DATED 09/09/13 A TO M POST ONE. M TO Z POST TWO

complements the BBC NEWS ( FINANCIAL GLOSSARY)
Financial glossary
A-C
D-H
I-M
N-R
S-Z

What's the difference between a bull and a bear?


Here is a guide to many of the business terms currently cropping up regularly, as well as some of the more exotic words coined to describe some of the social effects of the financial crisis.

A

AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of a borrower defaulting is minuscule.

Administration A rescue mechanism for UK companies in severe trouble. It allows them to continue as a going concern, under supervision, giving them the opportunity to try to work their way out of difficulty. A firm in administration cannot be wound up without permission from a court.

AGM An annual general meeting, which companies hold each year for shareholders to vote on important issues such as dividend payments and appointments to the company's board of directors. If an emergency decision is needed - for example in the case of a takeover - a company may also call an exceptional general meeting of shareholders or EGM.

Assets Things that provide income or some other value to their owner.

Fixed assets (also known as long-term assets) are things that have a useful life of more than one year, for example buildings and machinery; there are also intangible fixed assets, like the good reputation of a company or brand.
Current assets are the things that can easily be turned into cash and are expected to be sold or used up in the near future.
Austerity Economic policy aimed at reducing a government's deficit (or borrowing). Austerity can be achieved through increases in government revenues - primarily via tax rises - and/or a reduction in government spending or future spending commitments.

B

Bailout The financial rescue of a struggling borrower. A bailout can be achieved in various ways:

providing loans to a borrower that markets will no longer lend to
guaranteeing a borrower's debts
guaranteeing the value of a borrower's risky assets
providing help to absorb potential losses, such as in a bank recapitalisation
Bankruptcy A legal process in which the assets of a borrower who cannot repay its debts - which can be an individual, a company or a bank - are valued, and possibly sold off (liquidated), in order to repay debts.

Where the borrower's assets are insufficient to repay its debts, the debts have to be written off. This means the lenders must accept that some of their loans will never be repaid, and the borrower is freed of its debts. Bankruptcy varies greatly from one country to another, some countries have laws that are very friendly to borrowers, while others are much more friendly to lenders.

Base rate The key interest rate set by the Bank of England. It is the overnight interest rate that it charges to banks for lending to them. The base rate - and expectations about how the base rate will change in the future - directly affect the interest rates at which banks are willing to lend money in sterling.

Basel accords The Basel Accords refer to a set of agreements by the Basel Committee on Bank Supervision (BCBS), which provide recommendations on banking regulations. The purpose of the accords is to ensure that financial institutions have enough capital to meet obligations and absorb unexpected losses.

Basis point One hundred basis points make up a percentage point, so an interest rate cut of 25 basis points might take the rate, for example, from 3% to 2.75%.

BBA The British Bankers' Association is an organisation representing the major banks in the UK - including foreign banks with a major presence in London. It is responsible for the daily Liborinterest rate which determines the rate at which banks lend to each other.

Bear market In a bear market, prices are falling and investors, fearing losses, tend to sell. This can create a self-sustaining downward spiral.

Bill A debt security- or more simply an IOU. It is very similar to a bond, but has a maturity of less than one year when first issued.

BIS The Bank for International Settlements is an international association of central banks based in Basel, Switzerland. Crucially, it agrees international standards for the capital adequacyof banks - that is, the minimum buffer banks must have to withstand any losses. In response to the financial crisis, the BIS has agreed a much stricter set of rules. As these are the third such set of regulations, they are known as "Basel III".

Bond A debt security, or more simply, an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. They can be issued by companies, banks or governments to raise money. Banks and investors buy and trade bonds.

BRIC An acronym used to describe the fast-growing economies of Brazil, Russia, India and China.

Bull market A bull market is one in which prices are generally rising and investor confidence is high.

C

Capital For investors, it refers to their stock of wealth, which can be put to work in order to earn income. For companies, it typically refers to sources of financing such as newly issued shares.

For banks, it refers to their ability to absorb losses in their accounts. Banks normally obtain capital either by issuing new shares, or by keeping hold of profits instead of paying them out as dividends. If a bank writes off a loss on one of its assets - for example, if it makes a loan that is not repaid - then the bank must also write off a corresponding amount of its capital. If a bank runs out of capital, then it is insolvent, meaning it does not have enough assets to repay its debts.

Capital adequacy ratio A measure of a bank's ability to absorb losses. It is defined as the value of its capital divided by the value of risk-weighted assets (ie taking into account how risky they are). A low capital adequacy ratio suggests that a bank has a limited ability to absorb losses, given the amount and the riskiness of the loans it has made.

A banking regulator - typically the central bank - sets a minimum capital adequacy ratio for the banks in each country, and an international minimum standard is set by the BIS. A bank that fails to meet this minimum standard must be recapitalised, for example by issuing new shares.

