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YourMoney.com’s investment and pensions glossary

Joanna Faith
Written By:
Joanna Faith

An essential guide to all the important words, abbreviations and phrases from the world of investing and pensions, brought to you by YourMoney.com, in association with Liontrust.

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AIM: Formerly the Alternative Investment Market, AIM is part of the London Stock Exchange. Launched in 1995 with just 10 companies, it is an index where smaller fledgling firms can list and enjoy more regulatory flexibility compared to the bigger indices such as the FTSE 100. Some AIM shares are free from inheritance tax if held for more than two years.

Asset Class: An asset class is a term used to categorise different types of investment which share similar characteristics. For example stocks, bonds, and property are three different types of asset class.

Annuity: Typically sold by life insurers, an annuity is a financial product, which in return for a lump sum provides a guaranteed income every year for the rest of the retiree’s life or a specified period.

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Bull market: A ‘bull market’ is City slang for a rising market for securities such as shares and / or bonds. It is characterised by optimism and investor confidence. Technically, a sustained 20% market rise would be considered to be a bull market.

Bear market: The opposite to a bull market, where an index has endured a prolonged fall. Pessimism and negative sentiment tend to be characteristics of such a market. If a market falls 20%, it is technically considered to be a bear market.

Benchmark: The yardstick by which investment funds measure their performance. Fund managers typically try to outperform a certain benchmark. For example, a UK fund manager may benchmark their investment performance against the FTSE All Share index.

Blue chip: A phrase used to denote the biggest stocks listed on an exchange. The term derives from poker, where blue betting chips are traditionally of higher value than their white or red counterparts.

Book value: Also known as Net Asset Value (NAV), this is the value of a company, or an asset, according to its balance sheet. This term can be compared to market value to determine whether a company is under- or over-priced.

Bonds: Bonds are IOUs, or debt, issued by governments and corporations looking to raise cash. When you buy a bond, you are essentially lending out your money. They usually pay interest, and have a set duration period, or “maturity”. The loan must be repaid in full when the bond reaches maturity. Sometimes referred to as fixed interest securities.

Government bonds: IOUs, or debt, issued by governments looking to raise cash. They pay interest, usually fixed, and have a set maturity. UK government bonds are known as Gilts while US government bonds are called Treasuries.

Corporate bonds: IOUs, or debt, issued by businesses looking to raise cash. Corporate bonds, like government bonds, pay interest, usually fixed, and have a set maturity period. Generally companies pay interest in two instalments a year, but this can vary.

Junk bonds: A slang term for high-yield or non-investment grade corporate bonds. They are viewed as far higher risk than many bond investments, such as UK government bonds, and investment grade, as their issuer carries a greater chance of default. Rating’s agency Standard & Poor’s classifies junk bonds as those rated ‘BB’ and below, while Moody’s classifies them as ‘Ba’ and lower.

Investment grade: Corporate bonds that are issued by large financially stable businesses, where the likelihood of default on the loan is deemed to be the lowest of all corporate bonds. Rating agency Standard & Poor’s classifies Investment grade bonds as those rated BBB and above, while Moody’s classifies them as Baa or higher.

Bottom-up: Refers to an investment approach used by fund managers. A style that selects stocks by analysing companies based solely on their investment quality and potential, regardless of their wider industry and the macro-economic backdrop.

BRICs: Acronym for emerging market giants: Brazil, Russia, India and China. The term BRIC was coined by former Goldman Sachs director Jim O’Neill in 2001 after he forecast the four countries would surpass the likes of the US and Japan in the economic stakes by 2050.

Broker: Such as a stockbroker or insurance broker – a person or firm, which executes buy and sell orders on behalf of investors. Brokers make their money via commissions from their trades.

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CGT: Capital Gains Tax is the levy you pay on any profits made when selling something which has gone up in value. It is important to remember that it is the gain which is taxed – not the full sale price. For example, in an investment bought for £100 and sold later for £150, £50 would be subject to CGT. The annual tax-free allowance, which is known as the Annual Exempt Amount, allows you to make a certain amount of gain each year before you have to pay tax. In the 2015/2016 tax year, this allowance is £11,100 for individuals, and £22,200 for couples.

