Dictionary

Refers to the sale of a security which you do not own. A stock-borrow is secured to cover the delivery of the sale. A short sale is profitable if the price of the security declines, allowing the short-seller to repurchase the securities at the lower price and return the borrow.

In most cases, an investor will take a ‘long’ position in a security – purchasing the shares. This means that they anticipate that its price will rise at some point in the future. Some investors may anticipate that the price of the security they do not already own will fall in the future – and sell the shares. This is known as a ‘short’ position.

Example

An investor may have conducted some fundamental analysis on the price of a stock, ABC  PLC for example. Based on this analysis, the investor may decide that the price of ABC is inflated, and anticipate that the price of the stock will fall in the future. The investor, therefore, opens a trading account and sells the 100 units of ABC’s stock at the price of £200, to act on this sentiment. In 6 months’ time, the price of ABC’s stock has fallen to £180. The investor now buys back the ABC stock, closing his or her short position. The investor has therefore made a net profit of £2,000.

In most countries, it is illegal to ‘naked-short’ a security. Naked shorting means selling a security without borrowing it first. Therefore, by law, when short selling a security, the seller must borrow it first. Securities lending is the process which enables short sellers to borrow securities and execute their short sales.

Returning to our ABC PLC example:

The aforementioned ‘short’ investor, when selling shares in ABC on their trading account, is required to borrow the shares from a second investor (a ‘long’ holder). This second investor believes that over the course of the year, ABC stock will rise. The long investor is paid a fee for lending his or her securities to the short seller. In this example, over six months the short investor will pay the long investor as follows based on a lending fee of 2%.

This means over the six months the short investor actually generates a profit of £1,800.

Over the rest of the year, ABC’s stock rallies, with the share price reaching £220. Therefore, the long investor has made £2,200 year to date on their 100 ABC shares when the receipt of lending fees is included in the calculation.

The process of short selling has been proven to increase market liquidity and has similarly proven an essential tool for efficient market price discovery.

Corporate events (CEs), are events initiated by public companies that change the status of the securities issued by said company.

A corporate event is typically agreed upon by a company’s board of directors and then authorised by the company’s shareholders. Common examples of corporate events include stock splits, dividends, and mergers and acquisitions.

There are three categories of corporate events:

1. Mandatory corporate event (MCE): These affect all shareholders. An example of a mandatory corporate event is a cash dividend.
2. Voluntary corporate event (VCE): As the name suggests, a VCE is an event where the shareholders elect to participate. An example of a voluntary corporate event is a tender offer.
3. Mandatory with choice corporate event: This type of corporate event is similar to a mandatory corporate event in that it affects all shareholders. However, in this case, shareholders are given a chance to choose from several options. An example of a mandatory with choice corporate event is a cash or stock dividend option. Here, one of the options is chosen by default, in case the shareholder does not make an election.

Whilst your security is on loan, you forgo your right to vote (at Company meetings – AGMs/EGMs), however you still retain the right to elect on any relevant corporate events. Similarly, you still retain the right to receive all dividend entitlements on securities that are lent. Dividend payments on loaned securities are known as manufactured payments (or substitute payments in the US). Withholding tax liabilities on manufactured dividends (substitute payments) should be discussed with an independent tax advisor. Sharegain is committed to ensuring complete transparency for its clients and this includes transparency regarding corporate events. From your Sharegain dashboard, you will receive notifications about corporate events whilst your securities are on loan, thus allowing you to recall your securities should you so wish.

In finance, the beta (β) indicates whether an investment is more – or less – volatile than the market as a whole. In other words, beta is a measure of the risk arising from exposure to general market movements, and this is also known as the systematic risk.

Beta is used to assess and compare the amount of risk an investment adds to an already diversified portfolio. This means it is an important metric for measuring the risk exposure across investment strategies when that risk cannot be reduced through diversification.

A portfolio of all investable assets within the market has a beta of exactly one. A beta of less than one is indicative of either an investment with lower volatility than the market e.g. a government bond or else an investment with high volatility, whose price movements are not highly correlated with the market e.g. gold. A negative beta describes an investment that tends to increase in price when the general market price falls and vice versa. Securities Lending is an example of an investment strategy which has a negative beta. This is because, as the returns available from the market fall, lending rates will generally rise.

Alpha (α) is a term which describes returns from investments over and above a particular predefined benchmark.

By adopting an active investment management strategy (that is, investing in a manner which does not merely track a benchmark), you aim to beat a benchmark. As an investment manager, you will often be benchmarking your performance against an index like the FTSE 100.

For example, by actively investing you generate 8% returns this year. Assume you’re benchmarking yourself against the FTSE 100. If the FTSE 100 were to generate 3% in the same year, then your alpha would be 5%.

Securities lending is an example of an alpha-generating strategy. Lending your securities, whether your investment strategy is active or passive, will allow you to outperform the benchmark. Securities lending is a major reason why some passive investment funds are able to outperform the benchmark they are tracking.

Alpha is used in finance to measure the performance of investment managers and is one of five popular technical risk ratios intended to help investors assess the risk-reward of strategies.