale) of an instrument and the simultaneous taking of an equal and opposite position in a related instrument to exploit mispricing. Also defined as the making of riskless, guaranteed profits by exploiting market inefficiencies. An activity undertaken by arbitrageurs.
Arbitrage Channel An area which exists both above and below the fair value of a future, within which no arbitrage will take place. This is because additional costs, such as exchange fees, bid/offer spreads and commissions, will exceed arbitrage profits within this channel. Thus, the width of the channel depends on the costs incurred by the participant in the market place.
Arbitrageur An investor who trades in the markets with the intention of making riskless, guaranteed profits by exploiting market inefficiencies. For example, if the same index contract is traded in two different exchanges, it should trade at the same price in both exchanges. If the prices are not the same, an arbitrageur will buy at the cheaper price and immediately sell at the more expensive price in the other market, making a guaranteed profit.
Arbitration A low cost method of solving disputes, see Full Arbitration and Consumer Arbitration.
Articles of Association The document which acts as a contract between a company and its shareholders, giving the rights and duties of the shareholders with the company and between themselves. See also Memorandum of Association, the other main constitutional document of a company.
Asian Style Option An option which is exercised at the average underlying price over a period.
Ask
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The market selling price. See also Offer Price.
Asking Price See Offer Price.
Assets Resources owned and controlled by a company. Technically defined as access to future economic benefits as a result of past events or transactions. Assets are shown on a company’s balance sheet.
Assignment When an option is exercised by the holder, the clearing house will randomly match the exercise notice received against an open short position, and advise the chosen writer of the requirement to fulfil his contractual obligations. This is the process of assignment. Assignment is also the process by which a trade is directed into the appropriate account in TRS, either into the house, segregated or non-segregated account of the firm.
At-the-Money An option or warrant where the exercise price is equal to the current market price of the asset subject to the option. For example, a call option with an exercise price of 100p on a share with a share price of 100p is at-the-money. More generally, however, an at-the-money option is an option whose exercise price is nearest to that of the underlying asset. For example, where an option has strike prices at intervals of 10p, e.g. 90p, 100p, 110p etc, if the underlying asset has a price of 97p, the at-the-money option is the 100p strike, which is the nearest strike price to the underlying price. See also In-the-Money and Out-of-the Money.
Auction
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A common method of issuing gilts. Similar to a Tender Offer. In an auction, investors apply to buy the new gilts being issued, specifying the amount they wish to purchase and the price they are prepared to pay. The new gilts will be issued to investors who bid the highest prices and investors pay the price which they bid. This is the one difference between the auction and the tender - in a tender investors all pay the same strike price, regardless of what price they bid.
Auction Market Preferred Stock Preference shares issued by a company where the dividend is variable and is set at regular intervals to a market rate by means of an auction process between investors. Also known as AMPS.
Audit Trail The range of documents, and other evidence including tape recordings, which records all business activities and transactions which the firm effects. Such a historic record allows the firm to piece together the chronology of a trade. It is also required for compliance purposes.
Auditor’s Report All companies above a certain size are required to have their financial statements audited (i.e. checked for truth and fairness) by a registered auditor. The auditor prepares a report which is attached to the financial statements stating his opinion as to whether or not the financial statements give a true and fair view of the company’s results and financial position.
Authorisation The process by which organisations are vetted and licensed to conduct investment business under the Financial Services Act 1986. Such organisations are known as Authorised Persons.
Automated Pit Trading A screen trading system used on LIFFE for certain financial derivatives. APT is generally used for trading after hours (i.e. once the trading pit has closed); however, the JGB future trades exclusively on APT.
Automatic Exercise A procedure whereby clearing houses exercise all in-the-money options at expiry without requiring instructions (in the form of an exercise notice) from the holder. Most automatic exercise routines will not exercise options which are only just in-the-money.
Automatic Partials Processing This is an end of settlement day process whereby transactions which are ready for settlement, but cannot settle due to insufficient stock or cash, are split into two parts by CREST. One part reflects where sufficient stock or cash is available and will settle immediately. The other part remains within the settlement queue.

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