Capitulation (market). The point when a flurry of panic selling induces a final collapse - and ultimately a bottoming out - of prices.

Carry trade Typically, the borrowing of currency with a low interest rate, converting it into currency with a high interest rate and then lending it. The most common carry trade currency used to be the yen, with traders seeking to benefit from Japan's low interest rates. Now the dollar, euro and pound can also serve the same purpose. The element of risk is in the fluctuations in the currency market.

Chapter 11 The term for bankruptcy protection in the US. It postpones a company's obligations to its creditors, giving it time to reorganise its debts or sell parts of the business, for example.

Collateralised debt obligations (CDOs) A financial structure that groups individual loans, bonds or other assets in a portfolio, which can then be traded. In theory, CDOs attract a stronger credit rating than individual assets due to the risk being more diversified. But as the performance of many assets fell during the financial crisis, the value of many CDOs was also reduced.

Commercial paper Unsecured, short-term loans taken out by companies. The funds are typically used for working capital, rather than fixed assets such as a new building. The loans take the form of IOUs that can be bought and traded by banks and investors, similar to bonds.

Commodities Commodities are products that, in their basic form, are all the same so it makes little difference from whom you buy them. That means that they can have a common market price. You would be unlikely to pay more for iron ore just because it came from a particular mine, for example.

Contracts to buy and sell commodities usually specify minimum common standards, such as the form and purity of the product, and where and when it must be delivered.

The commodities markets range from soft commodities such as sugar, cotton and pork bellies to industrial metals such as iron and zinc.

Core inflation A measure of CPI inflation that strips out more volatile items (typically food and energy prices). The core inflation rate is watched closely by central bankers, as it tends to give a clearer indication of long-term inflation trends.

Correction (market) A short-term drop in stock market prices. The term comes from the notion that, when this happens, overpriced or underpriced stocks are returning to their "correct" values.

CPI The Consumer Prices Index is a measure of the price of a bundle of goods and services from across the economy. It is the most common measure used to identify inflation in a country. CPI is used as the target measure of inflation by the Bank of England and the ECB.

Credit crunch A situation where banks and other lenders all cut back their lending at the same time, because of widespread fears about the ability of borrowers to repay.

If heavily-indebted borrowers are cut off from new lending, they may find it impossible to repay existing debts. Reduced lending also slows down economic growth, which also makes it harder for all businesses to repay their debts.

Credit default swap (CDS) A financial contract that provides insurance-like protection against the risk of a third-party borrower defaulting on its debts. For example, a bank that has made a loan to Greece may choose to hedge the loan by buying CDS protection on Greece. The bank makes periodic payments to the CDS seller. If Greece defaultson its debts, the CDS seller must buy the loans from the bank at their full face value. CDSs are not just used for hedging - they are used by investors to speculate on whether a borrower such as Greece will default.

Credit rating The assessment given to debts and borrowers by a ratings agency according to their safety from an investment standpoint - based on their creditworthiness, or the ability of the company or government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted. Ratings of BBB- or higher are considered "investment grade". Below that level, they are considered "speculative grade" or more colloquially as junk.

Currency peg A commitment by a government to maintain its currency at a fixed value in relation to another currency. Sometimes pegs are used to keep a currency strong, in order to help reduce inflation. In this case, a central bank may have to sell its reserves of foreign currency and buy up domestic currency in order to defend the peg. If the central bank runs out of foreign currency reserves, then the peg will collapse.

Pegs can also be used to help keep a currency weak in order to gain a competitive advantage in trade and boost exports. China has been accused of doing this. The People's Bank of China has accumulated trillions of dollars in US government bonds, because of its policy of selling yuan and buying dollars - a policy that has the effect of keeping the yuan weak.

D

Dead cat bounce A phrase long used on trading floors to describe the small rebound in market prices typically seen following a sharp fall.

Debt restructuring A situation in which a borrower renegotiates the terms of its debts, usually in order to reduce short-term debt repayments and to increase the amount of time it has to repay them. If lenders do not agree to the change in repayment terms, or if the restructuring results in an obvious loss to lenders, then it is generally considered a default by the borrower. However, restructuring can also occur through a debt swap - a voluntary agreement by lenders to switch existing debts for new debts with easier easier repayment terms - in which case it can be very hard to determine whether the restructuring counts as a default.

Default Strictly speaking, a default occurs when a borrower has broken the terms of a loan or other debt, for example if a borrower misses a payment. The term is also loosely used to mean any situation that makes clear that a borrower can no longer repay its debts in full, such as bankruptcy or a debt restructuring.

A default can have a number of important implications. If a borrower is in default on any one debt, then all of its lenders may be able to demand that the borrower immediately repay them. Lenders may also be required to write off their losses on the loans they have made.

