Glossary

A

Annual General Meeting (AGM) - An annual meeting called by directors of a company that allow shareholders to stay informed and involved with company decisions and workings.

Assets - Anything owned or controlled that has value, but usually, for an investment trust, it refers to equities, bonds and cash. The underlying assets of an investment trust will vary depending on the company's objective.

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B

Benchmark - A measure against which the performance of an investment trust is compared or against which it sets its objective. See index.

Bid price - The price at which you will deal when you sell shares. See share price.

Bid-offer spread - See dealing spread.

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C

Capital return performance - For AIC statistics purposes the return on an investment based on the appreciation or depreciation in the value of the security over a given time period. Income from dividends is excluded. See Share price capital return performance or NAV total return performance.

Closed-ended - A company with a fixed capital structure. Variations in demand for the shares of the company are reflected in movements in their market prices and not by an increase or decrease in the number of shares in issue. Opposite of an open-ended fund, such as a unit trust.

Conventional investment company - Investment companies which issue only one class of ordinary share are commonly known as conventional investment companies.

Corporation tax - The tax a company may have to pay on its profits for a year. Investment trust companies are exempt from corporation tax on their capital gains and also do not pay tax on any UK dividends. As they can also offset expenses against any taxable income, most investment trusts do not pay corporation tax and are therefore very tax efficient.

Crest - The system introduced in July 1996 by the securities industry through which transactions in securities are 'settled' (i.e. :concluded) by the payment of cash or by the delivery of securities against payment.

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D

Dealing spread - The dealing spread ('spread' or 'bid-offer' spread) is the difference between the price at which you can buy (offer) and the price at which you can sell (bid).

For example, Ben buys 1000 shares in a company at 130p per share (the 'offer' price). He pays 1000 x 130p= £1,300 in total (ignoring the cost of dealing).

If the spread is 5p, he could immediately sell the shares at 125p each (the 'bid' price). In other words, he would make an immediate loss of 1000 x 5p=£50. The shares must rise by at least 5p per share before he can make a profit on them.

The situation described above is a simple example only. Figures such as the dealing spread and the cost of dealing vary. See share price.

Debt cover - For AIC statistics purposes, this is the ratio of total assets to the company's debt. Typically debt cover is an indicator used by banks in setting covenants in respect of loans to investment trusts.

Debt - For AIC statistics purposes, debt is the total value of all prior charges ranking before equity capital. Debt is also referred to as that which is used for investment purposes. See Gearing.

Diluted NAV - See Net Asset Value (NAV).

Discount - If the share price of an investment trust is lower than the net asset value (NAV) per share, the trust is said to be trading at a discount. The discount is shown as a percentage of the NAV. The opposite of a discount is a premium. It is more common for an investment trust to trade at a discount than a premium. See Premium.

Dividend yield - The annual dividend expressed as a percentage of the current market price. The yield on an investment trust share, or any other share, indicates the size of the income return on the share in relation to its current price (not what investors paid for it in the past). It is calculated by expressing the annual dividends as a percentage of the share price. A dividend yield can give you an indication of the potential level of income you would get from an investment trust share. However, future dividends may be higher or lower than indicated by the current dividend yield depending on the performance of the company.

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E

Ex-dividend - See ex.

Ex - When a stock or dividend is issued by a company it is based upon an "on register" or "record date". However, to create a level playing field when shares are traded on the London Stock Exchange during this benefit period an "ex" date is set. Before this "ex" date if shares are sold the selling party will need to pass on the benefit or dividend to the buying party.

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F

Financial Services Authority (FSA) - An independent watchdog set up by the government to regulate financial services and protect investors' rights. It provides free and independent information about financial matters on its website.

Fixed interest securities - Securities like debenture stocks, loan stock and convertibles which carry a fixed rate of interest called a coupon.

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G

Gearing ratio - A ration used for AIC statistics purposes. In a simple example, if a company has 100 million of total assets and 13 million of borrowings, shareholders' funds are 87 million. If the total assets grow or fall by 10% to 110million or 90million, and the borrowings remain the same at 13 million, the shareholders' funds grow to 97 million or fall to 77 million. This is an increase or decrease in shareholders' funds of 11.5%, which in both cases is 15% more than the 10% increase or decrease in total assets.

