Introduction to Investing
The attraction of investing is the lure of making more money than putting cash in the bank. However, unlike saving, investing normally means taking some risk, i.e. you could lose money.
In general, the more money you stand to make from an investment the more you could also lose.
If you can lose money then why bother? Well, more often than not, if you hold some sensible investments for long enough they'll make you more money overall than you'd get in a savings account.
The key is how long you'll have to hold them for and how much of a roller coaster ride they'll give you along the way. These are important points. If you're not prepared to sit tight for what could be many years, and/or will
sell in a blind panic if your investments fall in value, then you're probably better off sticking to cash.
The degree to which an investment fluctuates in value over time is called 'volatility', while the extent to which the value of two different investments tends to move in
the same direction at the time is called 'correlation'. Both volatility and correlation are key to many arguments on how to successfully invest.
Volatility is a statistical measure of the rate at which an investment moves up and down over time. If an investment changes rapidly in value over a short period of time it has high volatility, whereas an investment that hardly
ever changes in price has low volatility. Looking at volatility is a useful way of guesstimating how risky a particular investment might be.
Volatility is calculated by working out the 'annualised standard deviation of the daily change in value'. Don't worry about the jargon, as a rule of thumb you can calculate this figure by taking the typical daily change in value
of an investment and multiplying by 16. So, if the value of Stock A changes 1% a day on average it's annual volatility would be around 16%.
Why is this useful? Well, apart from helping us compare the possible risks of various investments, it can also help estimate your largest annual gain or loss in the normal course of events. Maths theory says (assuming a 'normal' distribution) there's a 95% likelihood
of an annual return being within two standard deviations (twice the volatility figure in this instance) from the average annual return (called the 'mean').
Based on this and assuming an average 6% annual return, we'd expect the annual return for Stock A to usually be between +38% and -26% (16% x 2 + 6% and 16% x 2 - 6%).
Of course, this is all guesswork and shouldn't be taken as an accurate prediction of what will happen in future. Nonetheless, understanding the potential volatility of your investment(s) can reduce the risk of a nasty shock.
When it's hot we tend to buy more ice cream. Another way of saying this using some statistical jargon is 'ice cream sales are positively correlated to the weather temperature'.
Conversely, when it's hot we tend to buy fewer winter coats, i.e. winter coat sales are negatively correlated to the weather temperature.
When two things ('variables') move exactly inline with each other, they have perfect positive correlation, a value of 1. If they move in exact opposite they have perfect negative correlation, value -1.
If they move totally independently of each other they are uncorrelated, value 0.
Investment correlation is all about trying to work out the extent that various investments are related. For example, you wouldn't want to buy two investments with perfect positive correlation, because if one falls
in value the other will too by the same amount - you might as well buy just one of the two. Likewise, if they were perfectly negatively correlated your investment return would always be zero. Whenever one increases in the
value the other falls by the same amount. Combining a range of investments with different positive and negative correlations reduces the risk that everything could fall in value at the same time, helping provide more
consistent investment returns.
Investment types
There's a massive range of investments you could choose to stick your cash into. However, the majority tend to focus on one or more basic investment types (a.k.a. 'assets'), as shown below:
You can read brief descriptions here, but visit the main pages for each asset to get a much better understanding.
GiltsBondsPropertyStock MarketsCommodities
These are IOUs from the Government. In return for buying a gilt the Government promises to pay you a fixed rate of interest for a fixed period (which is why these investments are commonly called 'fixed interest'), before returning your money.
They're as safe as the Government, but be aware that you can lose (or make) money if you buy or sell between the initial issue and final redemption.
Investment grade
Very similar to gilts, but the IOUs are issued by large, financially stable companies. However, because they're not viewed as being as safe as gilts, they must pay higher rates of interest to attract buyers.
High Yield Corporate Bonds
Unlike investment grade bonds, these are issued by companies whose credit worthiness is less certain. As a result they have to pay higher rates of interest to attract buyers. High yield corporate bonds also tend to
be affected by stock market movements more than investment grade. Falling markets usually increase worries over the ability of weaker companies to pay the interest (and eventually return the initial investment) on their bonds.