Commodities: Commodities are natural resources and raw materials, ranging from oil to gold. Includes ‘hard’ commodities such as industrial and precious metals, as well as ‘soft’ commodities such as agricultural produce including coffee and wheat.

Coupon: A coupon is the term used for the interest paid annually on a bond, expressed as a percentage of the bond’s par value – the value at which it was bought. Because the bond’s price will differ from its par value, the running yield (coupon/price) or yield-to-redemption (the expected yield if the bond is held to maturity) usually gives a better measure of the investment return from owning a bond.

CEO: Chief executive officer – the boss or highest-ranking employee at a firm. A CEO’s prime responsibility is management of the business.

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Deflation: Deflation is the opposite of inflation, IE when the price of goods and services declines. A country is in deflation if its inflation level drops below 0%. Prolonged bouts of deflation can be dangerous for an economy as consumers stop spending in the hope of buying something cheaper at a later date.

Derivatives: A derivative is a complex financial instrument but is essentially a contract between two or more investors, whose value is determined by fluctuating underlying assets. Typically these assets are stocks and bonds, but they can be linked to currencies, commodities and interest rates too.

Investment Trust Discount: Usually refers to an investment trust trading in a range less than its net asset value. As investment trusts are traded as shares on the stock exchange, their share price can fluctuate, based on demand. If a trust is in great demand, its shares can trade at a premium i.e. at a greater value than their actual net worth.

Dividends: Payouts made to shareholders of a corporation which shares its profits with its investors. Usually dividends are paid either quarterly, twice a year or annually.

Drawdown:  The difference between the highest price and lowest price during a specific period, usually quoted as a percentage. Not to be confused with pension drawdown.

Duration: Relates to bonds and is a measure of the interest rate risk of a bond, or the sensitivity of the bond to changes in interest rates.  The figure is expressed as a number of years.

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Enterprise Investment Schemes (EIS): Enterprise Investment Schemes (EIS) were launched to help smaller companies to raise cash by offering a range of tax reliefs to investors who invest in such companies. With an EIS, you can get income tax relief of 30 per cent and investors pay no capital gains tax on profits once the investment has been held for three years.

Exchange traded fund (ETF): An ETF is a security, or share, that replicates or tracks a particular index or market such as the FTSE 100. Unlike a tracker fund, they are traded on a stock exchange and can be bought and sold while the market is open.

Exchange Traded Products (ETPs): Like exchange traded funds, exchange traded products track the performance of a market or index however they tend to be derivative based – whereby they are not physically tracking an index, often they are linked to commodities such as oil.

Equities (Shares/Stocks): Equities refer to shares or stocks issued by firms, which usually trade on a stock exchange. Supply and demand dictates performance, whereby if a stock is in demand, its price will rise and vice versa.

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Fixed income: Another term for bond related investments. Fixed income assets are IOUs issued by governments and companies. They pay a fixed rate of return, and have a set duration period.

Financial Conduct Authority: The City regulator formerly known as the Financial Services Authority. The FCA oversees and checks financial firms providing services and products to UK consumers

Finance Director (FD): The person responsible for the financial health of a company. Duties will include managing financial statements and results and ensuring financial, fiscal and tax related obligations are met.

Fund-of-funds: Like a fund, a fund of funds, sometimes known as a multi-manager fund, is an investment portfolio which invests in a range of other funds, as opposed to individual stocks or securities.

Fund: A pooled investment. Typically run by a fund manager who uses investors’ money to invest in a wide range of assets, such as stocks or bonds with the aim of delivering capital growth and/or income.

Fund supermarket: An online platform where investors can buy, sell and hold investment funds. Buying an investment via a fund supermarket tends to be cheaper than buying directly from the provider. Many of these platforms also allow customers to trade other instruments, such as shares, ETFs, or currencies.

Financial Services Compensation Scheme (FSCS): The FSCS is a free service and the UK’s compensation scheme of last resort for customers dealing with authorised financial services firms. The organisation only pays customers compensation if a company is unable to, usually as a result of going bust.

