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ICWIM glossary

The terms and abbreviations you will meet across the eight ICWIM chapters, each explained in a sentence or two, with the chapter where it matters most.

A

Accumulation share class: A fund share class that keeps the fund's income and reinvests it, so the share price rises instead of income being paid out. Chapter 4
Acid-test ratio: A strict liquidity measure: current assets minus inventory, divided by current liabilities. Also called the quick ratio. Chapter 5
Active management: Running a fund by choosing investments with the aim of beating a benchmark, which needs research and usually costs more than a passive fund. Chapter 4
Advisory service: A service in which the adviser recommends and the client makes the final decision. Chapter 7
AER (Annual equivalent rate): The interest rate a year after allowing for compounding within the year: (1 + r ÷ m) to the power m, minus 1, where m is the number of periods. Chapter 5
Agent: A firm that arranges a trade on the client's behalf with someone else, rather than trading from its own book. Chapter 3
Alpha: The part of a portfolio's return not explained by its exposure to the market; a measure of the manager's added value. Chapter 6
AML (Anti-money laundering): The rules and controls firms use to prevent, detect and report money laundering. Chapter 2
Anchoring: A behavioural bias in which a first number or opinion keeps influencing later judgements even after new information arrives. Chapter 6
Annuity (calculation): A series of equal payments at regular intervals. Its present or future value is found with an annuity formula rather than by valuing each payment. Chapter 5
Annuity (retirement): A product that turns a lump sum into a regular income, often for life. Chapter 8
APT (Arbitrage pricing theory): A model in which expected return depends on exposure to several systematic factors, not on a single market beta. Chapter 6
Arithmetic mean: The simple average: the total divided by the number of observations. It does not give the compound return over several periods. Chapter 5
Asset allocation: How a portfolio is divided between asset classes such as cash, bonds, equities and property. It is the main driver of a portfolio's risk. Chapter 6

B

Balance of payments: A country's record of transactions with the rest of the world, split into the current account and the financial account. Chapter 5
Barbell: A bond structure with maturities concentrated at the short and long ends and little in between. Chapter 6
Bare trust: A trust in which the trustees hold the legal title as nominees and the named beneficiary owns the assets outright. Chapter 8
Base currency: The first currency in a quote. In GBP/USD 1.25, one pound (the base) costs 1.25 dollars. Chapter 3
Basel Committee: The international body that sets standards for the supervision of banks. Chapter 2
Bearer security: A security owned by whoever holds it, with no register of owners, so loss or theft is a serious problem. Chapter 3
Behavioural finance: The study of how psychological biases affect investors' decisions. Chapter 6
Benchmark: An index or measure a portfolio's performance is compared against. Chapter 6
Beneficial owner: The person who ultimately owns or controls an asset or a company, even if someone else is the legal owner. Chapter 2
Beta: A measure of how much a security tends to move with the market. A beta above 1 means it moves more than the market. Chapter 6
Bid and offer: The bid is the price a dealer will pay; the offer (or ask) is the price at which it will sell. The gap between them is the spread. Chapter 3
Bonus issue: Free new shares given to existing shareholders in proportion to their holdings. Each holder's percentage ownership does not change. Chapter 3
Bullet: A bond structure with maturities clustered around one target date, often matched to a known future liability. Chapter 6
Business cycle: The repeating pattern of expansion, peak, contraction and recovery in economic activity. Chapter 5

