FUNDAs

Above par: Having a current price above face value. This would generally be the case if the coupon paid on the bond exceeds the discount rate applicable, or if market interest rates fall after the bond is bought. If the bondholder had bought at a price above par, then he/she will suffer a capital loss upon maturity since the bond will only be redeemed at face value.

Account : Definition 1 : A record of financial transactions for an asset or individual, such as at a bank, brokerage, credit card company, or retail store. Definition 2 : More generally, an arrangement between a buyer and a seller in which payments are to be made in the future.

Accounting Equation : The fundamental balance sheet equation: assets = liabilities + net worth.

Accrual basis accounting : The most commonly used accounting method, which reports income when earned and expenses when incurred, as opposed to cash basis accounting, which reports income when received and expenses when paid. Under the accrual method, companies do have some discretion as to when income and expenses are recognized, but there are rules governing the recognition. In addition, companies are required to make prudent estimates against revenues that are recorded but may not be received, called a bad debt expense.

Acid-test ratio : The ratio of current assets less inventories to total current liabilities. This ratio is the most stringent measure of how well the company is covering its short-term obligations, since the ratio only considers that part of current assets which can be turned into cash immediately (thus the exclusion of inventories). The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. also called acid-test ratio.

Acquisition : Acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. also called takeover.

ADR : American Depositary Receipt. A negotiable certificate issued by a U.S. bank representing a specific number of shares of a foreign stock traded on a U.S. stock exchange. ADRs make it easier for Americans to invest in foreign companies, due to the widespread availability of dollar-denominated price information, lower transaction costs, and timely dividend distributions.

ADS : American Depositary Share. The share issued under an American Depositary Receipt agreement which is actually traded.

Aggressive growth fund : A mutual fund which aims for the highest capital gains and is not risk-averse in its selection of investments. Aggressive growth funds are most suitable for investors willing to accept a high risk-return trade-off, since many of the companies which demonstrate high growth potential can also show a lot of share price volatility. Aggressive growth funds tend to have a very large positive correlation with the stock market, and so they often produce very good results during economic upswings and very bad results during economic downturns. An aggressive growth fund might, for example, buy initial public offerings (IPOs) of stock from small companies and then resell that stock very quickly in order to generate big profits. Some aggressive growth funds may even invest in derivatives, such as options, in order to increase their gains.

Amalgamation : The merging of two or more businesses into single entity.

AMEX : American Stock Exchange. The second-largest stock exchange in the U.S., after the New York Stock Exchange (NYSE). In general, the listing rules are a little more lenient than those of the NYSE, and thus the AMEX has a larger representation of stocks and bonds issued by smaller companies than the NYSE. Some index options and interest rate options trading also occurs on the AMEX. The AMEX started as an alternative to the NYSE. It originated when brokers began meeting on the curb outside the NYSE in order to trade stocks that failed to meet the Big Boards stringent listing requirements, but the AMEX now has its own trading floor. In 1998 the parent company of the NASDAQ purchased the AMEX and combined their markets, although the two continue to operate separately. also called The Curb.

Amortization : is distribution of a single lump-sum cash flow into many smaller cash flow installments for easier repayment. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortization is chiefly used in loan repayments (a common example being a mortgage) and sinking funds. The payments are usually of equal amounts. In the case of a loan, a greater amount of the payment is applied to interest at the beginning, while during the latter portion, more money is applied to principal.

Annual meeting : The company gathering, usually held at the end of each fiscal year, at which the previous year and the outlook for the future are discussed and directors are elected by common shareholders. Shortly before each annual meeting, the corporation sends out a document called a proxy statement to each shareholder. The proxy statement contains a list of the business concerns to be addressed at the meeting and a ballot for voting on company initiatives and electing the new Board. This proxy ballot authorizes someone else at the meeting (usually the management team) to vote on investors' behalf.

Audited document required by the SEC and sent to a public company's or mutual fund's shareholders at the end of each fiscal year, reporting the financial results for the year (including the balance sheet, income statement, cash flow statement and description of company operations) and commenting on the outlook for the future. The term sometimes refers to the glossy, colorful brochure and sometimes to Form 10-K, which is sent along with the brochure and contains more detailed financial information. All 10-Ks for public companies and mutual funds incorporated in the U.S. are available on the SEC's website for free.

Arbitrage : Attempting to profit by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. The ideal version is riskless arbitrage.

Arbitration : A process in which a disagreement between two or more parties is resolved by impartial individuals, called arbitrators, in order to avoid costly and lengthy litigation.

Arbitrator : A private, neutral person chosen to arbitrate a disagreement, as opposed to a court of law. An arbitrator could be used to settle any non-criminal dispute, and many business contracts make provisions for an arbitrator in the event of a disagreement. Generally, resolving a disagreement through an arbitrator is substantially less expensive than resolving it through a court of law.

Articles of Association : A document describing the purpose, place of business, and details of a non-profit organization.

Articles of Incorporation : A document, filed with a U.S. state by a corporation's founders, describing the purpose, place of business, and other details of a corporation. also called charter.

Asset : Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings.

Asset allocation fund : A single mutual fund which tries to accomplish the goals of asset allocation all by itself. Such a fund invests in a variety of securities in different asset classes. The purpose is to provide investors with truly diversified holdings and consistent returns, while sparing the investor the trouble of having to accomplish asset allocation by purchasing a large number of different funds. Some asset allocation funds have a specific breakdown of asset classes that they try to maintain over time, while others vary the composition as opportunities and circumstances change.

Asset-backed security : Bonds or notes backed by loan paper or accounts receivable originated by banks, credit card companies, or other providers of credit; not mortgages.

At call : Any transaction which occurs in the call money market.

At par : A bond or preferred stock which is selling at a price equal its face (or par) value. Definition 1 : An examination and verification of a company's financial and accounting records and supporting documents by a professional, such as a Certified Public Accountant. Definition 2 : An IRS examination of an individual or corporation's tax return, to verify its accuracy. An audit is an IRS examination of an individual or corporation's tax return, to verify its accuracy. There are three types of audits: correspondence audits (the IRS mails a request for additional information), office audits (an interview is conducted at a local IRS office), and field audits (an interview is conducted at a taxpayer's place of business, for a corporate tax return). Since there is always the chance of an audit, experts recommend keeping good records to support all the information in a return. The reason detailed and accurate bookkeeping is so important is that the burden of proof is on the filer, not the IRS.

Authorized shares : The maximum number of shares of stock that a company can issue. This number is specified initially in the company's charter, but it can be changed with shareholder approval. Generally a much greater number of shares are authorized than required, to give the company flexibility to issue more stock as needed. also called authorized stock or shares authorized.

Authorized stock : The maximum number of shares of stock that a company can issue. It's specified initially in the company's charter, but it can be changed with shareholder approval. also called authorized shares or shares authorized.

B2B : Business-To-Business. A transaction that occurs between a company and another company, as opposed to a transaction involving a consumer. The term may also describe a company that provides goods or services for another company.

Back door financing : When a government agency borrows from the U.S. Treasury instead of relying on congressional appropriations.

