CISI Investment Advice Diploma key terms

The gap between the price at which a market maker will buy a security and the price at which it will sell it. It is a transaction cost borne by the investor and a key measure of market liquidity.

A firm that continuously quotes both buying and selling prices for a security in order to provide liquidity. It earns the spread and normally holds inventory to satisfy client orders.

A trading venue where buy and sell orders are matched directly against each other in a central order book. Prices emerge from supply and demand rather than being quoted by a dealer.

A bond issued by the UK government to borrow money, paying fixed or index-linked coupons and returning principal at redemption. Gilts are treated as low credit risk and set a benchmark for sterling yields.

The amount by which a convertible bond's price exceeds the value of the shares it could be converted into. It reflects the value of the bond floor plus the embedded equity option.

The minimum value a convertible bond should hold, being the present value of its remaining coupons and redemption proceeds as a straight bond. It cushions the price if the share price falls.

An equity class whose holders normally receive a fixed dividend before ordinary shareholders and rank ahead of them on winding up, but usually carry no voting rights. It behaves partly like debt and partly like equity.

A unit of ownership in a company carrying voting rights and a residual claim on profits and assets after all other claims are met. Dividends are discretionary and capital is at risk.

The combined result of income received plus capital growth or loss over a period, usually expressed as a percentage of the opening value. It captures the full investor experience rather than price change alone.

A return measured after stripping out inflation, showing the change in purchasing power. It is approximated by subtracting the inflation rate from the nominal return, or calculated exactly by compounding.

A return expressed in money terms without any adjustment for inflation. It is the figure usually quoted by funds and indices but overstates gains in purchasing power.

A statistical measure of how widely returns vary around their average, typically the standard deviation of returns. Higher volatility means a wider range of possible outcomes and is used as a proxy for risk.

A measure of dispersion showing how far individual observations sit from the mean. In investment analysis it quantifies total risk, combining both systematic and unsystematic elements of return variation.

A measure of how much a security's returns tend to move relative to the market, where the market has a beta of one. It captures systematic risk that cannot be removed by diversification.

Risk arising from economy-wide or market-wide factors such as interest rates, inflation or recession, which affects all securities to some degree. It cannot be eliminated by holding more assets.

Risk specific to an individual company or sector, such as a management failure or product recall. It can be largely removed by holding a diversified portfolio of unrelated holdings.

Spreading money across assets whose returns do not move in perfect step, so that poor results in one holding are offset by others. It reduces unsystematic risk but cannot remove market risk.

A measure between minus one and plus one of how closely two assets' returns move together. Low or negative correlation between holdings delivers the greatest diversification benefit.

The decision on how a portfolio is divided between asset classes such as equities, bonds, property and cash. It is the main driver of a portfolio's long-term risk and return characteristics.

The long-term target mix of asset classes chosen to fit an investor's objectives, time horizon and tolerance for risk. It is set by policy rather than by short-term market views.

Short-term deliberate deviations from the strategic mix, made to exploit expected market movements or relative value between asset classes. Positions are usually reversed once the view has played out.

The process of buying and selling within a portfolio to restore holdings to their target weights after market moves have shifted them. It enforces a discipline of selling winners and buying laggards.

A measure of a bond's sensitivity to interest rate changes, expressed in years. A duration of five means the price should fall about five per cent for a one percentage point rise in yields.

The annualised return an investor would earn by buying a bond at its current price and holding it to redemption, assuming all coupons are reinvested at that same rate. It links price, coupon and maturity.

The extra yield a corporate or other non-government bond offers over a comparable government bond, compensating for default and liquidity risk. It widens when investors become more risk averse.

An independent agency's opinion of a borrower's ability and willingness to meet interest and principal payments on time. Ratings run from high investment grade down to speculative, or junk, status.

The chance that a bond or loan issuer fails to pay interest or repay principal when due. It is the main reason corporate bonds yield more than government bonds of the same maturity.

A share price divided by earnings per share, showing how many years of current earnings the market is paying for. A high figure usually signals expected growth or optimism about the company.

The annual dividend per share divided by the share price, expressed as a percentage. It measures the income return from an equity holding and is useful when comparing income-focused investments.

A company's profit attributable to ordinary shareholders divided by the weighted average number of shares in issue. It is a core input to valuation and to measuring growth over time.

A model that prices an asset by adding a risk-free rate to a premium for the systematic risk taken, measured by beta. It underpins expected return estimates and cost of capital calculations.

Excess return above the risk-free rate divided by the standard deviation of returns. It shows how much return was earned per unit of total risk taken, allowing comparison between portfolios.

A return that accounts for the size and timing of cash flows into and out of a portfolio, effectively the internal rate of return. It reflects the actual experience of the investor rather than the manager.

A return that removes the effect of investor cash flows by linking the growth of each sub-period. It is the standard measure for judging a fund manager's performance.

The degree of investment loss an investor is financially able and psychologically willing to accept in pursuit of objectives. Capacity for loss and attitude to risk must both be assessed and can differ.

An investor's financial ability to withstand losses without jeopardising essential goals, based on income, assets, liabilities and time horizon. It is objective and may be greater or smaller than their attitude to risk.

The regulatory requirement to recommend or transact only what fits a client's objectives, financial situation, knowledge and risk appetite. It must be evidenced by an adequate fact find and recorded rationale.

The process of gathering and verifying information about a client's circumstances, objectives, experience and identity before giving advice or accepting business. It supports suitability and anti-money-laundering obligations.

The structured record of a client's financial position, commitments, objectives, time horizon, experience and attitude to risk. It is the evidence base for every suitability assessment.

The period over which a client expects to hold investments before needing the money. Longer horizons generally allow more equity risk because there is more time to recover from setbacks.

A UK tax wrapper within which interest, dividends and capital gains are free of UK tax. Annual subscription limits apply, and the wrapper sits around underlying cash, funds or shares.

A legal structure that shelters investments from some or all tax on income and gains, such as an ISA or a pension. The tax treatment depends on the wrapper, not only on the assets held.

Tax charged on the profit realised when an asset is sold for more than its acquisition cost, after allowances and reliefs. The rate depends on the asset type and the taxpayer's other income.

A pooled fund structured as a company whose share count expands and contracts with investor demand, priced at net asset value. It is a common UK vehicle for collective investment.

A pooled fund structured as a trust in which investors buy units priced from the value of the underlying assets. Units are created and cancelled to meet demand, so the fund is open-ended.

The value of a fund's assets less its liabilities, divided by the number of shares or units in issue. It is the basis for pricing open-ended fund deals and reporting performance.

A closed-ended company listed on a stock exchange whose shares trade at a price set by supply and demand. The share price can differ from net asset value, creating a discount or premium.

The use of borrowed money to increase the size of an investment position, magnifying both gains and losses. It is common in investment trusts and property funds and raises risk.

The risk that an asset cannot be sold quickly at a fair price, or that a fund must suspend dealing because it cannot meet redemptions. It is higher in thinly traded or physical assets.

Situations where a firm's or adviser's own interests could improperly influence advice or transactions to the client's detriment. Firms must identify, avoid or manage them and disclose where necessary.

Any fee, commission or non-monetary benefit paid to or received by a firm from a third party in connection with services to a client. Rules restrict or ban such payments to protect advice quality.

The duty to take all sufficient steps to obtain the best possible result for clients when executing orders, considering price, cost, speed, likelihood of execution and settlement.