Deficit The amount by which spending exceeds income over the course of a year.

In the case of trade, it refers to exports minus imports. In the case of the government budget, it equals the amount the government needs to borrow during the year to fund its spending. The government's "primary" deficit means the amount it needs to borrow to cover general government expenditure, excluding interest payments on debts. The primary deficit therefore indicates whether a government will run out of cash if it is no longer able to borrow and decides to stop repaying its debts.

Deflation Negative inflation - that is, when the prices of goods and services across the whole economy are falling on average.

Deleveraging A process whereby borrowers reduce their debt loads. Primarily this occurs by repaying debts. It can also occur by bankruptcies and debt defaults, or by the borrowers increasing their incomes, meaning that their existing debt loads become more manageable. Western economies are experiencing widespread deleveraging, a process associated with weak economic growth that is expected to last years. Households are deleveraging by repaying mortgage and credit card debts. Banks are deleveraging by cutting back on lending. Governments are also beginning to deleverage via austerity programmes - cutting spending and increasing taxation.

Derivative A financial contract which provides a way of investing in a particular product without having to own it directly. For example, a stock market futures contract allows investors to make bets on the value of a stock market index such as the FTSE 100 without having to buy or sell any shares. The value of a derivative can depend on anything from the price of coffee to interest rates or what the weather is like. Credit derivatives such as credit default swaps depend on the ability of a borrower to repay its debts. Derivatives allow investors and banks to hedge their risks, or to speculate on markets. Futures, forwards, swaps and options are all types of derivatives.

Dividends An income payment by a company to its shareholders, usually linked to its profits.

Dodd-Frank Legislation enacted by the US in 2011 to regulate the banks and other financial services. It includes:

restrictions on banks' riskier activities (the Volcker rule)
a new agency responsible for protecting consumers against predatory lending and other unfair practices
regulation of the enormous derivatives market
a leading role for the central bank, the Federal Reserve, in overseeing regulation
higher bank capital requirements
new powers for regulators to seize and wind up large banks that get into trouble
Double-dip recession A recession that experiences a limited recovery then dips back into recession. The exact definition is unclear, as the definition of what counts as a recession varies between countries. A widely-accepted definition is one where the initial recovery fails to take total economic output back up to the peak seen before the recession began.

E

EBA The European Banking Authority is a pan-European regulator responsible created in 2010 to oversee all banks within the European Union. Its powers are limited, and it depends on national bank regulators such as the UK's Financial Services Authority to implement its recommendations. It has already been active in laying down new rules on bank bonuses and arranging the European bank stress tests.

Ebitda Earnings (or profit) before interest payments, tax, depreciation and amortisation. It is a measure of the cashflow at a company available to repay its debts, and is much more important indicator for lenders than the borrower's profits.

EBRD The European Bank for Reconstruction and Development is a similar institution to the World Bank, set up by the US and European countries after the fall of the Berlin Wall to assist in economic transition in Eastern Europe. Recently the EBRD's remit has been extended to help the Arab countries that emerged from dictatorship in 2011.

ECB The European Central Bank is the central bank responsible for monetary policy in the eurozone. It is headquartered in Frankfurt and has a mandate to ensure price stability - which is interpreted as an inflation rate of no more than 2% per year.

EIB The European Investment Bank is the European Union's development bank. It is owned by the EU's member governments, and provides loans to support pan-European infrastructure, economic development in the EU's poorer regions and environmental objectives, among other things.

ESM The European Stability Mechanism is a 500bn-euro rescue fund that will replace the EFSF and the EFSM from June 2013. Unlike the EFSF, the ESM is a permanent bail-out arrangement for the eurozone. Unlike the EFSM, the ESM will only be backed by members of the eurozone, and not by other European Union members such as the UK.

EFSF The European Financial Stability Facility is currently a temporary fund worth up to 440bn euros set up by the eurozone in May 2010. Following a previous bail-out of Greece, the EFSF was originally intended to help other struggling eurozone governments, and has since provided rescue loans to the Irish Republic and Portugal. More recently, the eurozone agreed to broaden the EFSF's mandate, for example by allowing it to support banks.

EFSM The European Financial Stability Mechanism is 60bn euros of money pledged by the member governments of the European Union, including 7.5bn euros pledged by the UK. The EFSM has been used to loan money to the Irish Republic and Portugal. It will be replaced by the ESM from 2013.

Equity The value of a business or investment after subtracting any debts owed by it. The equity in a company is the value of all its shares. In a house, your equity is the amount your house is worth minus the amount of mortgage debt that is outstanding on it.

Eurobond A term increasingly used for the idea of a common, jointly-guaranteed bond of the eurozone governments. It has been mooted as a solution to the eurozone debt crisis, as it would prevent markets from differentiating between the creditworthiness of different government borrowers.

