Investments jargon buster

Asset classes – different types of investments with varying degrees of risk, eg, cash, shares, gilts and bonds.

Bonds – when you buy bonds, you’re effectively lending money to a government or corporation to fund spending or raise capital.

Capital Gains Tax (CGT) – tax payable on any gains over the CGT allowance from the sale or disposal of stocks or other assets subject to this tax. Tax is payable at 18% of 28% (2013/14 rates) depending on the taxpayer’s level of income.

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Collective investment – an investment structure that pools together investments from different investors and combines them to fund investments. Each individual investor then owns an interest in a small amount of each asset.

Diversification – a risk-management technique that mixes a wide variety of assets within a portfolio.

Dividends – payment made out of a company's post-tax profits and distributed to its shareholders at the discretion of the company’s board of directors. This is usually expressed as pence (per share).

Emerging market fund – a fund that mainly invests in countries with developing economies, eg, China, eastern European or South American countries.

Exchange Traded Funds – funds that track an index such as the FTSE 100, or market performance through a single share.

Funds – a generic term used to describe an investment vehicle where a professional investment manager takes the money paid in by multiple individuals and invests it in a wide range of underlying assets – shares, bonds etc - in accordance with the stated objectives of the fund. In the UK these normally mean unit trusts and open-ended investment companies (OEICs).

Gilts – securities issues by the government to borrow money.

High-yield bond fund – a fund that invests in corporate bonds issued by more risky companies and in return offers a higher rate of interest.

Inflation – an increase in the general price level of goods and services in an economy over a period of time. When there is inflation, the value of your money will decrease as things generally cost more.

Index – statistical tools that measure the state of the stock market or the economy based on the performance of shares or other investments, eg, the FTSE 100 and the Dow Jones Industrial Average.

Interest – the return earned for lending money to others. The money you can earn by depositing money in a savings account. You can also earn interest on some types of investments where you are lending money to a company or government, eg, gilts and bonds.

Investment Trusts – a collective-investment company listed on the London Stock Exchange that invests in the shares of other companies. These have a limited number of shares and the price varies with supply and demand.

Individual Savings Account (ISA) – a tax-efficient environment in which a variety of investments can be held. ISAs are either for holding cash or stocks and shares.

OEIC – Open Ended Investment Company. A collective investment fund similar to a unit trust. The major differences are that OEICs are established as companies rather than as trusts. Most new funds launched today are established under the OEIC structure.

Platform – a service, often available online, that gives you access to a wide range of investments and lets you pick and mix those you want to hold. It will also provide custody and administration services.

Portfolio – a selection of different investments held by you.

Shares – companies divide their capital into units called shares. Owning shares brings rights – a stake in the business – but also the risk of losing the investment. Although OEICs are funds, they issue shares which represent a share in the net asset value of their fund, and will issue new shares as new investors invest money.

Stock exchange – a market in which securities are bought and sold, eg, stocks, shares and gilts and bonds.

Securities – the general name given to shares, bonds and similar investments that are often traded on the stock market.

Unit trusts – open-ended investment funds are established as trusts where your money is invested with thousands of others so that you can invest in a greater variety of shares and other securities. Each investor owns a unit (or a number of them), which represents a fraction of the fund and the value of which is dependent on the value of the assets in the fund.

 

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