EAFE
Europe, Australasia and Far East. Often used to describe an overseas equity mandate for US investors.

Early stage (private equity)
Existing company requiring finance which has developed a prototype product or service but still has limited revenue.

Econometrics
The application of statistical and mathematical methods in the field of economics to test and quantify economic theories and the solutions to economic problems.

Equilibrium Price
The market price at which the quantity supplied of a commodity equals the quantity demanded.

Earnings
Net profits of a company available for distribution to shareholders.

Earnings per share (EPS)
Company’s annual earnings divided by the number of shares in issue. “Fully diluted” earnings per share takes account of the total number of shares allowing for any convertible securities.

Earnings yield
Company’s earnings per share divided by its current share price. This is the inverse of the price/earnings (P/E) ratio.

EASDAQ
Independent, Brussels-based, pan- European stock market set up in November 1996. It is set up along similar lines to NASDAQ in the US and tends to attract smaller and growth-oriented companies. Companies are allowed to list and trade in euros, sterling or US dollars.

EBITDA
Earnings before deduction of interest, taxes, depreciation and amortisation (an accounting term).

ECB
See European Central Bank.

ECN
See electronic communications network.

Economic cycle
Historic analysis of markets and economies demonstrates that they generally move in cycles. A typical cycle would start with a period of low economic activity and low confidence, depressing consumer spending. After some time, in anticipation of an economic and earnings recovery, share prices start to rise. Interest rates fall and stimulate economic activity, and as the economy improves, company earnings rise.
This expanding economy eventually puts upward pressure on inflation and interest rates. Bond prices fall and, as interest rates and inflation rise further, company earnings are hit and share prices slump, leading to the start of another cycle.

Economic indicators
Statistics that give an indication of the state of an economy. Commonly used indicators in investment analysis include wholesale and retail inflation measures, growth for various sectors of the economy, short- and long-term interest rates, the extent of unused manufacturing capacity and retail sales.

Economist
Person who analyses trends in economic indicators and attempts to forecast economic growth, likely trends in interest rates and inflation and the impact of such factors on financial markets.

Efficient frontier
Line of risk and reward that graphs all portfolios providing the greatest expected return for a given level of risk or, equivalently, the lowest risk for a given expected return.

Efficient market
Investment market where new information is quickly reflected in the price of securities in the market. It is generally more difficult for an investor to outperform in such a market.

Efficient portfolio
Portfolio which appears on the efficient frontier. There is no portfolio which has a greater expected return with the same level of risk.

Electronic communications network (ECN)
Electronic system that brings buyers and sellers together for the electronic execution of trades. It disseminates information to interested parties about the orders entered into the network and allows these orders to be executed. The ECN thereby networks major brokerages (and individual traders) so that they can trade directly between themselves without having to go through a middleman.

Emerging market
Financial market in a developing or newly industrialising country. Such markets can deliver high returns because of the rapid pace of industrialisation, but can be risky owing to low liquidity, lack of reliable information and potential political instability.

Emerging market debt
Debt issued by governments and corporations within developing economies. Debt may be issued in the currency of the issuing country or, more commonly, in the currency of a major industrialised economy.

Employee Retirement Income Security Act (1974) (ERISA)
Federal law in the US which governs pension plans in the private sector and specifies minimum levels of pension plan participation, vesting, funding and many other fundamentals. Also introduced stringent new standards of fiduciary responsibility on investment issues.

Enhanced indexation
Method of investment which attempts to outperform an index, but to a lesser extent than a traditional active manager. (See active management, passive management.)

Enterprise value (EV)
Market value measure of a company from the point of view of the aggregate of all the company’s sources of funding, namely: debtholders, preferred shareholders, minority shareholders and common equity holders. Because EV is neutral with respect to capital structure, it is useful when comparing companies with diverse capital structures. (See EV/EBITDA.)

EPS
See earnings per share.

Equal-weighted index
Index in which each component security is given an equal value weighting. This results in the need for frequent rebalancing, as the relative weightings are disturbed whenever the value of one security moves relative to another. (See capitalisation-weighted index.)

Equalisation
As income from a unit trust accrues between dividend distributions, it is added to the unit price. An investor purchasing units will thus be paying for some of the next dividend payment in the unit price, effectively turning capital into income (which is taxable). Unit trust managers state an equalisation factor with each distribution to indicate the proportion of the total distribution that is not subject to income tax.

Equities
Commonly used term for ordinary shares.

Equitisation
Using derivatives to create an exposure to equity market price movements, without actually investing in stocks. The derivative positions combined with cash holdings can be arranged so as to give the same returns as having the assets actually invested in stocks. The cash kept in a portfolio for regular settlement of trades can be equitised so that the portfolio is fully exposed to the stock market.

