Glossary of termsOur glossary provides you with definitions of and briefings on the terms and issues most widely-used and discussed in finance.
Acquisition & leveraged financeWays of financing corporate transactions by using own and outside capital. Lead to alterations of ownership.
Asset classCategory or class applied to characterize assets. Such categories are broadly defined and include shares, fixed-interest securities and real estate.
Asset managementSupplied to such clients as companies, banks, insurers, pension funds or private investors on the national and international levels, such services entail primarily the fiduciary management of funds and portfolios comprised of shares, bonds and debentures, cash and real estate.
Basel III"Basel III" denotes the recommendations formulated by the Basel Committee on Banking Supervision of the Basel-based Bank for International Settlements. These recommendations supplement the capital adequacy requirements for banks (Basel II) resolved upon in 2004. Basel III incorporates the experiences gained from the implementation of Basel II and the insights gained from the crisis that has gripped the world's financial and other markets since 2007. Basel III stiffens the requirements placed upon banks' minimum capital adequacy and introduces capital buffers. These measures are designed to impart a greater stability and resilience to banks in times of crisis. Basel III sets a 7% rate of hard core capital, a 1.5% rate of soft core capital and a 2% one of supplementary capital, thus adding up to a minimum percentage of capital adequacy of 10.5%. This represents a marked increase from the pre-crisis rate. Also stiffened by Basel III are the requirements placed by other important indicators of stability.
BISThe Bank for International Settlements (BIS) is headquartered in Basel. Its primary responsibilities are the supervision of transnational transactions and the formulation of internationally-applicable capital backing requirements.
BondsTerm referring to both fixed-interest securities and debt obligations.
Capital increaseA measure undertaken by a company to increase its amount of own capital. There are various kinds of capital increases. Shareholders are normally given the option of exercising their rights of procurement of → new shares to maintain their relative stakes of the company's capital stock. For it to be enacted, three quarters of the shareholders attending the AGM have to vote for an "ordinary capital increase". The company's executive board can also exercise its option of securing approval from the AGM for a capital increase to be undertaken some time during the next five years ("approved capital increase").
CEECEE = Central and Eastern Europe
CFD – Contract of difference
A CFD is a contract whose
value is derived from alterations in the value of an asset--a stock or an
index--during the period of agreement. CFDs are thus not informed by the
underlying value of the asset. Such contracts of difference thus precisely mirror
movements on securities exchanges and are, for that reason, easy to understand.
These contracts provide investors with a way of 'betting' on both kinds of
stock movements (rises and falls).
Core capital allocation
Allocation of core capital to individual
segments (such as corporate sectors).
Refers to financing secured from both own and outside sources. The term thus applies to project-related and → Acquisition & Leveraged Finance, and to goings public and → Mergers & Acquisitions.
Corporate governanceThis term refers to the set of regulations and rules governing the supervision and management of companies. The implementation of and adherence to such regulations make corporate operations easy to understand, thus enhancing outsider trust in the company management's acting in a way demonstrably sustaining and increasing corporate value. In use in Germany is the code formulated and updated on a regular basis by the country's Corporate Governance Commission.
Cost-income ratioRatio of expenditures for administration and the sum of income from interest, brokerage, trading and the balance of other operating results. A low cost-income ratio indicates a high level of productivity.
Coverage of securitiesSuch coverage is provided by analysts tracking and evaluating individual securities and the companies and institutes issuing them.
Credit derivativesDerivative financial instruments enabling a participant in a transaction (such as the seller of risks or the secured party) to transfer the credit-related risk arising from a receivable or a security to another participant (such as the purchaser of risk or the securing party). Levied in the process is a premium. The purchaser of risk thus assumes the credit-related risk borne by the receivable or by the security, and does so without actually having to purchase it.
Credit riskLoss of value possibly arising from customer default or deterioration of creditworthiness.
Cross-sellingInvolves supplying consulting services designed to get customers interested in purchasing other corporate products.
DerivativesFinancial instruments derived from investment vehicles traded on spot markets (such as shares, bonds, foreign exchange). The value of a derivative is largely determined by the price, change thereof and expectation there for of the financial instrument underlying it.
Portion of the company's profits disbursed to
its shareholders. This payout is divided among and according to the company's
shares. Along with the share's possible appreciation, the dividend is the
source of its yield. Companies are not obliged to pay out dividends. Some
companies--Microsoft is one of them--refrain, as a matter of corporate policy,
from doing so, preferring instead to devote profits to investments in assets
and innovations promising to secure corporate success and thus cause the
company's stock to appreciate.
Equity according to BIS(→ BIS) The recommendations formulated in July 1988 by the Basel Committee for Banking Supervision govern the amount of equity required to be maintained by banks. Such funds are comprised of liable equity capital and Tier III funds. The former is comprised of the core capital (itself primarily made up of subscribed capital and reserves) and of Tier II capital (participatory rights capital, subordinated term debt, provident reserves constituted according to §340f of Germany's Commercial Code, and revaluation reserves taking the form of securities and real estate).