Confusingly and quite separately, "Eurobond" also refers to a bond issued in a country which isn't denominated in that country's currency. For example, this is used to refer to bonds in US dollars issued in Europe.

Eurozone The 17 countries that share the euro.

F

Federal Reserve The US central bank.

Financial Policy Committee A new committee at the Bank of England set up in 2010-11 in response to the financial crisis. It has overall responsibility for ensuring major risks do not build up within the UK financial system.

Financial transaction tax See Tobin tax.

Fiscal policy The government's borrowing, spending and taxation decisions. If a government is worried that it is borrowing too much, it can engage in austerity; raising taxes and/or cutting spending. Alternatively, if a government is afraid that the economy is going into recession it can engage in fiscal stimulus, which can include cutting taxes, raising spending and/or raising borrowing.

Freddie Mac, Fannie Mae Nicknames for the Federal Home Loans Mortgage Corporation and the Federal National Mortgage Association respectively. They don't lend mortgages directly to homebuyers, but they are responsible for obtaining a large part of the money that gets lent out as mortgages in the US from the international financial markets. Although privately-owned, the two operate as agents of the US federal government. After almost going bust in the financial crisis, the government put them into "conservatorship" - guaranteeing to provide them with any new capital needed to ensure they do not go bust.

FTSE 100 An index of the 100 companies listed on the London Stock Exchange with the biggest market value. The index is revised every three months.

Fundamentals Fundamentals determine a company, currency or security's value in the long-term. A company's fundamentals include its assets, debt, revenue, earnings and growth.

Futures A futures contract is an agreement to buy or sell a commodity at a predetermined date and price. It could be used to hedge or to speculate on the price of the commodity. Futures contracts are a type of derivative, and are traded on an exchange.

G

G7 The group of seven major industrialised economies, comprising the US, UK, France, Germany, Italy, Canada and Japan.

G8 The G7 plus Russia.

G20 The G8 plus developing countries that play an important role in the global economy, such as China, India, Brazil and Saudi Arabia. It gained in significance after leaders agreed how to tackle the 2008-09 financial crisis and recession at G20 gatherings.

GDP Gross domestic product. A measure of economic activity in a country, namely of all the services and goods produced in a year. There are three main ways of calculating GDP - through output, through income and through expenditure.

Glass-Steagall A US law dating from the 1930s Great Depression that separated ordinary commercial banking from investment banking. Like the UK's planned ring-fence, the law was intended to protect banks which lend to consumers and businesses - deemed vital to the US economy - from the risky speculation of investment banks. The law was repealed in 1999, largely to enable the creation of the banking giant Citigroup - a move that many commentators say was a contributing factor to the 2008 financial crisis.

H

Haircut A reduction in the value of a troubled borrower's debts, imposed on, or agreed with, its lenders as part of a debt restructuring.

Hedge fund A private investment fund which uses a range of sophisticated strategies to maximise returns including hedging, leveraging and derivatives trading. Authorities around the world are working on ways to regulate them.

Hedging Making an investment to reduce the risk of price fluctuations to the value of an asset. Airlines often hedge against rising oil prices by agreeing in advance to to buy their fuel at a set price. In this case, a rise in price would not harm them - but nor would they benefit from any falls.

IIF The Institute of International Finance is a global trade association of the major banks.

IMF The International Monetary Fund is an organisation set up after World War II to provide financial assistance to governments. Since the 1980s, the IMF has been most active in providing rescue loans to the governments of developing countries that run into debt problems. Since the financial crisis, the IMF has also provided rescue loans, alongside the European Union governments and the ECB, to Greece, the Irish Republic and Portugal. The IMF is traditionally - and of late controversially - headed by a European.

Impairment charge The amount written off by a company when it realises that it has valued an asset more highly than it is actually worth.

Independent Commission on Banking A commission chaired by economist Sir John Vickers set up in 2010 by the UK government in order to make recommendations on how to reform the banking system. The commission reported back in September 2011, and called for:

a ring-fence, to separate and safeguard the activities of banks that were deemed essential to the UK economy
measures to increase the transparency of bank accounts and competition among banks, including the creation of a new major High Street bank
much higher capital requirements for the big banks so that they can better absorb future losses
Inflation The upward price movement of goods and services.

Insolvency A situation in which the value of a borrower's assets is not enough to repay all of its debts. If a borrower can be shown to be insolvent, it normally means they can be declared bankrupt by a court.

Investment bank Investment banks provide financial services for governments, companies or extremely rich individuals. They differ from commercial banks where you have your savings or your mortgage. Traditionally investment banks provided underwriting, and financial advice on mergers and acquisitions, and how to raise money in the financial markets. The term is also commonly used to describe the more risky activities typically undertaken by such firms, including trading directly in financial markets for their own account.