C

CAGR (Compound annual growth rate): The steady yearly rate that turns a starting value into an ending value: (end ÷ start) to the power of 1 ÷ years, minus 1. Chapter 6
Call option: The right, but not the obligation, to buy an asset at a set price. The buyer's loss is limited to the premium paid. Chapter 3
Capacity for loss: A client's financial ability to absorb a fall in value without serious harm to their plans. It can override their willingness to take risk. Chapter 7
Capital gains tax: Tax on the gain made when an asset is disposed of. Buying an asset does not create a gain. Chapter 7
CAPM (Capital asset pricing model): Expected return = risk-free rate + beta × (market return − risk-free rate). It rewards systematic risk only. Chapter 6
CBDC (Central bank digital currency): A digital form of central bank money, which is a liability of the issuing central bank. Chapter 3
CCP (Central counterparty): A clearing house that becomes buyer to every seller and seller to every buyer, so each side faces the CCP rather than each other. Chapter 3
CDD (Customer due diligence): Identifying and verifying a client and understanding their business and the purpose of the relationship. Chapter 2
Closed-ended fund: A fund with a fixed number of shares traded on an exchange. Its share price can sit at a discount or premium to the value of its assets. Chapter 4
Collective investment scheme: A fund that pools many investors' money into one professionally managed portfolio. Chapter 4
Compound interest: Interest earned on both the original amount and the interest already added. Future value = present value × (1 + r) to the power n. Chapter 5
Conflict of interest: A situation in which a firm's or adviser's own interests could pull against the client's. It must be avoided or managed, not only disclosed. Chapter 7
Convertible bond: A bond the holder can exchange for a set number of the issuer's shares. Chapter 3
Correlation: A measure from −1 to +1 of how two returns move together. Lower correlation gives more diversification benefit. Chapter 5
Coupon: The interest a bond pays, stated as a percentage of its nominal value. Chapter 3
Covariance: A measure of how two variables move together, in their own units. Correlation is covariance scaled to between −1 and +1. Chapter 5
CPI (Consumer price index): A measure of the change in prices paid by consumers for a basket of goods and services; the usual headline inflation figure. Chapter 5
Critical illness cover: Insurance that pays a lump sum when a specified serious illness meets the policy's definition. Chapter 8
Cumulative preference share: A preference share whose missed dividends are carried forward and must be paid before ordinary shareholders receive dividends. Chapter 3
Current account: The part of the balance of payments covering trade in goods and services and income flows. Chapter 5
Custodian: An institution that safeguards client assets and handles settlement, income collection and corporate actions. It does not decide what to invest in. Chapter 1

D

Deferred period: In income protection, the waiting time between becoming unable to work and the first benefit payment. Chapter 8
Defined benefit scheme: A pension that promises an income worked out by a formula, usually linked to salary and service. The employer carries the investment risk. Chapter 8
Defined contribution scheme: A pension whose value depends on what is paid in, investment returns and charges. The member carries the investment risk. Chapter 8
Dematerialised security: A security held only as an electronic record, with no paper certificate. Chapter 3
Derivative: A contract whose value comes from an underlying asset, rate or index. Futures, forwards, options and swaps are derivatives. Chapter 3
Discretionary management: A service in which the manager makes investment decisions within an agreed mandate without asking the client first. Chapter 7
Diversification: Spreading investments so that a fall in one has less effect on the whole. It reduces specific risk but not systematic risk. Chapter 6
Dividend growth model: Values a share as next year's dividend divided by (required return − dividend growth rate). Also called the Gordon growth model. Chapter 5
Dividend yield: Annual dividend per share divided by the share price. Chapter 5
Domicile: The country a person regards as their permanent home. It can differ from where they are resident and can affect how they are taxed. Chapter 7
Double taxation agreement: A treaty between two countries that sets which one may tax income or gains, so the same income is not fully taxed twice. Chapter 7
Duration: A measure of how sensitive a bond's price is to changes in interest rates. Longer duration means larger price moves. Chapter 3
DvP (Delivery versus payment): A settlement method in which securities are delivered only if payment is made at the same time. Chapter 3

E

EDD (Enhanced due diligence): Extra checks for higher-risk clients, such as confirming the source of funds and the source of wealth. Chapter 2
Elasticity of demand: The percentage change in quantity demanded divided by the percentage change in price. Below 1 is inelastic; above 1 is elastic. Chapter 5
ESG (Environmental, social and governance): Factors beyond the financial accounts that investors use to assess a company's risks and conduct. Chapter 6
ETC (Exchange-traded commodity): An exchange-traded product that tracks a commodity or a commodity index. Chapter 4
ETF (Exchange-traded fund): A fund, usually tracking an index, whose shares trade on a stock exchange throughout the day at market prices. Chapter 4
Execution-only: A service in which the client makes their own decisions and the firm simply carries out the trades, with no personal advice. Chapter 7

