ICWIM flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Primary market

Market in which new securities are issued and sold to investors for the first time, raising fresh capital for the issuer, with proceeds going to the company rather than a selling shareholder.

Eligible counterparty

Client category covering authorised financial firms such as banks and investment houses, which receive fewer conduct protections and disclosures than retail clients under the rules.

Anti-money laundering stages

Placement, layering and integration: introducing criminal proceeds into the system, disguising their origin through transactions, then reintroducing them as apparently legitimate funds.

Prudential regulation

Supervision of a financial firm's capital adequacy, liquidity and risk controls, aimed at preventing firm failure and protecting the stability of the wider financial system.

Conflicts of interest

Situations where a firm's or adviser's own interests, or duties to another client, could compromise the duty owed to a client; they must be identified and avoided, managed or disclosed.

Chinese walls

Internal information barriers that stop confidential or price-sensitive information flowing between departments of the same firm, for example between corporate finance and sales.

Inducement

A commission, fee or non-monetary benefit paid by a third party; it must not impair the duty to act in the client's best interest and must be disclosed.

Inside information

Precise, non-public information that, if made public, would likely affect the price of a security materially; using or disclosing it is market abuse.

Duration

Weighted average time until a bond's cash flows are received; modified duration estimates the percentage price change for a one percentage point change in yield.

Residual claim

Shareholders' right to a company's earnings and assets only after all creditors and other prior claims are satisfied, reflecting equity's subordinate position in the capital structure.

Money market instrument

Short-term debt security with an original maturity of one year or less, such as a treasury bill, commercial paper or certificate of deposit, carrying low price risk.

Contango

Futures market condition in which forward prices are higher than the spot price, typically reflecting storage, insurance and financing costs carried until delivery.

Open-ended fund

Collective investment scheme that creates and cancels units on investor demand at net asset value, so the number of units in issue rises and falls.

Investment trust

Closed-ended investment company whose shares are traded on a stock exchange and may stand at a premium or discount to the value of its underlying assets.

Exchange-traded fund

Index-tracking fund whose shares trade on an exchange throughout the day, typically offering low charges, transparency and small but non-zero tracking error.

Net asset value

A fund's total assets minus its liabilities, divided by the number of shares or units outstanding; it is the basis for pricing open-ended fund units.

Dividend discount model

Method valuing a share as the present value of its expected future dividends; the Gordon growth version assumes dividends grow at a constant rate forever.

Price-earnings ratio

Share price divided by earnings per share; a higher ratio generally implies the market expects faster earnings growth or perceives lower risk.

Yield to maturity

The internal rate of return on a bond bought at its current price and held to redemption, taking account of all coupons and the redemption payment.

Real return

Return measured after removing the effect of inflation, approximately nominal return minus the inflation rate; it shows the change in purchasing power.

Sharpe ratio

Excess return above the risk-free rate divided by the standard deviation of returns; it measures risk-adjusted performance using total risk.

Beta

Measure of how much a security's return responds to movements in the market; a beta above one means it is more volatile than the market.

Efficient frontier

The set of portfolios offering the highest expected return for each level of risk, derived from combining assets using expected returns, variances and correlations.

Investment policy statement

Document setting out the client's objectives, risk tolerance, constraints, target asset allocation, benchmark and review arrangements to guide portfolio management.

Suitability assessment

Check that a recommendation fits the client's objectives, risk profile, knowledge, experience and financial circumstances before advice is given.

Risk tolerance

Combination of a client's willingness to accept investment risk and their financial ability to bear losses, including time horizon and income stability.

Know your client

Process of collecting and verifying a client's identity, financial position, objectives, existing arrangements and attitude to risk before providing advice.

Accumulation phase

Life-cycle stage in which an investor builds assets ahead of future needs, typically able to accept more risk because the time horizon is long.

Capital gains tax

Tax charged on the profit made when an asset is disposed of, calculated as proceeds less allowable cost and expenses, often reduced by an annual exemption.

Tax wrapper

Account or product, such as an individual savings account or a pension, whose tax treatment differs from direct holdings by exempting or deferring tax.

Potentially exempt transfer

Lifetime gift that escapes inheritance tax if the donor survives seven years; if not, tax applies with taper relief for survival between three and seven years.

Double taxation treaty

Agreement between two countries allocating taxing rights over income and gains and granting relief so the same income is not taxed twice.