J

Junk bond A bondwith a credit rating of BB+ or lower. These debts are considered very risky by the ratings agencies. Typically the bonds are traded in markets at a price that offers a very high yield(return to investors) as compensation for the higher risk of default.

K

Keynesian economics The economic theories of John Maynard Keynes. In modern political parlance, the belief that the state can directly stimulate demand in a stagnating economy, for instance, by borrowing money to spend on public works projects such as roads, schools and hospitals.

L

Lehman Brothers A US investment bank, whose collapse in September 2008 sparked the most intense phase of the financial crisis.

Leverage Leverage, or gearing, means using debt to supplement investment. The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leverage can increase both gains and losses. Deleveraging means reducing the amount you are borrowing.

Liability A debt or other form of payment obligation, listed in a company's accounts.

Libor London Inter Bank Offered Rate. The rate at which banks in London lend money to each other for the short-term in a particular currency. A new Libor rate is calculated every morning by financial data firm Thomson Reuters based on interest rates provided by members of the British Bankers Association.

Limited liability Confines an investor's loss in a business to the amount of capital they invested. If a person invests £100,000 in a company and it goes under, they will lose only their investment and not more.

Liquidation A process in which assets are sold off for cash. Liquidation is often the outcome for a company deemed irretrievably loss-making. In that case, its assets are sold off individually, and the cash proceeds are used to repay its lenders. In liquidation, a company's lenders and other claimants are given an order of priority. Usually the tax authorities are the first to be paid, while the company's shareholders are the last, typically receiving nothing.

Liquidity How easy something is to convert into cash. Your current account, for example, is more liquid than your house. If you needed to sell your house quickly to pay bills you would have to drop the price substantially to get a sale.

Liquidity crisis A situation in which it suddenly becomes much more difficult for banks to obtain cash due to a general loss of confidence in the financial system. Investors (and, in the case of a bank run, even ordinary depositors) may withdraw their cash from banks, while banks may stop lending to each other, if they fear that some banks could go bust. Because most of a bank's money is tied up in loans, even a healthy bank can run out of cash and collapse in a liquidity crisis. Central banks usually respond to a liquidity crisis by acting as "lender of last resort" and providing emergency cash loans to the banks.

Liquidity trap A situation described by economist John Maynard Keynes in which nervousness about the economy leads everybody to cut back on their spending and to hold cash, even if the cash earns no interest. The widespread fall in spending undermines the economy, which in turn makes households, banks and companies even more nervous about spending and investing their money. The problem becomes particularly intractable when - as in Japan over the last 20 years - the weak spending leads to falling prices, which creates a stronger incentive for people to hold onto their cash, and also makes debts more difficult to repay. In a liquidity trap, monetary policy can become useless, and Keynes said that the onus is on governments to increase their spending.

Loans-to-deposit ratio For financial institutions, the sum of their loans divided by the sum of their deposits. It is used as a way of measuring a bank's vulnerability to the loss of confidence in a liquidity crisis. Deposits are typically guaranteed by the bank's government and are therefore considered a safer source of funding for the bank. Before the 2008 financial crisis, many banks became reliant on other sources of funding - meaning they had very high loan-to-deposit ratios. When these other sources of funding suddenly evaporated, the banks were left critically short of cash.

M

Mark-to-market (MTM) Recording the value of an asseton a daily basis according to current market prices. So for a Greek governmentbond, the MTM is how much it could be sold for today. Banks are not required to mark to market investments that they intend to hold indefinitely (in what is called the "banking book" in accounting jargon). Instead, these investments are valued at the price at which they were originally purchased, minus any impairment charges - which might arise following a defaultby the borrower.

Monetary policy The policies of the central bank. A central bank has an unlimited ability to create new money. This allows it to control the short-term interest rate, as well as to engage in unorthodox policies such as quantitative easing - printing money to buy up government debts and other assets. Monetary policy can be used to control inflation and to support economic growth.

Money markets Global markets dealing in borrowing and lending on a short-term basis.

Monoline insurance Monolines were set up in the 1970s to insure against the risk that a bondwill default. Companies and public institutions issue bonds to raise money. If they pay a fee to a monoline to insure their debt, the guarantee helps to raise the credit rating of the bond, which in turn means the borrower can raise the money more cheaply.

Mortgage-backed securities (MBS) Banks repackage debts from a number of mortgages into MBS, which can be bought and traded by investors. By selling off their mortgages in the form of MBS, it frees the banks up to lend to more homeowners.