F

Family income benefit: Life insurance that pays a regular income from the death until the end of the policy term, rather than a single lump sum. Chapter 8
Family office: An organisation that coordinates advisers and services for a wealthy family. It is not itself a bank. Chapter 1
FATF (Financial Action Task Force): The international body that sets standards against money laundering and terrorist financing. Chapter 2
Financial account: The part of the balance of payments covering investment flows into and out of a country. Chapter 5
Financial intermediation: Moving money from those with savings to those who need to borrow, while changing its amount, maturity and liquidity. Chapter 1
Fiscal policy: Government decisions on spending and taxation to influence the economy. Chapter 5
Foreign tax credit: Relief that offsets tax already paid abroad against tax due at home on the same income. Chapter 7
Forward contract: An agreement to buy or sell at a fixed price on a future date, arranged directly between two parties. Chapter 3
Forward rate: An exchange rate agreed today for a deal on a future date. Interest rate parity links it to the spot rate and the two currencies' interest rates. Chapter 3
Front running: Dealing ahead of a client's order to profit from the price move the order will cause. It is market misconduct. Chapter 7
FSB (Financial Stability Board): The international body that monitors risks to the global financial system and coordinates work to keep it stable. Chapter 2
Fundamental analysis: Estimating a security's value from the business, its accounts and the economy. Chapter 5
Future value: What a sum invested today will be worth at a future date after compounding. Chapter 5
Futures contract: A standardised exchange-traded agreement to buy or sell an asset at a set price on a future date. Chapter 3

G

GDP (Gross domestic product): The value of all output produced within a country's borders over a period. Chapter 5
Geometric mean: The average that allows for compounding; it gives the true average yearly growth rate over several periods. Chapter 5
GNP (Gross national product): The value of output produced by a country's nationals and businesses, wherever in the world they are. Chapter 5

H

Hedge: A position taken to offset the risk of an existing exposure. Chapter 3
Hedge fund: A lightly constrained fund that may use leverage, short selling and derivatives, often charging a management fee and a performance fee. Chapter 4
Holding period return: (Ending value − starting value + income) ÷ starting value, over the whole period held. Chapter 6

I

Income protection: Insurance that replaces part of earnings when illness or injury stops someone working, paid after a deferred period. Chapter 8
Income share class: A fund share class that pays the fund's income out to investors. Chapter 4
Inflation: A general rise in prices, which reduces what money can buy. Chapter 5
Inside information: Information that is precise, not public and likely to move the price of a security if it were made public. Chapter 2
Insider dealing: Dealing, or encouraging someone else to deal, while holding inside information. Chapter 2
Interest cover: Operating profit (EBIT) divided by interest expense: how many times a company's profit covers its interest bill. Chapter 5
Interest rate parity: The relationship between spot and forward exchange rates and the two currencies' interest rates. The higher-rate currency trades at a forward discount. Chapter 3
Intestacy: Dying without a valid will. The estate then passes under the intestacy rules of the relevant law. Chapter 8
Intrinsic value: For a share, its estimated true value from analysis. For an option, the amount by which it is in the money. Chapter 5
Investment bank: A bank that serves companies and institutions: raising capital, underwriting securities and advising on mergers and acquisitions. Chapter 1
IOSCO (International Organization of Securities Commissions): The international body that brings together securities regulators and sets standards for securities markets. Chapter 2
IPS (Investment policy statement): A document recording a client's objectives, risk, constraints, strategy and how the portfolio will be reviewed. Chapter 7

K

Key person insurance: Insurance a business takes out to cover its loss if someone it depends on dies or becomes seriously ill. Chapter 8
KYC (Know your client): The checks a firm carries out to identify a client and understand their circumstances. Chapter 2

L

Ladder: A bond structure with maturities spread evenly over time, giving regular reinvestment and liquidity. Chapter 6
Layering: The second stage of money laundering: moving funds through transactions designed to hide where they came from. Chapter 2
Leverage: Using borrowed money or derivatives to take a larger exposure than the cash committed. It magnifies gains and losses. Chapter 3
Life assured: The person whose life an insurance policy covers. It is not always the person who takes out or pays for the policy. Chapter 8

M

Market abuse: Behaviour that damages the integrity of markets, including insider dealing and market manipulation. Chapter 2
Market maker: A firm that quotes bid and offer prices using its own capital, providing liquidity in a quote-driven market. Chapter 3
Market manipulation: Creating a false or misleading impression of supply, demand or price, for example by spreading false rumours. Chapter 2
Maturity transformation: Using short-term deposits to fund longer-term loans, a core function of banks. Chapter 1
MLRO (Money laundering reporting officer): The person in a firm who receives internal suspicion reports and decides whether to report them to the authorities. Chapter 2
Monetary policy: Central bank action on interest rates and the money supply to influence inflation and growth. Chapter 5
Money laundering: Dealing with the proceeds of crime to hide their origin and make them appear legitimate. Chapter 2
Money-weighted return: A return that reflects the timing and size of the investor's own cash flows, so it measures the investor's experience rather than the manager's skill. Chapter 6
Murabaha: An Islamic finance sale in which the bank buys an asset and sells it to the client at cost plus an agreed profit, usually paid later. Chapter 7

