The world of investing can sometime involve terms that you may be unfamiliar with, please below for our handy guide on some of the common terms you may come across. Your adviser will always you clear and jargon free language with you and will be at hand to assist you as and when required.
Accumulation shares/units:
Shares or fund units where any income earned is reinvested in buying additional shares or units, rather than being paid out as cash.
Active investment or active management:
An ‘active’ fund manager takes a hands-on approach to stock picking, aiming to outperform a stated benchmark or index.
Adventurous (portfolio or investor):
Taking on more risk and volatility in the short term with the objective of achieving greater potential returns over the long-term, for example, investing in emerging industries or markets.
Alternative Investment Market (AIM):
AIM is a sub-market of the London Stock Exchange, which allows companies to raise capital with a lower level of regulatory requirements than the main market.
Ask price:
Also known as offer price, this is the minimum price that a seller is willing to take for their shares. In other words, the ask price is the price that investors will pay in order to buy shares.
Asset allocation:
The proportion of the different types of assets (shares, bonds, property and cash) a fund invests in.
Balanced or cautious funds:
Funds that invest across equity and non-equity investments, such as bonds and cash, to provide a modest return while attempting to protect against stock market downturns.
Bank or Base interest rate:
The rate that a central bank, such as the Bank of England, charges to lend money to commercial banks.
Bear market:
A prolonged period of falling share prices (usually defined as 20% or more from a recent high) which often corresponds with an economic downturn. A bear market is the opposite of a bull market.
Benchmark:
An index or peer group against which the performance of a fund or investment trust is compared. The index may be broad-based (e.g. UK All Companies or the MSCI World Index), or narrow (e.g. US technology stocks or precious metals).
Bid price:
The maximum price that a buyer is willing to pay for their shares, in other words, the price that investors will receive if they sell their shares.
Blue-chip:
A company that is reputable, financially stable and well-established in its sector.
Bonds:
A debt instrument where an investor lends money to a company or government for a set period of time, in exchange for interest payments. Once the bond reaches maturity, the investor’s money is repaid.
Book value:
The total value of a company’s assets less its liabilities. This is also known as the company’s net asset position.
Bottom-up investing:
Focusing on company-specific fundamentals when deciding whether to buy or sell shares. Bottom-up factors include financial information, the management team, forecast earnings growth, market share and competitors.
Bull market:
A market in which prices are rising, or are expected to rise, often lasting for months or years. A bull market is the opposite of a bear market, where prices are falling.
Buy limit:
An order to buy shares automatically which is triggered if the offer price falls to, or below, a price set by the investor. It allows buyers to time their share purchases without having to monitor the share price in real-time.
Buy-sell spread:
The difference in price between the buy (offer) price and the sell (bid) price of a share. The size of the spread varies with a wider spread in less-traded shares, and represents the ‘margin’ or profit made by the broker on each transaction.
Capital gain:
The profit you make if you sell shares or investments for a higher price than the price you paid.
Capital gains tax:
A tax charged on the capital gain, or profit, you make from selling assets such as shares or property. This tax is not incurred until the asset is sold.
Capital growth:
The increase in the value of your capital (the amount of money you invest).
Commodities:
Physical resources such as oil, gas, copper, sugar, wheat and precious metals.
Consumer price index (CPI):
An index that measures the change in price that consumers pay for a basket of goods and services.
Defensive assets:
These include fixed-interest investments such as bonds and gilts, alongside cash-based investments. They aim to provide stable returns over the long-term with relatively low volatility.
Defensive asset allocation:
Investing in a higher proportion of more defensive assets, such as bonds and cash-based investments, typically with a lower allocation to share-based investments, with the objective of reducing risk and volatility.
Defensive companies and sectors:
These aim to provide regular dividends and/or stable earnings regardless of economic and stock market conditions. Examples include utilities and consumer staples such as food and healthcare.
Diversification:
A strategy to invest in a range of asset classes, geographic regions or industry sectors to spread the risk of one asset underperforming, reduce overall volatility, and increase potential returns over time.
Dividend:
A payment to shareholders, usually in cash, which provides a source of income (in addition to the potential for capital growth via any increase in the share price). A company may also pay a one-off special dividend to return surplus cash to shareholders.
Dividend yield:
The return paid to shareholders in the form of dividends based on the current share price. Dividend yield is calculated as the dividend per share (which can be historic or forecast) divided by the current share price.
Earnings per share (EPS):
The profit after tax of a company divided by the number of shares.
EBIT:
Earnings before interest and tax, which measures the profitability of a company before paying any interest or tax due.