Equity risk premium
Extra return expected from investing in equities rather than a riskless asset to compensate for the additional risk/ volatility associated with equities.

Equivalent yield (real estate)
Time-weighted average of the initial yield and reversionary yield. (See initial yield [real estate], reversionary yield [real estate].)

ERISA
See Employee Retirement Income Security Act (1974).

ETF
See exchange traded fund.

Ethical investment
Term given to an investment philosophy focusing on investing in companies according to non-economic criteria such as ethical or religious beliefs. (See socially responsible investment, green investing.)

Euro (€)
Single currency unit adopted by member countries of the Economic and Monetary Union (of the European Union; EMU) launched on 1 January 1999, with notes and coins introduced on 1 January 2002.

Eurobond
Bond that is issued by an international syndicate or government and offered to investors in a number of countries at the same time. It is usually issued by a non-European company for sale in Europe, but it does not have to be. Eurobonds are issued outside the jurisdiction of any single country and are traded through banks rather than on stock exchanges.

Euroland/eurozone
Group of countries which use the euro as their common currency.

European Central Bank (ECB)
Independent central bank responsible for setting and implementing monetary policy and conducting foreign exchange and reserve operations for the members of the (European) Economic and Monetary Union (EMU). Established in June 1998 as an essential part of the adoption of a single currency.

European-style option
Option which can only be exercised for a short, specified period of time just prior to its expiration, usually a single day.

Eurotop indices
Indices covering the largest companies in Europe and calculated by FTSE International. Variations are Eurotop
100 (top 100 companies) and Eurotop 300 (top 300 companies).

Event risk
Risk of a substantial change in the market price of a stock due to a particular event. Often used in bond markets to describe the risk that the rating of a bond will drop due to the taking on of additional debt or a recapitalisation by a company.

EV/EBITDA
Method of valuing companies calculated by dividing a company’s enterprise value (market value of equity plus net debt of the company) by its earnings before interest, tax, depreciation and amortisation. This measure relates short term cash flow generation to market valuation.

Excess return
Return of a security or portfolio in excess of its benchmark.

Exchange rate
Measure of the value of one country’s currency in terms of another. Exchange rates may be either floating (determined by the market forces of supply and demand) or fixed (values are artificially held at a certain rate or within a certain narrow band of the value of a specified currency).

Exchange traded fund (ETF)
Fund that tracks an index, but can be traded like a stock. The most well-known ETF is the SPDR, which tracks the S&P 500.

Exchange traded options
Options traded on a recognised exchange.

Ex-ante
Forward-looking measure or estimate. (See tracking error.)

Ex-dividend
Security where the purchaser is not entitled to receive the next coupon or dividend payment. A security’s um-or
ex-dividend status is dependent on the time it is purchased in the dividend/coupon payment cycle. (See cum dividend.)

Exotic options
Generic term for complex financial engineering products created using a combination of basic option contracts.

Exit strategy (private equity)
Method by which venture capitalists realise their original investment — usually by sale or flotation.

Expected return
Statistical measure of the average future return from an asset or portfolio. Often an asset with a higher expected return will also have a higher standard deviation of return. (See also mean, standard deviation of return.)

Expiry date
Last date on which an option can be exercised.

Ex-post
Backward-looking measure using actual historical data. (See also tracking error.)

Exempt approved pension plan
Plan other than a personal pension approved under the Inland Revenue for certain tax advantages in relation to contributions and investment returns.

Exercise price
Price at which a call option or put option may be exercised. Also known as the strike price.

Eurodollars
U.S. dollars on deposit with a bank outside of the United States and, consequently, outside the jurisdiction of the United States. The bank could be either a foreign bank or a subsidiary of a U.S. bank.

European Terms
A method of quoting exchange rates, which measures the amount of foreign currency needed to buy one U.S. dollar, i.e., foreign currency unit per dollar. See Reciprocal of European Terms.

Exchange For Physicals (EFP)
A transaction generally used by two hedgers who want to exchange futures for cash positions. Also referred to as against actuals or versus cash.

Exercise
The action taken by the holder of a call option if he wishes to purchase the underlying futures contract or by the holder of a put option if he wishes to sell the underlying futures contract.

Exercise Price
See Strike Price.

Expanded Trading Hours
Additional trading hours of specific futures and options contracts at an exchange, that overlap with business hours in other time zones.

Expiration Date
Options on futures/other contracts generally expire on a specific date during the month preceding the futures contract delivery month. For example, an option on a March futures contract expires in February but is referred to as a March option because its exercise would result in a March futures contract position.

Extrinsic Value
See Time Value.