N

NAV (Net asset value): The value of a fund's assets minus its liabilities, often stated per share or unit. Chapter 4
Negative screening: Excluding companies or sectors from a portfolio because of their activities or conduct. Chapter 6
Nominal return: The return in money terms, before allowing for inflation. Chapter 5
Novation: Replacing one contract with new ones, as when a central counterparty steps between the original buyer and seller. Chapter 3

O

OEIC (Open-ended investment company): A UK open-ended fund structured as a company, also called an ICVC, and run by an authorised corporate director (ACD). Chapter 4
Oligopoly: A market dominated by a few large firms, whose decisions affect one another. Chapter 5
Open-ended fund: A fund that creates and cancels units or shares as investors put money in and take it out, so it grows and shrinks with demand. Chapter 4
Open-market operations: A central bank buying or selling securities to add or remove reserves from the banking system. Chapter 5
Option: The right, but not the obligation, to buy (call) or sell (put) an asset at a set price within or at a set time. Chapter 3
Order-driven market: A market where buyers' and sellers' orders are matched directly by price and time priority. Chapter 3
OTC (Over the counter): Trading agreed directly between two parties rather than on an exchange. Chapter 3

P

Placement: The first stage of money laundering: putting criminal proceeds into the financial system. Chapter 2
Potential GDP: The output an economy can sustain when its labour and capital are used normally, without causing persistent inflation. Chapter 5
PPI (Producer price index): A measure of the change in prices received by producers or paid for their inputs. Chapter 5
Preference share: A share that ranks ahead of ordinary shares for dividends and, usually, for repayment of capital. Chapter 3
Present value: What a future sum is worth today, found by discounting it at an appropriate rate. Chapter 5
Primary market: The market in which new securities are issued and capital is raised. Chapter 1
Principal: A firm that trades from its own book, so it is the client's counterparty. Chapter 3
Principles-based regulation: Regulation that sets outcomes to achieve and leaves firms to decide how to meet them. Chapter 2
Private bank: A bank offering high-net-worth clients a tailored combination of banking, lending, investment and wealth services. Chapter 1
Private equity: Investment in unlisted businesses for the long term, with returns usually realised on exit, such as a sale or a stock market listing. Chapter 4
Professional client: A client presumed to have the expertise and resources to need less regulatory protection than a retail client. Chapter 7
Put option: The right, but not the obligation, to sell an asset at a set price. It is in the money when the strike price is above the market price. Chapter 3

Q

Quantitative easing: A central bank creating money to buy assets, usually government bonds, to lower longer-term interest rates. Chapter 5
Quantitative tightening: A central bank reducing its asset holdings by selling them or letting them mature without reinvesting. Chapter 5
Quote-driven market: A market in which market makers quote the prices at which they will buy and sell. Chapter 3

R

R-squared: The share of a fund's movements explained by its benchmark's movements. Chapter 6
Real return: The return after allowing for inflation. Approximately, nominal return minus inflation. Chapter 5
Rebalancing: Trading a portfolio back to its agreed asset allocation after market moves have changed it. Chapter 6
REIT (Real estate investment trust): A listed company that owns income-producing property and distributes most of its income to shareholders. Chapter 4
Relief at source: Applying a reduced treaty rate of withholding tax when income is paid, instead of reclaiming the tax later. Chapter 7
Residence: For tax purposes, where a person lives, usually judged by time spent and connections. It often decides which country can tax them. Chapter 7
Retail client: A client given the highest level of regulatory protection, presumed to have less financial knowledge and bargaining power. Chapter 7
Rights issue: An offer of new shares to existing shareholders in proportion to their holdings, so they can keep their percentage of the company. Chapter 3
Risk premium: The extra return expected for taking risk: expected return minus the risk-free rate. Chapter 6
Risk tolerance: A client's willingness to accept ups and downs in value. It is different from their capacity for loss. Chapter 7
Risk-free rate: The return on an investment treated as having no default risk, usually short-term government debt. Chapter 6
ROCE (Return on capital employed): Operating profit divided by capital employed: how efficiently a business uses its capital. Chapter 5
Rules-based regulation: Regulation that sets detailed instructions and limits for firms to follow. Chapter 2
Running yield: Annual coupon divided by the bond's clean market price. Also called the flat yield. Chapter 3

