Investing for the first time can seem really daunting, not least because there’s lots of jargon to get to grips with.
Here, we explain some of the more terms you might come across at all levels of investment. For a breakdown of some of the most basic terminology, check out our Investment glossary.
Remember, if you’re not sure where to invest, or you’re looking for specific recommendations tailored to your individual circumstances, you should seek professional independent advice.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,250 reviews on VouchedFor, the review site for financial advisors.
A
Annual Management Charge (AMC)
If you invest money into an investment fund, such as a unit trust or a pension fund, you will normally have to pay an annual management charge. It’s charged as a percentage of the amount you’ve invested.
Asset Allocation
This refers to the way your money is spread across different types of investment – or asset classes – to reduce your risk. The way you split your money would normally depend on how much of a risk taker you are, among other things.
Asset Class
Shares, bonds, property and cash make up different asset classes.
B
Bear market
This term defines the state of the stock market, and means it has declined over time. Specifically, a bear market is when the value of the market or index falls by 20% in the space of two months.
Bid-Offer Spread
If you take out an investment, such as a unit trust or shares in a company, you buy units or shares at a higher price than you sell them at. This is called the bid-offer spread and it can be around 5% for unit trusts. It means if you invest £100 in a plan with a 5% bid-offer spread, you immediately lose 5% of its value. When looking at investments, it’s worthwhile checking the bid-offer spread as one with a large spread could drive down the value of your investment.
Blue Chip
Blue chip companies are meant to be the biggest and safest companies in the UK. Well known high street names and other large companies may be described as ‘blue chip’.
Bond
A true bond is an IOU for a loan, either to a company or a government. If you invest in a bond you receive interest on the loan (normally at a fixed rate), with the capital being paid back at the end of the term. A company bond is called a corporate bond and a UK government bond is a gilt.
Bond Fund
An investment fund that puts money into a variety of different bonds; normally a mixture of either company or government bonds or both.
Bull Market
This is another term that describes the state of the market and is used at times when markets are performing well and investors see their share prices rise. Technically, a bull market is when the stock market value has risen by 20% without a considerable decline.
C
Capital
This refers to the original amount you invest.
Capital gain
If you sell certain assets, such as shares or investment property, for a higher price than you paid for them (once any expenses have been taken into account), you have made a capital gain.
Capital gains tax (CGT)
If you make a capital gain as outlined above, you might need to pay tax on this. Whether you need to pay CGT will depend on your personal circumstances. You can read more about CGT in our article What is Capital Gains Tax and how do I pay it?
Closed Fund
A with-profits fund (which invests in a mixture of shares, bonds and cash) that is not taking on any new business. Closed funds normally give investors a far worse deal than funds that are still trying to attract new customers.
Collective Investment
Sometimes also called a ‘pooled fund’, it allows a group of investors to combine their money into one fund. The advantage of a collective investment is that it lets you spread your risk by buying a range of different shares or bonds etc. It’s typically used to describe investment funds such as OEICS, unit trusts or investment trusts.
D
Discretionary Stockbroker
If you have a large amount of money that you want to invest in shares and investment funds etc, you can ask a stockbroker to manage your investments for you without checking with you every time she or he wants to sell or buy shares.
Dividend
If you own shares in a company, you may receive a dividend as a share of the profits. Dividends are normally paid twice a year; either as cash or as additional shares, but their level (and, indeed, whether there is a dividend at all) is not guaranteed.
Diversification
The process of spreading your money around several different assets (such as shares, bonds and cash) to reduce the risk of losing money if one of them falls in value.
E
Equities
If you invest in shares, you may also hear them described as equities and/or stocks.
Ethical Investment
This may include investment funds that refuse to invest in certain companies (such as those that have a significant impact on the environment, manufacture weapons or are involved in the tobacco industry). Many ethical funds also positively select companies that they believe are trying to operate in a sustainable way.
Exchange-Traded Funds
Low-cost investment funds that track or mirror a particular index. They are traded in the same way as shares on the stock market.
Execution Only
Selling or buying shares or investments through a broker without receiving advice.
F
Fixed Income
Those involved in the financial industry often refer to bonds (which are simply loans to a company or government) as fixed income.
FTSE
The FTSE provides stock market indices such as the FTSE 100 index (made up of the 100 largest publicly quoted companies), the FTSE 250 (the next largest 250 companies) and the FTSE All-Share, which represents 98-99% of UK companies.
Fund manager
Either one person or a team of people who run an investment fund. He or she decides which companies to invest in, when to invest and how much of the fund’s money to commit to a particular company.
I
Investment Trust
A pooled fund (often made up of shares or a mixture of shares and bonds) which itself issues shares to investors. Investment trusts tend to have relatively low charges but may be riskier than some other pooled funds as fund managers are allowed to borrow against its value.
M
Managed Fund
A type of pooled investment fund that is actively managed (as opposed to one that tracks a stock market index). Some financial companies also describe some funds they offer as ‘managed funds’, in which case it normally refers to a fund that invests in a variety of shares and other assets (such as bonds and cash-based investments) to reduce the risk.
N
Nominee Account
If you buy shares through an online broker, they will normally be held in your name in a nominee account. These accounts usually give you fewer rights; for example you may not be able to vote at the company’s annual general meeting and you will not generally receive any perks that shareholders are entitled to.
O
OEIC (Open-Ended Investment Company)
A type of pooled investment fund. It’s similar to a unit trust except that an OEIC has a simpler and more transparent charging structure.
Offer Price
The price at which you buy a share or a unit in a unit trust. The offer price can be up to 5% higher than the bid price. It’s a bit like the different prices at which you buy travel money.
P
Pound Cost Averaging
If you pay a regular amount into an investment plan every month, you get fewer units or shares when prices are high and more when prices are low.
Q
Quartile
When investment funds are ranked according to their performance, they will be placed in one of four quartiles. The top quartile represents the best performing 25% of funds (generally in a particular sector and across a particular time frame).
R
Rights Issue
A way for a company that sells shares to investors to raise money from those investors by issuing extra shares. Existing shareholders are normally given the opportunity to buy these shares at a preferential price.
S
Self Invested Personal Pensions (SIPPs)
A personal pension that lets you invest your pension contributions in a wide variety of investments while giving you more control about how your money is invested. The costs and charges tend to be higher than with standard personal pensions.
Self-Select ISA
A stocks and shares ISA (Individual Savings Account) where you can choose the investments that go in it. You can pick from a range of investments including individual shares and pooled funds, such as OEICS, investment trusts and exchange traded funds (ETFs).
Share
It literally means a share in the company. If you own shares you own a percentage of the company (probably a miniscule fraction of a percentage, unless it’s a small company).
T
Tracker Fund
An investment fund that buys shares in companies that make up a particular share index (such as the FTSE 100 or the FTSE All-Share). Different tracker funds have different ways of operating.
U
Unit Trust
A form of pooled investment that lets you combine the money you pay into the fund with that of thousands of other investors. The money may be split between a number of different assets (such as shares, bonds and/or cash-based investments) or different companies (in the case of shares and bonds). Unit trusts have a complicated pricing structure and so many fund management companies sell OEICS, or open-ended investment companies, instead.
V
Volatility
A reflection of how changeable share prices are. The more volatile the stock market (or a particular stock market index) is, the more of a roller-coaster ride you’re likely to experience. Shares are by nature, fairly volatile investments.
W
With-Profits Policy
A type of investment (such as a pension or endowment) where the return is ‘smoothed’ over the years. In good times, some of the return is held back so you receive something when investments are not performing well. With-profits policies are often very opaque in terms of their charging structure.
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