EBITDA:
Earnings before interest, tax, depreciation and amortisation, which is a measure of the underlying profitability of a company.
Emerging markets:
Countries whose financial markets and economies are less developed than countries such as the UK and US. Emerging markets include Brazil, India, Mexico, Taiwan and Turkey.
Environmental, social and governance (ESG):
Also known as ‘socially responsible investing’ or ‘sustainable investing’, ESG refers to investing which prioritises environmental, social and government factors in deciding which companies or sectors to invest in.
Equities (shares):
A security or share that provides ownership rights to a company. Equities are often categorised by geographical region (e.g. the UK, US and global) or by size of the company (e.g. small, mid or large market capitalisation).
Equity fund:
A fund that invests primarily in shares. Equity funds are principally categorised by income or growth investment objectives, company size, sector and/or geography.
Ex-dividend:
The day that the share starts trading without the value of the next dividend payment. The ex-dividend date is usually one or more business days before the record date. If you purchase a share on or after the ex-dividend date, you will not receive the next dividend payment.
Exchange rate:
The value of a country’s currency against that of another country. For example, how many US dollars or Euros you would receive for every £1 of sterling.
Exchange-traded fund (ETF):
A collective investment that tracks a specific index, sector, commodity or other asset in order to replicate its performance. ETFs can be bought and sold on a stock market, in the same way as shares.
Exit charge:
Also known as a ‘redemption charge’, an exit fee may be charged when an investor sells shares or units in a fund.
Expense ratio:
The amount, expressed as a percentage of the total value of fund assets, that investors are charged to cover a fund’s operating expenses and management fees.
Foreign currency risk:
The risk of losing money due to an unfavourable movement in exchange rates. For example, if you held shares in US dollars and the pound strengthened against the dollar, your shares would be worth less in pounds sterling.
Fractional shares:
The option to buy less than one whole share, for example, 0.2 of a share. Some trading platforms offer the choice of buying fractional shares for investors wanting to invest smaller amounts in a company with a high price per share, such as Microsoft, Apple and Meta.
FTSE (Financial Times Stock Exchange) 100:
Also known as the “Footsie”, this is a share index composed of the largest 100 companies listed on the London Stock Exchange by market capitalisation.
FTSE 250:
An index of the 250 largest companies by market capitalisation, excluding the constituents of the FTSE 100 index.
FTSE All Share:
The aggregation of the FTSE 100, 250 and Small Cap Indexes, representing nearly 99% of UK listed shares by market capitalisation.
FTSE Small Cap:
This comprises around 270 companies outside the largest 350 companies by market capitalisation.
Fund:
A fund is a pool of money collected from investors that is invested in a range of underlying assets by the fund manager. Two of the most common types of fund in the UK are unit trusts and open-ended investment companies (OEICs).
Fund of funds:
Also known as multi-manager funds, these are funds that invest in a portfolio of other funds, rather than investing directly in a portfolio of shares or other assets.
Fund manager:
The person responsible for implementing a fund’s investment strategy and investing the fund’s assets.
Gilts:
Bonds issued by the UK government, most of which have a fixed-cash payment (known as a ‘coupon’) every six months until the gilt matures. The government also issues index-linked gilts with payments adjusted in line with inflation.
Greenwashing:
The process by which companies make false or misleading statements about their environmental credentials, whether unintentionally or as a deliberate marketing strategy.
Growth funds:
Funds invested in stocks with the potential for a high level of earnings growth, which could result in share price growth over time.
An investment strategy focused on shares with the potential for growth in profits and share price.
Growth share or stock:
A company experiencing rapid growth in earnings and revenue and typically reinvesting surplus cash into the business, rather than paying dividends.
Hedging:
A strategy used by companies and investors to offset the risk of an adverse price movement in an asset. Hedging generally involves the use of financial derivatives such that a loss in the underlying investment is offset by a gain in the derivative.
High net worth individual:
This is someone with significant liquid assets who has the capacity to build and maintain an investment portfolio.
IA Sector:
The Investment Association (IA) divides sectors into broad groups to allow funds with similar characteristics to be compared. There are over 50 sectors based on assets and their geographic focus, for example, UK Equity Income, Property, Global and Targeted Absolute Return.
Income:
Money paid out from an investment, including interest from bonds or dividends from shares.
Income shares/units:
Shares or units where income is paid out in the form of cash to investors (rather than being reinvested as with accumulation units).
Index:
A group of shares or other financial instruments that represents a specific sector or asset class. For example, the FTSE 100 Index measures the combined value of the shares of the 100 largest companies by market capitalisation on the London Stock Exchange. Indices are often used as a benchmark to measure fund performance.
