Alternative Investor

Jargon Buster

There is a lot happening in the stock market of late and as we listen to the newscasts there are a lot of terms that are used that we may not understand.
Below is a list of the most common stock market terms used on trading floors.

AAA-rating - The best credit rating that can be given to a corporation's bonds, effectively indicating that the risk of default is negligible.
Administration  -A rescue mechanism for UK companies in severe trouble. It allows them to continue as a going concern, under supervision, effectively to try to trade out of difficulty.
Assets - Things that have earning power or some other value to their owner.
Fixed assets - are more long term than other assets; 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.
Bear market - In a bear market, prices are falling and investors, anticipating losses, tend to sell. This can create a self-sustaining downward spiral.
Bond - An IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. Banks and investors buy and trade bonds.
Bull market - A bull market is one in which prices are generally rising and investor confidence is high.
Capital - The wealth - cash or other assets - used to fuel the creation of more wealth.
Capitulation - The point when a flurry of panic selling induces a bottoming out of prices.
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.
Commercial paper - Unsecured, short-term loans issued by companies. The funds are typically used for working capital, rather than fixed assets.
Commodities - Commodities are products that, in their basic form, are all the same so it makes little difference from whom you buy them. For example, Iron ore will have a trading price no matter which mine you buy it from.
Correction - A short-term drop in stock market prices. The term comes from the notion that, when this happens, overpriced stocks are returning back to their "correct" values.
Credit crunch - The situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had.
Credit default swap - A swap designed to transfer credit risk, in effect a form of financial insurance.
Dead cat bounce - A phrase used on trading floors to describe a short-lived recovery of share prices in a falling stock market.
Derivatives - Derivatives are a way of investing in a particular product or security without having to own it.
Credit derivatives - are based on the risk of borrowers defaulting on their loans, such as mortgages.
Dividends - A payment by a company to its shareholders, usually linked to its profits.
Equity - In a business, equity is how much all of the shares put together are worth. In a house, your equity is the amount your house is worth minus the amount of mortgage debt that is outstanding on it.
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.
Hedge fund - A private investment fund with a large, unregulated pool of capital and very experienced investors.
Hedging - Making an investment to reduce the risk of price fluctuations to the value of an asset.
Inflation - The upward price movement of goods and services.
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.
Leveraging - Leveraging, or gearing, means using debt to supplement investment.
Deleveraging - means reducing the amount you are borrowing.
Libor - London Inter Bank Offered Rate. The rate at which banks lend money to each other.
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.
Liquidity - The liquidity of something is how easy it is to convert it into cash. Your current account, for example, is more liquid than your house.
Loans to deposit ratio - For financial institutions, the sum of their loans divided by the sum of their deposits. Currently important because using other sources to fund lending is getting more expensive.
Mark-to-market - Recording the value of an asset on a daily basis according to current market prices.
Money markets - Global markets dealing in borrowing and lending on a short-term basis.
Mortgage-backed securities - These are securities made up of mortgage debt or a collection of mortgages. Banks repackage debt from a number of mortgages which can be traded. Selling mortgages off frees up funds to lend to more homeowners.
Naked short selling - A version of short selling, illegal or restricted in some jurisdictions, where the trader does not first establish that he is able to borrow the relevant asset.
Preference shares - A class of shares that usually do not offer voting rights, but do offer a superior type of dividend, paid ahead of dividends to ordinary shareholders. Preference shareholders often also have superior status in the event of a liquidation.
Profit warning - When a company issues a statement indicating that its profits will not be as high as it had expected.
Rating - Bonds are rated according to their safety from an investment standpoint Ratings range from AAA, the safest, down to D, a company that has already defaulted.
Recapitalisation - To inject fresh money into a firm, thus reducing the debts of a company.
Securities lending - Security lending is when one broker or dealer lends a security to another for a fee. This is the process that allows short selling.
Securitisation - Turning something into a security. For example, taking the debt from a number of mortgages and combining them to make a financial product which can then be traded.
Security – A contract that can be assigned a value and traded.
Short selling - A technique used by investors who think the price of an asset, such as shares, currencies or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market. The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.
Stagflation - The dreaded combination of inflation and stagnation - an economy that is not growing while prices continue to rise.
Sub-prime mortgages - These carry a higher risk to the lender because they are offered to people who have had financial problems or who have low or unpredictable incomes.
Swap - An exchange of securities between two parties.
Tier 1 capital - A calculation of the strength of a bank in terms of its capital, defined by the Basel Accords, typically comprising ordinary shares, disclosed reserves, retained earnings and some preference shares.
Toxic debts - Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some customers cannot repay; toxic debt describes a whole package of loans where it is now unlikely that it will be repaid.
Underwriters - When used of a rights issue, the institution pledging to purchase a certain number of shares if not bought by the public.
Unwind - To unwind a deal is to reverse it - to sell something that you have previously bought, or vice versa. When administrators are called in to a bank, they must do the unwinding before creditors can get any money back.
Warrants - A document entitling the bearer to receive shares, usually at a stated price.
Write-down - Reducing the book value of an asset to reflect a fall in its market value. For example, the write-down of a company's value after a big fall in share prices.

