Guide to Analysing Companies

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CHINESE WALL
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in value and the fund managers, having inside knowledge not
available to other investors, may make a tidy profit.
Since the boom and subsequent bust of the dotcom market,
regulators have also been keen to avoid conflicts between the
advisory and broking arms of banks. Because their salaries and
bonuses were pegged to the overall profitability of the bank,
some investment analysts were found to be publicly touting
particular new issues of shares which, privately, they consid-
ered rubbish. Other people, such as lawyers, erect Chinese walls
to help them act independently on behalf of clients who may be
in the same business or industry. As with banks, experience
shows that such walls can be paper thin.
Churn
To trade excessively in the shares of a client’s account, with the
result that the broker generates a larger amount of commis-
sion income (based on turnover). Investors are most at risk from
churning where they give fund managers discretion on their
behalf to buy and sell shares within certain limits. In the United
States, churning is illegal if it can be proved that the purchases
and sales in question were largely inappropriate for the client.
Circular transaction
Where two companies carry out reciprocal transactions artifi-
cially to inflate each other’s accounts. For example, company A
sells to B $1m-worth of goods and B reciprocates by immediately
selling a similar amount to A. After the transaction nothing has
changed except for the stated turnover of each company, which
has become $1m higher than it would otherwise have been.
The City
The name traditionally given to the part of the City of London
that is roughly bounded by St Paul’s Cathedral to the west and