FTSE 100: The FTSE 100 is an index comprised of the 100 largest listed UK firms, often dubbed ‘blue-chips’, listed on the London Stock Exchange (LSE).

Futures: Like derivatives, futures are contracts agreed for assets. Commonly used in oil trading, a future contract refers to an asset that is purchased at a set price but will not be delivered until sometime later.

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Gearing: Gearing describes the ratio of a corporation’s debt to the value of its ordinary shares. Investment trusts often borrow – use gearing – to boost investor returns.

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Income drawdown: Pension product – with income drawdown savers remain invested during retirement and draw an income from their pot. It is a riskier strategy than buying an annuity but it allows retirees to potentially enjoy the benefit of further growth.

Index: Index refers to stocks markets, such as the FTSE 100 index of the UK’s largest firms or the S&P 500 index, which represents the biggest firms in the US. An index tracker fund will mirror the performance of a particular index.

Inflation: Inflation represents an increase in the cost of everyday living as it devalues spending power. The higher it rises, the less money is worth and people have to spend more to buy the same items. Measured in the UK by the Consumer Price Index (CPI).

Investment trust: An investment trust operates like an investment fund but it is a structured as a limited company, and its primary business is to invest its shareholders money. They are closed-ended, trading with a set amount of money, and are bought and sold on the London Stock Exchange.

Initial Public Offering (IPO): An IPO, sometimes referred to as floatation, marks a company’s stock market debut. It is the very first time it sells shares on a stock exchange, when it goes public.

ISA / NISA: Individual savings account. A tax-efficient savings tax wrapper. In an ISA UK savers can put away up to  £15,240 in shares and/or cash (for tax year 2015-16) and all the gains and returns are tax-free.

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Junior ISAs (JISAs): Like an ISA, a JISA is a tax efficient savings account, except they are designed to help families save or invest for their children. The money is not available to the child until they reach 18 years. The current allowance (tax year 2015/2016) is £4,080 and all income and gains are tax-free.

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Leveraging: The borrowing of money or capital with the aim of increasing the potential returns on an investment.  Leverage can amplify losses as well as gains.

LIBOR: London Interbank Offered Rate (LIBOR) is the global benchmark interest rate at which banks lend money to each other for short-term loans. LIBOR is widely viewed as a barometer of how confident banks are in each other’s financial strength.

Liquidity: Liquidity refers to cash flow, or how easily an asset can be converted into cash. Shares which can be bought or sold rapidly on the stock market are considered a liquid asset whereas a commercial property would be considered more illiquid as it is can take a lot longer to sell.

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Market capitalisation: Calculated by multiplying the share price by the number of shares in issue, market capitalisation represents the total value of a company’s shares. When combined with the total value of a company’s debt (and other small adjustments), this gives the ‘Enterprise Value’, or total value, of a company.

Multi-asset: A fund that generally invests across a very wide spread of asset classes in order to diversify risk. As well as other funds multi-asset portfolios can invest in individual shares, bonds and commodities such as gold.

M&A: A common phrase used to describe Merger & Acquisition activity – company consolidation trends. A merger is when two firms join forces to create a new corporation. An acquisition is the purchase of another company, which is absorbed into the buying firm.

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Ongoing Charges Figures (OCF): The OCF covers all aspects of operating a fund during the course of its financial year. These include the annual charge for managing the fund, administration and independent oversight functions, such as trustee, depository, custody, legal and audit fees. The OCF excludes portfolio transaction costs except for an entry/exit charge paid by the fund when buying or selling units in another fund. This will have an impact on the realisable value of the investment, particularly in the short term

OEIC: OEIC or Open Ended Investment Company is legal speak for a fund, which were established after unit trusts. An OEIC manager creates and redeems shares when investments and redemptions are made.

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PE Ratio: The Price to Earnings, or Price/Earnings to Growth, Ratio is one common method of valuing a company. It is calculated by dividing a company’s market value per share by its earnings per share.

