In the futures market the price of a contract for future delivery of a commodity usually trades above the spot price because the owner of the contract is deemed to have the advantage of holding cash until the time of delivery and is assumed to be able to earn interest on that cash.

Occasionally, however, the spot price actually exceeds the futures price. This is known as backwardation, or an inverted market.

A country's financial position, with other countries of the world, which is made up of its current account and capital account (or capital movement) over a given period of time.

• The current account covers the balance of imports and exports.
• The capital account covers the difference between the capital which the country has invested in other countries, and the capital invested by other countries in it.

The difference between a country's exports and imports over a given period of time.

Exports and imports come in two kinds:

• Visible: products and goods
• Invisible: intangible services

The UK's invisible earnings from financial services are an important part of its international trade and go some way to making up for deficits on the visible side.

One of the main components of a company's Report and Accounts, the balance sheet provides a snapshot of everything the company owes and owns at the end of the financial year in question. On a specific date it lists:

• tangible assets
• intangible assets
• stock
• debtors
• cash

• bank creditors
• trade creditors
• share capital
• reserves

Where the profit and loss account tells you how the company has performed in the previous year, the balance sheet reveals things about its fundamental health, like whether it can pay its debts and how good its cash management is. A 'strong' balance sheet is one where liabilities (including borrowings) are considerably outweighed by assets (including cash).

Significance: if the company is having problems, the balance sheet (together with the cash flow statement) will tell you whether it can stand the strain.

The central bank of the United Kingdom, similar to the Federal reserve in the United States and the Bundesbank in Germany. Its main functions are:

• to ensure the stability and promote the efficiency and competitiveness of the financial system
• to set the official interest rate in order to achieve the government's inflation target
• to manages the government's foreign currency borrowing programme
• to act as banker to the banks - taking deposits from commercial banks and controlling the supply of money to keep the financial system stable. If necessary it will act as the lender of last resort to banks facing liquidity problems
• to support the government's exchange rate policy by intervening in the currency markets (i.e. buying and selling sterling - remember its fight with George Soros?)
• to control the design, production and issue of banknotes in England and Wales

The Bank is sometimes known as 'The Old Lady of Threadneedle Street'.

A situation where an individual is incapable of settling his/her debts and has been served a bankruptcy order by a court.

The petition can either be filed by the individual concerned, or by his/her creditors. An inquiry into the debtor's affairs is made by the Official Receiver and the debtor's assets are realised and distributed among creditors.

Personal pension assets are not included under the bankrupt's distributable assets for petitions made after May 29, 2000, unless the bankrupt has deliberately put assets into a personal pension specifically to avoid paying creditors. Money in occupational pensions schemes is also excluded.

The equivalent process for companies is 'liquidation'.

Bar charts have a wide variety of applications and in the financial markets are used by technical analysts to plot share price histories of companies.

The chart is similar to a line chart in having time along the X-axis and price along the Y-axis. But instead of a single point being put on the chart for each time period (say each day) a bar is drawn. The top of the bar is drawn at the highest price reached by the instrument during the day and the bottom of the bar is at the lowest price.

A variation on the simple bar chart is made when opening and closing prices are available. As well as the main bar the opening price is represented by a tick on the left side of the bar and the closing price by a tick on the right side of the bar.

A term used on the London Stock Exchange to describe a share purchase or sale. The term does not imply that the transaction was a 'special price' in the normal sense of the word.

Note that the LSE collates its information on bargains from brokers' contract notes which means that it reports a single transaction as two bargains (one buy and one sell). The significance of this is that other exchanges often report a transaction as a single bargain, so if you were ever comparing the number of bargains of exchanges, the LSE figures would need to be divided by two.

The lowest rate at which a bank will charge interest.

Banks usually charge at a stipulated figure 'above base rate', and the figure will depend on all sorts of circumstances to do with the loan and the borrower.

If the base rate rises, then usually the rate of interest charged on the loan will rise as well to preserve the differential. If it falls, so will the rate on the loan. Thus, a loan at '4% above base rate' will be 10% if the base rate is 6%, and will rise to 11% of the base rate rises to 7%.

The main rate of income tax in the UK, which for the year 2006-2007 is 22%. The rate is applied to each individual's Taxable Income which is calculated as:

Income - Reliefs - Allowances

The basic rate is only applied to the income between £2,151 and £33,300, as the following table illustrates.

• £1-£2,150: tax rate is 10% (starting rate)
• £2,151-£33,300: tax rate is 22% (basic rate)
• Over £33,300: tax rate is 40% (higher rate)

A term used in conjunction with policies such as low cost endowment assurance and low start endowment assurance.

