Scrip issues are born out of an accounting quirk. When a company has retained profits, these appear on its balance sheet as 'Profit and Loss Account Reserves'. If the company has been trading profitably for some time, the reserves can far outweigh the Ordinary Share Capital of the company as a proportion of total Shareholders' Funds.

For instance, a company might have Shareholders' Funds as follows:

• Ordinary share capital (10p par value x 500 million shares in issue) = £50 million
• Profit and Loss Account reserves = £250 million

Suppose that this company has a share price of 900p which is quite 'heavy' for a UK company. The directors of the company might decide that the shares would be more marketable if the share price was lower. One way to achieve this is to have a scrip issue, the basis of which is that part of the P&L Reserves are converted into new share capital.

In the above example, the company might convert £50 million of Reserves into new shares.

• It creates 500 million new shares at 10p par value
• It uses £50 million from the Reserve account to make them 'fully paid'.
• It distributes the new shares to existing shareholders pro rata to their existing holding
• In this case, there were 500 million shares before the scrip and 500 million new shares have been created, so shareholders would get one new share for every share they already hold.

After the scrip issue shareholders funds would look like this:

• Ordinary share capital (10p par value x 1 billion shares in issue) = £100 million
• Profit and Loss Account reserves = £200 million

Shareholders should not pop the champagne corks though. True, individually they have twice as many shares as they had before. But total shareholders funds haven't changed. They are still £300 million. All that has happened is that £50 million has been moved from one row in the balance sheet to another.

The price of the shares will be adjusted to reflect the fact that there are twice as many in issue. Instead of being 900p it will halve to 450p.

The other point to note is that if the company pays the same dividend per share after a scrip issue as it did the previous year, it will in fact be paying out a lot more. So the dividend per share will usually drop after a scrip issue.

The trading of shares amongst investors which does not involve the company itself. When people talk about trading on the stock market, they are generally referring to the secondary market, which involves brokers, market makers and an exchange providing a technical platform for trades to take place. The companies and their shares are the subject of the trading, but they are not directly involved as participants.

The primary market refers to the situation in which a company sells newly issued shares to investors, possibly in an IPO, or places them with institutions.

A group of listed companies operating in the same industry. In order to help investors compare the performance of similar companies, the share prices and financial ratios of these companies are reported together in newspapers.

Example sectors:

• Entertainment and Hotels
• General Retailers
• Electrical and Electronic equipment
• Beverages

In deciding whether a share price is good value or bad value, it helps to look at companies in the same sector. If Company A is on a P/E of 15 and Company B is on a P/E of 26, and they are both in toy retailing, you would certainly want to find out why before buying either. You would also want to compare the P/Es to the average P/E of the whole sector.

If you plan to run a diversified portfolio in order to minimise risk, one way to do this is to make sure that you have no more than 2 shares in each sector. So a portfolio of 20 shares might span 10 sectors. The logic is that different sectors react to economic conditions in different ways, so a portfolio with shares across a number of different sectors maybe at less risk than one heavily concentrated in one sector.

In February 2000 FTSE International launched a set of global sector indices, reflecting the shift by fund managers away from country-driven portfolio management towards sector-driven portfolio management. The indices cover:

• autos
• banks
• basic industries
• energy
• financials
• general industries
• media
• pharmaceutical
• technology
• telecommunications
• utilities

For each sector the indices include the most widely traded blue chip stocks, and their purpose is to give investors benchmarks against which to measure performance, and for which to create retail products such as exchange-traded funds.

A Self Regulating Organisation (SRO) with responsibility for the regulation of firms engaged in the securities and futures sectors of the financial services market.

Companies regulated by the SFA are those engaged in dealing or advising in securities or derivatives including shares, bonds, traded options, corporate finance and futures. A list of authorised firms is published from time to time by the SFA enabling clients to confirm authenticity.

All regulatory functions of the SFA have been taken over by the Financial Services Authority as of December 2001.