Endowments take another Financial Bashing

The current economic climate is hitting share prices on a scale that has not been seen for decades and a consequence of this is that many investors are also worried about the performance of their endowment policies, where most of the money is invested in shares.
The overwhelming advice with any endowment policy is avoid cashing them in. Even if your policy has performed poorly, endowments are much better value if the contributions are maintained to the end of the policy. Furthermore, any policy that is cashed in early could have exit penalties that will further diminish its value.

This is a bad situation for an endowment as a savings investment. However, there will be further worries for those who are relying on their endowment policy largely invested in shares to pay off their mortgage.

Even after the recent revelations of mis-selling of endowment mortgages in the 1980s there are still six million holders of endowment mortgages. More than half already face the risk that their endowment will be worth less, when it matures, than the original mortgage loan it is meant to pay off. Such a "mortgage shortfall" could leave them having to find the extra money elsewhere, or else face repossession.

The longer the stock market decline continues, and the deeper it is, the greater that risk that shares based endowments will not hit the mark. Worried homeowners have several options to ensure their loan is repaid.

One is to convert part of the mortgage to a repayment basis, so there is less capital to pay off when the mortgage matures, another option is to put extra money into an alternative investment that is separate from the stock market.

Stamp seller Stanley Gibbons has seen a rise in profits in 2008 saying investors are steering away from erratic financial markets and seeking other more stable investments. Stanley Gibbons Pre-tax profits for the six months to June rose by 6% to £1.8m based on sales that jumped by 12% to £9.8m.

Centaur Global who run alternative investments based on analyst predictions in sports outcomes have seen their operating fund jump from circa £2million to nearly £10 million in the period 2007 to 2008. “We have seen a large upturn in clients who have withdrawn money from their stock market portfolios to invest in our products” said Chairman Keith Sobey, “People are realising that a structured analyst based approach to gambling based investment products does not have the level of risk they previously imagined”.

This does seem to be true, one of their investment products “Maxnet” had tax free growth of 69% in 2007, that is the kind of growth that can help to shore up any endowment.

Alternatives certainly seem to be taking a more prominent role in people’s portfolio and after the current stock market dive it may be that even more people look to taking a percentage of their fund and placing it in new alternative investments. One thing’s for sure, endowment holders must act now to ensure they can meet their mortgage debts when their endowment matures.

Social Lending, a borrower or a lender be...

The internet seems to be trying to make everything social. We have social networking sites like MySpace and Facebook where you can stay in touch with the smallest updates of your friends’ lives.
We have social business sites like LinkedIn where you can be judged by those that you once worked with.
Many of the new social sites deal with helping others for instance Kiva.org where you can lend money direct to individuals in third world areas who wish to start a business or build an existing business. Kiva give money direct to individuals who would never be deemed credit worthy with a financial institution and they pay it back interest free over a set period. I myself have done four Kiva loans all of which have been paid back, and I have another four outstanding across the world at this time.

This idea of direct borrowing and lending between individuals and with no input from a bank is the idea behind Zopa (www.zopa.co.uk)
What Zopa do is take money from people who want to make a profit and lend it to individuals who need a loan.
Lenders make an average return of 8.6% although this can be higher if they choose to lend at different levels of risk.
If you wish to lend through the Zopa markets your funds are split between different loans so that the risk is spread. You can choose to lend through the Zopa markets or you can hand pick your borrowers by looking at their Zopa listings and then offer to lend to them at a certain rate of interest.