These sorts of policies operate on a 'with profits' basis and often in conjunction with repayment of a loan or mortgage. If the policyholder dies during the term, a guaranteed death benefit repays the loan.

However, to guarantee to pay the entire loan at maturity would incur very high premiums. Accordingly, a policy with lower premiums guarantees to repay only a proportion of the loan amount at maturity (the basic sum assured). The expectancy then is that the balance will be repaid out of reversionary and (possibly) terminal bonuses.

A contract or other instrument for the purchase or sale of a group of shares or currencies, all of which are traded together.

Sometimes used to refer to a UK share trade using every share in the FTSE 100.

An investor who believes share prices are going to fall. He therefore sells shares, sometimes in anticipation of buying them back at a lower price.

The antonym is a bull - someone who believes prices are going to rise.

A market in which sellers outnumber buyers and where the trend of share prices is consequently a falling one.

The UK's longest running bear market lasted from 1972-1974. From a height of 530 points in 1972 the FT 30 Index fell consistently for more than two years, only reversing its downward trend at the start of 1975. It took almost five years - until the middle of 1977 - before it regained its mid-1972 level.

Recent bear markets in the UK have not lasted so long. After Black Monday in October 1987, the FTSE 100 took until July 1989 to regain its pre-crash high of 2,250 points.

The practice of selling shares on one day and buying them back on the next. The purpose for UK taxpayers was to crystallise a gain (or loss) in a share which could then be:

• offset against gains on other shares in the same tax year or
• used against an annual capital gains tax allowance (£8,500 of tax-free gains in 2005-2006, rising to £8,800 of tax-free gains in 2006-2007)

The anti-avoidance provisions of the 1998 Budget effectively ended the practice of bed and breakfasting by making it impossible to get the tax advantage. However, as of 22nd March 2006, this rule may be disapplied if the person is a non-resident of the UK.

1. A person who benefits from a trust set up on his/her behalf
2. Anyone who benefits from the proceeds of a will
3. A person who benefits from the proceeds of a life insurance policy

In short, anyone who stands to benefit from a contractual or fiduciary relationship.

http://www.jobcentreplus.gov.uk

The Stock Exchange rule that requires brokers to carry out a deal on behalf of a client at the best price available in the market.

This begs the question, of course, of how long brokers should wait before executing the deal. If they think the market is falling, should they hang on a bit? Brokers have some discretion but generally speaking they execute deals immediately (as much for their own protection as anything else). 'Timely execution' means carrying out the deal within 20 minutes of receiving the client's instruction.

The difference between the selling price and the purchase price for investments.

When you ask a broker what price the shares of a company are trading at in the market, he will quote two prices: the bid price is the price at which you can sell your shares, and the offer price is the price at which you can buy them. The first is always lower than the second, and the difference between them is the spread.

Market makers, who act like wholesalers in the stock market, make their profit from the spread - buying shares at the bid price and selling them at the offer price

The price at which a market maker will buy a security - which could be shares, warrants or, in the case of unit trusts, the price at which units will be bought back from their holders.

Needless to say, a market maker's bid price is always lower than his 'offer price' which is the price at which he will sell you the security. The difference between the two is known as the 'spread'.

Bid prices for shares are quoted on the Stock Exchange's SEAQ system, and displayed live on brokers' computer screens. The prices are only 'firm' for quantities within the 'normal market size' of a stock. So if you try to sell a large quantity of shares in a small AIM stock, you may find that you cannot get the bid price from the market maker because the normal market size quoted for that stock is below the quantity which you want to sell.

A reference to the major operational changes on the London Stock Exchange which took place on 27th October 1986. These included:

• the introduction of market makers to combine the functions of stockbrokers and stockjobbers and the ending of fixed commissions
• the introduction of the Stock Exchange Automated Quotation system (SEAQ) which replaced the trading floor of the Stock Exchange with a screen-based quotation system used by brokers
• the abolition of the restrictions on ownership of UK stockbrokers

The Chancellor of the Exchequer's least favourite part of the economy - also known as the cash economy.

• at least 75 times the Normal Market Size (NMS) for a security with an NMS of 2,000 shares

or

• above 50 times the NMS for a security with an NMS of 1,000 shares. i.e. a very large transaction.

A company on the London Stock Exchange with a large market capitalisation, stable earnings, consistent dividend record, and reputation as a reliable investment.

There are no formal rules for joining the ranks of blue chips, and not necessarily any agreement about which companies belong to the club, but the companies which make up the FTSE 100 index would commonly be regarded as blue chips. The term is believed to come from the gambling chip used in casinos.

