Accumulation unit/share: The classification of a unit or share in an investment fund that reinvests income from the underlying assets, possibly from share dividends, bond coupons or property rent. The unit or share price is then adjusted to reflect the income, which is not taxed, although the final return is treated as a capital gain or loss. Funds with accumulation units or shares can be denoted with the suffix ‘Acc’.
Active investment: A strategy where an investor (often a fund manager) makes active decisions about where, when and how to buy, sell, or hold equities, bonds or other financial instruments. It is distinct from passive investment, by which a benchmark, such as the FTSE 100 Index, is duplicated and tracked.
AIM: Formerly the Alternative Investment Market, AIM is part of the London Stock Exchange. Launched in 1995 with just 10 companies, it lists smaller fledgling firms that can enjoy more regulatory flexibility compared with the larger companies on the main market, such as those in the FTSE 100. In the UK, some AIM shares are free from inheritance tax if held for more than two years.
Alpha: A measure that indicates how a fund has performed when compared with its benchmark (often an index such as the FTSE 100) when adjusted for the risks taken. Alpha is often expressed as a percentage versus the performance of its benchmark.
Alternative investments: Investments outside of the three main asset classes of equities, bonds and cash. These include investments such as real estate, private equity, commodities and hedge funds.
Annuity: Typically sold by life insurers, an annuity is a financial product which, in return for a lump sum, provides a guaranteed income every year for the rest of the retiree’s life or a specified period.
Asset class: An asset class is a term used to categorise different types of investment that share similar characteristics. For example, stocks, bonds and property are three types of asset class.
Assets under management (AUM): The total value of the assets, including cash, held within a fund or managed as a whole by a fund management company.
Bear market: A market that is undergoing a prolonged fall or weakness driven by pessimism and negative sentiment. Technically, if a market falls 20%, it is a bear market.
Benchmark: The yardstick by which investment funds measure their performance. Fund managers typically try to outperform a certain benchmark. For example, a UK fund manager may benchmark their investment performance against the FTSE All Share index.
Beta: A measure of how closely an investment tracks the performance of its respective market.
Bid/Offer spread: Dual-priced funds have an offer (or buying) price and a bid (or selling) price and the difference between these is known as the bid-offer spread.
Black swan event: A rare event with unexpected consequences that are severe and widespread. Examples include the dotcom crash in 2000; the Global Financial Crisis of 2008 and the COVID-19 pandemic. It could also be a natural event such as a major catastrophe. Investors can help to protect their portfolios against black swan events by diversifying their portfolios and investing in funds managed by professional managers who are informed about financial markets. Such events could also be viewed as good buying opportunities because financial markets generally over-react initially to them, making assets cheaper, and invariably recover at some stage.
Blue chip: Denotes the biggest stocks listed on an exchange. The term derives from poker, where blue betting chips are traditionally of higher value than white or red ones.
Bond: Bonds are IOUs, or debt, issued by governments and corporations looking to raise cash. When you buy a bond, you are essentially lending out your money. They usually pay interest, and often have a set term to “maturity”, when the loan must be repaid, although some bonds never mature. Bonds are also known as fixed interest securities.
Book value: Also known as Net Asset Value (NAV), this is the value of a company, or an asset, according to its balance sheet. This term can be compared to market value to determine whether a company is under- or over-priced.
Bottom-up: Refers to an investment process, or approach, used by fund managers. Stocks are selected by analysing companies based solely on their investment quality and potential, regardless of their wider industry conditions and the macro-economic backdrop.
BRICs: Acronym for emerging market giants: Brazil, Russia, India and China. The term BRIC was coined by former Goldman Sachs director Jim O’Neill in 2001 after he forecast the four countries’ economies would surpass those of the US and Japan by 2050.
Broker: Such as a stockbroker or insurance broker – a person or firm that executes buy and sell orders on behalf of investors. Brokers make their money via commissions from their trades.
Bull market: A ‘bull market’ is City slang for a rising market for securities such as shares and / or bonds. It is characterised by optimism and investor confidence. Technically, a sustained 20% market rise is a bull market.
CEO: Chief executive officer – the boss or highest-ranking employee at a firm. A CEO’s prime responsibility is management of the business.
CGT: In the UK, Capital Gains Tax is the levy you pay on any profits made when selling something that has risen in value. It is important to remember that it is the gain which is taxed – not the full sale price. For example, if an investment is bought for £100 and sold later for £150, £50 would be subject to CGT. The annual tax-free allowance, which is known as the Annual Exempt Amount, allows you to make a certain amount of gain each year before you must pay tax.