Back office : Definition 1 : The administrative functions at a brokerage that support the trading of securities, including trade confirmation and settlement, recordkeeping, and regulatory compliance. Definition 2 :More generally, administrative functions that support but are not directly involved in the operations of a business, such as accounting and personnel.

Bad debt : Accounts receivable that will likely remain uncollectable and will be written off. Bad debts appear as an expense on the company's income statement, thus reducing net income. In general, companies make an estimate of bad debt expenses that might be incurred in the current time period based on past records as part of the process of estimating earnings. Most companies make a bad debt allowance since it is unlikely that all of their debtors will pay them in full.

Bank Credit : The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual.

Bank : An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.

Bank discount : The bank charge made for payment of a note prior to maturity, expressed as a percentage of the note's face value.

Bank Rate : Definition 1 : The interest rate charged by a bank for loans., Definition 2 : The discount rate set by a central bank.

Bank Reconciliation : The process of adjusting an account balance reported by a bank to reflect transactions that have occurred since the reporting date.

Bankrupt : A person, firm, or corporation that has been declared insolvent through a court proceeding and is relieved from the payment of all debts after the surrender of all assets to a court-appointed trustee.

Bankruptcy : A proceeding in a federal court in which an insolvent debtor's assets are liquidated and the debtor is relieved of further liability. Chapter 7 of the Bankruptcy Reform Act deals with liquidation, while Chapter 11 deals with reorganization.

Bank Term Loan : A bank loan to a company, with a fixed maturity and often featuring amortization of principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon after they become available. Bank term loans are very a common kind of lending.

Basic Earnings Per Share : Earnings per share of common stock.

Bear : An investor who believes that a security, a sector, or the overall market is about to fall. opposite of bull.

Bearer : The holder of a negotiable instrument.

Bearer bond : An unregistered, negotiable bond on which interest and principal are payable to the holder, regardless of whom it was originally issued to. The coupons are attached to the bond, and each coupon represents a single interest payment. The holder submits a coupon, usually semi-annually, to the issuer or paying agent to receive payment. Bearer bonds are being phased out in favor of registered bonds. also called coupon bond.

Bell : The open (opening bell) or close (closing bell) of a trading session; sometimes a bell is used, sometimes a buzzer.

Bill : Definition 1 : A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of one year or less. Exempt from state and local taxes. also called T-Bill or U.S. Treasury Bill or Treasury Bill. Definition 2 : Paper currency. Definition 3 : An invoice of charges for products and services.

Bill of Exchange : An order by one person for a second person to pay a third.

Black Friday : September 24, 1869, the day the markets crashed following a failed attempt by some financiers to corner the gold market. Led to a depression.

Black Market : A market where products are bought and sold illegally.

Black Monday : October 19, 1987, the day on which the DJIA fell 508 points

Blackout Period : An interval of up to 60 days during which employees may not adjust the investments contained in their plans. Such blackout periods often occur when the plan is undergoing significant changes.

Blend Fund : A mutual fund whose assets are composed of a combination of stocks, bonds, and money market securities, rather than just one or two of these asset classes. This enables investors to diversify their holdings with a single fund. Since blend funds vary considerably in composition is difficult to make generalizations about their performance or risk level, but usually they are somewhat less risky than stock mutual funds and somewhat more risky than bond funds or money market mutual funds. also called hybrid funds.

Board of Directors : Individuals elected by a corporation's shareholders to oversee the management of the corporation. The members of a Board of Directors are paid in cash and/or stock, meet several times each year, and assume legal responsibility for corporate activities. also called directorate.

Board of Governors : Definition 1 : The governing body of the Federal Reserve System, which is responsible for U.S. monetary policy. Definition 2 : The members of a stock exchange that supervise the functioning of the exchange.

Board of Trustees : A group of people that oversees a non-profit organization.

Boardroom : A room set aside for the meetings of a company's board of directors.

Bond : A certificate of debt that is issued by a government or corporation in order to raise money with a promise to pay a specified sum of money at a fixed time in the future and carrying interest at a fixed rate. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity).The main types of bonds are corporate bond, municipal bond, treasury bond, treasury note, treasury bill, and zero-coupon bond. It is a tradable debt instrument that might be sold at above or below par (the amount paid out at maturity), and are rated by bond rating services such as Standard & Poor's and Moody's Investors Service, to specify likelihood of default. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. It is relatively more secured than equity and has priority over shareholders if the company becomes insolvent and its assets are distributed.

Bond Discount : The amount by which a bond's par exceeds its market price. also called discount.

Book-Entry Security : Security issued not as a certificate but simply as an entry in a bank account. Most Treasury securities are book-entry.

Bookkeeping : The systematic recording of a company's financial transactions. The two most common bookkeeping methods are single entry and double entry.

Book Profit : Profit which has been made but not yet realized through a transaction, such as a stock which has risen in value but is still being held. also called unrealized gain or unrealized profit or paper gain or paper profit.

Break-Even Analysis : A calculation of the approximate sales volume required to just cover costs, below which production would be unprofitable and above which it would be profitable. Break-even analysis focuses on the relationship between fixed cost, variable cost, and profit.

Break-Even Point : Definition 1 : The price at which an option's cost is equal to the proceeds acquired by exercising the option. For a call option, it is the strike price plus the premium paid. For a put option, it is the strike price minus the premium paid. Definition 2 : The price at which a securities transaction produces neither a gain nor a loss. Definition 3 : The volume of sales at which a company's net sales just equals its costs.

Broker : An individual or firm which acts as an intermediary between a buyer and seller, usually charging a commission. For securities and most other products, a license is required.

Books of Original Entry : Accounting journals where financial transactions are initially recorded.

Budget : An itemized forecast of an individual's or company's income and expenses expected for some period in the future.

Book Value : Definition 1 : A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, most companies end up being worth far more in the marketplace than their book value would suggest. For this reason, book value is of more interest to value investors than growth investors. Definition 2 : The value of an asset as it appears on a balance sheet, equal to cost minus accumulated depreciation. Book value often differs substantially from market price, especially in knowledge industries such as high-tech.

Bull : An investor who believes that a particular security, a sector, or the overall market is about to rise. opposite of bear.

Bullion : Gold, silver, platinum, or palladium, in the form of bars or ingots. Some central banks use bullion for settlement of international debt, and some investors purchase bullion as a hedge against inflation.

Bullish : Believing that a particular security, a sector, or the overall market is about to rise. opposite of bearish.

CAD : Cash Against Documents. A transaction in which the buyer assumes the title for the goods being purchased upon paying the sale price in cash.

Calendar Year : A year that ends on December 31.

Capital Asset : All tangible property which cannot easily be converted into cash and which is usually held for a long period, including real estate, equipment, etc.

Capital Asset Pricing Model : CAPM. An economic model for valuing stocks by relating risk and expected return. Based on the idea that investors demand additional expected return (called the risk premium) if asked to accept additional risk.

Capital Budget : A plan to finance long-term outlays, such as for fixed assets like facilities and equipment.

Capital Expenditure : Money spent to acquire or upgrade physical assets such as buildings and machinery. also called capital spending or capital expense.