The generic name for a tradable loan security issued by governments and companies as a means of raising capital.

The bond guarantees its holder:

• repayment of capital at a future specified date (the maturity date)
• a fixed rate of interest (also known as the coupon)

Government bonds are known as gilts or Treasury Stock.

Bonds offer certainty of income, but may fail to keep pace with inflation.

As far as the capital is concerned, you only know exactly how much your bond is worth if you plan to hold it to maturity (when you will be paid back the face value). But in the time between issue and maturity, a bond's value can be as volatile as a share, and if you plan to sell before maturity you run the risk of capital erosion. In general:

• Bond prices fall when bank interest rates go up (because the interest rate rise attracts money out of bonds into cash)
• Fear of rising inflation will cause bond prices to fall, because investors worry that bonds will not bring enough income to keep pace with inflation
• The German and American bond markets have an effect on UK bond prices, because they are competing for the same institutional capital.

The difference between a bond's face value and the lower market price.

If the market price is higher than the face value, the difference is known as the bond premium.

When interest rates rise, it is usual for bond prices to fall and when interest rates fall it is usual for bond prices to increase.

Yield calculations on bonds aim to show the return on a gilt or bond as a percentage of either its nominal value or its current price. There are three types of yield calculation that are commonly used:

1. Nominal Yield
   This is calculated by dividing the annual income on the bond by its nomina or 'par' value. So the nominal yield on a £100 bond which pays 5% interest per year is 5/100 x 100 = 5%.
2. Current or 'Running Yield'
   This is calculated by dividing the annual income on the bond by its current market price. So if the market price of the £100 bond dropped to £95, the current yield on the bond at that time would be 5/95 x 100 = 5.36%. Note that as the market price of a bond drops, its yield goes up.

3. Redemption Yield'
   The Redemption Yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures. The income element is the same 'current yield' calculation performed above. The gain/loss element is calculated by taking the difference between the current market price and the nominal value of the bond (e.g. in our example 100 - 95 = 5), dividing it by the number of years til maturity (assume 5 years for simplicity, so 5/5 = 1) and then dividing that figure by the current price of the bond (1/95 x 100 = 1.05%) The yield to redemption is the sum of the current yield (5.36%) and the capital yield (1.05%) = 6.41%.

Corporate and government bonds are generally considered a safe form of investment compared to shares, in the sense that you are 'guaranteed' to get repayment of the principal and interest payments. But the value of the 'guarantee' depends substantially on who has issued the bond - a financially healthy issuer, or one that is struggling to meet its borrowing obligations.

Credit rating agencies like Moody's and Standard & Poor's (S&P) and Fitch IBCA provide a service to the investment community by grading bonds according to how likely it is that the issuer will default either on interest or capital payments.

• For S&P the ratings vary from AAA (the most secure) to D which means the issuer is already in default.
• For Moody's the ratings go from Aaa to D.

Only bonds with a rating of BBB or better are considered 'investment grade' - that is, secure enough for institutions to invest in. Anything below that grade is 'non-investment grade' or 'junk'.

The ratings which S&P and Moody's give a bond are continually checked and revised in the light of new research done by those firms. When a bond is downgraded it is a serious event for the issuer because it makes it harder (or more expensive) to raise new borrowings, but it is also bad news for holders of the bonds, because the market invariably marks down the value of the bond.

Yield calculations on bonds aim to show the return on a gilt or bond as a percentage of either its nominal value or its current price. There are three types of yield calculation that are commonly used:

1. Nominal Yield (also known as 'flat yield')
   This is calculated by dividing the annual income on the bond by its nomina or 'par' value. So the nominal yield on a £100 bond which pays 5% interest per year is 5/100 x 100 = 5%.
2. Current or 'Running Yield'
   This is calculated by dividing the annual income on the bond by its current market price. So if the market price of the £100 bond dropped to £95, the current yield on the bond at that time would be 5/95 x 100 = 5.36%. Note that as the market price of a bond drops, its yield goes up.

3. Redemption Yield'
   The Redemption Yield shows what the total return on a bond would be if held to its maturity date. It reflects not only the interest payments a bondholder will receive, but also the gain/loss he will make when it matures. The income element is the same 'current yield' calculation performed above. The gain/loss element is calculated by taking the difference between the current market price and the nominal value of the bond (e.g. in our example 100 - 95 = 5), dividing it by the number of years til maturity (assume 5 years for simplicity, so 5/5 = 1) and then dividing that figure by the current price of the bond (1/95 x 100 = 1.05%) The yield to redemption is the sum of the current yield (5.36%) and the capital yield (1.05%) = 6.41%.