This means the shareholders' funds are 15% geared (and the gearing factor/ratio would be 115 in this instance.)

Gearing is expressed as a ratio of total assets to shareholders' funds multiplied by 100.

It provides an indication of the level of a company's/share's financial and/or structural gearing.

A figure of 100 means that there is no gearing. Normally, the higher the gearing factor, the more sensitive an investment trust's shares will be to the movements up and down in the value of the investment portfolio.

Gearing - The term used to describe the process of borrowing money for investment purposes in the expectation that the returns on the investments purchased using the borrowings exceed the costs of those borrowings.

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I

Index number - An index number is a statistic indicating the relative change occurring in the price or value of a commodity, share price or in a general economic variable e.g. retail price increases, with reference to a previous base period conventionally given the number 100.

Index - A statistical measure of the changes in a portfolio of stocks representing a portion of the overall market.

Index number - An index number is a statistic indicating the relative change occurring in the price or value of a commodity, share price or in a general economic variable e.g. retail price increases, with reference to a previous base period conventionally given the number 100.

Investment Company - A closed-ended fund which invests primarily in a diversified portfolio of the shares and securities of other companies. See Investment trust.

Investment Trust - An investment company which satisfies the requirements of Section 842 of the Income and Corporation Taxes Act 1988.

Companies which meet these criteria are exempt from having to pay tax on the capital gains they realise from sales of the investments within their own portfolios. See Investment Company.

ISA - ISA stands for Individual Savings Account.

ISAs are savings accounts free of personal taxes which can be used to hold many types of savings and investment products. They have replaced Personal Equity Plans and TESSAs.

ISIN - International Securities Identification Number (ISIN). International code for a listed security.

Issued Capital - Issued share capital is the total number of shares subscribed to by the shareholders.

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M

Main Market - The London Stock Exchange's principal market for listed companies from the UK and overseas. The securities need to be admitted to the Official List by the UK Listing Authority (UKLA), a division of the Financial Services Authority if they are to trade on the main market.

Management charge - The charge levied by an external investment manager for the management of a trust or fund. It is usually charged annually, and may consist of a fixed fee and/or a performance related fee.

Market capitalisation - The stock market value of a company as determined by multiplying the number of shares in issue by the price of the shares.

Market makers - Those who trade in the market as principals, and create a market in a specific stock by quoting prices at which they will buy or sell on demand.

Market Price - See Share price.

Mid-market price - A price calculated as the mid point between the bid and offer prices. See share price. The mid-market price is used to calculate the discount, yield and share price performance data on the AIC website.

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N

NAV capital return performance - For AIC statistics purposes, the theoretical capital return on shareholders' funds per share, including the assumed £100 original investment at the beginning of the period specified, reflecting the change in the net asset value (NAV). A simple measure of NAV at the end of the period compared with NAV at the beginning of the period. See Net asset value.

NAV per share - Shareholder funds or the net asset value expressed as an amount per share. The NAVs published on the AIC website are diluted NAVs with debt deducted at fair value. See Net asset value.

NAV per share with debt deducted at fair value are used to calculate the discount. NAV with debt deducted at par are used to calculate the NAV performance data. Daily NAVs published on the trust profile pages are estimated by Fundamental Data Ltd. Actual month-end NAVs supplied by Member companies can be found on www.aicstats.co.uk

NAV total return performance - For AIC statistics purposes, the theoretical total return on shareholders' funds per share, including the assumed £100 original investment at the beginning of the period specified, reflecting the change in net asset value (NAV) assuming that dividends paid to shareholders were reinvested at NAV at the time the shares were quoted ex-dividend. A way of measuring investment management performance of investment trust which is not affected by movements in discounts/premiums. See Net asset value.

Net asset value (NAV) - Also referred to as shareholders funds. It is arrived at by totalling the value of the trust’s investments, cash and other net current assets, and deducting all of its liabilities, including any issued preference capital.

Loans and preference shares can be deducted at their par (nominal value) or at their fair value (also known as market value). The resulting figure is then divided by the number of shares in issue. Shareholder funds are the net value of all the company's assets having deducted all prior charges. Prior charges can be valued at par or fair value (also known as market value). See NAV per share.