Closed-ended: A type of investment fund in which the number of shares or units are fixed at any given time. Investment trusts are examples of this, with investors having to buy or sell shares to invest or divest. Investment trusts can create more shares through new issues, however, and can conduct share buy-backs to reduce the number.
Commodities: Commodities are natural resources and raw materials, ranging from oil to gold. Includes ‘hard’ commodities such as industrial and precious metals, as well as ‘soft’ commodities such as agricultural produce, including coffee and wheat.
Corporate bond: An IOU, or debt, issued by businesses to raise cash. Corporate bonds, like government bonds, pay interest and usually have a set maturity period. Generally, companies pay interest in two instalments a year, although this can vary.
Coupon: A coupon is the term used for the interest paid periodically on a bond, expressed as a percentage of the bond’s par value (the value at which it was bought). Because the bond’s price will differ from its par value, the running yield (coupon/price) or yield-to-redemption (the expected yield if the bond is held to maturity) usually gives a better measure of the investment return from owning a bond.
Default risk: The probability that a borrower, including individuals, countries or companies, cannot pay a debt. Agencies such as Fitch ratings, Moody’s and Standard & Poor’s, provide credit ratings on companies and governments.
Deflation: Deflation is when the prices of goods and services decline. A country is in deflation if its inflation level drops below 0%. Prolonged bouts of deflation can be dangerous for an economy as consumers stop spending in the hope of buying something cheaper in future.
Derivative: A complex financial instrument that is a contract between two or more investors. Its value is determined by the fluctuating prices of underlying assets. Typically, these assets are stocks and bonds, but they can be linked to currencies, commodities and interest rates.
Distribution: A payment of interest or dividends to investors by the issuer (for example, a fund manager).
Diversification: Investing in a spread of assets to reduce risk. A portfolio invested in one company for example risks losing all its assets if that company goes bankrupt.
Dividend: The payout to shareholders of a company that shares its profits with its investors. They are usually paid quarterly, twice a year or annually.
Drawdown: The difference between the highest price and lowest price during a specific period, usually quoted as a percentage. Not to be confused with pension drawdown.
Dual pricing: When the sale and purchase prices of shares and units in funds are different at any given time. This is less common today but historically many funds have had an offer (buying) price and a bid (selling) price. The difference between these is known as the bid-offer spread.
Duration: A measure of the interest rate risk of a bond, or the sensitivity of the bond to changes in interest rates. The figure is expressed in years, representing the time required for the investor to recover the present value of the cash flows of a bond.
Emerging market: A developing country that typically has a fast-growing economy. Examples include Brazil, Mexico and Russia.
Enterprise Investment Scheme (EIS): These were launched in the UK to help smaller companies to raise cash by offering a range of tax incentives to investors who invest in such companies. An EIS gives income tax relief of 30 per cent and investors pay no capital gains tax on profits once the investment has been held for three years.
Equities (Shares/Stocks): These give the owner part ownership of a company, the right to a portion of the profits and a vote at annual general meetings. They usually trade on a stock exchange, where prices are determined by supply and demand.
ESG: Environmental, Social and Governance are the widely recognised criteria used to assess the ‘sustainability’ of an investment.
Exchange traded fund (ETF): An ETF is a security, or share, that tracks a particular index, such as the FTSE 100, or the price of a commodity, such as gold. Unlike a tracker fund, they are traded on a stock exchange and can be bought and sold while the market is open.
Finance Director (FD): The person responsible for the financial health of a company. Duties will include managing financial statements and results and ensuring financial, fiscal and tax related obligations are met.
Financial Conduct Authority: The City regulator formerly known as the Financial Services Authority. The FCA oversees and checks financial firms providing services and products to UK consumers.
Financial Services Compensation Scheme (FSCS): The FSCS is a free service and the UK’s compensation scheme of last resort for customers dealing with authorised financial services firms. The organisation only pays customers compensation if a company is unable to do so, usually as a result of going bust.
Fixed income: Another term for bond related investments. Fixed income assets are IOUs issued by governments and companies. They pay annual interest and normally repay the amount borrowed to the bond holder at the end of a fixed term, although some fixed income instruments are non-maturing.
Floating Rate Notes (FRNs): Bonds with floating – rather than fixed – coupon payments that are linked to a reference interest rate. The interest rate sensitivity or duration of FRNs is typically lower than similar, fixed coupon bonds.