Money paid by life insurance companies to policyholders based on endowment policies and with-profit bonds.

The amount of the bonus is calculated by actuaries and the criteria they use are:

• how well the insurance company's investments have done
• how well they think they are going to do in the future
• the insurer's overall financial strength

Reversionary bonuses are normally paid annually and could typically be in the region of 2% to 5%. Terminal bonuses (payable at maturity or prior death) tend to vary much more but could vary from say 10% to 100% at maturity depending on the term of the policy, for example ten and twenty five year terms.

The bonus is declared each year and at the end of the policy's life. As a policyholder you have no way of knowing what the bonus is going to be until it is declared, and no real way of knowing how it has been calculated and whether it is fair, so the whole process can be a bit frustrating.

When a company is about to have a new issue of shares (possibly an IPO), its advisers may well do the rounds of the City fund managers to establish how many shares they are interested in taking and at what price. This is known as bookbuilding, and its purpose is to help the company find an offer price that ensures the new issue is successful. The bookbuilding process can begin several months before the company floats:

• Two months to flotation: the company's investment banks decide which institutional investors to target.
• One month to flotation: roadshows begin. Management and banking advisers meet potential investors to present their case and to get a feel for the level of interest.
• Two weeks to go: bookbuilding starts in earnest. Advisers canvas interested investors to establish how many shares they want and how much they are prepared to pay. If demand is weak, the bankers may cut the price range of the issue.
• One week to go: investors confirm to the banks the exact number of shares that they want.
• One day to go: the company and its bankers make a final decision on price, and allocate shares.

The total value of all a company's separate operations if sold separately.

The terms is used most often when contrasted with the market capitalisation of the company as a whole, and the implication is that if the sum of the parts is greater than the whole, the company should be split up to release the extra value to shareholders.

The total value of all a company's separate operations if sold separately.

The terms is used most often when contrasted with the market capitalisation of the company as a whole, and the implication is that if the sum of the parts is greater than the whole, the company should be split up to release the extra value to shareholders.

A term used by the London Stock Exchange to denote that a transaction was between two member firms where neither firm is registered as a market maker in the security in question and neither is a designated fund manager.

Brokers may also apply this indicator when buying or selling domestic equity market securities through a broker, which is not a member firm.

Commission or fees charged by a broker for conducting transactions for its clients.

Brokerage fees can be structured in lots of different ways. Some brokers charge a percentage of the contract value, others charge a flat fee whatever the value of the contract, and others have a mixture of these two methods.

'Mutual' non-profit-making institutions set up to lend money to their members for house purchase. Building societies are 'mutual;' because they are owned by their members, and their members are entitled to their profits and benefits.

The Building Societies Act 1986 enabled building societies to provide a much wider range of services to their members, including unsecured personal loans, insurance policies, house-selling, and pensions. This was designed to put them on a level playing field with banks.

In recent years some of the UK's largest building societies have demutualised and effectively turned themselves into profit-making banks, with their profits being distributed to shareholders rather than their customers.

Building societies are regulated by the Financial Services Authority (FSA).

A facility on a website which allows users to write messages on a particular subject and 'post' them on the site. Other users read the message and post a reply which in turn is visible by anyone else.

The idea is to generate a discussion on a particular subject through the thread of messages which is enlightening and helpful.

The quality of messages posted on bulletin boards varies widely within each site and from site to site. Some messages will be interesting and informative, others will be puerile and scatological.

Financial bulletin boards come with a health warning because of the 'pump and dump' messages - that is, messages which promote the virtues of a stock which the poster just happens to hold in his portfolio. As messages can be posted using a pseudonym, the temptation for some people to do this is irresistible. All in all, tips on bulletin boards are best ignored.

Some bulletin boards are monitored by an editor, to ensure a quality threshold.

The rate at which a company is spending its cash reserves.

The term is associated strongly with dotcom companies, many of which have been launched with venture capital money and in some cases have raised more money by coming to market via a new issue, but few of which have revenues anywhere close to their monthly outgoings.

Boo.com, the online fashion retailer that went spectacularly bust in mid-2000 extended new reach to the burn rate measurement. In 16 months it went through £91 million put up by investors.

The purchase by a listed company of its own shares either in the open market or by tender offers. Companies do it for five reasons:

• to increase the share price
• to rationalise the capital structure - the company believes it can sustain a higher debt-equity ratio
• to substitute the dividend payouts with share repurchases (because capital gains may be taxed at lower rate than dividend income)
• to prevent the dilution of earnings caused, for example, by the issue of new shares to meet the exercise of stock option grants
• to deploy excess cash flow and return it to shareholders