Shareholders funds can be calculated taking into account whether the company has issued, and has outstanding, convertible loan stocks, warrants or options and treasury shares, this is known as diluted shareholders funds or diluted NAV. The calculation assumes that the holders have exercised their right to convert or subscribe, thus increasing the number of shares among which the assets are divided. If the company holds shares in treasury shares the shares are valued at mid-market price unless there is a restriction in place which prevents the shares being issued at a discount to NAV and the shares are currently trading at below NAV. Valuing shares in treasury on a mid-market price basis may differ from the re-issuance policies of individual companies. Revenue items for the current financial year are excluded.

New issue - The offer to the public, via a prospectus, of shares or loan capital in a company.

Nominee accounts - When buying shares in an investment company you may hold the shares in your own name, in which case you may be issued with a share certificate, or they may be held for you by the broker or manager on a "nominee basis".

Nominee accounts can be a far easier way to hold shares as they avoid some of the paperwork and costs associated with more traditional ways of buying shares. The majority of wrapper schemes are held on this basis.

You may, however, lose some of the advantages of holding shares in your own name, such as being sent the report and accounts directly and you may not always have voting rights at the AGM or on other issues that affect shareholders (you may wish to clarify these details with the provider/management group).

Nominee companies - A company formed by a bank or other organisation for the purpose of holding shares on behalf of the beneficial owner. Nominee company employees carry out all the paperwork and other tasks associated with the documentation of shareholding and arrange for necessary transfers when a share is purchased or sold. See Nominee accounts.

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O

Offer price - The price at which you will deal when you buy shares. See share price.

Official List - A list of securities maintained by the UK Listing Authority. The Official List includes all securities that are approved for trading in the UK.

Ordinary shares - The main type of equity capital issued by conventional investment companies. Investors are therefore entitled to their share of both income in the form of dividends paid by the company and any capital growth.

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P

Par Value - The par value of a loan stock is its face value (also known as its nominal value).

Portfolio - A group of investments. Investments can be made up of various asset classes (stocks, bonds, real estate, commodities) or the same asset class (exposure to stocks across companies and industries).

Portfolio yield - The portfolio yield, for AIC statistics purposes, represents the expected revenue, over the next twelve months from the appropriate month-end, as a percentage of the total assets at the appropriate month end. The revenue includes all expected income as calculated over the next twelve months from investments, cash deposits and other current assets with no deductions for expenses, interest, costs and tax.

Pound-cost averaging - An investment strategy by which the investor invests fixed sums over time, without specific regard to the share price at the time of purchase. The idea is that, by setting aside a fixed amount, rather than focusing on share price, you end up buying more shares when the price is low and fewer when the price is high. It can be a useful way to invest in the stock market if you are concerned about short-term volatility, as issues of timing are not as critical.

Premium - If the share price of an investment company is higher then the net asset value (NAV) per share, the trust is said to be trading at a premium. The premium is shown as a percentage of the NAV. The opposite of a premium is a discount. Please see discount.

Price - See share price.

Prospectus - When a company applies for a listing of its securities which are to be offered to the public in the UK, a prospectus is required in accordance with the UKLA's Listing Rules, detailing information on the company, its accounts, directors and its securities.

Public offer - It is a method of flotation in which a company issues shares to the public at large, including private and institutional investors.

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R

Registrar - An organisation responsible for maintaining a company's share register.

Reinvestment of dividends - 1) For the purposes of AIC total return performance statistics, it is assumed that any dividends received on an investment trust share are reinvested back into the shares of the investment trust.

2) The process of reinvesting dividends by buying additional shares in the investment trust. A useful tool for shareholders who have no immediate need for this income.

Many management groups now offer saving schemes where dividends can be reinvested.

Rights issue>/strong> - An invitation to existing shareholders to purchase additional shares in the company.

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S

Savings and investment schemes - A facility to enable purchases of investment trust shares to be made easily and cheaply by the investment of regular (usually monthly) sums of money or by occasional lump sum contributions. See wrapper products and pound-cost averaging.

SEAQ - The London Stock Exchange Automated Quotations system is a London Stock Exchange trading service. SEAQ is a continuously updated electronic notice board containing price quotations of UK securities. Market makers use the system to display the prices at which they are prepared to buy or sell shares.

Secondary market - Marketplace for trading in securities.