Exchange Traded Commodities (ETCs) are bearer
bonds which are traded on exchanges in the same way as → ETFs, and which
ETFExchange Traded Funds (ETFs) are funds that are directly bought and sold on stock exchanges without incurring any asset-based fees. To be paid are ordering fees and the security's price. ETFs feature easy-to-use and understand structures. They precisely depict such stock indexes as the DAX or the pan-European EuroStoxx. After having been constituted, ETFs are generally not proactively managed. Their term is not preset. Although relatively new in Europe, ETFs are rapidly gaining in popularity.
EuriborEuropean Interbank Offered Rate. This is the rate of interest levied among European banks trading deposits bearing a preset term of one week or of between one and twelve months. The Euribor is the reference rate which is the most widely used for floating bonds denominated in euros.
ExposureExposure refers to the amount expected to be borne by a bank facing the delinquency of a loan recipient. The exposure is proportionately comprised of freely-available outside lines and of certain products.
Fast exit optionThe executive board of Deutsche Börse AG convenes once a year (at its statutory meeting of adjustment) to determine the composition of the DAX. Bases for these decisions are the proposals formulated by the company's dedicated working circle, which uses two criteria in evaluating a company's worthiness for being part of this index. One is the so-called book of commissions turnover ("Orderbuchumsatz") achieved by the shares traded on the Frankfurt Stock Exchange and via its Xetra electronic system. The other criterion is the company's market capitalization. This is determined to be equivalent to the capital circulating among the investing public. A ranking of 41st or higher in either these criteria as of September's statutory meeting of adjustment suffices to remove a company from inclusion in the DAX. The stock's being replaced in the index depends on there being a company which has registered 35th or better rankings in both criteria: book of commissions turnover and market capitalization. Via the "fast exit option", Deutsche Börse is also entitled to remove companies from the DAX on such other days as the third Friday of the last month (March, June, September, December) in a quarter. This option can be exercised in those cases in which the company being replaced has rankings of 46th or worse in either of the above criteria, and in which a substitute is available which has placed 35th or better in both criteria.
Germany's legal codes define investment funds to
be "special assets" managed by an investment trust. The class patronized by
small-class investors is comprised of funds open to the general public. Such
funds enable investors to realize their objectives of consigning their funds to
a large number of shares or other securities. Such funds thus offer investors
not possessing great amounts of capital a way of achieving this sought-after
diversification. The funds gather money from a large number of investors, and
then invest the proceeds in a great variety of vehicles. By doing such, they
reduce the risk associated with investing in securities. Funds thus offer the
ideal way of leveraging a relatively small amount of capital into a broad
selection of investments. The funds show a great diversity of investment
specialization: in shares, bonds and debentures, indexes, money markets, real
estate, and even in other funds (fund of funds). A fund's total value is
determined by that of the items comprising its portfolio. To find out a fund's
current value, consult with the issuing party or with the Munich Stock
Exchange, which provides real-time and binding quotes of purchase and sale
during the entire trading day for more than 3,800 funds.
GoodwillThe difference between the amount that a purchaser is prepared to pay for a company and the balance of the company's individual assets and liabilities (asset value). The size of this difference is determined by the expectations of future earnings (earnings value).
Hybrid capital transactions (Hybrid capital)Issues taking the form of assets contributed by silent partners or of preference shares whose emissions involves special purpose entities maintained by the group. Such issues are regarded by authorities supervising banks as being core capital.
Income retentionRefers to a company's plowing its profits back into financing its operations.
Such "barometers" depict the weighted movement
of a basket of securities. The most important index of stocks in Germany is the
DAX, which comprises the performance of the stocks of the 30 largest joint
stock companies headquartered in Germany and traded on exchanges. Inclusion is
determined by the company's market capitalization, which is the stock's quote
times the number of shares issued, and by its stock's daily turnover (both of
sales and purchases) on exchanges. Prime among the international-level indexes
is the EuroStoxx 50, which is comprised of the 50 largest (in terms of capital)
companies in Europe; as well as the USA's Dow Jones Industrial Index and the
NASDAQ 100. Predominating in the latter are technology companies. A large
number of derivatives, certificates and funds mirror indexes. In most cases,
its incorporation into an index leads to the stock's rising. This rise is
caused by the propensity among fund managers and other investors to purchase
all shares comprising an index.
International Accounting Standards (IAS)Enacted by the IASC (International Accounting Standards Committee), an international body of experts stemming from national organizations and charged with resolving accounting issues, the IAS have been created to ensure the international-level uniformity, accountability and transparency of accounting practices.
International Financial Reporting Standards (IFRS)The IFRS include the previously-enacted International Accounting Standards (→ IAS), as well as the interpretations issued by the Standing Interpretations Committee, and those standards and interpretations to be issued by the IASB in the years to come.