1. A financial asset such as a share or bond.
2. An asset which is offered by a borrower to a lender to safeguard a loan.

From April 1996 all taxpayers in the UK were obliged by law to maintain records of their income of all types and capital gains so as to enable annual tax returns to be completed. This is known as Self Assessment. In April each year the Inland Revenue sends out almost nine million self assessment forms to taxpayers.

You need to complete a form if you are self employed, a business partner, a company director, or your tax affairs are ' complicated' by any of the following:

• you have capital gains of over £8,800 in the 2006-2007 tax year
• you pay income tax at 40%
• you received income from more than one source
• you received a lump sum or compensation payment from your employer
• you lived abroad for all or part of the tax year
• you want to claim complicated pension contribution reliefs or tax relief
• you are involved in one of the more sophisticated investments such as enterprise investment schemes or venture capital trusts

If you are unsure of your position or have any problems with the forms, your local tax office will help. Alternatively you can phone the Inland Revenue's helpline on 0845 9000 444.

The key dates for self assessment are:

• April 2006: Inland Revenue issues self assessment tax returns for the year ended April 5 2006 issued.
• July 31 2006: Pay second instalment for year ended April 5 2005.
• September 30 2006: File your return for the year ended April 5 2006 if you want the Revenue to calculate your tax liability.
• October 5 2006: Ask the Revenue for a tax return if you owe tax for the year ended April 5 2006 but have not received a form.
• January 31 2007: Final date to file your 2005-2006 tax return. This must include your own or your accountant's assessment. Pay any outstanding tax assessed for 2004-2005. Pay first instalment for 2005-2006.

Penalties apply if you miss any of these payment deadlines!

A type of personal pension which gives the policy holder more choice about the investments held.

With a traditional personal pension, your choice is limited to funds run by the insurance company. With a SIPP you can invest in the shares of any company listed on a stock exchange recognised by the Inland Revenue, which is appealing to people who are interested in the stock market and think they have the knowledge and skill to get superior performance themselves.

SIPPs incur higher charges than normal personal pensions:

• the IFA who sets up the SIPP will normally receive a set-up fee of £1,000
• whoever administers the plan will charge a fixed annual fee - typically £400-£500
• every time you trade shares there will be a transaction fee

As a rule of thumb, the total cost or running a SIPP is 2 per cent per year.

This really makes SIPPs only suitable for those with at least £50,000 to invest, and preferably nearer £100,000. Any less, and the charges will be disproportionately high. As a comparison, the charges on a stakeholder pension are capped at 1%.

Settlement is what happens after your broker has bought or sold shares on your behalf. There are three aspects to it:

1. Transfer of ownership

   If you have a nominee account with your broker, the shares you buy or sell are registered in the broker's name, and responsibility for sorting out changes of ownership rests with the broker and the registrar.

   If you have a certificated account, and you have sold shares, you have to send the share certificate(s) to the broker so that settlement can be effected. If you have bought shares, you will receive a share certificate from the company's registrar either direct or vis your broker.

2. Payment when you buy shares

   Share purchases have to be paid for. If your broker works on a 'cleared funds' basis, you will have to have enough money in your broker account to pay for the shares and transaction costs before you buy them. If you haven't got the money available, the broker's system will spot the deficit, and will not process the order.

   For offline trading, your ability to buy 'on credit' will depend on the kind of relationship you have with your broker. If you have £300 in your account and want to buy £12,000 of shares, eyebrows will be raised and you may be asked to deposit money with the broker before the order is processed.

   Once a broker has bought shares on your behalf, you have an obligation to supply him with funds prior to the settlement date. Most brokers will accept cheques, direct bank transfers, and debit cards. It is important to check how your broker accepts payment beforehand.

3. Receipt of proceeds when you sell shares

   When you sell shares, the broker will credit funds to your client account after deducting commission. It is then up to you to decide what to do with that money. You can ask your broker to send the money to your normal bank account, or you can reinvest it in the market, or you can leave it in the client account where it will earn interest.

