IMC key terms

The gap between the highest price a buyer will pay and the lowest price a seller will accept for a security. It is a transaction cost, usually narrower for heavily traded, liquid instruments.

A firm that continuously quotes both buy and sell prices for a security, earning the spread while carrying inventory risk. Market makers help ensure trades can be executed promptly.

The ease and speed with which an asset can be bought or sold in size without materially moving its price. Cash is the most liquid asset; property is typically far less liquid.

The annualised return an investor earns by holding a bond to redemption, assuming all coupons are reinvested at that same rate. It reflects the bond's price, coupon, and time to maturity.

The fixed annual interest a bond issuer promises to pay, expressed as a percentage of the bond's nominal or par value. It does not change when the bond's market price moves.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. Longer duration means a larger price fall when yields rise.

The extra yield a bond offers over a comparable risk-free government bond. It compensates investors for default risk and typically widens when credit conditions worsen.

An independent agency's assessment of a borrower's ability and willingness to repay debt, expressed on a letter scale. Ratings guide investors on default risk and affect borrowing costs.

The chance that a bond issuer or borrower fails to make scheduled interest or principal payments. Investors demand higher yields to hold debt with greater default risk.

The face amount of a bond that the issuer repays at maturity. A bond trading at par has a market price equal to this stated amount.

A share's market price divided by its earnings per share. It shows how much investors pay for each unit of profit and is often used to compare valuations.

A company's profit attributable to ordinary shareholders divided by the number of shares in issue. It is a core input to many valuation measures.

Annual dividend per share divided by the share price, expressed as a percentage. It shows the income return an investor receives from holding the shares.

Earnings per share divided by dividend per share. A higher figure suggests the dividend is more comfortably funded from profits and less likely to be cut.

The proportion of a company's capital financed by debt rather than equity. High gearing magnifies both profits and losses for shareholders and raises financial risk.

Operating profit divided by interest expense. It measures how many times a company can pay its interest bill from earnings, signalling financial resilience.

Using borrowed money to increase the size of an investment position. It amplifies returns and losses, and increases the risk of forced selling if values fall.

Spreading money across assets whose returns do not move in perfect step, so that losses in one holding are offset by others. It reduces risk without necessarily lowering expected return.

A statistical measure, from -1 to +1, of how closely two investments' returns move together. Low or negative correlation gives the greatest diversification benefit.

The degree to which an investment's returns vary around their average, usually measured by standard deviation. Higher volatility means a wider range of possible outcomes.

A statistical measure of how far returns typically deviate from their mean. In finance it is the most common single number used to describe risk.

Deciding how a portfolio is split among asset classes such as shares, bonds, and cash. It is a major driver of long-term return and risk.

Adjusting a portfolio back to its target weights after market movements have shifted them. It enforces a discipline of selling what has risen and buying what has fallen.

The return available on an investment with effectively no default risk, commonly proxied by short-dated government debt. It is the baseline against which other returns are judged.

The extra expected return investors require for holding a risky asset instead of the risk-free rate. It compensates for uncertainty and the possibility of loss.

A measure of how much a share's price tends to move relative to the wider market. A beta above one implies greater sensitivity than the market; below one, less.

Risk that affects the whole market, such as interest rate changes or recessions, and cannot be removed by diversification. Investors are compensated for bearing it.

The total value of a fund's assets minus its liabilities, divided by the number of shares or units. It is the price at which open-ended funds are typically traded.

A collective investment scheme that issues and redeems units on demand at net asset value. Its size expands and contracts with investor flows.

An investment company with a fixed number of shares that trade on an exchange rather than being redeemed by the manager. Prices can differ from net asset value.

A UK-listed closed-ended company that invests in a portfolio of securities. Its shares trade on the stock exchange and may stand at a discount or premium to net asset value.

A fund whose shares trade on an exchange throughout the day, usually tracking an index. Most are open-ended but priced continuously by supply and demand.

Managing a portfolio to replicate the returns of a specified market index rather than trying to beat it. It typically offers low costs and low tracking error.

The standard deviation of the difference between a portfolio's returns and those of its benchmark index. It measures how closely a fund follows its stated objective.

The recurring fee a fund manager deducts from a fund's assets each year to cover running costs. It reduces the return investors actually receive.

A single percentage showing all the annual costs of running a fund as a share of its assets. It gives a fuller picture than the management charge alone.

An investor's willingness and financial ability to accept losses or volatility in pursuit of higher returns. It shapes the appropriate asset mix and is assessed before advice is given.

A legal obligation to act in the client's best interests rather than the adviser's own. It covers loyalty, disclosure of conflicts, and suitability of recommendations.

The requirement that an investment recommendation fits a client's objectives, circumstances, and attitude to risk. It is the foundation of regulated investment advice.