Capital Gain : The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. For most investments sold at a profit, including mutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed money called capital gains tax. opposite of capital loss.

Capital Goods : Raw materials used to produce finished products.

Capital Loss : The decrease in the value of an investment or asset. opposite of capital gain.

Capital Market : A market where debt or equity securities are traded.

Capital Stock : The number of shares authorized for issuance by a company's charter, including both common stock and preferred stock.

Cash Flow : A measure of a company's financial health. Equals cash receipts minus cash payments over a given period of time; or equivalently, net profit plus amounts charged off for depreciation, depletion, and amortization.

Cash Flow Statement : A summary of a company's cash flow over a given period of time.

Chapter 10 : The part of the U.S. Bankruptcy Code describing how a company can file for court protection. Reorganization occurs under an independent, court-appointed manager.

Chapter 11 : The part of the U.S. Bankruptcy Code describing how a company or creditor can file for court protection. In the case of a corporation, reorganization occurs under the existing management.

Chapter 13 : The part of the U.S. bankruptcy code allowing an individual to begin debt repayment without forfeiting property. Chapter 13 requires that the debtor maintain a source of income and adhere to a payment schedule set forth by the court.

Chapter 7 : The part of the U.S. Bankruptcy Code describing the liquidation of a company after bankruptcy.

Class Action Suit : A lawsuit brought by one party on behalf of a group of individuals all having the same grievance.

Clearinghouse : An agency associated with an exchange, which settles trades and regulates delivery.

Closed Corporation : A corporation in which all of the voting stock is held by a few shareholders, such as management or family members. also called private company.

Closed-End Fund : A fund with a fixed number of shares outstanding, and one which does not redeem shares the way a typical mutual fund does. Closed-end funds behave more like stock than open-end funds: closed-end funds issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange, and they are not obligated to issue new shares or redeem outstanding shares as open-end funds are. The price of a share in a closed-end fund is determined entirely by market demand, so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). also called closed-end investment company or publicly-traded fund.

Closed Fund : An open-end mutual fund that has temporarily or permanently suspended sale of shares to new customers, usually due to rapid asset growth. Outstanding shares are still accepted for redemption by the fund, and existing shareholders may also buy shares in some cases. The primary reason for closing a fund to new investors is that fund managers are concerned that if they increase the asset base of the fund any further, their current investment strategy will become too difficult to achieve.

Collective Bargaining : A method of negotiation in which employees use authorized union representatives to assist them.

COMEX : Commodity Exchange. The leading U.S. exchange for metals futures and options trading.

Commercial Paper : An unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. Commercial paper is available in a wide range of denominations, can be either discounted or interest-bearing, and usually have a limited or nonexistent secondary market. Commercial paper is usually issued by companies with high credit ratings, meaning that the investment is almost always relatively low risk.

Corporate Governance : A generic term which describes the ways in which rights and responsibilities are shared between the various corporate participants, especially the management and the shareholders.

Cost Of Goods Sold : COGS. On an income statement, the cost of purchasing raw materials and manufacturing finished products. Equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory. also called cost of sales.

Cost of Sales : On an income statement, the cost of purchasing raw materials and manufacturing finished products. Equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory. also called Cost Of Goods Sold (COGS).

Debenture : Unsecured debt backed only by the integrity of the borrower, not by collateral, and documented by an agreement called an indenture. One example is an unsecured bond.

Debit Note : A note indicating an amount owed by a person or company. Serves the same function as an invoice.

Debt : A liability or obligation in the form of bonds, loan notes, or mortgages, owed to another person or persons and required to be paid by a specified date (maturity).

Deed of Trust : The document used in some states instead of a mortgage. Title is conveyed to a trustee rather than to the borrower.

Dividend : A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders. also called payout.

Earnings per Share : EPS. Total earnings divided by the number of shares outstanding. Companies often use a weighted average of shares outstanding over the reporting term. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). Note that last year's EPS would be actual, while current year and forward year EPS would be estimates.

Encroachment : A structure, or part of a structure, built on another individual's property.

Encumbered : Owned by one entity but subject to another's valid claim.

Endorsement : Definition 1 : A signature used to legally transfer a negotiable instrument.Definition 2 : A provision added to an existing insurance policy to modify its coverage; here, also called rider.

Endowment : A permanent fund bestowed upon an individual or institution, such as a university, museum, hospital, or foundation, to be used for a specific purpose.

Equilibrium : Balance, for example when demand equals supply.

Equity Fund : A mutual fund which invests primarily in stocks, usually common stocks.

Exchange : Definition 1 : Any organization, association or group which provides or maintains a marketplace where securities, options, futures, or commodities can be traded; or the marketplace itself. Definition 2 : To provide goods or services and receive goods or services of approximately equal value in return; here, also called barter. Definition 3 : The currency markets.

Ex-Dividend : A security which no longer carries the right to the most recently declared dividend; or the period of time between the announcement of the dividend and the payment. A security becomes ex-dividend on the ex-dividend date (set by the NASD), which is usually two business days before the record date (set by the company issuing the dividend).

For transactions during the ex-dividend period, the seller, not the buyer, will receive the dividend. Ex-dividend is usually indicated in newspapers with an x next to the stock or mutual fund's name. In general, a stocks price drops the day the ex-dividend period starts, since the buyer will not receive the benefit of the dividend payout till the next dividend date. As the stock gets closer to the next dividend date, the price may gradually rise in anticipation of the dividend.

Ex-Dividend Date : The first day of the ex-dividend period. The ex-dividend date was created to allow all pending transactions to be completed before the record date. If an investor does not own the stock before the ex-dividend date, he or she will be ineligible for the dividend payout. Further, for all pending transactions that have not been completed by the ex-dividend date, the exchanges automatically reduce the price of the stock by the amount of the dividend. This is done because a dividend payout automatically reduces the value of the company (it comes from the company's cash reserves), and the investor would have to absorb that reduction in value (because neither the buyer nor the seller are eligible for the dividend). also called reinvestment date.

Face Value : The nominal dollar amount assigned to a security by the issuer. For an equity security, face value is usually a very small amount that bears no relationship to its market price, except for preferred stock, in which case face value is used to calculate dividend payments. For a debt security, face value is the amount repaid to the investor when the bond matures (usually, corporate bonds have a face value of $1000, municipal bonds $5000, and federal bonds $10,000). In the secondary market, a bond's price fluctuates with interest rates. If interest rates are higher than the coupon rate on a bond, the bond will be sold below face value (at a "discount"). If interest rates have fallen, the price will be sold above face value. here also called par or par value.

Fiscal Year : An accounting period of 365 days (366 in leap years), but not necessarily starting on January 1.

Form 10-K : Audited document required by the SEC and sent to a public company's or mutual fund's shareholders at the end of each fiscal year, reporting the financial results for the year (including the balance sheet, income statement, cash flow statement and description of company operations) and commenting on the outlook for the future. The term sometimes refers to the glossy, colorful brochure and sometimes to Form 10-K, which is sent along with the brochure and contains more detailed financial information. All 10-Ks for public companies and mutual funds incorporated in the U.S. are available on the SEC's website for free. also called annual report.