   The timing of payment will depend on the settlement time of your transaction. The industry standard used to be T+5 but this changed to T+3 in February 2001. The '5' and '3' simply indicate the number of working days after the transaction date by which settlement must be complete.

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:

1. to increase the share price - according to the normal laws of supply and demand, the entry into the market of a buyer, in this case the company itself, has a tendency to push up prices
2. to rationalise the capital structure - the company believes it can sustain a higher debt-equity ratio
3. to substitute dividend payouts with share repurchases, because capital gains may be taxed at lower rate than dividend income
4. to prevent the dilution of earnings caused, for example, by the issue of new shares to meet the exercise of stock option grants
5. to deploy excess cash flow and return it to shareholders

Sometimes investment markets look with favour on companies that indulge in buybacks. Sometimes it is seen as a sign that the company's directors have run out of ideas. It all depends on the circumstances of the company concerned.

An incentive given to company directors and employees to promote loyalty and commitment.

The employee is offered an option to buy shares in the company at a fixed price, at or below the then market price. The option specifies the time during which the employee can exercise the right, and often this will be a period of years. If the company's share price rises in that period, the employee can exercise the option, acquire the shares at the option price, and immediately sell them for a capital gain. If the company's shares do not rise, the employee may take the view that the option is not worth exercising. The option mechanism thus gives the employee discretion.

Tax liabilities may be reduced on gains where schemes are approved by the Inland Revenue.

Many companies give their shareholders a discounted price on the company's goods and services. Ferry companies, for instance, offer reduced cross-Channel prices, and restaurant chains reduced prices on meals. These discounts are known as share perks.

Conventional wisdom is that you should not take perks into account when buying shares, because the value of the perks is seldom significant, and most companies require you to hold a minimum number of shares to qualify. On the other hand, if buying just one share allows you to take advantage of the perks, then why not?

Note that if your shares are registered in the name of a nominee (e.g. a broker account) you will not normally be entitled to share perks.

The expressions 'short term', 'medium term' and 'long term' mean different things in different contexts and, indeed, they mean different things to different people. In general, the stock market uses the terms as follows:

• short term - anything from 1 week to 2 years
• medium term - anything from 2 years to 5 years
• long term - anything from 5 years to 30 years!

1. Redeemable gilts or bonds with a redemption date within five years
2. Securities, commodities or financial instruments held in a short position.

One of a trio of terms commonly used to rank companies according to their size, the others being 'mid cap' and 'large cap'. 'Cap' is short for 'market capitalisation' which is calculated by multiplying the number of shares which a company has in issue by the current market price. So a company with 500 million shares in issue and a share price of 50p has a market cap of £250 million.

This would probably make it a small cap, but there are no fixed rules about where the thresholds lie. 'Small cap', for instance, can refer to companies with market capitalisations of just £50 million or as much as £500 million.

Of course, market cap is a moveable feast. If an AIM company is tipped in a Sunday newspapers, and its shares rise 30%, its market cap might leap from one side of the threshold figure to the other. Overnight it could turn from a small cap to a mid cap, even though its sales and earnings are the same.

Some commentators argue that market cap isn't a very good measure of whether a company is big or small. A hot stock company might have a £1,000m market cap, but if it has sales of £500,000 and makes a big loss, can it really be described as a large company?

Perhaps a better way of identifying a small cap is to leapfrog the whole question of market cap, and concentrate instead on the features that attach to this sort of company. They are:

• lack of research
• wide bid-offer spreads
• poor liquidity

That's a pretty negative way of looking at small caps, but it has the advantage of being realistic.

An investment trust with a limited life, in which the equity capital is divided into two classes - income shares and capital shares.

• Holders of income shares receive the majority of the trust's income throughout its life and a specified capital amount on liquidation
• Holders of capital shares receive virtually no income during the trust's life but on liquidation receive all the assets after repayment of capital to holders of income shares. In other words they get the benefit of most of the capital growth.