S

Sanctions screening: Checking clients and the parties to a transaction against official sanctions lists. Chapter 2
Secondary market: The market where investors trade securities that have already been issued. Chapter 1
Sequence-of-returns risk: The risk that losses early in retirement, while withdrawals are being taken, permanently weaken a fund. Chapter 8
Settlement: The completion of a trade: delivery of the securities and payment of the cash. Chapter 3
Sharpe ratio: (Portfolio return − risk-free rate) ÷ standard deviation: the extra return earned per unit of total risk. Chapter 6
SICAV: A European open-ended investment company with variable capital. Chapter 4
Simple interest: Interest on the original amount only: principal × rate × time. Chapter 5
Sortino ratio: Like the Sharpe ratio, but dividing by downside deviation, so only falls count as risk. Chapter 6
Source of funds: Where the money for a particular transaction comes from. Chapter 2
Source of wealth: How a client built up their overall wealth, such as earnings, a business sale or an inheritance. Chapter 2
Specific risk: Risk belonging to one company or security, which diversification can reduce. Also called unsystematic risk. Chapter 6
Spot rate: The exchange rate for immediate settlement. Chapter 3
Stamp duty: A transaction tax charged when ownership of certain assets changes. Chapter 7
Standard deviation: A measure of how widely returns spread around their average; the usual measure of volatility. Chapter 5
Strategic asset allocation: The long-term mix of asset classes chosen to match a client's objectives and risk. Chapter 6
Strike price: The price at which an option holder may buy or sell the underlying asset. Also called the exercise price. Chapter 3
Structured product: An investment combining a deposit or bond with derivatives to deliver a return linked to an index or asset. Any protection depends on the issuer. Chapter 4
Suitability: Whether a recommendation fits the client's objectives, circumstances, knowledge, risk profile and capacity for loss. Chapter 7
Suitability report: A written record explaining why a recommendation is suitable, with its risks, costs and features. Chapter 7
Sukuk: Sharia-compliant certificates whose returns come from assets, leases, sales or participation rather than interest. Chapter 4
Swap: A contract in which two parties exchange cash flows, such as fixed for floating interest payments. Chapter 3
Synthetic ETF: An ETF that gets its index return from a swap with a counterparty instead of holding the index's securities, adding counterparty risk. Chapter 4
Systematic risk: Market-wide risk from forces such as recessions and interest rate changes. Diversification cannot remove it. Chapter 6

T

Tactical asset allocation: A deliberate short-term move away from the strategic allocation to take advantage of an expected opportunity. Chapter 6
Technical analysis: Forecasting prices from past prices and volume, using patterns such as support and resistance. Chapter 5
Term assurance: Life insurance that pays out only if death occurs within a set term. Chapter 8
Time horizon: How long a client can invest before they need the money. Chapter 7
Time-weighted return: A return that removes the effect of cash flows in and out, so it measures the manager's performance. Chapter 6
Tracking error: How much a fund's returns differ from its benchmark's over time; a measure of how closely it follows the index. Chapter 6
Treasury bill: Short-term government borrowing issued at a discount to its face value and repaid at par. Chapter 3
Treynor ratio: (Portfolio return − risk-free rate) ÷ beta: the extra return per unit of systematic risk. Chapter 6
Trust: An arrangement in which trustees hold assets for the benefit of beneficiaries, under the terms of the trust. Chapter 8
Trustee: A person who holds and manages trust assets and must act loyally, prudently and within the trust's terms. Chapter 8

U

UHNWI (Ultra-high-net-worth individual): A label for the wealthiest segment of private clients. Chapter 1
Underwriting (insurance): The insurer's assessment of health, occupation, lifestyle and the amount of cover before it offers terms. Chapter 8
Unit trust: An open-ended fund set up as a trust, with a trustee holding the assets for the unit holders. Chapter 4

W

Wholesale market: The market for large transactions between professional institutions, such as banks, governments and large companies. Chapter 1
Withholding tax: Tax deducted at source by the payer before income such as a dividend or interest is paid. Chapter 7

Y

Yield to redemption: A bond's total return if held to maturity, combining the coupons with any gain or loss to par. Also called yield to maturity. Chapter 3

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