Form 10-Q : Unaudited document required by the SEC for all U.S. public companies, reporting the financial results for the quarter and noting any significant changes or events in the quarter. The Form 10-Q contains financial statements, a discussion from the management, and a list of "material events" that have occurred with the company (such as a stock split or acquisition). also called quarterly report.

Form 3 : A document required by the SEC and the appropriate stock exchange to announce the holdings of directors, officers, and shareholders owning 10% or more of the company's outstanding stock.

Form 4 : A document required by the SEC and the appropriate stock exchange to announce changes in the holdings of directors, officers, and shareholders owning 10% or more of the company's outstanding stock.

Form 8-K : A document required by the SEC to announce certain significant changes in a public company, such as a merger or acquisition, a name or address change, bankruptcy, change of auditors, or any other information which a potential investor ought to know about.

Form S-1 : A registration statement used in the initial public offering of securities.

Form T : A NASD-required form that is used by brokers to report equity transactions after the market's usual hours.

Fortune 500 : An annual list of the 500 largest industrial corporations in the U.S., published by Fortune magazine. The corporations are ranked based on such metrics as revenues, profits, and .

Franchise : A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee.

Fully Diluted Earnings Per Share : Common stock earnings per share that would result if all warrants and stock options were exercised and all convertible bonds and preferred stock were converted. For a firm that has a lot of stock options, warrants, convertible bonds and preferred stock outstanding, the fully diluted earnings per share are the most appropriate way of looking at earnings on a per share basis.

Fund : Definition 1 : To finance or underwrite. Definition 2 : An investment company or mutual fund.

GAAP : Generally Accepted Accounting Principles. A widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as established by the Financial Accounting Standards Board.

Global Depositary Receipt : GDR. A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. American Depositary Receipts make it easier for individuals to invest in foreign companies, due to the widespread availability of price information, lower transaction costs, and timely dividend distributions. also called European Depositary Receipt.

Going Concern : The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets. For this to happen, the company must be able to generate and/or raise enough resources to stay operational.

Goodwill : An intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.

Grant : Definition 1 : Funding for a nonprofit organization, usually for a specific project. Definition 2 : To give a right to.

Growth and Income Fund : A mutual fund whose aim is to provide both growth and income, often by investing in companies which have earnings growth as well as dividends.

Growth Fund : A mutual fund whose aim is to achieve capital appreciation by investing in growth stocks. They focus on companies that are experiencing significant earnings or revenue growth, rather than companies that pay outdividends. The hope is that these rapidly growing companies will continue to increase in value, thereby allowing the fund to reap the benefits of large capital gains. In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets.

Hedge : An investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale.

Hedge Fund : A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).

Horizontal Acquisition : An acquisition by one company of another company in the same industry.

Horizontal Merger : Merger of two or more companies with similar product lines.

Hostile Takeover : A takeover which goes against the wishes of the target company's management and board of directors. opposite of friendly takeover.

Hot Issue : Stock, often an IPO, which is in great demand.

Hypothecation : The pledging of securities or other assets as collateral to secure a loan, such as a debit balance in a margin account.

Hyperinflation : A period of rapid inflation that leaves a country's currency virtually worthless.

Impairment : The amount by which stated capital is reduced by distributions and losses.

Imperfect Market : A market in which the public does not immediately receive full access to financial information about securities and in which buyers are not immediately matched with sellers for particular securities.

Income Fund : A mutual fund which emphasizes current income in the form ofdividends or coupon payments from bonds and/or preferred stocks, rather than emphasizing growth. Income funds are considered to be conservative investments, since they avoid volatile growth stocks. Income funds are popular with retirees and other investors who are looking for a steady cash flow without assuming too much risk.

Index Fund : A passively managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500. Since portfolio decisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds.

Indexing : Definition 1 : A passive investment strategy in which a portfolio is designed to mirror the performance of a stock index, such as the S&P 500. Definition 2 : Tying taxes, wages, or other amounts to an index.

Initial Public Offering : IPO. The first sale of stock by a company to the public.

Injunction : A court order requiring a person not to do something.

Insider : Definition 1 : A shareholder who owns more than 10% of a corporation, or an officer or director.

Definition 2 : Any individual who has inside information.

Insider Trading : Trading by insiders; or illegal trading by insiders who trade based on insider information.

Insolvency : The state of being insolvent.

Insolvent : Unable to meet debt obligations. opposite of solvent.

Interim Dividend : A dividend which is declared and distributed before the company's annual earnings have been calculated; often distributed quarterly.

Iternational Fund : A mutual fund which invests in stocks and bonds of companies outside of the U.S.

Joint Stock Company : A company which has some features of a corporation and some features of a partnership.

Joint Venture : A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise.

Junior Debt : Debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property. also called subordinated debt.

Limited Company : A business structure used in Europe and Canada, in which shareholder responsibility for company debt is limited to the amount he/she has invested in the company. Abbreviated Ltd or plc.

Limited Liability Partnership : LLP. Another name for a Limited Liability Company, often used by professional associations. The partner or investor's liability is limited to the amount he/she has invested in the company.

limited liability : Type of investment in which a partner or investor cannot lose more than the amount invested. Thus, the investor or partner is not personally responsible for the debts and obligations of the company in the event that these are not fulfilled.

Limited Liability Company : LLC. A type of company whose owners and managers receive the limited liability and (usually) tax benefits of an S Corporation without having to conform to the S corporation restrictions.

limited partnership : A business organization with one or more general partners, who manage the business and assume legal debts and obligations, and one or more limited partners, who are liable only to the extent of their investments. Limited partners also enjoy rights to the partnership's cash flow, but are not liable for company obligations.

liquidity : The ability of an asset to be converted into cash quickly and without any price discount.

Lockup Period : An interval during which an investment may not be sold. In the case of an IPO, employees may not sell their shares for a period time determined by the underwriter and usually lasting 180 days.

Long-Term Assets : On a balance sheet, the value of a company's property, equipment and other capital assets expected to be useable for more than one year, minus depreciation.

Malpractice : Injurious conduct by an individual acting in an official or professional capacity, such as a doctor.

Manifesto : A written declaration of intent or principles.

Marginal Cost : The cost associated with one additional unit of production. also called incremental cost.

Money Market : Market for short-term debt securities, such as banker's acceptances, commercial paper, repos, negotiable certificates of deposit, and Treasury Bills with a maturity of one year or less and often 30 days or less. Money market securities are generally very safe investments which return a relatively low interest rate that is most appropriate for temporary cash storage or short-term time horizons. Bid and ask spreads are relatively small due to the large size and high liquidity of the market.

Merger : The combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Differs from a consolidation in that no new entity is created from a merger.

Mortgagee : The creditor or lender in a mortgage agreement.

Mutual Company : A company whose profits are distributed in proportion to the amount of business each participant does with the company. Examples include federal savings and loan associations, state-chartered mutual savings banks, and mutual insurance companies.