The raison d'etre of split capital investment trusts is that a single trust can accommodate the requirements of two types of investor in one fund, and provide better performance for both than they would be able to achieve if they invested in separate funds.

It works like this:

• Ian Illingworth has £10,000 to invest and wants to get maximum income from it. He buys 'Income Shares' in the Split.
• Colin Casey has £10,000 to invest and wants to get maximum capital growth from it. He buys 'Capital Growth Shares' in the Split.
• The Split invests their pooled money and during the lifetime of the trust pays out all the income to Ian. At the end of the Split's life, when the capital value of the fund has risen to, say, £60,000, it pays Ian back his £10,000, and pays £50,000 to Colin.

How have Ian and Colin benefited?

• Ian has benefited because for 7 years he has received the income on £20,000 even though he only invested £10,000.
• Colin has benefited because he has received the capital growth on £20,000 even though he only invested £10,000 and, being a higher-rate taxpayer, it has suited him very well not to have received any income on his £10,000 in that time.

Basically, it is as if Ian said to Colin 'You have the capital growth on my £10,000' and Colin said to Ian 'Fine, I'll give you the income on my £10,000 in return.'

There are many other classes of share within splits, and the thinking behind them gets progressively more complex. It is also important to note that Splits are geared investments (they can borrow money) which, depending on performance, can either be beneficial or detrimental to investors. If you are interested in what they have to offer it is essential to get specialist advice.

A form of investing which is more akin to betting, and can be applied either to sporting events or to the financial markets. At its core is the maxim 'the more right you are, the more you win'.

In the simplest terms, a spread betting firm quotes two figures for, say, the position of the FTSE 100 index at close of trading on a certain day. Its 'spread' is 6005 - 6011.

• If you think that the FTSE is going to end up higher on the day than 6011, you might buy (go high) at 6011 and choose a stake per point of £5.00 (the 'tick value')
• If you think that the FTSE is going to end up lower on the day than 6005, you might sell (go low) at 6005 and choose a stake per point of £5.00.

If the FTSE actually closes at 6034, and you were a buyer at 6011 you were right by a margin of 23 points, and therefore win £115 which is 23 times your stake. If, however, you were a seller at 6005, you were wrong by 29 points and would lose £145.

Spread betting is risky, therefore, because the movement of the underlying index (or share, or football score . . ) can mean you lose a high multiple of your stake. What makes it exciting is that the spreads offered by firms like IG Index, Financial Spreads, City Index and Cantor Index move all the time during the course of the trading day (or during a football match) so:

• If you are wrong half way through the day you may be able to recover your position by placing another bet
• If you are right halfway through the day you can lock in your gains by placing another hedge bet.

The other feature of spread betting is that there are no brokerage costs, commissions or charges to pay, and gains are tax free. But it is risky!

A person who applies for shares in a new issue with the intention of selling them soon after trading begins. The stag hopes that the price will rise high enough in early trading for him to make a quick profit.

Some new issues are structured in a way to frustrate stags. For instance, the flotation of Carphone Warehouse on the London Stock Exchange in 2000 included a special provision favouring shareholders who kept their shares for three months or more.

On offer from April 2001, stakeholder pensions aim to provide a low-cost, transparent and flexible way for people to save for their retirement.

• £3,600, including basic rate tax relief, can be invested in the stakeholder pension each year
• Basic rate tax - worth 22% - will be claimed on your behalf by the pension company running the pension. So the maximum you actually pay is £2,808 per year.

Money invested in stakeholder pensions will be invested in the stock market. On retirement a quarter of the accumulated capital can be taken out as a tax-free cash sum, and the rest has to be used to buy an annuity which pays the retirement pension.

Employers with five or more employees who do not offer any kind of pension scheme will have to provide access to a stakeholder scheme.

Currently, stamp duty on share purchases applies at the rate of 0.5%. Note that it only applies to purchases and not to sales. Private investor groups and brokers are lobbying for the abolition of stamp duty. They note that there is no stamp duty in the USA which makes it cheaper to trade there and that, in an international market of online trading, UK brokers could lose out to American-based brokers.