MPC The Monetary Policy Committee of the Bank of England is responsible for setting short-term interest rates and other monetary policy in the UK, such as quantitative easing
CONT. NEXT POST N TO Z

GEARING-ALPHA-BETA INFORMATION OF INTEREST

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A company's profit and loss statement, or balance sheet, gives a lot of insight into its degree of financial stability. For accountants and business owners, this information dictates numerous financial decisions, from budget allocation to hiring practices. In economics, companies' relative financial practices give insight into the state of the industry. For investors, an accurate assessment of the financial strength of a company means creating more informed trading strategies. In any of these sectors, the use of a gearing ratio is one of the most popular methods of evaluating a company's financial fitness. Though there are several variations, the most common ratio measures the amount of debt a company is liable for relative to its equity, often called the net gearing ratio.
The net gearing ratio is calculated by dividing the total debt, including long- and short-term liabilities and bank overdrafts , by the total shareholder equity. Expressed as a percentage, this ratio reflects the amount of existing equity that would be required to pay off all outstanding debts. A low-geared company with a ratio of 10% would be able to pay off debt several times over and would be considered low-risk by both investors and lenders. Companies with higher ratios, upwards of 50% for example, represent a greater risk, because even a brief period of reduced profits or a sudden increase in interest rates could mean bankruptcy and loan default .
Generally, a lower gearing ratio means greater financial stability. However, not all debt is bad debt. Loans and other fixed interest liabilities are a way for companies to leverage their value to increase profits for shareholders, so the optimal gearing ratio is largely determined by the individual company relative to others in its sector.



stable. A low-geared company with a ratio of 20%, for example, would have debts that equal only 20% of its total equity.
While the definition of a bad gearing ratio depends on the company and the situation involved, a highly geared company is usually considered a greater potential risk for investors or lenders as a downturn in revenue could mean bankruptcy or a loan default. This is especially risky if the company has loans with variable interest rates, as a sudden rate increase can easily spell disaster. Generally, a gearing ratio of more than 50% is considered high.

EXAMPLE
The gearing ratio compares a company’s owners’ equity to debt. The resulting ratio shows how leveraged a company is, or how much its owners have at stake compared to its creditors. The gearing ratio thus tells investors how much risk they could be taking on by investing in a particular company.
John and Adam own a specialty coffee shop into which John has invested $750,000 and Adam has invested $250,000. Total owner’s equity is $1 million. They’ve also borrowed $500,000 to expand their business by opening a new location. Their gearing ratio is $500,000 divided by $1 million, which equals 50%.
The more John and Adam personally have at stake in their coffee business, the better, as far as investors are concerned. Carrying debt costs money, and debt must be repaid whether the company performs well or not. The more debt a company has, the greater its risk of defaulting, which would cause investors’ shares to lose value.
If John and Adam’s store’s coffee sales plummet because of a natural disaster that disrupts their coffee bean supply, creditors will still expect to be paid, but John and Adam won’t have much income to repay that debt. If they weren't able to keep up with their payments for long enough, they might have to declare bankruptcy, and shareholders would lose everything.
A high gearing ratio may be acceptable if that is the norm for the industry in which the company operates. In this case, John and Adam’s potential investors would prefer to see a gearing ratio closer to 30%, so they invest in a different coffee business with less debt.
The Bottom Line
The gearing ratio gives investors a look at how risky a potential investment may be. It shows how leveraged a company is, based on its amount of equity in relation to debt. Generally, the lower the ratio the better, though some industries may permit a higher ratio than average.

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evaluating a company’s financial fitness through the figures found on its profit and loss statement.

The net gearing ratio is the most common one. It reflects the amount of existing equity that would be required to pay off a company’s outstanding debts. It’s expressed as a percentage, and it’s calculated by dividing a company’s total debt, including bank overdrafts, by its total shareholder equity.

A company with $2 million in debt and $20 million in shareholder equity would have a 10% net gearing ratio. The company would be able to pay off its debts several times over, and investors and lenders would consider it low risk.

Companies with ratios that are 50% or higher pose a greater risk. Even a short period of reduced profits or higher interest rates could lead them to bankruptcy or to default on a loan.

While a lower gearing ratio means greater financial stability, not all debt is bad. Companies use loans and fixed interest liabilities to leverage their value and increase profits. Ultimately, the optimal gearing ratio for any single company depends on the other companies in its sector.


Financial Gearing

A term used to describe the relationship between the Companys debt and equity shareholders funds.

Gearing is usually expressed as a percentage and is calculated by dividing the Companys debt by its equity.

A highly geared company is one where there is a high proportion of debt to equity, and can be considered a risky investment as there is a higher likelihood of the company being unable to pay its large debts.