Mutual Fund : An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund. Benefits of mutual funds include diversification and professional money management. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment. A closed-end fund is often incorrectly referred to as a mutual fund, but is actually an investment trust. There are many types of mutual funds, including aggressive growth fund, asset allocation fund, balanced fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund, crossover fund, equity fund, fund of funds, global fund, growth fund, growth and income fund, hedge fund, income fund, index fund, international fund, money market fund, municipal bond fund, prime rate fund, regional fund, sector fund, specialty fund, stock fund, and tax-free bond fund.

National Income : The income earned by a country's people, including labor and capital investment.

NAV : Net Asset Value. The dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day.

Net Present Value : NPV. The present value of an investment's future net cash flows minus the initial investment. If positive, the investment should be made (unless an even better investment exists), otherwise it should not.

Nifty Fifty : Term given to fifty blue chip stocks which were so popular prior to the bear market of 1973-1974 that their prices were temporarily driven up to ridiculous levels.

Off-board : A transaction of a listed stock which is not completed on a national exchange, or a transaction of an over-the-counter stock. also called off the board.

Open-End Fund : A fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. Open-end funds raise money by selling Open-end funds offer choice, liquidity, and convenience, but charge Open Market : A market which is widely accessible to all investors or consumers.

Operating Asset : Asset which contributes to the regular income from a company's operations.

Outside Director : A member of a corporation's board of directors who is not an employee of the company and has no operational responsibilities within the company.

Preference Shares : Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the companys assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred, non-cumulative, participating, and convertible. also called preferred stock.

Public Company : A company which has issued securities through an offering, and which are now traded on the open market. also called publicly held or publicly traded. opposite of private company.

Public Sector : The part of the economy concerned with providing basic government services. The composition of the public sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity.

Quorum : Minimum number of people who must be present (physically or by proxy) in order for a decision to be binding.

Quote : The highest bid or lowest ask price available on a security at any given time.

Regional Fund : Mutual fund which invests in one specific region of a country or the world.

Registered Company : A corporation that has filed a registration statement with the SEC prior to releasing a new stock issue.

Reverse Acquisition : One way for a company to become publicly traded, by acquiring a public company and then installing its own management team and renaming the acquired company.

Reverse Merger : The acquisition of a public company by a private company, allowing the private company to bypass the usually lengthy and complex process of going public.

Reverse Mortgage : An arrangement in which a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender. also called reverse-annuity mortgage or home equity conversion mortgage.

Reverse Split : A stock split which reduces the number of outstanding shares and increases the per-share price proportionately. This is usually an attempt by a company to disguise a falling stock price, since the actual market capitalization of the stock does not change at all. For example, if a company declares a one-for-ten reverese split, then a person who previously held 20 shares valued by the market at $1 each will then have 2 shares worth $10 each. Many stock exchanges in the U.S. do not allow companies with a stock price of less than $1 to remain listed, and many such companies then have to undertake reverse splits if they want to remain listed.

Reverse Take-Over : Definition 1 : RTO. When a company buys out a larger company, but could also occasionally refer to a private company taking over a publicly listed company. Typically, a public company that is taken over by a private company will remain listed, and the private company will use the acquisition as means of gaining a listing. A reverse take-over is a relatively rare event. Definition 2 : One way for a company to become publicly traded, by acquiring a public company and then installing its own management team and renaming the acquired company. also called reverse acquisition.

Revolving Line of Credit : An agreement by a bank to lend a specific amount to a borrower, and to allow that amount to be borrowed again once it has been repaid. also called revolving credit.

Same-Store Sales : In retail, sales to stores which have been open for more than one year. This enables investors to determine what component of the overall sales growth was due to the opening of new stores.

SEC filing : A document, usually containing financial data, that a company delivers to the SEC and, thereby, to the public.

Sector Fund : A mutual fund which invests entirely or predominantly in a single sector. Sector funds tend to be riskier and more volatile than the broad market because they are less diversified, although the risk level depends on the specific sector. Some investors choose sector funds when they believe that a specific sector will outperform the overall market, while others choose sector funds to hedge against other holdings in a portfolio. Some common sector funds include financial services funds, gold and precious metals funds, health care funds, and real estate funds, but sector funds exist for just about every sector.

Security : Definition 1 : An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity. The official definition, from the Securities Exchange Act of 1934, is: "Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."

Speculation : Taking large risks, especially with respect to trying to predict the future; gambling, in the hopes of making quick, large gains.

Spinoff : An independent company created from an existing part of another company through a divestiture, such as a sale or distribution of new shares.

Split : An increase in the number of outstanding shares of a company's stock, such that proportionate equity of each shareholder remains the same. This requires approval from the board of directors and shareholders. A corporation whose stock is performing well may choose to split its shares, distributing additional shares to existing shareholders. The most common split is two-for-one, in which each share becomes two shares. The price per share immediately adjusts to reflect the split, since buyers and sellers of the stock all know about the split (in this example, the share price would be cut in half). Some companies decide to split their stock if the price of the stock rises significantly and is perceived to be too expensive for small investors to afford. also called stock split.

Statutory Merger : A merger in which one of the merging companies continues to exist as a legal entity, rather than being replaced by the new entity. opposite of statutory consolidation.

Buyback : Definition 1 : The purchase of a long position to offset a short position.Definition 2 : A corporation's repurchase of stock or bonds it has issued. In the case of stocks, this reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company. This is usually considered a sign that the company's management is optimistic about the future and believes that the current share price is undervalued. Reasons for buybacks include putting unused cash to use, raising earnings per share, increasing internal control of the company, and obtaining stock for employee stock option plans or pension plans. When a company's shareholders vote to authorize a buyback, they aren't obliged to actually undertake the buyback. also called corporate repurchase.

Swap : An exchange of streams of payments over time according to specified terms. The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving a adjustable rate from another party.

Takeover : Acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly.

Ticker : A scrolling display of current or recent security prices and/or volume.

Treasury Bill : A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of one year or less. Exempt from state and local taxes. also called Bill or T-Bill or U.S. Treasury Bill.

Treasury Bond : A negotiable, coupon-bearing debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of more than 7 years. Interest is paid semi-annually. Treasury bonds are exempt from state and local taxes. These securities have the longest maturity of any bond issued by the U.S. Treasury, from 10 to 30 years. The 30-year bond is also called the "long bond." Denominations range from $1000 to $1 million. Treasury bonds pay interest every 6 months at a fixed coupon rate. These bonds are not callable, but some older Treasury bonds available on the secondary market are callable within five years of the maturity date. also called U.S. Treasury bond or T-bond.

Trust Company : Organization which acts as a fiduciary, trustee or agent for individuals and businesses in the administration of trust funds, estates and custodial arrangements.

Turnaround : A sharp, positive reversal in the performance of a company or the overall market.

Tycoon : An extremely powerful business person. also called mogul.

Turnover : For a company, the ratio of annual sales to inventory; or equivalently, the fraction of a year that an average item remains in inventory. Low turnover is a sign of inefficiency, since inventory usually has a rate of return of zero. here also called inventory turnover. For a mutual fund, the number of times per year that an average dollar of assets is reinvested.