Stamp duty on property purchases applies on a sliding scale according to the purchase price. For property over £125,000 it is 1%, over £250,000 it is 3%, and over £500,000 it is 4%.

In November 2001, the government raised the first band to £150,000 for 2,000 deprived areas in the UK in a bid to encourage investment.

The star system is to provide investors with a visible means of quickly finding The Share Centre’s most favoured stock within a sector, when there is more than one ‘buy’ recommendation in any sector. The selection process will be undertaken by our Advice Team and their strategy for allocating the number of stars will be based on the following factors:

• Track record of company
• Sector view
• Future outlook
• Management
• Share price performance
• Prospective P/E ratio
• Other broker research

Regular income from the state paid to retired people who have made contributions during their life. In the UK, the retirement age for men is 65 and for women is 60. The basic state pensions is currently £84.25 a week for single people and £134.75 for couples (2006-2007). This rises in line with price inflation.

To qualify individuals must have made full National Insurance contributions. Men must have worked for 44 years and women for 39 years, or have received a special waiver such as invalid care allowance.

1. The American terms for shares in a company. The two main types of stock are common stock and preferred stock. Owners of common stock are entitled to vote at shareholder meetings and to receive a dividend if payable. Owners of preferred stock receive an annual dividend before common stockholders and priority in the event of the liquidation of a company. However they do not, as a rule, have voting rights. The equivalent terms in the UK are ordinary shares and preference shares.
2. In the UK, stock is traditionally used to mean fixed interest securities like gilts (e.g. 'Treasury Stock'). There is normally a redemption date when the par value is repaid to whoever is the holder at the time. They are traded on stock exchanges where their prices fluctuate according to demand, influencing factors including interest rates and time to redemption.
3. In accounting terms, stock refers to inventory - that is, goods which a company has processed but not yet sold.

The computerised system at the London Stock Exchange which continuously updates prices and trade reports for UK securities (shares, gilts etc). SEAQ lists the market makers' bid and offer prices, together with the Normal Market Size at which those prices will be honoured. Shares traded using SEAQ are said to be traded on the 'quote book'.

The very largest companies quoted on the London Stock Exchange are traded on the Stock Exchange Electronic Trading Service (SETS) which automatically matches buyers and sellers, and which is known as the 'order book'. SEAQ is used for those stocks which are too small to be traded on SETS.

For instance, buying one stock future contract of Vodafone at 230p represents 1,000 shares. If the shares are at 231p on the settlement date, the owner of the stock future would have made a profit of £10 (1,000 x 1p).

The main feature of stock futures is 'leverage'. In the above example, it would cost £2,300 to buy 1,000 Vodafone shares, excluding commission and stamp duty. To get the same exposure, you'd only have to buy one stock future contract which might cost around £230.

As an investor, you will need to use a broker for most share dealing, and you should choose one that is a member of the London Stock Exchange and regulated by the Financial Services Authority (FSA). There are three types of service on offer:

1. Discretionary

• The broker has general discretion as to how he manages your portfolio.
• You can narrow the discretion by giving the broker guidelines. For instance, you can ask him to pick shares that provide high income rather than capital growth, or to investing only in 'ethical' companies.
• For his services you pay a commission on dealing (usually around 1.65%) and possibly a quarterly or annual management charge based on the value of your portfolio. If you are paying a management charge, your dealing commission should be lower (around 1%).
• Beware of the discretionary broker who churns your portfolio. Churning means frequent dealing which creates commissions for the broker but may not be in your interests.

2. Advisory

• The broker will contact you to suggest changes in the composition of your portfolio, but he does not have the authority to trade on a completely discretionary basis.
• Charging structures will vary from broker to broker. Some charge more for an advisory service than for a discretionary service, because there is more work in having to contact you before every deal.
• Under FSA rules you will have to fill out a form describing your financial situation and your objectives, so that the broker can provide a suitable service.