Residential property
For many of us residential property is our biggest investment, i.e. our home. You might not treat it as an investment, but if your home rises in value over time you could sell at a profit in future.
Some investors do buy residential property as an investment, renting it out to get an income, this is known as 'buy to let'.
Commercial property
Commercial property means properties such as retail parks, offices and factories. Unlike residential property, companies who rent commercial property normally agree to very long rental periods, 10 - 25 years is common.
This should provide a stable long term income, although the prospect for rising property prices is lower than residential.
Developed stock markets
Refers to buying shares in companies based in developed economies such as the UK, US and Europe. Your investment buys shares in a company, so your investment returns depend on that company's fortunes.
Of course, risk (and possible returns) can vary very widely between companies. A large well-established company with predictable earnings is likely to be safer (but less exciting) than a small technology company just starting out.
The technology company could make a fortune or might just fall by the wayside.
Emerging stock markets
Similar to buying shares in developed stock markets, but the underlying economies (e.g. China, India, Russia and Brazil) are still developing, making them potentially more exciting but also riskier. If things go well your investment could soar, but temporary or permanent setbacks could see the value of your shares plummet.
Also bear in mind that these economies tend to be dominated by a handful of industries, so if one dominant sector sector struggles the whole country (hence other companies) could suffer.
A commodity is something that is standardised worldwide and has a universal global price. There are 'hard' commodities such as gold, metals, oil and gas as well as 'soft' commodities such as rice, meat and sugar.
Given commodities are generally not available in unlimited supply, the long term prospects look favourable if worldwide demand continues to grow.
However, be warned, prices can fluctuate quickly and wildly, i.e. they can be very volatile.
Investment returns
When you put money in the bank your only return is the interest (i.e. income) you receive. With investments there's more than one way to get a return.
As well as the possibility of income, the value of the actual investment could change too.
For example, let's say you own a house that you rent out. You'll receive a monthly income from the rent, but could also make or lose money when
you eventually sell if the property's price has changed from when you originally bought. The change in value of an asset when you sell is known as a 'capital' gain or loss.
We'll look at where these returns come from in more detail in the main pages for each asset type.
The value of your investment depends on supply and demand. If there's more sellers than buyers, the buyers can drive a hard bargain and the price falls. When there's more
buyers than sellers, the sellers can take advantage by pushing up the price.
Measuring performance
How do you know whether your investment returns are any good?
The simplest way, and the one most of us subconsciously use, is to see whether you've earned more than you'd got by sticking the money in the bank. However, this
doesn't tell us how well your investment(s) has performed against others in a similar area. Your UK stock market fund may have grown by 10% over a year, much better than cash,
but this looks less than impressive if most other UK stock market funds grew by 20% or more over the same period.
A more useful approach would be to compare your returns against an average for that investment type, or a comparable 'Index'. Indices are calculated by financial companies
to measure the performance of stock markets and most other asset types. They provide a simple 'at a glance' indication of how a particular market or asset is performing. In the UK the FTSE 100
is probably the best known index, this measures the performance of the 100 largest companies on the London Stock Exchange.
Comparing your investment against an appropriate index or average is called 'benchmarking'. Doing this on a regular basis can help you check whether your investment is performing as well as it should.
Most people do this by just looking at the total return over three or five years, but this can hide the true picture:
| Item |
5 Year Return |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
| Benchmark Index |
+30% |
+12% |
-5% |
+18% |
-8% |
+14% |
| Investment A |
+30% |
+90% |
-12% |
-2% |
-15% |
-7% |
Looking at the five year return, investment A has matched the benchmark, not bad. But look more closely at each individual year: investment A
did really well in the first year but has been pretty awful compared to the benchmark ever since. Would you really want to buy that investment now?
Looking at year by year (called 'discrete') performance is the most sensible way of reviewing investment returns. You just need to make sure you use
an appropriate benchmark.
The benefit of combining investments
If you buy just one investment and it dives in value, you could lose most or all of your money. However, buy two and the chances of a wipe-out are reduced, especially
if the investments usually have a low or negative correlation.
