KEY TERMS
Shares
Assets
These are the different financial instruments in which it is possible to invest through the funds: stocks, bills, bonds…
Financial leverage
The effect that indebtedness has on profitability. In the securities markets, it refers to the fact that with small amounts of money an investment can be made that behaves like an investment of much larger volume.
Asset Allocation
It is the diversification of investments among different products or markets, in order to improve the return and/or control the risk of the aggregate.
Financial Chiringuito
It is an informal definition for those entities that offer and provide investment services without being authorized to do so.
These are dangerous because in most cases the apparent provision of such services is only a cover to appropriate the capital of their victims, making them believe that they are making a highly profitable investment.
The moment they cannot justify the losses, they disappear or change their name. In other words, they are swindlers.
Custody of Securities
Investment service consisting of the maintenance of a securities account. In exchange for a commission, the intermediary providing this service must keep the client’s positions up to date, facilitate the exercise of the rights derived from the holding of the portfolio, etc.
CII Custodian
Banks, savings banks or other financial institutions that assume custody of the securities, cash and, in general, of the assets invested in collective investment schemes. Among other functions, they are responsible for overseeing the performance of the management company. The depositaries must be authorized by the CNMV and registered in the corresponding public registry.
Derivatives
Derivatives are financial instruments whose price not only varies according to parameters such as risk or term, but also depends on the market price of another asset, called the underlying. The investor bets on a certain evolution of the underlying asset (upward or downward) in the stock markets.
Risk diversification
This is a basic principle of financial market operations, according to which risks can be controlled if the overall amount to be invested is distributed among products with different return and risk expectations. The underlying idea is that, by integrating assets with opposite risks, these can be compensated to different degrees, so that the risk of the aggregate is lower.
Statement of position
Document prepared by the management companies to inform the unitholders or shareholders of their position in the fund or investment company. It must be sent to investors every month, if there have been movements during the period, or annually if there have not been any.
Family office
Family groups that develop an integral management of their assets, by themselves or through specialized entities. They may include services such as global financial and tax planning, asset management, investment management, etc.
Collective Investment Scheme Prospectus
Informative document containing the basic characteristics of a CII. This is an official document, the minimum content of which is determined by the regulations: investment policy, type of fund, past performance, target investor profile, commission system, etc. Depending on its content, there are two types: the full prospectus and the simplified prospectus. The latter must be delivered to the investor by the marketing entity free of charge, prior to the subscription of the units or shares. The prospectuses of the CIIs are reviewed by the CNMV and can be consulted in the public registers of this body and on the marketer’s website.
Prospectus
Official document in which the necessary information and data on the issuers and the securities being offered are included in writing, so that potential investors may obtain a true and fair view of the issuer and a well-founded judgment on the proposed investment. The National Securities Market Commission (CNMV) checks that the prospectus refers, in clear and understandable language, to all the aspects established by law, so that relevant facts are not omitted, nor are data offered that could mislead investors. In general, the registration of the prospectus is mandatory for issues and public offers for sale and subscription of securities (OPV/OPS) and public offers for acquisition of shares (OPA), and the issuing or offering entities are obliged to make it available to the public prior to the subscription of the securities. It can also be consulted on the issuer’s website and in the CNMV registry.
Investment Funds
Investment Funds are Collective Investment Institutions, whose management and representation corresponds to a management company.
Investment Funds are professionally managed by a manager and are regulated by the Law and Regulations of Collective Investment Institutions, as well as their own management regulations.
In addition, the National Securities Market Commission (Comisión Nacional del Mercado de Valores) has the function of controlling the management of the investment funds and protecting the unit holders from possible bad practices by the managers.
In the Mutual Fund there are different figures:
– The unitholder. This is the saver.
– The manager. It is in charge of managing the fund, that is to say, it invests the money to generate more.
Custodian of the fund. Custodian and oversees the fund’s assets.
– The participant buys shares in the fund and the manager, applying his knowledge, will make his savings grow.
When the unitholder buys (subscription) the fund charges a commission as well as when the unitholder sells (redemption). The manager and the management company in turn also charge a commission for their work.
The number of units of a fund is not fixed, it increases each time new unitholders are added to the fund. The value of each unit is therefore calculated by dividing the fund’s assets by the number of units.
Financial Future
A contract negotiated on an organized market, whereby the parties agree to buy and sell a specific quantity of a security (underlying asset) at a predetermined future date, and at a price agreed in advance.
Hedge Fund
Fund based on the acquisition of any type of financial asset, hence its name, without applying the rules on investment concentration established in the general regulations. They are preferably aimed at qualified investors (institutional or high net worth), as Spanish regulations establish a minimum initial investment of 50,000 euros and entail a higher risk than traditional investment funds. This fund has no maturity period.