Physical Asset: An item, which has a material existence and has some economic or commercial value.  Common physical assets include property or machinery.

Premium: A difference between an asset’s net asset value and the price being paid. For example an investment trust’s shares can trade at a premium to the portfolio’s actual net worth, if it is in high demand.

Profit warning – An announcement from a company to the stock market that its profits are likely to be less than anticipated. Typically a profit warning is flagged up a few weeks before a firm publishes it latest results in a bid to manage shareholder expectations.

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Quantitative Easing (QE):  Quantitative Easing is a tactic used by central banks to encourage lending and spending whereby they electronically print money in a bid to prop up the economy and stave off a period of deflation. Essentially QE typically involves a central bank purchasing government bonds.

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Redemptions: The process by which an investment can be converted back to cash. The ease with which this can be done is often dictated by the liquidity – i.e the number of potential buyers and sellers in the market for a specific asset –  of the underlying investments.

Rights issue: A rights issue occurs when a publicly listed firm issues new shares to existing shareholders in a bid to raise money. Existing shareholders have pre-emption rights to buy the shares before anyone else. A company might do this if it is in financial difficulty and needs more cash or if it wants to raise money for expansion. It will dilute the value of the shares already in issue.

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Securitisation: Securitisation refers to turning something into an asset or security. For example debt from mortgages could be packed together and then be sold off.

Share buyback: A process in which companies either buy shares back from investors on the open market, or present shareholders with a tender offer in which the investor can redeem an allocation of their shares at a premium to the current market value. In cutting the number of shares in issue, businesses aim to increase the value of shares still available.

Share class: Companies and funds typically issue more than one class, whether it be shares or units. Different stock or share classes from the same company will have different obligations to their investors.

Shares in issue: The total number of shares currently attributable to a company, whether owned by the general public, large institutional investors, or employees of the company as part of their remuneration.

Shorting: A strategy used by professional investors where they bet on the value of an asset, such as shares, losing value. It involves borrowing an asset and selling it on in order to buy it back at a later date, at a lower price where it is then returned it to its original owner.

SIPP: A Self invested personal pension or SIPP is a pension wrapper, which allows savers to buy and sell investments such as funds and shares, to match your needs and risk appetite. Some bespoke Sipp offerings even allow investors to hold physical commercial property.

S&P 500: The US’s main stock index – the Standard & Poor’s 500, is an equity index based on the market capitalisation of the 500 largest companies listed on the New York Stock Exchange.

Swap rate: The difference in value between a swap or the exchange of one investment for another. Common swaps include currency and interest rate swaps.

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Top down: A term used by professional investors. Top down investors select industries and stocks to invest in based on the wider macro-economic and industry backdrop rather than the fundamentals of individual shares. Most investors will combine top-down and bottom-up strategies (looking at an individual share’s characteristics) when they make investment decisions.

Tracker fund: A tracker fund, sometimes known as an index tracker, is essentially a computer run fund which mirrors, or tracks, the trajectory of a particular market or index, such as the FTSE 100.

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Unit trust: Legal term for a type of open-ended pooled investment or mutual fund, where investors can buy up units. The manager creates units for new investors and cancels them when they are redeemed.

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VCT: Venture Capital Trusts (VCTs) are listed funds, run by a fund manager, who invest primarily in fledgling businesses, which are not publicly listed on a stock exchange. There are strict rules governing what types of companies VCTs can invest in. VCTs are typically viewed as higher risk investments than when investing in large listed companies but if you hold your shares in a VCT for at least five years you get to keep the income tax relief. There is no Capital Gains Tax on profits from selling your shares.

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Wrapper: Wrapper refers to a tax-efficient structure in which you can save, such as a pension, SIPP or ISA where gains and interest earned are sheltered from the taxman to some extent.

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Yield: Yield is another term for the income received from an investment, such as a fund, bond, or dividend-paying share.

Yield curve: A line on a graph, which plots the interest rates of similar bonds with different lengths of time to maturity, such as three-month, two-year, five-year and 30-year government bonds. The curve is analysed for signals of future changes in interest rates and economic activity

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