So, rather than back just one horse, it makes sense to spread your money across a range of investments
to try and reduce risk and deliver more consistent returns. This is known as 'diversification' and how you spread the money between various investment types is called
'asset allocation'. Some investment funds try to benefit from this by combining a range of investment types, they're often called 'multi-asset' or 'diversified' funds.
In the above diagram, holding investments A, B and C would leave you better off than had you just invested in B and/or C.
The example below shows the benefits of diversification:
| Investment |
Return Year 1 |
Return Year 2 |
Total Return |
| A |
-10% |
+20% |
+8% |
| B |
+20% |
-10% |
+8% |
| If held 50/50 not re-balanced |
+5% |
+2.86% |
+8% |
| If held 50/50 and re-balanced |
+5% |
-5% |
+10.25% |
Suppose we just buy investment A. After one year we've lost 10%, though thanks to a good second year we end up with an 8% overall gain after two years.
Buying investment B on it's own is a similar story, albeit with the gain in year one and loss in year two.
By combining the two investments and simply holding them for two years, we get the same overall return. However, the combined return is positive each year,
providing a more steady performance.
If we swapped a bit of investment B for investment A at the end of year one, so that we hold them in equal proportion again, then the overall return would be
10.25%. In this example, diversifying and re-balancing our portfolio has both increased the overall return and delivered more consistent returns.
To make the most of the potential benefits from diversification, you need to combine investments that have a low or negative correlation to each other.
Choosing which investment types to hold and how to effectively combine them is what asset allocation is all about. The amount of risk you're comfortable taking and
how much (if any) income you need will largely determine your investment choice and the proportion held in each.
When looking at an investment, asset allocation factors to consider include:
Asset TypeIndustry TypeCompany SizeCountry
How does the asset type correlate to others you own and is it suitable for income? Gilts and shares are a classic investment combination. Gilts are lower risk and provide a steady income,
shares are higher risk and income can vary widely. They also tend to have low or negative correlation to each other. Likewise, property and commodities have little correlation,
with property generally lower risk and good for income while commodities are higher risk and more growth orientated.
Risk, income and correlation to the stock market in general varies widely between industries. For example, technology companies tend to be high growth, high risk and re-invest any profits in their business rather than pay income to shareholders.
Conversely, tobacco companies are usually steady and pay a reasonable income to shareholders because people tend to smoke whatever and they don't have much need to re-invest most of their profit
in the business.
Large companies, on average, tend to be less risky than smaller companies. They've already got an established, hopefully profitable, business and don't need to try and grow
as aggressively as a small company might. This means they're also more likely to return profits to shareholders as income. Also bear in mind that some industries tend to be
dominated by companies of a certain size, e.g. utilities are invariably large companies while the technology sector is dominated by smaller companies.
Geography can also affect portfolio risk, income and correlation. While globalisation has reduced the impact this has, it can still make a big difference. Emerging economies
such as China and India tend to be more risky than developed economies like the UK, although their long term prospects are arguably better. Some industries are far better
represented in certain areas than others and currency movements can also affect your investment.
Ways to invest
The obvious way to invest is to go and buy the asset you want directly, e.g. shares, gilts, gold or a property.
An alternative is to buy a share of a fund, such as a unit or investment trust, which invests in the asset(s) you want. There are pros and cons of doing so:
| Pros & Cons of using Funds |
| Pros |
Cons |
- Simple route to diversification.
- Fund manager could perform better than you'd manage to.
- Cost effective for small investments and monthly savings.
- Easy to manage capital gains tax.
- Simple to switch investments.
|
- Fund manager could perform worse than you'd manage to.
- Funds charge fees, which can really add up.
- Might not be available for the specific area of investment you want.
- You have no control over how the fund manager invests, although most funds have limits on what the manager is allowed to do.
|
Reasons to invest
Common reasons to invest include saving for retirement, school fees, a dream car/holiday and building a nest-egg for children / grandchildren.
To track or not to track?
If you choose to invest in a fund one of your biggest decisions is whether to buy a tracker or an actively managed fund.
Trackers simply try to mirror the performance of a specific investment index, usually charging little to do so. Actively managed funds are run by managers
who use their skill and judgement to try and beat the index, often charging handsomely to do so. Trouble is, the majority of active managers typically fail to deliver,
making them poor value for money. There are some good ones, but it can sometimes be like trying to find a needle in a haystack.