Inflation:
Inflation refers to the increase in the price of goods and services over time. There are various different measures of inflation, including the Consumer Prices Index and the Retail Prices Index.
Inflation rate:
The rate of the increase in prices. It is calculated as the percentage change in a price index, such as the Consumer Price Index over a period of time, typically annually.
Initial public offering (IPO):
When a private company offers its shares to institutional and retail investors for the first time on a stock exchange. It is also known as ‘floating’ or ‘going public’.
Interest rate:
The percentage annual return provided to investors for lending money, including savings accounts and bonds, or charged to individuals borrowing money, such as a loan or credit card.
Investments:
Shares, bonds, property or other assets, whether owned directly or indirectly via an investment fund.
Investment trusts:
Public listed companies that hold and manage a portfolio of investments. Their shares can be bought and sold on the stock exchange.
Junk bonds:
These are debts issued by companies or governments which are at high risk of default, either by not paying their interest or repaying their capital at maturity. Levels of interest are high to compensate for the risks involved to the bondholder.
Key Investor Information Document (KIID):
A document that provides information about an investment, including asset allocation, fees and the investment objectives.
Limit order:
An order to buy or sell shares automatically at a specified price or better. A buy limit order will be triggered if the price falls to, or below, a specified level. A sell limit order will be executed if the price rises to, or above, a specified level.
London Stock Exchange (LSE):
This is the primary stock exchange in the UK, comprising 1,300 companies listed on the main market and the Alternative Investment Market (AIM).
Lump sum investing:
Investing the whole amount of your capital in one transaction. This is in contrast to regular or monthly investing where you ‘drip feed’ your funds to buy investments over a period of time.
Main market:
This is the primary equity market of the London Stock Exchange and includes some of the largest public companies in the UK.
Market capitalisation (market cap):
The total value of a company’s shares, calculated as the total number of shares multiplied by the current share price. This is often used as the basis for a fund’s investment objectives, which may be to invest in small or large ‘cap’ companies.
Market risk:
The risk of an individual or entity incurring a loss due to a fall in overall stock markets.
Market sentiment:
The overall attitude or tone of investors towards a particular investment, or about financial markets as a whole.
Morningstar Analyst Rating:
Morningstar awards a gold, silver or bronze rating to funds that are expected to consistently deliver strong returns against their benchmark and peer group.
MSCI All Country World Index (ACWI):
An index designed to provide a broad measure of global equity markets, comprising the shares of nearly 3,000 companies from 48 developed and emerging markets countries.
Nasdaq:
A stock exchange based in New York, which has attracted the listing of many of the US technology firms, such as Apple, Amazon and Meta.
Negative growth:
A decline in value over a period of time. It is often used to refer to a reduction in sales, earnings or economic activity, such as a country’s gross domestic product.
New York Stock Exchange (NYSE):
The largest equities-based stock exchange globally, based on the total market capitalisation of its listed companies.
Nominal value:
The face value of money without taking into account the effect of inflation. This differs from real value which is adjusted for inflation.
Offer price:
Also known as ask price, this is the minimum price that a seller is willing to take for their shares. In other words, the ask price is the price that investors will pay in order to buy shares.
Ongoing charge:
This is charged by the fund management company to cover the investment management, administration and other costs. It is usually expressed as a percentage of the total value of the investment.
Passive investment or passively-managed:
The fund manager aims to track or replicate the performance of an index or benchmark, by buying the underlying shares or bonds in the same proportion as the index. Passively-managed (also known as ‘index’ or ‘tracker’) funds tend to charge lower fees than actively-managed funds.
Platform:
An online service that enables you to buy and sell shares and other investments. They are often called ‘online supermarkets’ as they offer low fees and a wide choice of products.
Platform fee:
Also known as a custody fee, this is charged by trading platforms for holding investments such as shares and funds. Platform fees are typically charged at a percentage of the overall portfolio value, although some platforms offer a flat fee (or charge no platform fee).
Pound-cost averaging:
Making regular contributions to investments to smooth out the highs and lows of the stock market. This provides some protection if a share price falls sharply after you have bought shares, as you will effectively invest at the average share price over the whole period.
Portfolio allocation:
The process of dividing money in a portfolio across different assets, such as shares, bonds and share-based investments. Different allocations will have different risk and return profiles.
Price-earnings (P/E) ratio:
This is calculated as the current share price of a company divided by its earnings per share. P/E ratio is a measure of a company’s valuation – a high price-earnings ratio suggests that investors are willing to pay a high price for the shares today based on their expectation of future earnings growth.
