Guide to Analysing Companies

Index option
An option whose underlying asset is a stockmarket
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INDEX FUND
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index, such as the s&p 500 or the ftse 100. By purchasing the
right, but not the obligation, to buy the underlying shares, an
investor is therefore betting on the overall direction of the
market. Buying an index option is an easier and cheaper way of
getting exposure to the stockmarket as a whole than buying all
the individual shares that make up a particular index. Financial
institutions may also use index options to hedge their risk in
the equity market; in other words, to lay off to other investors
part of the risk that they may already have through the shares
that they own.
Index tracking
The process of comparing the performance of an investment
portfolio with the performance of a relevant stockmar-
ket index. If an actively managed investment fund outper-
forms the index, it can be said to have earned its fee. Otherwise
its investors would have been better off investing passively in
the constituent parts of the index. This can be done by investing
in a tracker fund, which tracks the index. These funds are
cheaper because there is no need for a manger to make invest-
ment decisions and they are simpler to administer. The index
being tracked is said to be a benchmark.
Individual retirement account
A special fund, set up under US tax law, into which an individ-
ual can put a certain amount of money each year towards his or
her pension. Since 2001, there have been two types of individ-
ual retirement account (ira). The first, called a traditional ira,
allows payments (lump-sum or regular) to be paid in free of tax.
When a pension is paid out of a traditional ira, the beneficiary
pays tax on it like any other income. The second, called a Roth
ira, offers no relief from tax on contributions but shelters all
earnings within it (provided the ira has been set up for at
least five tax years and the holder is at least 59.5 years old before
he or she begins to make withdrawals). Contributions to both