Trackers don't suit every asset type or market, but are certainly worthwhile in some instances. To find out more visit the trackers page.
Tax
Whereas savings are only liable to income tax, investments can be liable to capital gains tax too. There are exceptions, such as Individual Savings Accounts (ISAs),
and careful planning can reduce or eliminate potential tax bills. It's important to keep on top of the tax position of your investments to avoid falling foul of the taxman
or paying too much tax.
You can find out more about income tax and capital gains tax in the tax section.
Investment taxation can be summarised as follows:
| Tax Due on Investment Returns (where no tax already deducted) |
| Return Type |
Tax Type |
Non
Taxpayers |
Basic Rate
Taxpayers |
Higher Rate
Taxpayers |
Top Rate
Taxpayers |
Individual Savings
Account |
| Interest |
Income Tax |
0% |
20%* |
40%** |
45% |
0% |
| Dividends*** |
Income Tax |
0% |
0% |
27% |
33.53% |
0% |
| Gains**** |
Capital Gains Tax |
10% |
10% |
10% |
10% |
0% |
* No tax on first £1,000 of interest received.
** No tax on first £500 of interest received.
*** No tax on the first £5,000 of dividends received.
**** Tax only payable on gains above the annual capital gains tax allowance. |
Dividends
Dividends are paid out of a company's profits, which have already been (or will be) taxed. Because of this the Government attaches a 9%
tax 'credit' to dividends and then taxes basic rate taxpayers at 9% and higher rate taxpayers at 33.8%
on the 'gross' dividend (i.e. the dividend plus the tax credit).
The upshot is that basic rate taxpayers have no extra tax to pay, as the credit cancels out the tax owed. Higher rate taxpayers must pay an additional
25.0% on the 'gross' dividend, equal to 27% on the dividend they actually receive. The same
figurs for top rate taxpayers are 39.4% and 33.53% respectively.
Thanks to a Gordon Brown 'stealth' tax, non-taxpayer and ISA investors are unable to reclaim the tax credit, so they're no better off than basic rate taxpayers.
Capital Gains
Capital gains tax is payable at a rate of 10% on all gains per tax year above your annual personal allowance of £6,000.
How easily can I sell?
Some investments could prove tricky to sell, in financial jargon they're called 'illiquid'. For example, you might find it hard to shift a rental property at a decent
price during a tough market. Specialist investment trusts and venture capital trusts can also prove difficult to sell (at a reasonable price) at times.
Most mainstream investments should be ok, but it's always worth checking what the liquidity is like before you buy. You'll find more details on liquidity on each asset page.
Currency Risk
When you travel overseas, the cost of your spending depends very much on the exchange rate between the pound and the currency of the country you're visiting. A strong pound is good news
but a weak pound means your holiday will end up costing more - a US$100 hotel room costs £50 at US$2 to £1 but shoots up to £67 if the exchange rate is US$1.5 to £1.
Exchange rates also affect the value of any overseas investments you might own, e.g. a fund that invests in US shares, but the effect is opposite to if you were going on holiday.
Peter Ward buys 10,000 shares in a US fund. The unit price is US$2, which translates to £1 as the exchange rate is US$2 to £1, i.e. £10,000 in total. After five years the unit price is US$3
and Peter decides to sell. Were the exchange rate the same as when he'd bought he'd receive £15,000. However, the exchange rate has fallen to US$1.5 to £1, meaning he receives £20,000,
i.e. a £5,000 profit purely from the currency movement.
Currency movements can work for or against you and are difficult to predict. Some fund managers try to reduce or avoid this risk by 'hedging' currency exposure. This means they take
out a form of insurance to protect against currency movements, for better or worse.
Inflation
Inflation is bad news for investors. Rising prices of goods and services mean that your money will be worth less in future than today, so your investment could fall behind.
For example, if your investment returns 5% after tax and inflation over the year is 5% then you're no better off. If looking at future investment projections, always try to do
in today's terms, i.e. after inflation.
How can I buy?
Once you've decided on an investment, there's usually several ways to buy it, some more cost effective than others. Read the 'How can I buy?' section on each investment
type's page to review your options.