Frontier market: Developing countries that are less advanced than emerging markets. They can have fast-growing economies but also tend to pose higher risks.
FTSE 100: The FTSE 100 is an index comprised of the 100 largest listed UK firms, often dubbed ‘blue-chips’, listed on the London Stock Exchange (LSE).
Fund: A pooled investment. Typically run by a fund manager who uses investors’ money to invest in a wide range of assets, such as stocks or bonds, with the aim of delivering capital growth and/or income.
Fund-of-funds: Sometimes known as a multi-manager fund, a fund of funds is an investment portfolio that invests in a range of other funds rather than directly in individual stocks or securities.
Fund share classes: Fund managers often provide different versions of fund units – or shares – for investors to buy. These can include an income unit (usually abbreviated to “inc”) or an accumulation unit (usually abbreviated to “acc”).
Fund supermarket: An online platform where investors can buy, sell and hold investment funds. Buying an investment via a fund supermarket tends to be cheaper than buying directly from the provider. Many of these platforms also allow customers to trade other instruments, such as shares, ETFs, or currencies.
Futures: Futures are a type of derivative commonly used in relation to commodities, currencies and stock markets. They involve purchasing an asset at an agreed price for delivery on a future date.
Gearing: The ratio of a corporation’s debt to the value of its ordinary shares. Investment trusts often borrow to amplify investor returns.
Government bonds: IOUs, or debt, issued by governments to raise cash. They pay interest, usually fixed, and have a set maturity. UK government bonds are known as gilts while US government bonds are called treasuries.
Greenwashing: A play on the term ‘whitewashing’, this is the practice of providing misleading information about an investment, company or project to make it appear more environmentally friendly than it really is.
Impact investing: Investing with the aim of bringing about positive and measurable Environmental, Social and Governance (ESG) results while delivering financial returns. This goes beyond just ‘negative screening’ or avoiding undesirable investments such as companies deemed to have harmful practices. Impact is usually measured with reference to the United Nations’ Sustainable Development Goals (SDGs).
Income drawdown: A pension feature which allows savers to remain invested during retirement while drawing an income from their pot. It is a riskier strategy than buying an annuity but it allows retirees to potentially enjoy the benefit of further growth in the value of their investments.
Income unit: The classification of an investment holding in a unit trust in which income from the assets held, possibly from share dividends, bond coupons or property rent, is paid to the investor as cash. This cash could be used to provide an income, or it could be used to buy more units in a fund.
Index: An equity index follows the performance of a particular group of shares on a stock market, often the largest - such as the UK FTSE 100 index or the US S&P 500 index. An index tracker fund will mirror the performance of a particular index.
Individual Savings Account (ISA): A tax-efficient savings tax wrapper for UK savers, where the gains and returns are tax-free.
Inflation: The percentage measure of a rise in prices, usually expressed in annual terms. In the UK, the Consumers Price Index is based on a basket of goods and services chosen to reflect the general cost of living. Inflation reduces spending power and beating it is a core aim for many investors.
Initial Public Offering (IPO): An IPO, sometimes referred to as flotation, marks a company’s stock market debut. It is the very first time it sells shares on a stock exchange to ‘go public’.
Investment Company with Variable Capital (ICVC): Similar to an Oeic, An ICVC is a fund which, unlike a unit trust, is legally structured as a company. The manager creates and redeems shares when investments and redemptions are made by investors.
Investment grade bonds: Corporate bonds that are issued by large, financially stable businesses, where the likelihood of default on the loan is deemed to be the lowest of all corporate bonds. Rating agency Standard & Poor’s classifies Investment grade bonds as those rated BBB and above, while Moody’s classifies them as Baa or higher.
Investment trust: An investment trust operates as an investment fund but it is a structured as a limited company, and its primary business is to invest its shareholders money. They are closed-ended, trading with a set amount of money, and are bought and sold on an exchange, such as the London Stock Exchange.
Investment Trust Discount: An investment trust trades at a discount when its share price is less than its net asset value. Given investment trusts are traded on the stock exchange, their share prices can fluctuate, based on demand and supply. If a trust is in great demand, its shares can trade at a premium i.e. at a greater value than their actual net worth.
Junior ISAs (JISAs): Like an ISA, a JISA is a tax efficient savings account, except they are designed to help families save or invest for their children. The money is not available to the child until they reach 18 years.