Investor Relations (IR)This corporate department is charged with cultivating and maintaining relationships with shareholders, analysts and other players on capital markets by providing them with information on strategies, on key financial indicators and on the central →Value Drivers boosting corporate worth.
IPO (Initial Public Offering)IPO refers to the administrative procedures governing the initial issuing of shares on a primary exchange. An IPO generally involves securing the admission for and listing of a company's joint stock and shares on an exchange.
IssuingRefers generally to that of securities. This can be done directly (proprietary issuing) or by such outside parties as banks (outside issuing). Banks can do such on a per-commission basis. In such transactions, the bank acts on behalf of the issuing party and is paid commission on sales of issues. Banks can also purchase the securities at a preset price, to then offer them at a higher one to outside investors (placement).
Jumbo mortgage bondsMortgage bonds with an issuing volume of more than €500 million and used to refinance municipal (public sector mortgage bonds) or real estate loans.
Lead brokerThese brokers are responsible for achieving the best possible quotes for and the largest possible volume of trading on exchanges for the securities entrusted to them. This day-to-day optimization of stock quotes by the lead brokers is monitored by the body supervising the trading on the respective exchange. The lead broker records each security and all orders (both sales and purchases) in his or her electronic order book. Such brokers are employed by such securities brokerages as Germany's Baader Bank AG and mwb fairtrade Wertpapierhandelsbank AG.
This form of corporate takeover can be
undertaken by in-company or external investors. Should managers conduct the
takeover, the takeover is referred to as either→ management buy in or →
management buyout. A relatively small amount of own funds is used to take over
the company, with the preponderance of capital stemming from loans provided by
banks or from the issuing of bonds.
Limit orderPredetermined upper and lower limits for the prices of securities to be bought or sold on exchanges. In addition to the quotes, the limits can also apply to the time of transaction. A "stop buy limit" refers to a limit placed upon purchasing; a "stop loss" to one triggering the sale of a security.
Management buy-inThe takeover of a company by outside management. t.
The takeover of a company by its management.
Market risk positionPrinciple 1 stipulates that such positions are comprised of the risks associated with foreign exchange, commodities and options, as well as those found in the trading ledger. The latter include risks arising from rates of interest and stock quotes, and from → credit risks.
Market techniquesMethod used to predict or explain movements of stocks and other securities. The method takes into account all important corporate data, the stock's performance and that of the sector as a whole, as well as psychological factors.
Mergers & acquisitions (M&A)The arranging of mergers among and of purchases of companies or parts thereof, plus the provision of related consulting services to either purchasers or sellers.
Mezzanine loansA financing instrument which is subordinate to bank loans and which is primarily used as a component of the financing required in leveraged buyouts. The subordinate nature of this instrument imparts to its supplier a higher level of risk. This is generally compensated for by supplying a higher rate of interest and an option to acquire a stake in the equity of the company being purchased.
Mortgage bondsMortgage bonds are issued by a dedicated bank (Pfandbriefbank) whose authorization to do such stems from BaFin, Germany's national financial supervision commission. In awarding such permits, BaFin employs the country's Mortgage Bond Act (Pfandbriefgesetz-PfandBG). Mortgage bonds are an especially secure investment, as they always have an adequate amount of coverage. This is comprised of mortgage-based receivables accruing to the mortgage banks from either the public (in cases of public sector mortgage bonds) or private sectors. The latter class of receivables includes those bonds secured by encumbrances on real property (through dedicated mortgage bonds) and on ships (through ship mortgages).
New sharesNew shares are those issued in conjunction with a company's increase of capital. These shares are generally cheaper than those preceding them, and are offered to either existing shareholders or-should their exclusion have been resolved-to new investors. It is only in cases in which existing shareholders do not exercise their rights of procurement that the new shares are offered on stock exchanges.
Operational RiskLosses possibly arising from defective internal processes, human errors, technological failures, and events outside corporate control.
Partial execution"Piecemeal" execution of the sale or purchase of securities. Such operations are no longer carried out on such stock exchanges as Munich, as these practices often give rise to higher costs for investors. Xetra, the electronic trading system, does allow such partial executions, in cases in which the offsetting offers are not large enough, or in which the mathematics of the situation so dictate.
These hybrids have elements of both shares and
bonds, and are not to be categorized as being either a company's own or outside
capital. PCs are generally issued by joint stock companies. They assure the
investor of receiving at term all of his or her nominal capital plus interest.
The latter's amount depends, as is the case with dividends, upon the profits
earned by the company. The investor also generally participates in the losses
suffered by the company. In most cases, and by way of compensation, investors
receive supplemental payouts in high earning years. Participatory certificates
are not classified as being securities governed by trading regulations.
This means that companies are free to constitute them according to their needs and wishes. The PCs do not bear voting rights at AGMs. Should the issuing party be insolvent, the PCs enjoy only subordinate rights of service. This generally means that holders of PCs do not receive any recompense in such cases.