If it's too good to be true...
It almost certainly is. Ask yourself, if an investment opportunity really is so unmissable why is the salesman wasting his time selling it to you? Surely he'd be investing his life's savings
and getting ready to go and buy an island in the sun! You can also help protect yourself by ensuring the adviser and investment are regulated by the Financial Conduct Authority (FCA).
Check the FCA Register here.
What protection do I have?
If you lose money simply because the investment falls in value, then tough luck.
If you lose money due to dishonest or misleading advice, fraud or poor administration then you might have some comeback provided the adviser or investment is regulated by the Financial Conduct Authority.
If unhappy, your first step should be to set out your grievance in writing to the adviser or investment company concerned. Hopefully they will respond positively and help resolve the issue.
If, having done this, you are not happy with the firm's response you can take your complaint to the Financial Ombudsman Service (FOS). Their role is to review the complaint impartially and decide on a fair outcome.
If the decision is in your favour then the offending firm must abide by that and pay any compensation detailed in the FOS decision (limited to £100,000 plus interest and costs). Firms generally dislike their customers
taking a complaint to the FOS because they're usually charged a several hundred pounds handling fee per complaint, regardless of the outcome.
If the firm is unable to pay the compensation, perhaps because they've stopped trading, then you should contact the Financial Services Compensation Scheme (FSCS). For
investments the FSCS covers 100% of the first £50,000 invested per person. The FSCS also applies if a firm goes bust and is unable
to return investments or money to investors. Although the FSCS says it aims to process claims within six months, there's no guarantee it will do so. Don't expect to get your
money in a hurry.
Jargon
Here's some of the more common investment jargon you might come across:
| 5% Withdrawal | The amount of your initial invesment bond investment that can be withdrawn each year with no tax liability at that time (it's calculated at maturity). |
| Absolute Return | A type of investmet fund where managers strive to deliver positive returns regardless of market conditions. |
| Accumulation Unit | A type of unit trust unit that increases the unit price when income is distributed by the fund, rather than physically pay out income. |
| AIC | The Association of Investment Companies, the trade body for investment trust companies. |
| AiM | The Alternative Investment Market, a London based stock market where shares in small companies are traded. |
| Annual Management Charge | The annual fee that a fund manager charges for running an investment fund. |
| Asset Allocation | The spread of investments across a range of investment types/assets. Can help reduce risk and improve investment return prospects. |
| Asset Classes | Refers to the various types of investment assets, e.g. shares, fixed interest, property, commodities etc. |
| Asset Cover | Measures the extent that the assets in the zero and income share classes of a split capital investment trust currently cover the expected return at redemption. |
| Backwardation | When the price for immediate delivery of a commodity is higher than the price of delivery for a future date. |
| Bear | An investor who believes share prices will fall. Likely to sell shares in the hope of buying them back at a lower price in future. |
| Bid Offer Spread | The difference between the buying and selling price of an investment. |
| Bid Price | The selling price of an investment. |
| Brent Crude | The name given to oil produced in the North Sea and also a benchmark used for oil pricing. |
| Bull | An investor who believes share prices will rise. Therefore likely to buy shares now in the hope of selling at a profit in future. |
| Call Option | Gives the right to buy an investment at a certain price in future. |
| Cancellation Price | The amount a unit trust manager receives when cancelling units, the bid price of the underlying investments less dealing costs. |
| Capital | The money you invest. |
| Capital Growth | Growth in your original investment after all charges/costs have been taken into account. |
| Capital Shares | The part of a split capital investment trust that usually gives you the right receive all the trust's proceeds at wind up after the other share classes have taken their entitlement. |
| Cash ISA | Annual allowance that offers long term tax-free interest on your savings. |
| Chain | A succession of buyers and sellers who are reliant upon one another to complete buying or selling properties. A delay on one will have a knock on effect along the chain. |
| Commercial Property | Property from where someone can run a business, e.g. offices, shops and factories. |
| Contango | When the price for immediate delivery of a commodity is lower than the price of delivery for a future date (due to storage costs, insurance and financing etc.) |
