From builders to dentists, every profession uses its own expressions or language within its world. Fair enough, but it can be baffling if you don’t know what they mean.
Simple language is best, but when it comes to investing, it’s hard to avoid some words and labels in constant use across the board.
So just follow our handy guide to some of the financial terms you may come across if you’re thinking about investing some money, or currently managing existing – but confusing – holdings.
If stocks and shares are not your thing, read about some fun alternative investments.
Some basic labels
Stocks and shares
These are basically financial stakes in a company, also sometimes called equities. When you buy a stock or share – they are the same thing – you become a part-owner of the company, along with all the other investors. As you acquire more stock, your ownership stake in the company becomes greater. Rather than buying individual shares, which can work out to be both expensive and impractical for the small investor, many people prefer to invest in funds.
When companies or governments need to raise money they issue bonds, which are basically IOUs. In exchange for your money, the bond issuer typically promises to pay a fixed amount of interest on a regular basis until the end of the agreed term. UK Government bonds are called Gilts, while those issued by companies are known as corporate bonds.
Bonds are generally considered a less risky investment than shares (unless, of course, the company or government goes bankrupt or cannot repay the loan). Many bonds can be traded, so you don’t necessarily have to hold them until the end of their term but can sell them to other investors.
The interest rate on a bond is known as the coupon, a legacy of clipping off part of the bond certificate when each interest payment was made.
If the interest rate is good, expect to pay more than the face value of the bond (known as par) for the privilege of acquiring the income stream.
Read Annie Shaw's guide to investment mistakes.
This is pooled money from a range of investors held as a single collective investment and managed by an expert. If you’re looking at investing in a fund, the words get tougher! You may well not need these as a beginner, but just so you know, funds come in a few different forms:
- Accumulation funds: Often shortened to ‘acc’, this means that any money generated is retained within the fund, not handed to you as income. An accumulation fund is divided into units. The number of units remains the same, but as money is added, the price of each unit goes up. This means the overall value of your holding increases.
- Income fund: As the name implies, any money made by the fund is paid to you in cash, not reinvested. This can be withdrawn to provide an income for you, or remain as a credit in your account for the fund manager to reinvest. The value of your investment increases as you acquire more units.
- Tracker fund: Also known as a passive fund, a tracker doesn’t have a manager who decides what to buy and sell. So holding a tracker should be cheaper in terms of charges. Instead, the fund is set up to mirror the movements of another set of investments – perhaps shares in the companies that make up the FTSE 100 index of the biggest firms in the UK.
- Closet tracker: You may hear the disparaging term ‘closet tracker’ applied to a managed fund. This means that although the fund does indeed have a manager – for which you are paying – he or she is simply following an index rather than using discretion and expertise to buy and sell shares.
- Multi-asset fund: Funds are usually devoted to specialities and have names that describe what they invest in (shares, property, bonds, etc). A multi-asset fund has a variety of assets within it to spread risk and minimise management costs for an investor wanting to place money into a range of investments.
- Cash fund: Surprisingly this type of fund, when held in an investment company or pension, may not always be invested in cash at all, but may be in volatile pooled funds of money-market instruments that carry charges which could eat into returns.
If you are considering holding money within a cash fund – and there may be good reason to do so – make sure you know what the terms are, and do not confuse a cash fund with, for instance, holding your money in cash in a building society.
- Open-ended fund: A collective investment where the fund manager creates units or shares for new investors and cancels units for those cashing in (as opposed to selling the units to other investors). The number of units or shares that can be created is unlimited – or open ended. Unit trusts and Open-ended Investment Companies (Oeics) are both types of open-ended funds.
- Closed-end fund: A collective investment, such as an investment trust, where a fixed number of shares is issued and if new investors come along they have to buy from existing investors who are prepared to sell. An investment trust is a closed end fund that is a public limited company and traded on the stock exchange.
- Exchange traded fund: A low-cost fund that tracks an index of assets, such as stocks, commodities, bonds or precious metals.
- Fixed income or bond fund: Investments that typically pay a specified return on a fixed schedule, with the possibility of capital growth.
General words and phrases
Attitude to risk
How much risk you are prepared to take will be key to where you place your money. Risk is closely related to reward, with riskier investments bringing the chance of greater profits, but also the possibility of greater losses if things go badly.
An individual’s risk profile can be tricky to determine because people’s attitude can change over time and in different circumstances. Financial advisers use questionnaires and tools to determine their clients’ attitude and you can find examples on the internet.
The key test for someone who says they are happy to take risk in the hope of greater reward is how they feel if the value of their investments falls. If they do anything other than take a market fall in their stride, then they are probably a more cautious investor than they have been letting on.
Tolerance for risk
The other side of attitude to risk is tolerance for risk. People of limited means or who have dependants are, unsurprisingly, less likely to be able to stand losses than their wealthier neighbours without their standard of living being seriously affected. Even when people feel confident about having an adventurous investment strategy, an adviser may suggest a more cautious path.
This is the foundation stone of your investment strategy. Your risk profile will determine what proportion of your money you are prepared to devote to each asset class – shares, fixed interest, cash and other investments. The proportions you choose will also depend on your investment goals and your time frame.
The act of spreading investments across a range of assets to suit the investor’s risk profile. Essentially it means ‘don’t put all your eggs in one basket’, and is a vital part of asset allocation.
You should regularly re-examine your attitude to risk, your goals and the performance of your investments so far. You may find that if some of your investments have done particularly well, your asset allocation needs adjusting.
Let’s say you have invested in overseas shares that have done very well; you may find that they now make up a bigger proportion of your portfolio than your risk profile suggests is wise, leaving you exposed to big losses should the market fall. Bank some profits and move some of the money into a lower-risk area.
One-stop online facility that allows advisers and investors to view and manage investment portfolios.
The price at which you can buy shares.
The price at which you can sell shares.
This is a figure based on the current market price of a certain group of shares on a stock exchange, say the FTSE 100 index of the 100 biggest companies listed on the London Stock Exchange measured by the market value of their currently issued shares.
How does the stock market work? Read our simple guide.
This stands for the Financial Conduct Authority, the UK’s City watchdog, which authorises and regulates individuals and companies dealing with finance. Visit fca.org.uk or call 0800 111 6768.
Financial Ombudsman Service
The UK’s arbitrator in disputes between consumers and financial firms. Visit financial-ombudsman.org.uk or call 0800 023 4567.
Financial Services Compensation Scheme
The UK’s deposit protection scheme. Visit fscs.org.uk or call 0800 678 1100.
One you might already know
ISA (Individual Savings Account)
A savings and investment account free of personal taxes, such as income tax and capital gains tax, with contributions permitted to a certain limit each year. Its baby brother is the Junior ISA (Junior Individual Savings Account), a special ISA for any eligible child up to the age of 18.
Annie Shaw writes a monthly column for Saga Magazine. Subscribe here.
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