Zopa do all of the legal work, they credit check borrowers and assess the risk and even chase defaulters on your behalf however the default rate at Zopa is extremely low compared to bank defaults, possibly because Zopa clients know that they are borrowing money from other people rather than institutions.
So far Zopa UK has made over £25million pounds worth of loans on a people to people basis with no bank in sight.
Becoming a Zopa lender is a fascinating way to make a higher than average return on a cash sum while at the same time doing exactly what a bank would do with it if you had it on deposit with them.
If you have a cash sum that you can afford to be without for the duration of a loan term then Zopa is certainly an alternative worth looking at.

Intruments hit the high note

Guitars can really hit the right note as long term money makers.
Instruments made in the ‘golden era’ of the 50’s, 60’s and 70’s have soared as much as 1,000%.
According to guitar experts the best buy for the uninformed is to start at the top investing in already rare models like Gibson Les Pauls or Fender Stratocasters and Telecasters made in the 1950s and 1960. These guitars are the gold bullion of guitar collection, they have been strong over the decades and just grow in value year on year.
These guitars originally cost a couple of hundred pounds but can now be worth £200,000+, and guitars that can be proved to have been played by a star of the past or the present have extra value.

Guitar collectors have seen such good returns that in March 2008 Anchorage Capital Partners ("ACP") (a Mercantile Investment Group company)  reported to the Financial Times that it is preparing to launch a closed-ended fund which will invest in the rare and vintage guitar market to the tune of US$100 million for a 10-year term.

The term Guitar Acquisition Syndrome was originally coined by Steely Dan front man Walter Becker, and there are many very wealthy businessmen who readily admit to this bug.
One of the most famous is Microsoft co-founder Paul Allen. For example; his collection includes the white 1968 Stratocaster that Jimi Hendrix played at Woodstock in August 1969 which he bought from an Italian disk jockey for $1.3 million.
Also Frank De Fina, president of Panasonic Systems Solutions Company of America, conservatively numbers his guitar collection as "dozens." Its highlights include a 1939 Martin D-18 acoustic and three electric models lusted after by collectors worldwide: a 1953 Fender Esquire, a 1956 Fender Stratocaster and a 1959 Gibson Les Paul.
With such a large number of treasures on hand, storage became an issue. So a few years back, De Fina bought a flame proof bank vault to house his collection. "Bank vaults are more readily available than many kinds of vintage guitars," he quips, "and they're a lot cheaper, too."

In terms of new guitars, Paul Reed Smith guitars which start from around £2,000 are considered the new collectables and signature versions (which have the designers name on the body or head) are considered to rise in value in the short term as well as the long term.
But the market isn’t just around electric guitars, a 1924 signature Gibson mandolin recently sold for $1million and the price for pre war branded Ukuleles and Martin acoustic guitars from the early 1940’s has jumped 75% year on year since 2004.
So, old or new it would seem that you wont get strung along if you invest in a good quality limited edition guitar, and if you get lucky perhaps the next pop idol will be photographed with one round his neck.

USA National Debt Clock Runs Out

The United States National Debt clock was invented and bankrolled by New York real estate developer Seymour Durst, the 11-by-26 foot digital clock was erected in 1989. When it first was plugged in, the odometer-style clock whirred furiously as the national debt rose by $13,000 a second, over the first few years no one saw the last few digits as they increased so fast they were just a blur.
At one point in 1996 the debt was rising so fast the clock's computer crashed.

Under the cautious presidency of Bill Clinton with his push for a balanced budget the clock started ticking in the opposite direction, shaving off roughly $30 a second towards the turn of the century. Strangely enough the makers son felt that the negative fall national debt shown on the clock was sending out the wrong message and he closed it down until 2002 when the "fiscally conservative" administration of George W. Bush reversed course and brought positive meaning back to the ticker.

When it was erected in the late nineties the board showed the $2.7 trillion level of debt in 1989.
Now however the United States government debts have ballooned so badly that the national debt clock has ran out of digits
When that passed the $10 trillion point in September 2008, the sign could not display the full amount.
The clock's owners say they plan to add two more zeros early next year, allowing the clock to record a quadrillion dollars of debt.
For the time being, the Times Square counter's electronic dollar sign has been replaced with the extra digit required and the dollar sign itself has been painted on, perhaps a sign of the times for the American economy.
Some economists believe the $700bn bail-out plan for ailing US financial institutions could send the national debt level to $11 trillion, but when you look at the figures on the clock you start to realise that the $700bn rescue package from the United states even if added to the UK’s £500bn still doesn’t make any kind of impact on the debt of the worlds so called richest nation.
The only way to stop the debt is to reverse the clock once again, and perhaps this time with lessons learned from the past it would be good to leave it running and reflect this.