Price-to-book (P/B) ratio:
This is calculated as the market capitalisation of a company divided by its net assets (assets less liabilities). P/B ratio is a measure of a company’s valuation – a low price-book ratio suggests that a company may currently be undervalued relative to its assets.
Primary market:
When new shares and bonds are offered by companies, governments or other public sector institutions to investors for the first time, such as through an initial public offering (IPO).
Quantitative easing:
A form of monetary policy in which a central bank increases the supply of money by buying gilts and other securities. In turn, this reduces interest rates and stimulates economic growth.
Quartile rank:
This is a measure of how well a fund has performed against the other funds in its IA sector. For the specified time period (often 1-5 years), the funds are ranked by total returns. A fund in the top quartile has delivered a total return that places it within the top 25% in its sector.
Real value:
The nominal value of money adjusted for inflation. It is a measure of the ‘relative’ value of money in terms of the goods and services that can be bought with the money.
Retail Prices Index (RPI):
An index that measures the change in price that consumers pay for a basket of goods and services including mortgage interest payments. The Consumer Price Index (CPI) replaced the RPI as the basis for calculating the official inflation rate in 2011.
Recession: A downturn in economic activity, often defined as two or more consecutive quarters of decline in a country’s gross domestic product.
Regular investing:
Also known as monthly investing, you drip feed your money to buy investments over a period of time, typically on a monthly basis. As a result, you benefit from pound-cost averaging which helps you to smooth out the highs and lows of the stock market.
Reinvestment:
The option to buy additional shares or units with the income from dividends or capital gains from a fund, rather than paying it out in cash to investors.
Risk-free rate of return:
Theoretical rate of return from an asset with zero-risk. Also known as the ‘risk-free interest rate’, this measure, often based on government bond yields, is used as a benchmark to compare the rate of return from riskier assets.
Risk-off:
A term relating to the impact of investor sentiment on asset pricing. Used when investors are pessimistic about the economic outlook and characterised by decreasing demand for higher-risk assets and an associated reduction in their price.
Risk-on:
A term relating to the impact of investor sentiment on asset pricing. Used when investors are optimistic about the economic outlook and characterised by rising demand for higher-risk assets and an associated increase in their price.
Secondary market:
The trading of previously-issued shares and bonds on public markets such as the London Stock Exchange or Nasdaq.
Sector:
A group of companies with similar business activities, such as healthcare, technology, energy and financial services.
Shares:
Units of ownership of a company or investment, also known as ‘stocks’ or ‘equities’.
Share capital:
The funds invested in a company by its shareholders.
Share trading fee:
Also known as a dealing fee, this is a fee charged by trading platforms when you buy or sell shares. Share trading fees are typically a flat fixed fee, although some platforms charge no share trading fees.
Standard & Poor’s (S&P) 500:
An index that tracks the 500 largest companies (by market capitalisation) listed on US stock markets.
Stop-loss order:
An order to sell shares automatically if the bid price falls to, or below, a price set by an investor. It is often used to limit potential losses if the share price falls.
Top-down investing:
Focusing on high-level economic factors when deciding whether to buy or sell shares. Top-down factors include interest rates, inflation, commodity prices and GDP as well as the outlook for the sector or industry.
Total return:
Any income or dividends received, plus any changes in the value of the capital from an investment. It assumes that any dividends or capital gains are reinvested.
Unit:
An individual “piece” of a fund, as with a share in a company. A fund is divided into units that investors can buy or sell and the units represent a share of the underlying assets in the fund.
Valuation:
A way of estimating the current worth of a company. One way of valuing a company is to look at its price-earnings ratio compared to other similar companies in its sector.
Value investing:
A strategy of buying shares that investors believe are trading at a discount to their intrinsic value. Value investing is based on the premise that the company’s share price will rise in the future when it is revalued by the stock market.
Value shares:
Typically companies who are seen as underpriced in the short-term with the hope that their share price will increase in the future.
Volatility:
A measure of how much the price of an investment moves up and down over the short-term.
Windfall profits:
These are large and unexpected profits made due to exceptional circumstances beyond the control of the company concerned. In recent times, oil and gas producers have made large windfall profits because of the unexpected rise in wholesale energy prices.
XD:
This is shorthand for ‘ex-dividend’, which refers to a share that is trading without reference to the value of of its next forthcoming dividend payment.
Yield:
The income provided by an investment, usually shown as a percentage of the value of the investment.
Zero-coupon bond:
This sort of bond does not pay interest during its lifetime. Instead, it is sold at a discount to its face value, with the full value payable to the investor at maturity. Such bonds can be traded actively during their lives prior to maturity.