| Convertibe Share | Preference shares that give the option to convert into ordinary shares at a future date. |
| Conveyacing | The legal process for transferring ownership of a property from the seller to the buyer. |
| Corporate Bond | IOU issued by a company. They pay a fixed rate of interest until they eventually pay back the money. |
| Coupon | The interest you receive from a gilt or corporate bond. |
| CPPI | Constant Proportion Portfolio Insurance is an investment method that actively manages the split between cash and shares, based on a mathematical formula, with the aim of protecting your money. |
| Creation Price | The cost to a fund manager of creating new units in a unit trust, includes the offer price of the underlying investments plus stamp duty and dealing costs. |
| Credit Ratings | Ratings issed by agencies such as Standard & Poor's and Moody's that help investors determine the likelihood a company will default on its bond. |
| Debt Securities | Another name for a corporate bond. |
| Deeds | Legal documents proving ownership of the property. |
| Default | When a company is unable to pay interest and/or redemption on their bonds. |
| Derivative | A specialist financial product, usually provides some sort of exposure to an underling asset, e.g. an option to buy shares at a certain price in price. |
| Discount | When an investment trust's value based on it's share price is lower than the actual value of the underlying assets. |
| Distressed Securities | An investment (hedge fund) strategy where managers seek out companies that are in big trouble, often on the verge of bankruptcy, in the hope they can improve matters and make a profit. |
| Distribution Bond | A type of investment bond that provides a regular income. |
| Dividend | The slice of annual profits that a company pays out to its shareholders, distributed as a fixed amount per share. |
| Dividend Cover | A ratio used to gause the likelihood a company will continue paying its current level of dividend. Equal to the profit after tax dividend by the total dividends paid out. |
| Duration | A measure of how sensitive a bond's price is to movements in interest rates. The higher a bond's duration, the more sensitive it will be. |
| EIS | Enterprise Investment Scheme. A scheme that allows you to enjoy tax benefits when buying shares in very small companies. |
| Equity Backing Ratio | The proportion of a with-profits fund that is invested in shares and property. |
| ETF | Exchange Traded Fund, a type of invesment fund traded on the stock market that's ideally suited to tracking indices. |
| Ex-Dividend | When a share goes ex-dividend, dividends are only paid to whoever owned the shares before that date. The price of the shares subsequently fall by around the amount of the dividend to reflect this. |
| Final Results | End of financial year information published by all companies listed on the stock exchange, includes details of any dividend payment. |
| Forward Pricing | When you buy or sell units in a unit trust you'll normally do so at the next published price, i.e. the 'forward' price. |
| Freehold | When you have absolute ownership of a plot of land and all buildings on it. |
| Funds of Funds | An invesment fund that invests in a range of other funds (usually unit trusts). Provides a potentially wide range of investment but can be expensive. |
| Funds of Hedge Funds | Funds, normally investment trusts, that invest in a range of hedge funds. Easy way to access edge funds but can be expensive. |
| Futures | A financial product that gives you the right to buy or sell something on a future date at a certain price. |
| Gearing | Borrowing money to add to an investment, increasing the potential return (or loss). Increases investment risk. |
| Gilt | IOUs issued by the British Government. They pay a fixed rate of interest until repaying the money on an agreed date. |
| Global Macro | An investment (hedge fund) strategy where managers aim to profit from global events and situations using any available type of investment. |
| Growth Shares | Shares that may not be cheap, but look worthwhile based on future growth prospects. |
| Hard Commodities | Commodities that are mined from beneath the ground, e.g. oil. |
| Hedge Fund | Investment funds where the manager can invest in pretty much whatever they want, although some strive to deliver positive returns regardless of market conditions. |
| Hurdle Rate | Measures the average annual performance required for the zero and income share classes of a split capital investment trust to receive the expected return at redemption. |
| IMA | Investment Management Association, the trade body for unit trust management companies. |
| Income Shares | The part of a split capital investment trust that usually gives you the right to all of the income produced by the trust and the return of your original investment at wind up. |
| Income Units | A type of unit trust unit that physically pays out an income when income is distributed by the fund. |
| Income Yield | A percentage measurement of annual bond income, also known as 'running yield'. Calculated by dividing annual interest by the bond price. |
