How to decode the most common financial jargon and gobbledygook

Active management:

The managers of actively managed funds attempt to outperform a market (such as the FTSE 100 index) by researching, analysing and actively selecting investments to buy.

Association of Investment Companies (AIC):

The investment trust trade body.

Benchmark:

The yardstick against which funds measure their performance. It’s usually an index such as the FTSE 100 in the case of a UK equity fund.

Blue chip:

A large well-established company, typically among the stalwarts at the upper end of the FTSE 100 index, such as Royal Dutch Shell and HSBC.

Bonds:

A form of IOU issued by a business or government looking to raise cash from investors for an agreed amount of time. Investors (or lenders) are paid a regular fixed rate of interest in exchange for the loan, and paid back at the end of the specified period unless the business or government runs out of money.

 

Compounding:

The phenomenon whereby investment returns are reinvested and themselves generate further gains.

Diversification:

The strategy of investing in a wide range of investment types, with the aim of reducing overall risk.

Dividends:

A sum of money paid by a company to its shareholders out of profits, usually quarterly, once or twice a year.

Equity:

The value of shares issued by a company. Individual shares are known as equities.

Exhange traded funds (ETFs):

A type of passive fund listed and traded on the stock exchange.

FTSE 100 Index:

The premier league of the UK stock market, an index reflecting the share price movements of the 100 largest UK firms listed on the London Stock Exchange.

FTSE all-share index:

Follows the share price fortunes of a broader selection of UK shares – the top 600 or so names.

Fund Factsheet:

A two- or three-page document that gives a quick overview of a fund’s performance, where it is currently investing, the top 10 holdings and how the fund manager invests.

 

Inflation:

The rate at which the general level of prices for goods and services is rising over the course of a year. Inflation devalues the real value of savings because your money will buy less over time.

Investment Association (IA):

The trade body for the fund management industry.

Investment trust:

Investment trusts, like unit trusts and Oeics, invest in a ‘basket’ of various investments. But they differ in that they are structured as companies listed on the London Stock Exchange and investors hold shares (rather than units).

 

Investment trust discounts and premiums:

As investment trusts issue shares in their own right, they have a share price that moves according to investor demand. This price does not directly reflect the value of the underlying investments in the trust. The share price of the trust will generally either be higher (at a premium) or lower (at a discount) than the underlying holdings. A share price discount means investors can buy the trust cheaply, whereas a premium indicates they are paying over the odds.

Isa:

An individual savings account (Isa) is a tax-free way to save or invest. The investment version is called a stocks and shares Isa. Those who want to stick to bank deposits should opt for a cash Isa. Any growth or income produced within an Isa is protected from income and capital gains tax.

Liquidity:

In the investment world ‘liquid’ describes an investment that can be bought or sold quickly and easily. Investments considered ‘illiquid’ can at times be difficult to sell, due to a lack of buyers or the nature of the investment (property is considered illiquid, for instance).

Oeics:

As terms go, this is a mouthful – it stands for open-ended investment company – but the main thing to remember is that Oeics are similar to unit trusts.

Ongoing charges figure (OCF):

The annual cost of investing in a fund, expressed as a percentage of the value of your investment. Unfortunately, trading costs (incurred when the fund manager buys or sells investments) are not included in the OCF, so the true annual cost will be higher than the stated OCF.

Passive funds:

In contrast to active funds, passive funds – also called tracker or index funds – aim to mirror the performance of a market. This is achieved by simply holding the same investments and weightings as the index. So if Vodafone makes up 5 per cent of the FTSE 100, a UK passive fund aiming to replicate the FTSE 100 will also invest 5 per cent in Vodafone.

Platform or online broker:

A middleman that allows investors to set up accounts (including Isas), buy or sell funds and other investments online, and view the value of the investments they hold there.

 

Share class:

Funds are typically sold in a number of different share classes, the two most common being accumulation and income. The accumulation share class reinvests dividends (income generated by the fund), while the income share class returns the income to investors.

Tracking error:

The gap between the return produced by a passive fund and that produced by the index it follows.

Unit trust:

A fund in which investors buy units. Their money is pooled and used by the manager to buy a portfolio of holdings.

Volatility:

A measure of how much the value of an asset moves up and down.

Yield:

A percentage figure showing how much a company pays out in dividends relative to its share price.