Underwater : A call option whose strike price is higher than the market price of the underlying security, or a put option whose strike price is lower than the market price of the underlying security. Thus, there is no incentive to exercise the option today. However, the option still has "time value", value based on the fact that the prices of the underlier can change. This "time value" diminishes as the option approaches maturity.

U.S. Treasury Bill : A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of one year or less. U.S. Treasury Bills are exempt from state and local taxes. These securities do not pay a coupon rate of interest, and the interest earned is estimated by taking the difference between the price paid and the par value of the bond, and calculating that rate of return on an annual basis. Treasury Bills are considered the safest securities available to the U.S. investor, and so the yield on these securities are considered the risk-free rate of return. also called Bill or T-Bill or Treasury Bill.

U.S. Treasury Bond : A negotiable, coupon-bearing debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of more than 7 years. Interest is paid semi-annually. U.S. Treasury Bonds are exempt from state and local taxes.

These securities have the longest maturity of any bond issued by the U.S. Treasury, from 10 to 30 years. The 30-year bond is also called the "long bond." Denominations range from $1000 to $1 million. U.S. Treasury Bonds pay interest every 6 months at a fixed coupon rate. These bonds are not callable, but some older U.S. Treasury Bonds available on the secondary market are callable within five years of the maturity date. also called Treasury bond or T-bond.

U.S. Treasury Note : A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of between 1 and 10 years. U.S. Treasury Notes are safe investments and are actively traded in the secondary market. also called Treasury Note.

Value Added Tax : VAT. A consumption tax which is levied at each stage of production based on the value added to the product at that stage.

Venture Capital : VC. Funds made available for startup firms and small businesses with exceptional growth potential. Managerial and technical expertise are often also provided. also called risk capital.

Vertical Acquisition : An acquisition in which the acquirer and the target are in the same industry but focus on different parts of the production process.

Vertical Merger : Merger of a vendor and a customer.

Warrant : A certificate, usually issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price, usually above the current market price at the time of issuance, for an extended period, anywhere from a few years to forever. In the case that the price of the security rises to above that of the warrant's exercise price, then the investor can buy the security at the warrant's exercise price and resell it for a profit. Otherwise, the warrant will simply expire or remain unused. Warrants are listed on options exchanges and trade independently of the security with which it was issued. also called subscription warrant.

White Paper : An educational report made available to the public that expounds on a particular industry issue.

Window-Dressing : Definition 1 : The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund's holdings are made public, in order to give the appearance that they've been holding good stocks all along. Definition 2 : The deceptive practice of using accounting tricks to make a company's balance sheet and income statement appear better than they really are.

Write-Off : To charge an asset amount to expense or loss, in order to reduce the value of that asset and one's earnings.

Zero-Base Budgeting : Budgeting method for a corporation or government in which all expenditures must be justified each year, not just amounts in excess of the previous year.

Z shares : Mutual fund shares of a class available to employees of the fund.

DIRECTORS RESPONSIBILITIES

1.COMPANIES1.1Types of business

Business can be conducted through one of three main business structures.

Sole traders and partnerships are not legally distinguished from the personal affairs of those running them. Personal assets may be called upon to meet business liabilities.

A company is created as a separate legal entity and continues to exist through changes of ownership and management until officially wound up.

1.2Types of company

The majority of companies are limited by shares. Each of the shareholders are the owners of the company and may also be referred to as members. Their liability is limited to amounts unpaid on their shares.

A company may be limited by guarantee. Upon winding up, members are liable for company debts to the amount guaranteed.

Unlimited companies do not offer the proprietors any limitation upon their liability when wound up.

2.DIRECTORS

2.1Definition

The Companies Act states that the term includes any person occupying the position of director by whatever name called. A company may give its directors alternative titles; this does not affect their legal status.

Indeed, the title director does not imply board status. It is generally accepted that a Director of ... does not sit on the board, but the ... Director does. A director is therefore recognised by function, not by title.

One of several individuals elected by a corporation's shareholders to establish company policies, including selection of operating officers and payment of dividends.

Insider

A shareholder who owns more than 10% of a corporation, or an officer or director.

Outside director

A member of a corporation's board of directors who is not an employee of the company and has no operational responsibilities within the company.

2.2Types of directors

In addition to board duties executive directors have day-to-day management responsibilities. Normally such directors are employed under a service contract.

Non-executive directors take no part in the day-to-day running of the business, but contribute at board meetings. Strictly non-executive directors have the same responsibilities as executive directors, however should a company fail the courts might attribute more blame to the executive directors.

Shadow directors. The definition of a shadow director is any person in accordance with whose directions or instructions the directors of the company are accustomed to act. The term can be applied to individuals, who effectively run the company but are not appointed director. Holding companies, banks and venture capitalists who exercise significant influence on decisions made may also be deemed shadow directors.

Alternate directors. A director who is temporarily absent or incapacitated may be permitted under the articles to appoint a person to speak on his or her behalf.

Associate directors. This term is used to cover special, assistant, local, regional or divisional directors, none of whom are board members. However, the actions of these persons can be binding on the company, where a third party relies upon their apparent authority.

Nominee directors. The interests of substantial shareholders or the companys bankers may be represented by a nominee director. Any such person is required to act in the interests of the company as a whole and not purely for the interest of their principal.

Managing director. All or any of the powers of management may be delegated by the board to one director, the managing director, if permitted by the articles.

Lead Director: The Board has adopted a policy that it have a Lead Director, selected by non-employee directors, who will chair regularly scheduled executive sessions of the non-employee directors and may have such other responsibilities as the non-employee directors may designate from time to time. Should the Company be organized in such a way that the Chairman is other than a non-employee director, another director will be selected for this responsibility.

2.3Appointment

Private companies must have at least one director and public companies at least two. The articles may limit the number of directors on the board and may prescribe a higher minimum number.

The first directors are appointed when the company is formed but must normally retire at the first annual general meeting. Directors may then offer themselves for re-election.

The directors may appoint additional directors or fill any vacancy which arises, but the person appointed must normally retire at the following annual general meeting. A notice of appointment, must be signed by the appointee and a serving director and then filed with the Registrar of Companies.

Certain persons may be disqualified from directorship by the articles, for example those of unsound mind and those absent from board meetings for six months or more without consent. The following can never be appointed as director:

-undischarged bankrupts, unless approved by the court;

-those disqualified (see section 7.5);

-the company auditor;

-those over seventy years of age, unless specifically allowed in the articles.

2.4Resignation and dismissal

Generally a director can resign at any time by notifying the company of his intentions. The articles may impose certain restrictions or conditions.

Resignation does not exempt the director from the results of his actions whilst a director nor does it free him from obligations under his service contract; the company may be able to sue for damages.

Normally the articles do not give the board the power to remove a director, although some specially adapted ones do. Directors can be removed from the board by an ordinary resolution of the members. The company must be given 28 days notice of such a resolution. The director concerned must be notified and has the right to speak at the meeting or to have written representations circulated to members.

2.5Shareholdings

A director may also be a shareholder of the company. Some articles make a minimum shareholding a pre-requisite of directorship.