Securities - General name for stocks and shares of all types

Self managed - An investment company whose assets are managed by its own team of managers or by the directors of the company, rather than by hiring the services of an external management company.

SETS - The London Stock Exchange Electronic Trading Service (SETS) is the London Stock Exchange trading service for UK blue chip securities. It is an automatic electronic order driven trading service that can execute hundreds of trades a second.

Share - The authorised share capital of a company is divided into a number of equal parts. Each part is called a share. See ordinary share or securities.

Share buy-backs - A way for investment companies to return cash to their shareholders is through offering to buy back a proportion of the shares currently issued. Trusts need to seek the permission of their shareholders to do this, and will typically put a motion to their AGMs allowing them to buy back a proportion of their total shares (up to 15 per cent).This process has the effect not only of returning cash to shareholders but also reducing any discount to Net Asset Value, by reducing the total number of shares in issue. It also reduces the total share capital of the company giving the remaining shareholder a larger percentage ownership.

Share price - The share price is the value of the share at a given moment. It is determined by the balance between demand and supply on stock markets price of a share. There are different share prices quoted in the market. Bid/Sell is the price offered in the market to buy shares from an investor, also referred to as the selling price. Offer/Buy is the price offered in the market at which shares are offered to investors also referred to as the buying price. The mid-market price is calculated as the mid point between the bid and offer prices and is used to calculate the price related data.

Some investment companies securities trade on SETs. SETs trading service operates for the securities comprising the FTSE 100 index and the most liquid FTSE 250 securities. Securities which trade on SETs only have one official closing price; this price is used to calculate the price related data in the MIS. See dealing spread.

Share price capital return performance - For AIC statistics purposes, the theoretical capital return to the investor, including the original £100 invested at the beginning of the period specified, on a mid-market to mid-market basis, reflecting the change in share price over the period. A simple measure of price at the end of the period compared with price at the beginning of the period. Transaction costs are not taken into account. See share price.

Share price total return performance - For AIC statistics purposes, the theoretical total return to the investor, including the original £100 invested at the beginning of the period specified, on a mid-market to mid-market basis, assuming that all dividends received were reinvested in the shares of the company at the time the shares were quoted ex-dividend. Transaction costs are not taken into account. See share price.

Shareholders' funds - See Net Asset Value (NAV).

Stamp duty - A tax payable on the purchase of shares, property and businesses. All shares purchases incur 0.5% stamp duty. All other assets are charged at different rates, dependant on their value.

Stock exchange indices - Stock exchange indices are calculations made on an index number basis to indicate the movements in the general level of prices of securities listed on stock exchanges. There are many different indices which are designed to meet different investor needs.

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T

Total assets - For an investment company, this figure would give an indication of the total value of all the company's investments before deducting any borrowings used for gearing/investment purposes.

Total Expense Ratio (TER) - A Total Expense Ratio (TER) represents the drag on performance caused by all annual operating costs (including administration, trustee and audit fees), not just the basic annual management charge.

There are many different definitions of TER, but those shown on the AIC website have been calculated by Lipper Fitzrovia in conjunction with the AIC.

Total return performance - For AIC statistics purposes the return on an investment, including income from dividends, as well as appreciation or depreciation in the value of the security, over a given time period. See share price total return performance or NAV total return performance.

Trade - A deal made on the London Stock Exchange, also referred to as a 'bargain' based on a selection of shares listed others on the whole market. See Index Number.

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V

Volatility - A measure of the tendency of a market/share price to vary over time. There are several ways to measure volatility, but the most common method used is the standard deviation. Standard deviation measures the extent to which a value, such as the share price, has varied around its average level during a past period. The higher the volatility of the values, the higher the standard deviation will be. Standard deviation is often used as a measure of investment risk.

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W

Warrants - In the context of investment companies, a form of traded option which gives the holder the right to subscribe for shares in the trust at some time or times in the future and at prices fixed when the warrants are issued. They offer the purchaser of warrants an option on a future interest in the equity of the trust for a relatively small initial investment. They are generally regarded as high risk investments and do not carry the same rights and protections as shares.

Wrapper products - ISAs, savings and investment schemes, and pensions are all 'wrapper products'. They are not investments in their own right, but simply different ways of holding investments; some of the wrappers have tax advantages.

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