3. Execution only

• The broker's primary function is to execute the buy/sell instructions which you give him. He does not give advice either proactively or at your request.
• Varying degrees of administrative help will be provided - e.g. summaries of your year's trading for your tax return; e.g. factual education.
• Execution-only brokers make their money from dealing commissions, and the market is very competitive. Typically, the percentage charged on a purchase or sale depends on the value of the transaction, with the percentage dropping as the value rises. There will usually be a minimum charge.

Note that you don't actually need a broker in all circumstances:

• When a company has a new issue, you can subscribe for shares directly on the basis of its printed or online prospectus.
• You can invest in unit trusts by filling in one of their advertisements in the newspapers, or getting in touch on the internet.
• You can even deal through a bank, accountant or solicitor.

But if you want to deal at all frequently it makes sense to use a broker.

A financial ratio which shows how fast a company sells its goods, calculated as: sales divided by year-end stocks. If, for example, a company has sales of £60m and a year-end stock figure of £3.2m its stockturn multiple is 18.85.

Stockturn is particularly relevant for manufacturing or retailing businesses. The higher the figure, the more efficient the company is in processing stock. The typical multiple for a manufacturer is 5 to 6. Retailers that are doing well and run efficiently will have a much higher multiple because they should be able to put the burden of carrying stock on their suppliers.

Another way of looking at stock is to calculate the number of days on average that a company keeps its stock. This is expressed as the year-end stock figure divided by the sales, and multiplied by 365. Using the figures above, £3.2m divided by £60m, then multiplied by 365 = 19.46 days.

• The stop loss could be specified in percentage terms: e.g. when the price falls to 90% of the price you paid, then you sell. So if you bought at 100p and they fell to 89p, the stop loss is triggered.
• Or it could be set to track the share price. e.g. when the share price falls 10% below its highest value, you sell. So if the shares were to increase from your 100p purchase price to 125p and subsequently fall by 10% to 112.5p the stop loss would be triggered.

Some of the better investor software programs now incorporate stop loss 'alerts'. You specify the level of stop loss for each share or your whole portfolio, and the program alerts you of the stop loss level is breached.

We recommend for lower risk stocks a stop loss level of 12.5%, for medium risk 15% and for higher risk a stop loss of 20%. Stop losses are indicated on our FTSE100, Top Tip and Sharepicker buy recommendations, and are taken from the point of the recommendation being made and are not a tracking stop loss. Stop losses should be set from the point of your purchase price.

Stop loss levels explanation:

• Lower Risk: (12.5%) shares in this category will, in the main, be FTSE 100 companies and are regarded as lower risk relative to medium and smaller-sized companies.
• Medium Risk: (15%) mostly FTSE 250 firms, with some FTSE 100 judged in terms of market size and volatility.
• Higher Risk: (20%) companies within this classification will, in the main, be smaller companies, such as those which make up the FTSE SmallCap Index and which could include larger companies, the reasons which will be outlined in their respective commentaries.

The price level at which technical analysts note persistent buying of a share or commodity.

If the share price of XYZ company is plotted on a chart, and the chart shows that over the period the price always seems to bounce back whenever it falls to, say, 320p, technical analysts would see that price as a 'support level'.

The significance of the support level is that if the share price does break below it, that indicates a change of sentiment in the market towards the share, and may indicate the arrival of a new trading range. If the technical analyst is right in making this observation, he can buy or sell accordingly and make a profit.

Traditionally the exchange of one security for another to change the maturities of a bond portfolio or the quality of the issues in a stock or bond portfolio, or because investment objectives have changed.

Currency swaps involve the purchase/sale of a currency in the spot market against the simultaneous purchase/sale of the same amount of the currency in the forward market.

An interest rate swap is an arrangement in which two parties agree to exchange periodic interest payments, at agreed intervals, over an agreed period, but without any principal being paid. The most common and simplest deal involves one party paying a fixed rate of interest and the other paying a floating rate.