Value Investing
Value investing generally consists of buying securities at a low price, determined according to fundamental analysis. If the market price is lower than the intrinsic or fundamental value of the stock, in theory its price will rise in the future when the market adjusts. The main problem is to estimate what the intrinsic value of the stock should be. Another problem is to predict when the market will reflect the expected value.
Participation
The participation is each of the aliquots into which the assets of a fund are divided. The value of this participation varies daily according to the performance of the fund’s portfolio.
Investment Policy
Guidelines defining the securities and financial instruments that should make up the portfolio of an investment fund (percentage of fixed or variable income, domestic or foreign securities, etc.). The investment vocation of a fund determines its level of risk, so knowledge of it enables the investor to know whether the fund is suited to his expectations and needs. The investment policy is established by the management company and is set out in the fund’s prospectus.
Portfolio
A portfolio is the set of investments, or combination of financial assets that constitute the assets of a person or entity.
Fixed Income
Financial instrument issued by a company or public institution, representing a loan that the entity receives from investors. Fixed income confers economic but not political rights; the principal is the right to receive the agreed interest. Although traditionally in fixed income the interest was established precisely from the date of issue to maturity, today there are other possibilities. It is common for the interest to be variable and referenced to interest rates, such as Euribor, stock market indexes or even the evolution of a share or basket of shares.
Variable Income
Financial instrument whose profitability is not defined in advance, but depends on different factors, including the profits obtained and the issuing company’s business expectations. In general, they do not have a predetermined maturity. The most representative equity securities are shares.
SICAV
Variable Capital Investment Company. It is a collective investment instrument that requires a minimum capital of 2.4 million euros and 100 participants.
SIL
Hedge Funds. Hedge funds are also known as alternative investment funds or “hedge funds”. They are not subject to the investment restrictions established for most funds. Among their characteristics are that they can invest in any type of financial asset, follow the investment strategy they consider most appropriate and take on debt up to five times the value of their assets and the minimum initial investment is 50,000 euros and the maximum limits on commissions that apply to other funds do not apply to this type. The net asset value is calculated at least quarterly, i.e. participants may only subscribe or redeem every three or six months (although funds may choose to offer liquidity more frequently, e.g. monthly).
SIF
Specialised Investment Fund. The SIF is a regulated vehicle subject to the permanent supervision of the Luxembourg Commission du Surveillance du Secteur Financier (CSSF).
It is an investment vehicle intended for investors with extensive financial expertise such as institutional investors, professional investors or individual investors who meet certain conditions established by law. The main characteristic of this type of vehicle is the flexibility of its investments, being able to invest in a greater diversity of assets: Equities; Debt; Real Estate Securities; Financial Derivatives; Hedge Funds; and Private Equity investments.
The SIF requires for its incorporation a minimum net worth of 1.25 million euros and a single investor. It is legally obliged to comply with the principle of risk diversification.
The SIF or its sub-funds may not invest more than 30% of their assets in a single line of investment. Exempt from this restriction are investments in collective investment schemes governed by risk diversification requirements equivalent to those applicable to SIFs. It was also established that a series of risk control systems must be in place to identify, measure, manage and monitor the risks associated with the positions of each asset and their contribution to portfolio risk.
CII Management Company
The Management Company is a public limited company in charge of the administration and management of an investment fund. It receives a management fee, which is usually a percentage of the volume of funds managed.
Its duty is to disseminate to unitholders, shareholders and the general public a full prospectus, a simplified prospectus, an annual report, a half-yearly report and two quarterly reports.
Securities Companies
These are investment services companies (ESI), which act as intermediaries in the financial markets. They take the form of a corporation, with a minimum capital of 2,000,000 euros. Securities companies may receive, transmit and execute orders from third parties, also trade on their own account and manage investment portfolios on a discretionary and individualized basis, mediate in the placement and underwriting of public offerings, etc.
UCITS
This stands for “Collective Investment in Transferable Securities”. It refers to the European Union directive that establishes the conditions under which a fund domiciled in one member state can be distributed in all other member countries. The aim is to simplify investment regulations and increase investor protection.
Net present value of an investment, NPV
It is the value at the present time of all the receipts and payments that a given financial asset is expected to generate in the future.
Net asset value
This is the valuation of each of the fund’s units. It is calculated by dividing the total assets of the fund by the total number of units existing at any given time. This calculation is made daily by the fund manager, who publishes it on its website or in the Stock Exchange Bulletins.
Volatility
The variability of a stock’s return with respect to its average over a given period of time.
