How to decode the most common financial jargon and gobbledygook
Association of Investment Companies (AIC):
The investment trust trade body.
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.
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.
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.
The phenomenon whereby investment returns are reinvested and themselves generate further gains.
The strategy of investing in a wide range of investment types, with the aim of reducing overall risk.
A sum of money paid by a company to its shareholders out of profits, usually quarterly, once or twice a year.
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.
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.
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 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.
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.
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).
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.
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.
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.
The gap between the return produced by a passive fund and that produced by the index it follows.
A fund in which investors buy units. Their money is pooled and used by the manager to buy a portfolio of holdings.
A measure of how much the value of an asset moves up and down.
A percentage figure showing how much a company pays out in dividends relative to its share price.
- This article was orginally written for our sister website, www.Moneyobserver.com.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Named after a high value gambling chip, the term is used for an investment seen as solid and whose share price is not volatile. Blue chip companies are normally household names and have consistent records of growth, dividend payments, stable management and substantial assets and are the bedrock of a pension fund’s portfolio.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.