The Government Savings Guarantee

You will have heard about the Financial Services Compensation Scheme (FSCS). When a bank fails, this protects up to £50,000 of your savings, but not everyone is aware of how complex this scheme is and how it works.
We look at it in more details and answer some of the questions.

First we ask, does the scheme cover all of my £50,000?
Yes. Previously, the FSCS covered just a percentage of the first £50,000 you had in an account with a failed bank. This has caused some confusion, so now all of your deposit up to £50,000 is covered.

Does the scheme cover interest that I have earned?
Yes. Not only are your savings deposits protected, but any interest you’ve earned right up to the point the bank was liquidated is protected too.

If I have two accounts with one bank am I protected?
No. You only get £50k protection in total from the bank; this is because the scheme is based on banking licenses.

If I have two accounts in the same group am I protected?
Some banks are connected; for example, HSBC owns First Direct. If you have savings in both these banks you’re protected on up to £50,000 of the total. That’s because these banks share the same banking license. In another situation, Royal Bank of Scotland owns Nat West, but these banks have separate licenses. Therefore you could have £50,000 in both banks (£100,000 in total) and it is all protected by the FSCS.

Here is a list of banking groups to help you place your capital wisely:

1 Abbey, Cahoot, Bradford & Bingley
2 Bank of Ireland, Post Office
3 Barclays, Woolwich
4 Halifax, Bank of Scotland, Birmingham Midshires, Saga, The AA, Intelligent Finance
5 HSBC, First Direct
6 Lloyds TSB, Cheltenham & Gloucester
7 Newcastle Building Society, BMW Savings
8 Royal Bank of Scotland, Direct Line
9 The Co-Operative Bank, Smile
10 Yorkshire Bank, Clydesdale Bank

If you need to spread money about do not put it into banks that are named in the same group. As mentioned previously, the one exception is Nat West and RBS who operate under separate banking licenses.

I use an overseas bank, am I protected?
Yes. If the bank trades here, it must have a valid UK banking licence, which means your savings are still protected by the scheme. However, with a foreign bank you will probably be covered by similar schemes running from the parent country so you will have to claim through that system first, and then the balance up to £50,000 will be topped up by the FSCS.

What about my mortgage?
Your mortgage will end up being passed to someone else to look after. It may be the Government or, much more likely it will be bought or acquired against debt by another bank. You will continue to pay your mortgage under the same terms and conditions as before. However the situation is different if you have both savings and a mortgage with the same bank or group. If you owed, say, £200,000 to the failed bank, perhaps through a mortgage, and you had £150,000 in savings, it’s likely the FSCS administrators will deduct your savings from the mortgage so that you now owe it £50,000. You would get no compensation.

The FSCF scheme does not just cover bank deposits, compensation can also be given for insurance policies and investments too.
In all cases, the following three things must apply before the FSCS can step in:
* You must have suffered financial loss.
* The firm in question must be authorised by the Financial Services Authority (FSA).
* The firm must be in default which means it’s unable, or likely to be unable, to pay claims against.
If the firm is still trading, claims for compensation should be directed to the Financial Ombudsman Service.

If an insurer were to default, the maximum protection the FSCS could provide is 100% of the first £2,000 plus 90% of the remainder of the claim. There is no upper limit on the amount of compensation that could be paid on the remaining 90%
However each amount is decided by the courts and each claim will be dealt with on a case by case basis, so there may be some time while your case goes through the legal system. For example:

If you have been making contributions to a pensions policy and your provider goes bust. You would need to make a claim for financial loss. If the pension provider is unable to meet your claim because it has insufficient assets and you can’t be compensated by other means you can turn to the FSCS for help.
The FSCS would try to arrange for the pension you had with the failed provider to continue in one of two ways:
1. This could be achieved by transferring your pension to another provider, or
2. By substituting your original pension with one offered by an alternative provider.
Whichever route is used, the FSCS will ensure you receive at least 90% of your pension pot. The pot's value as mentioned above would be determined by a court.
Alternatively, the scheme could instead provide funds to return the contributions you have made for your pension where appropriate.