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How to pick a good investment fund
If you take enough time and follow a detailed process, you can swing the odds in your favour, writes financial planner Mike Devere
 
by Mike Deverell on Mar 25, 2011 at 00:01

Any investment adviser will tell you that past performance is no guidance to future performance, often just before they tell you to buy a fund based on exactly that!
It is easy to identify a fund which has performed brilliantly, but that doesn’t mean it will continue to do so. Most investors, including professionals, have invested in a fund that they thought was the bee’s knees, only to get stung.
However, if you take enough time and follow a detailed process, you can swing the odds in your favour.
What do you want?
It sounds simple, but the first step is to define what it is you’re looking for.
Take a ‘top down’ approach. Decide your asset allocation first – how much to invest in equities, bonds, property etc.
Secondly, decide what mix of funds you want within each asset class. For example, within equity, how much do you want in the UK, US, emerging markets or elsewhere?
Even within each sector, there are a wide variety of investment styles and approaches. For example, within the UK equity asset class, special situations, recovery funds or those with a small or mid cap bias are likely to outperform in rising markets. However, they may well lose more money in falling markets. Large cap biased funds and equity income funds tend to do better in more difficult markets.
Decide these sorts of things before you even look at any fund data. Write it down so you can compare any funds you identify against your criteria.
Performance
You can’t ignore past performance. It is worth looking at cumulative performance against the fund’s benchmark or sector, preferably looking at 3, 5 and 10 year periods.
However, looking at cumulative performance alone can be misleading. A fund manager can have one lucky year and that can make cumulative performance look good even over 10 years. How good were the other nine years?
Look at discrete annual performance over 10 years if possible. This is usually available in bar chart format.  This will show you how well a fund did in each individual calendar year.
How many years out of 10 has the fund beaten the sector

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by Mike Deverell on Mar 25, 2011 at 00:01
Risk
Most fund analysis tools will also tell you how volatile a fund is - how much the price goes up and down. The lower the number, the lower the volatility.
You can see the effect of volatility visually by looking at a discrete performance bar chart mentioned earlier. Has the fund tended to beat the sector in rising markets? How has it done in falling markets? A fund that has done well in both types of markets is a rarity, but something to look out for.
You should also be able to find out what is the most a fund has lost within a given period, called ‘maximum drawdown’. Compare this to the sector average and then decide how comfortable you would feel if that happened again.
Fund manager skill
Now for the hard part. You’ve found a fund that has done well in the past. It may even have exhibited lower than average volatility. How much of that was down to the manager’s skill and how much was luck?
Going back to that bar chart can help. If a fund has outperformed 10 years out of 10, through good years and bad, then something is working well; a good process and/or a skilful manager. Unfortunately, the number of funds that have done this can be counted on one hand.
Two statistical measures help work out whether a fund manager has outperformed through good stock selection or through just taking market risk. The first is ‘beta’, which is a measure of how correlated the fund is to the market. If a fund has a beta of 1 it is perfectly correlated, so if the market goes up by 10%, the fund should increase by 10%. If it has a beta of 1.1, it should go up by 11%.  
The second part is alpha, which measures how much value has been added by stock selection. If a fund has a beta of 1 but when the market goes up by 10% the funds gains 12%, the extra 2% is the alpha.
If a fund has a positive alpha score, the manager has added value through stock selection. The higher the better. If a fund has a negative score, the manager’s stock selection has detracted from value.
Even a high alpha score does not necessarily mean skill – it could mean a short period of good luck. This brings me back to that word ‘consistency. If a fund has consistently had a high alpha, has consistently outperformed, and consistently had below average risk, you may just have identified a great investment.
Quality or quantity?
To help us, we’ve put together our own screening tool which scores funds based on the above criteria, paying particular attention to consistency. However, even once we’ve found a fund with great scores in all areas, we won’t invest until we understand more about how it works.
Returning to where I started; past performance tells us little about the future. As a result, a large part of the fund selection process is qualitative, not quantitative. We always meet a fund manager before investing so that we understand the process behind their performance, and can judge how successful it might be in the future.
Before you invest, find out how the fund manager is positioned based on their outlook for the future. If you disagree with the outlook, you might not want to invest right now.

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We often hear the terms alpha and beta when talking about investments. Both of these are numbers that measure related but different things.
Alpha
Alpha is a number assigned to the return over a given index. So if you invest in a stock and it returns 20% while the S&P 500 earned 5%, then you have an alpha of 15. A -15 means that your investment underperformed by 20%. Alpha is also a measure of risk. In the above example the -15 means the investment was far too risky given the return. An alpha of zero is "just right" – one has earned a return commensurate with the risk. Alpha of greater than zero means an investment outperformed. (For more, see: Bettering Your Portfolio With Alpha and Beta.)
When hedge fund managers talk about high alpha, they're usually saying that their managers are good enough to outperform the market. But that raises another important question: if alpha is an "excess" return over an index, exactly what index are you using? For example, a fund manager might say that she or he got a 20% return when the S&P brought in 15%, an alpha of 5. But was the S&P an appropriate index to use? Consider a manager who put all of a client's money into Apple Inc. (AAPL