Directors are required to disclose their interests in shares of the company, which must be recorded in a register available for public inspection.

2.6Remuneration and employment

Directors have no right to remuneration. However, most modern forms of articles allow directors to fix their own remuneration.

Non-executive directors are normally paid fees for their part-time service to the board. Executive directors are advised, as employees, to have a written service contract. The Institute of Directors produces a specimen contract which suggests that duties, remuneration, holidays, sickness, pension and notice details should be incorporated into a service contract. In addition, there may be clauses requiring confidentiality and devotion from the director.

Service contracts which cannot be terminated within five years, may not be entered into without prior approval of members. Members also have a right to inspect directors service contracts.

2.7Duties

The duties of a director derive from two separate sources:

Common law: Decided legal cases have established the directors position as one of both trustee and agent. As a trustee he has a fiduciary duty to the company. As an agent he has a duty of skill and care.

Statute: The Companies Act 1985 imposes a large number of duties upon the director. These relate to accounts and auditors, administration and transactions with the company.

3.COMMON LAW DUTIES3.1Fiduciary duty

Directors are entrusted with the assets of the shareholders and should therefore act in good faith in the best interests of the company. They should not place themselves in a position of conflict between personal and company interests. A director should try to avoid any interest in contracts entered into by the company. Where such an interest exists the director is required to make disclosure to the board.

The fiduciary duty of a director also excludes him gaining personally from opportunities arising due to his directorship regardless of him acting for the good of the company. Should any such profit arise it must be paid over to the company.

Company law recognises the importance of a directors fiduciary duty and has re-inforced the common law principles by including detailed statutory requirements regarding transactions between a company and its directors (see section 6).

3.2Skill and care

Every director is required to exercise the degree of skill and care expected from somebody in their position. This is, however, a subjective matter and a director is judged by the way he applies the skills he personally possesses. Professionally qualified directors are required to act with the skill and care expected from a member of their profession.

Executive directors should devote themselves absolutely to the business of the company. Although non-executive directors attend board meetings on a intermittent basis, they should exercise independent judgement. Directors may rely on their peers and staff provided they are satisfied as to the competence, honesty and reliability of the individual concerned. However, they must not abandon all responsibility by delegation and have a duty to ensure that they are informed as to the progress of tasks assigned.

3.3Breach of duty

Failure by a director to fulfil his duties constitutes a breach and the director may have an unlimited personal liability for any loss. Professional liability insurance is available to indemnify a director against liability to the company and third parties.

Where the directors are also the shareholders, an action is unlikely as the company may ratify the breach. However, certain breaches cannot be ratified and there are also provisions to protect minority shareholders.

The company has the following legal remedies if it chooses to sue:

-an injunction to prevent the breach from continuing;

-dismissal;

-damages for loss suffered;

-restoration of property;

-repayment of secret profit;

-rescission of a contract.

However, the court may find that the director has acted honestly and reasonably and ought to be excused.

4.STATUTORY DUTIES - ACCOUNTING4.1Accounting records

Many businesses fail through a lack of accurate financial information. For this reason the Companies Act 1985 requires the company to maintain proper accounting records which:

-provide a reasonably accurate picture of the companys financial position at any time;

-enable the directors to produce the annual accounts for shareholders in a form required by the Act.

All companies must maintain records of day-to-day money received and paid together with records of assets and liabilities. In addition, where goods are held, stocktaking records and summaries must be prepared at the financial year end.

Private companies are required under the Act to retain their accounting records for three years. However, VAT regulations state that records must now be kept for six years and it is therefore advisable that all records are retained for that period.

Company auditors must refer in their report to any failure to keep adequate records.

4.2Accounting periods

Under the Companies Act directors must prepare a profit and loss account for each accounting period and a balance sheet as at the end of the period. Companies must notify the Registrar of their year end within nine months of incorporation, if they fail to do so it is taken as the end of the month in which the anniversary of the incorporation date falls.

The first accounting period must be of six to eighteen months in length.

4.3Annual accounts

The directors of a company have a duty to produce accounts regularly for members in order that a judgement may be made as to how well the directors have managed the company assets.

The annual accounts include the profit and loss account, balance sheet and supporting notes, a directors report and an auditors report. The balance sheet is signed on behalf of the board.

The requirements relating to the content of accounts are contained in the Companies Act. To ensure that members are given sufficient information the disclosure rules are very strict and detailed. Professional assistance is usually required in the preparation of the accounts.

Members must be given sight of the accounts at least twenty-one days before the annual general meeting (see section 5.2) where the accounts are presented. Private companies must file their accounts within ten months of the accounting reference period. The Registrar may prosecute directors who fail to comply with the requirements to prepare and file accounts.

Certain small and medium sized companies can file abbreviated accounts with the Registrar. The advantage of these accounts is that less information is given and therefore available to the public. However, a set of full statutory accounts must be presented to the members.

4.4Auditors

Auditors are required to report to the members of the company whether or not in their opinion the accounts give a true and fair view. It is essential that the auditor is independent and therefore cannot be a director or employee of the company nor a partner of those persons. Normally auditors are professionally qualified chartered or certified accountants.

The auditors report is attached to the accounts circulated to members and is often read aloud at the annual general meeting (see section 5.2). At the same time the appointment or reappointment of the auditors is approved by the members.

There are exemptions available for certain small companies whereby they may only need an independent examination, or indeed no examination for very small companies.

5.STATUTORY DUTIES - ADMINISTRATION5.1Statutory books

A company is required by the Companies Act to maintain the following registers:

Register of members. The register lists the names and addresses of members, the numbers and classes of shares held and the date on which each person was registered and ceased to be a member.

Register of directors interests. Every director is obliged to notify the company in writing of his interest in, or of his ceasing to be interested in the shares or debentures of the company. Any change must be notified to the company within five days and the amendment made to the register within three days.

Both the register of members and directors interests should be kept at the registered office. If the registers are kept elsewhere the Registrar should be notified.

Register of directors and secretaries. For each director an entry should be made giving all names (and any former names), residential address, nationality, business occupation and details of other directorships held or previously held within the last five years. Changes should be notified to the Registrar within fourteen days.

Register of charges. A charge is a type of security given to a creditor. It must be registered with the Registrar within twenty-one days. The register must contain details of the parties to and the amount of the charge together with a description of the property charged.

Minute books. Proceedings of general meetings and directors meetings must be recorded in minute books. These should be signed by the Chairman of the meeting or of the next meeting as evidence of the proceedings.

Many small companies fail in their duty to regularly update these statutory books. Failure to maintain the registers and minute books is a default and every director is liable to a fine.

5.2Meetings

Normally a company will have only one meeting with its members each year, known as the annual general meeting (A.G.M.). Twenty-one days notice in writing must be given to the members.

The ordinary business of the A.G.M. is to present the accounts to the members, to declare a dividend, to elect and re-appoint directors and to appoint and fix the remuneration of the auditors. Any other business dealt with at the A.G.M. must be called special business and be referred to in the notice of the meeting.