Junk bonds: A slang term for high-yield or non-investment grade corporate bonds. They are viewed as far higher risk than many bond investments, such as UK government bonds, and investment grade, as their issuer carries a greater chance of default. Credit rating agency Standard & Poor’s classifies junk bonds as those rated ‘BB’ and below, while Moody’s classifies them as ‘Ba’ and lower.
Leveraging: The borrowing of money or capital with the aim of increasing the potential returns on an investment. Leverage can amplify losses as well as gains. Investment trusts can leverage but it is illegal for units trusts to do so.
LIBOR: London Interbank Offered Rate (LIBOR) is the global benchmark interest rate at which banks lend money to each other for short-term loans. LIBOR is widely viewed as a barometer of how confident banks are in each other’s financial strength.
Liquidity: Liquidity refers to how easily an asset can be converted into cash. Shares which can be bought or sold rapidly on the stock market are considered to be liquid assets whereas a commercial property is more illiquid because it can take longer to sell.
M&A: A common phrase meaning Merger & Acquisition. A merger is when two firms join forces to create a new corporation. An acquisition is the purchase of another company, which is absorbed into the buying firm.
Market capitalisation: Calculated by multiplying the share price by the number of shares in issue, market capitalisation represents the total value of a company’s shares. When combined with the total value of a company’s debt (and other small adjustments), this gives the ‘Enterprise Value’, or total value, of a company.
Multi-Asset: A fund or portfolio that invests across various asset classes to diversify sources of return and risk. As well as investing in other funds, multi-asset products can also invest in individual shares, bonds, property, cash and commodities such as gold.
Multi-manager: A fund/portfolio that invests in other funds: this can either be fettered (using the fund manager’s own fund range) or unfettered (free to invest across the whole market). Similarly, multi-manager funds can focus on particular asset classes (equities for example) or take a multi-asset approach.
Mutual fund: An investment vehicle that pools money from many investors and invests in a range of assets. The key advantage is that it provides economies of scale and gives individual investors access to a diversified portfolio. Examples of mutual funds include unit trusts, Oeics and investment trusts.
Oeic: An Open-Ended Investment Company is a fund which, unlike a unit trust, is legally structured as a company. An Oeic manager creates and redeems shares when investments and redemptions are made.
Ongoing Charges Figure (OCF): The OCF covers all the fees incurred for operating a fund throughout its financial year. These include the annual charge for managing the fund, administration and independent oversight functions, such as trustee, depository, custody, legal and audit fees. The OCF excludes portfolio transaction costs except for an entry/exit charge paid by the fund when buying or selling units in another fund. This will have an impact on the realisable value of the investment, particularly in the short term.
Open-ended: A type of investment fund in which units can be created and cancelled, depending on investors’ requirements to make or withdraw investments. Unit trusts and Oeics are examples of this.
Passive investment: A strategy in which a benchmark, such as the FTSE 100 Index, is duplicated and tracked. Funds using this strategy, sometimes known as tracker funds or index trackers, are often run by robots (or algorithms) rather than fund managers making active investment decisions.
PE Ratio: The Price to Earnings Ratio is a common method of valuing a company. It is calculated by dividing a company’s share price by its earnings per share.
Pound cost averaging: A strategy by which investors can diversify their risk across time. Investing a substantial lump sum in one go can run the risk of subjecting the whole capital to a market fall soon after. Regular monthly investments, for example, can help smooth exposure to fluctuations in the market.
Premium: The difference between an asset’s market price and its net asset value when the former is higher. For example, an investment trust’s shares can trade at a premium to its actual net worth if it is in high demand.
Private equity: Shares held in a company that is not listed on a public stock exchange. Individuals and other entities such as companies and funds can hold private equity.
Profit warning: An announcement from a company to the stock market that its profits are likely to be less than anticipated. Typically, a profit warning is flagged up a few weeks before a firm publishes its latest results in a bid to manage shareholder expectations.
Real return: A measure in percentage terms of the return delivered by an investment that takes account of the impact of inflation or deflation, taxes and investment fees over a specific period. It can be calculated by subtracting the inflation/deflation rate, tax and investment fees from the nominal return.
Redemptions: The process by which an investment can be converted back to cash. The ease with which this can be done is often dictated by the liquidity – i.e. the number of potential buyers and sellers in the market for a specific asset – of the underlying investments.
Responsible investing: An approach to investment that integrates environmental, social and governance (ESG) considerations within the decision-making.
Rights issue: The action by which a publicly listed firm issues new shares to existing shareholders in a bid to raise money. Existing shareholders have pre-emption rights to buy the shares before anyone else. A company might do this if it is in financial difficulty and needs more cash or if it wants to raise money for expansion. It will dilute the value of the shares already in issue.
