An investment glossary: jargon debunked

Here is a list of key terms to give you confidence and help you make investment decisions.

5th June 2019 11:10

by Edmund Greaves from interactive investor

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A list of key terms to give you confidence and help you make better investment decisions. Click here to read ii's full investment glossary.

This investment glossary, which is by no means exhaustive, gives beginner or less confident investors a quick and easy reference point to help understand some of the finance industry's most frequently used terms.

Active management: Investment funds that are actively managed (as opposed to passively - see below), are looked after by a fund manager who picks stocks to hold in a portfolio with the goal of growing their investors money or providing an income.

Bond: A bond is a type of debt that companies take on in order to fund expansion or other activities or that the government issues (often called gilts). Investors who buy bonds are lending money to the company or government, which will pay a regular income over a fixed period. Bonds are generally considered a less risky investment than stocks and shares.

Compound interest: When you save money, as well as earning interest on your initial savings, you can also earn interest on the interest earned, which is known as compounds interest. For example, if you have £100 in a savings account paying 10% a year, after one year you will earn £10, leaving a balance of £110. In the second year you will earn £11 in interest as you are earning interest on the first year's interest.

Dividend: This is the sum of money that is usually paid annually by a company to its shareholders out of its profits or reserve.

Dividend yield: This is the annual dividend expressed as a percentage of a company's current share price.

ETF: Exchange-traded funds or ETFs invest in a portfolio of assets in much the same way as funds. Unlike funds, they can be traded throughout the day.

FCA: The Financial Conduct Authority is the independent regulator of the UK's financial services industry. It does not investigate individual complaints.

Fund: A fund is an investment vehicle that invests in a portfolio of assets. They are managed by a fund manager and individuals can buy into the fund through a stockbroker. Some funds target growth in value, while others deliver a regular income to their investors. Funds can come in the form of OEICs, investment trusts or ETFs (see below).

Gearing: Gearing refers to the amount of loans or debt that a company takes on relative to the value of its shares. Gearing can be used to boost a company's cash flow so it can invest in new assets. High levels of gearing can indicate a high level of borrowing and debt a fund manager has undertaken.

Investment trusts: Companies which invest in a portfolio of assets. These companies are listed on the stock exchange. Individuals can then buy shares in each investment trust. Unlike funds, there are a finite number of shares available in each trust – this is called being 'closed-ended'.

OCF: Ongoing charges figure, or OCF, gives the annual cost of investing in a fund or investment trust as a percentage so that investors can have an idea of annual running costs. So if a fund has an OCF of 1%, for every £1,000 you invest, £10 goes on costs. This differs from the fee charged by the investment platform you use.

OEIC: Open-ended investment companies, or OEICs, are also funds that investors can buy 'units' in, but unlike Investment trusts, it can continue to grow in size.

Passive investing: Rather than using a fund manager to actively manage your funds, passive investors use tracker funds, which move in line with an index, such as the FTSE 100. They are usually cheaper than actively managed funds.

Robo advice: A form of advice that uses computer algorithms to recommend products or create investment portfolios, based on your stated financial attitudes and circumstances. Robo advice is generally cheaper than traditional alternatives.

Stocks and shares: Also known as equities, these allow you to invest in individual companies. The value of your shares will rise or fall depending on the performance of the company. You may also receive an income from the shares if it pays a dividend.

Stocks and Shares ISA: A tax-efficient savings vehicle that individual investors can use to build an investment portfolio. The annual limit allowed by the government is £20,000 for the 2018/19 and 2019/20 tax years.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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