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) stock on Aug. 1, 2014. Compared to the S&P 500 the alpha would look quite good: Apple returned 18.14% while the S&P 500 returned 6.13%, for an alpha of about 12.
But it's unlikely that most experts would consider the S&P a proper comparison for Apple all by itself, given the differing levels of risk. Perhaps the NASDAQ would be a more appropriate measure. The NASDAQ in that same yearlong period returned 15.51%, which pulls the alpha of that Apple investment down 2.63. So when judging whether a portfolio has a high alpha or not, it's useful to ask just what the baseline portfolio is. (For more, see: Adding Alpha Without Adding Risk.)
Beta
This relates to beta. Unlike alpha, which measures relative return, beta is the measure of relative volatility. If you put all your money in every possible investment then your beta is 1. A tech stock in this case would have a beta above 1 (and probably rather high), while a T-bill would be close to zero, because their prices hardly move relative to the market as a whole.
Beta is a multiplication factor. A stock with a beta of 2 relative to the S&P 500 goes up or down twice as much as the index in a given period of time. If the beta is -2 then the stock moves in the opposite direction from the index, by a factor of two. Some investments with negative betas are inverse exchange-traded funds (ETFs) or some types of bonds. (For more, see: Beta: Know the Risk.)
What beta also tells you is the risk that you can't get rid of by diversifying. If you look at the beta of a typical mutual fund it's essentially telling you how much risk you're adding to a portfolio of funds.
Again similar caveats to alpha apply: it's important to know just what you're using as your benchmark for volatility. Morningstar, Inc.

), for example, uses U.S. Treasuries as its benchmark for beta calculations. The firm takes the return of a fund over T-bills and compares that to the return over the markets as a whole and using those two numbers comes up with a beta. There are, though, a number of other benchmarks one could use. (For more, see: Beta: Gauging Price Fluctuations.)
The Bottom Line
Alpha and beta are both risk ratios that investors use as a tool to calculate, compare and predict returns. They're very important numbers to know, but one must check carefully to see how they are calculated. (For more, see: A Deeper Look at Alpha.)

(A) Alpha - Investopedia defines Alpha as: "A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha."
My plain English definition: Alpha tells you if the investment manager is worth what you pay him. Alpha tells you how well a mutual fund or similar investment performs compared to the stated benchmark it's trying to beat. If a funds benchmark is the S&P500 index and the index returned 20% while the fund returned 22%, then the fund will have a positive Alpha (obviously positive Alpha is good, negative Alpha is bad). Compare the Alpha over longer time periods in order to understand what value the manager brings to the table versus the index he is trying to beat.
(B) Beta - Investopedia defines Beta as: "A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market."
My plain English definition: Beta is an expression of how volatile an investment is compared to the overall market. A beta of 1 indicates that the investment will move with the market. A beta of less than 1 means that the investment will be less volatile than the market. For example, if a stock's beta is 1.3, then theoretically it's 30% more volatile than the broad market.

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ADD ON DATED 13/08/2017
OF INTEREST / INFORMATION PASSED ON RE SHARE PRICING

What really happens at 4.30 when the market closes is the "closing auction" ( if there are any potential trades left on the book), anyone at this point with Direct Market Access including joe public can enter their bids/offers for the stock, from here lets call them buys and sells, its easier.
What the SETS system is trying to do is give the official closing MID price for the days trading.

The participants have 5 minutes to enter what price they will pay for or be prepared to sell their stock for at this point, no-one is trading here, just entering. Furthermore, their entries have to be within 5% of the last AT trade of the day. If the last AT trade was at 16.5p, the range for the entries of proposed buys and sells must fall between 15.675 - 17.325p.After 5 mins and all the entries are in, the SETS computer swings into action, and what it does is calculate from the entries the HIGHEST VOLUME trades that can be made, the MOST shares it can UNCROSS from one side of the book to the other. It is literally "matching" any trade that will trade at the prices on the book, if you see what I mean? This takes up to 30 secs above the 5 min auction.
The resultant figure becomes the UT ( uncrossing Trade) for the day and the official days closing MID price...which in our example .. 16.35.14..... 1750000 @ 17p....UT.
So the UT you see every evening at something like 16.35.+30secs is NOT a BUY, is NOT a SELL.. but half and half, it is a Volume figure. It is recorded as a buy or sell like all trades are: a guess based on which side of the "last mid" it is.
The 17p official closing price is then taken forward to the OPENING auction at 7.50am the next day where the city johnnies do the whole auction thing again until the 8.00am open.

11/02/2020
found this quite interesting to watch for those who dabble in stocks
i know it is a sales pitch for Stockopedia but the video is quite interesting


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https://www.youtube.com/watch?v=GICubyTFE6Q