Risk: The probability that an investment will deliver a negative return. Many factors can contribute to risk, such as inflation, the business environment, the wider economy and the personal qualities of a company’s management. Inevitably, some investments incur higher risks than others but these can be addressed through diversification and investing in funds managed by investment professionals.
S&P 500: An equity index that tracks the performance of the 500 largest companies listed on US stock exchanges. It is the country’s main stock index.
Sector rotation: Selling investments in one industrial sector to move them into another, possibly because of a change in the economic environment.
Securitisation: The process of creating an investment that is secured against an underlying illiquid asset or group of assets. For example, debt from mortgages could be packaged together and the related securities could then be traded in the market.
Security: A financial asset such as a bond or equity that can be traded. Strict definitions of what constitutes a security can vary, depending on the jurisdictions in which the security is traded.
Self-Invested personal pension (SIPP): A personal pension plan that gives the holder significant freedom over how it is invested. The charging structures tend to favour larger pension pots.
Share buyback: A process in which companies either buy shares back from investors on the open market, or present shareholders with a tender offer in which they can redeem an allocation of their shares at a premium to the current market value. In cutting the number of shares in issue, businesses aim to increase the value of shares still available.
Share class: Companies and funds typically issue more than one class, whether it be shares or units. Different stock or share classes from the same company will have different obligations to their investors.
Shareholder: A person, company or organisation that owns shares in a company.
Shares in issue: The total number of shares currently attributable to a company, whether owned by the general public, large institutional investors, or employees of the company as part of their remuneration.
Shorting: A strategy used by professional investors where they bet that an asset, such as shares, will lose value. It involves borrowing shares and selling them on before buying them back at a later date, hopefully at a lower price, to return them to the original owner. If the price of the shares has risen, however, then the shorting party will lose money.
Single pricing: When shares and units in funds can be purchased and sold at the same price. This is more common today but historically many funds have had different ‘bid’ and ‘offer’ prices.
SIPP: A Self Invested Personal Pension is a pension wrapper that enables the holder to buy and sell investments such as funds and shares to match their needs and risk appetite. Some bespoke SIPP offerings even allow investors to hold physical commercial property.
Sustainable investment: An approach to investment that integrates Environmental, Social and Governance (ESG) considerations within the decision-making.
Sustainable Development Goals (SDGs): Established in 2015 by the United Nations General Assembly, the 17 SDGs are inter-linked global goals by which to achieve a better and more sustainable future for all of humanity by the year 2030. They are usually used as the basis by which to measure the effects of impact investing.
Swap: A derivative contract in which two parties agree to swap the investment returns from two instruments. Common swaps include currency and interest rate swaps.
Target risk: An investment approach, typically used in multi-asset, where a fund/portfolio focuses on the level of volatility/risk taken (usually within set parameters) and then looks to produce the best return possible within these parameters.
Top-down: Top-down investors select industries and stocks to invest in based on the wider macro-economic and industry backdrop rather than the fundamentals of individual shares. Most investors will combine top-down and bottom-up strategies (looking at an individual share’s characteristics) when they make investment decisions.
Total return: A percentage measure of the performance of an investment, including the returns from both income and capital growth.
Tracker fund: A tracker fund, sometimes known as an index tracker, is essentially a computer-run fund that mirrors, or tracks, the trajectory of a particular market or index, such as the FTSE 100.
Trustee: A trustee safeguards assets for investors.
Valuation point: The time of day at which the price of a fund is calculated.
VCT: Venture Capital Trusts are listed closed-ended funds that invest primarily in fledgling businesses that are not publicly listed on a stock exchange. There are strict rules governing what types of companies VCTs can invest in. VCTs are typically viewed as higher risk than investments in large, listed companies but if you hold your shares in a VCT for at least five years you get income tax relief in the UK and there is no Capital Gains Tax on profits from selling your shares.
Volatility: Volatility is sometimes used interchangeably with risk but ultimately refers to how much and how quickly an asset class moves up and down within a certain timeframe. The more and the faster it moves, the more volatile is an investment considered to be.
Yield: The income received from an investment, such as a fund, bond or dividend-paying share.
Yield curve: A line on a graph that plots the interest rates of similar bonds with different lengths of time to maturity, such as three-month, two-year, five-year and 30-year government bonds. The curve reflects market expectations and it can be analysed for signals of future changes in interest rates and economic activity.