The FSCS scheme doesn’t cover the Channel Islands or the Isle of Man, nor does it cover deposits outside the European Economic Area.

What if we have a joint account?
Yes. Joint account holders will usually both benefit from £50,000 of protection, making a total of £100,000. If the FSCS’s administrators see evidence that the pot isn’t evenly split, it’s possible that one of you will receive less than £50k. This event is unlikely though, and it would only likely happen if the FSCS was handed evidence that one of you had individual savings of less than £50k.

How long does it take to pay out?
There’s no fixed time in which the FSCS pays out. From the date of your claim it may be just a few weeks. But we don't know for sure how long it would take with a bigger bank.

If you’ve ever claimed with the FSCS, please let us know your about your experience.

Early stage environmental investment

The environmental sector is growing and growing quickly. The Secretary of State for Environment, Food and Rural Affairs, Hilary Benn MP, estimates that the UK's environmental goods and services industry is currently worth around £25 billion and is quoted as expecting this figure to double by 2015 on the back of (at least in part) a number of “green” initiatives set by the EC. On a global scale, the UK Government estimates that the world market for environmental goods and services could be worth £350 billion by 2010, as much as the global aerospace industry.

In particular the renewables sector has seen soaring rates of investment over the past year with the UN Environmental Programme announcing that that $148.4 billion of new money was raised in 2007 – a massive 60% increase over 2006.

The rapid growth of the environmental goods and services industry is an anomaly in today's economic climate of credit crunch and fear of recession, with numerous drivers creating new and expansive markets. Drivers such as climate change, increasing energy demand, political pressure, new environmental legislation, corporate social responsibility and the financial incentives of increased efficiency are generating a demand for environmental goods and services that has never been known before.

However, many companies are still struggling to obtain investment for the development of new environmental technologies and services.

Research has shown that a funding gap exists, preventing many Small and Medium Enterprises (SMEs), start-up companies and academic spin-outs from securing investment. Investors are cautious to venture into riskier, early stage investment projects, despite their global potential with many venture capitalists only considering opportunities in excess of £5 million from established companies, often such as those preparing for AIM listing.

As a result, numerous technologies fail to reach commercialisation. A recent report published by the United Nations Environmental Programme's Sustainable Energy Finance Initiative and New Energy Finance revealed that although $148 billion was invested in sustainable energy in 2007, early stage venture capital investment represented only $2 billion of this total, approximately 1.3%.

In 2007, Clarkslegal LLP and The Environmental Industries Commission established The EIC Environmental Investment Network, specifically aimed at bridging the funding gap for early stage environmental projects.  Over the past year they have received a wealth of pioneering and innovative proposals which have the potential to create new and exciting markets within the environmental sector.  Proposals received cover a broad range of environmental sectors including renewables, automotive and waste industries, with the majority of projects relevant not only to their domestic market but to the worldwide, international market. For example, a technology that significantly reduces transport emissions in the UK will significantly reduce transport emissions in the US, China or India and investors from these countries are currently trawling European research centres and universities to export such technologies.

Now looks to be the time for investors to investigate opportunities beyond their traditional criteria and explore the largely untapped supply of early stage, potentially groundbreaking environmental technologies before someone else does.

Matthew Evans
Network Manager, The EIC Environmental Investment Network
www.environmentalinvest.com

The EIC Environmental Investment Network (EIN) is an investment network designed to facilitate the raising of finance for the commercialisation of environmental technologies and services, specifically for start-up companies, SMEs and academic spin-outs, which have traditionally struggled to attract investment.

Established by leading commercial law firm Clarkslegal LLP and The Environmental Industries Commission (EIC) in 2007, the EIN has received over £300 million of potential investment opportunities covering a range of sectors including renewable energy, automotive, water and waste management. 

Matthew Evans is an Associate Member of The Chartered Institute of Marketing and his qualifications include a Masters in Marketing, with Distinction. He has also recently completed The Chartered Institution of Wastes Management Waste Awareness Certificate. Matthew’s background involves a wide range of marketing and market research projects for a variety of organisations in the UK and Canada.
As EIN Network Manager, Matthew Evans is responsible for its day to day management on behalf of Clarkslegal LLP.