We take a look at some of the most commonly used jargon in the investing world and explain what they mean.
Unlocking investment jargon
The stock market and, frankly, the investment world generally, are notorious for using jargon and technical terms which can be baffling for many non-professional investors. Understanding how frustrating that can be, we thought it might be helpful to explain a few commonly used words and phrases in plain English.
When a company is going to pay a dividend it goes ‘ex-dividend’ a few weeks before the payment, so it can establish a cut-off point for those shareholders who qualify for it.
After this point, any investors buying shares will not receive the next dividend payment. Investors who watch the market regularly may have noticed that the ex-dividend date for UK shares often falls on a Thursday, and the shares tend to ease down to account for the loss of entitlement to the next dividend. As a general rule, if an investor buys a share before the ex-dividend date they will receive the next payment, but if they buy it on, or after, that date they will have to wait for the following one.
When a company needs to raise money, perhaps to pay for an acquisition or reduce its debts, one option is to offer its shareholders the opportunity to buy new shares at a rate that is proportionate to their current shareholding. Typically, the offer is styled as ‘x’ number of new shares for every ‘y’ number currently held, or, for example, ‘2-for-1’ for short.
The price of the new shares is usually set at a discount to the existing share price. This normally falls on the day that the shares ‘go ex’, which means anyone buying them on, or after, that day will not receive any rights to the new shares.
These represent a shareholder’s entitlement to buy new shares offered in a rights issue and the number is based on the shareholder’s existing holding. If the holder does not want to take up their rights it may be possible to sell them in the market for a short period, or simply allow them to expire.
If an investor wants to buy the new shares in a rights issue but doesn’t have sufficient funds available, they can sell some of their nil-paid rights and use the proceeds to exercise their rights over the rest.
Return of capital
In some ways, the opposite of a rights issue. This is where a company looks to give money back to its shareholders, either as a lump sum or spread across several payments. This is not ‘free money’, since the capital, usually in the form of cash, already belongs to shareholders as the owners of the company. Handing back the money simply reduces the value of the company, and that is often reflected in the share price.
Stands for Ongoing Charges Figure and reflects the overall cost of managing and operating a fund. It includes the annual management charge and expenses such as trading fees, legal fees, auditor fees and other expenses.
A Dividend Reinvestment Plan is simply a way of automatically reinvesting cash received as dividends into buying more shares in the same investment for a small fee. For those who don’t need the income it avoids cash lying unused in an account and can be a good way to increase capital over the long term.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.