The first A.G.M. must be held within eighteen months of the incorporation of the company. From that time an A.G.M. must be held once every calendar year and no more than fifteen months after the previous meeting. Failure to call an A.G.M. leaves the company and every director liable to a fine.

Any other general meeting is known as an extraordinary general meeting. Directors or 10% of members (or those holding 10% or more of the issued share capital) may call an extraordinary general meeting.

Private companies can make elective resolutions to dispense with an AGM and deal with related matters and, subject to certain exceptions and conditions, can deal with general meeting business by written resolutions.

5.3The company secretary

The administrative duties are generally delegated to the company secretary. Where there is only one director, a separate person must be appointed as company secretary. However, generally the position is combined with that of director.

Duties of the secretary would include convening board and shareholders meetings, taking minutes of those meetings, filing returns with the registrar and dealing with share transfers. In addition the secretary normally maintains the statutory books and witnesses the company seal when applied to documents.

6.LOANS TO AND TRANSACTIONS WITH DIRECTORS

6.1Restrictions on loans

The law here is very complex and professional advice should be sought. It is intended to prevent directors abusing their position and borrowing money from the company.

A company is prohibited from making loans to its directors or from guaranteeing loans to them from third parties. The restriction applies to directors of the company and its holding company.

6.2Permitted loans

Loans of up to 5,000 per director may be made. In addition, directors may be provided with funds to meet expenses incurred for the purposes of the company or in performance of their duties. Prior approval by the members in the general meeting must be given or the loan must be repaid within six months if not approved at the following annual general meeting .

Quasi loans, which are indirect loans by a company to a director, are not prohibited for private companies. Similarly the law does not prohibit the sale of goods or services on deferred credit terms by a private company to its directors, although there may be taxation implications.

6.3Disclosure of loans

The annual accounts must contain details of loans, quasi loans and credit transactions with directors whether or not they are legal. If the company fails to make this disclosure, the auditors must detail the information in their report.

These disclosure requirements extend to transactions between the company and persons or businesses connected with a director or the company. The legal definition of connected person is very complex but includes spouse, children, partners and companies in which the director controls over 20% of the shares.

6.4Substantial property transactions

Directors cannot acquire from or sell to the company non-cash assets worth more than 100,000 or 10% of the companys net assets without the shareholders consent. Transactions with a value of 2,000 or less are excluded from this rule. If approval in general meeting is not obtained, the company has various remedies depending upon the circumstances.

6.5Material interest in contracts

A director who is interested in a contract or proposed contract with the company must declare the nature of his interest at a meeting of the directors. Although there is no prohibition regarding these transactions, in most circumstances disclosure must be made in the audited accounts.

These rules also apply to transactions between the company and persons connected with a director.

7.FINANCIAL PROBLEMS

The provisions of the Insolvency Act 1986 affect the day to day responsibilities of directors, who may find themselves personally liable for incompetent management should the company be insolvent.

7.1Going concern/considerations

There is no precise legal definition of insolvency. However, a company becomes insolvent if:

-it is unable to pay its debts as they fall due;

-the value of its assets is less than its liabilities. The Act includes contingent and prospective liabilities within the definition, which makes this test of insolvency very difficult to assess.

Directors who are concerned about their companys ability to continue to trade should seek professional advice immediately.

In many cases it will be possible to come to an informal agreement with creditors, to extend the bank overdraft facility or to arrange to sell the company. However, if the cash position is critical the only solution may be to appoint an administrative receiver, an administrator or a liquidator.

7.2Administrative receivership

Administrative receivers may be appointed by a creditor who has a floating charge on the assets of a company, generally a bank. The receiver, who acts as agent of the company, has obligations not only to the creditor that appointed him but to all other creditors.

The duty of the receiver is to assess the companys financial position and to recover the amount due to the creditor who appointed him. He has no power to deal with unsecured creditors.

Receivership does not always result in liquidation, as debts may be repaid. However, the receivers contract is terminated upon liquidation.

Directors remain in office but their powers are suspended during the receivership. It is their duty to assist the receiver in appraising the financial position of the company and to submit to the receiver, within twenty-one days of his appointment, a Statement of Affairs showing assets and liabilities.

7.3Administration

Where no debenture exists or the debenture holder refuses to appoint an administrative receiver, the directors, company or creditors may apply for administration. An administrator is then appointed by the Courts. The appointment will assist the company to:

-survive as a going concern;

-come to an arrangement with its creditors;

-secure a more advantageous realisation of assets for creditors than a liquidation would.

The role of the administrator is very similar to that of the administrative receiver, and the obligations of directors identical.

7.4Liquidation

Any creditor may put a company into liquidation. Alternatively the directors can place the company in voluntary liquidation.

The company remains in the directors control, until the appointment of a liquidator at a shareholders meeting. Creditors must confirm the appointment within fourteen days of the shareholders meeting. It is essential at this stage that the directors act only under professional advice. Duties of directors at this time include:

-disposing of perishable and other goods which might decrease in value;

-protecting company assets, including freezing the company bank account;

-avoiding further credit;

-preparing a Statement of Affairs;

-chairing the creditors meeting.

The directors powers cease once the liquidator has been appointed. The liquidator must secure control and realise the companys assets. Creditors claims are agreed and funds distributed accordingly. Finally it is the responsibility of the liquidator to look at the companys affairs prior to his appointment. Directors are required to assist the liquidator throughout his appointment despite their lack of power.

7.5Reports on the conduct of directors

If the administrative receiver, the administrator or liquidator considers that the conduct of a director makes him unfit to run a company, he must report the matter to the Secretary of State.

The Secretary of State generally has two years from the date of insolvency to apply to a court for a disqualification order. Directors may also be disqualified following a report from an inspector appointed under the Companies Act.

If found unfit a director may be disqualified for up to fifteen years, with a minimum of two years where insolvency is involved. Disqualified persons may not act as director or take part in the management of a company. If they do so it may result in personal liability for debts of the company in addition to being a criminal offence.

7.6Fraudulent and wrongful trading

Under the Companies Act fraudulent trading is committed where a company is found to have traded with intent to defraud its creditors. It is an offence whether or not a company is being wound up. However few actions have been successful at it is necessary to prove dishonest intent.

Wrongful trading applies only to directors of a company in insolvent liquidation. It is not necessary to prove intent to defraud, but to show that the director knew or should have concluded that insolvency was inevitable. If the court decides that the director took all possible steps to minimise the loss to creditors, a declaration of wrongful trading cannot be made.

A director who is found guilty of wrongful trading is required to make a contribution to the companys assets, which is dependent upon his personal skills and role within the company. Directors with financial qualifications are therefore more at risk, but ignorance is no defence; all directors should keep themselves informed of the companys financial position.

8.SUMMARY

The position of director carries responsibilities and onerous duties. The law is designed to penalise those who act irresponsibly and incompetently. However, a director who acts honestly and conscientiously, seeking professional advice where necessary, should have nothing to fear.

This document provides only an overview of the regulations in force at the date of publication and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this document can be accepted by the firm.

Investor Words

Structured Finance : A service offered by many large financial institutions for companies with very unique financing needs. These financing needs usually don't match conventional financial products such as a loan. Structured finance generally involve