| Index | A statistic calculated by financial companies to measure the performance of stock markets and most other asset types, e.g. FTSE 100. |
| Index-Linked Gilt | Gilts where both interest and the redemption value are linked to inflation. |
| Information Ratio | A statistic that measures how well an investment manager has performed against their benchmark relative to the risk they have taken. |
| Interim Results | Financial information published after the first 6 months of the financial year by all companies listed on the stock exchange. |
| Investment Bond | A single premium life policy where the money is invested in a fund. Basically a type of insurance company investment with it's own set of tax rules. |
| Investment Grade Bond | Corporate bond issued by a company where it's expected they'll be able to pay interest and repay the bond at redemption. |
| Investment Trust | A company listed on the stock exchange whose sole purpose is to trade as an investment fund. |
| IPO | Initial Public Offer - when shares are offered to the public prior to being traded on a stock exchange for the first time. |
| ISA | Individual Savings Account. An annual allowance that offers long term tax benefits on savings and investments. |
| Junk Bond | Corporate bond issued by a company where there's some doubt over their ability to pay interest and/or repay the bond at redemption. |
| Land Registry | A government office responsible for recording the ownership of land. |
| Landlord | Someone who owns a property and rents it to a tenant. |
| Leasehold | You own the property for the duration of a lease, after which it reverts to the freeholder. |
| Life Settlements | Investments that involve buying a life insurance policy from someone in the latter stages of their life. The seller gets money while they're still alive and the buyer pays less than the sum assured. |
| Long / Short Funds | Investment funds that can benefit from both rising and falling markets. |
| LSE | London Stock Exchange, the UK's main stock market, based in London. |
| Market Capitalisation | The value of a company based on the market value of its shares (i.e. share price x number of shares issued). |
| Market Neutral | An investment (hedge fund) strategy where managers try to remove all market risk, so that overall market movements have no impact on the fund's performance. |
| Maxi ISA | A type of ISA most commonly used for investing in shares. Scrapped in April 2008 in favour of simpler rules. |
| Merger Arbitrage | An investment (hedge fund) strategy where managers aim to buy shares in companies being taken over (below the acquisition price) where they believe they can make a profit. |
| Mini ISA | A type of ISA most commonly used for cash savings accounts. Scrapped in April 2008 in favour of simpler rules. |
| MVA / MVR | Market value adjuster / reduction. A charge applied to some investors wanting to sell their with-profits investments during or after periods of poor performance. |
| NAV | Net asset value. The actual value of underlying investments within an investment trust, often differs from the value based on the trust's share price. |
| OEICS | Open Ended Investment Companies, similar to unit trusts except that they have a single price at which units are bought and sold. |
| Offer Price | The buying price of an investment. |
| Offplan | Committing to buy a new-build property before it's completed. |
| Open Ended Fund | An investment fund that can create and cancel units as required, i.e. it can expand and contract, e.g. unit trust. |
| Ordinary Income Shares | The part of a split capital investment trust that usually receives some, or all, of a trust's income and has an entitlement to the trusts's capital after the other share classes have taken their share. |
| Ordinary Share | The most common type of share. Ownership gives you a share of a company's profits via a dividend, but you'll be bottom of the pile re: getting any money back if the company goes bankrupt. |
| PEP | Personal equity plan, a forerunner to stocks & shares ISAs. |
| PIBS | Permanent Interest Bearing Shares. A type of corporate bond issued by building societies. |
| Preference Share | Shares that simply pay a fixed dividend rather than participate in a company's profitability. They must receive their dividend before ordinary shareholders. |
| Premium | When an investment trust's value based on it's share price is higher than the actual value of the underlying assets. |
| Private Equity | Shares in companies that are not listed on a stock market. |
| Property Stamp Duty | A tax levied when purchasing a property. |
| Protected Funds | Investment funds that typically provide a pre-determined level of capital protection (e.g. 95% or 100%) every quarter while offering some upside linked to an index or managed fund. |
| Protected Plans | Investments that run for a fixed term and protect your initial investment while offering some upside linked to a specific investment index. |
| Qualifying Policy | An insurance company regular savings plan with included life cover, e.g. endowment. If certain criteria are met there's no further tax at maturity, although they're taxed at basic rate by default. |
| Real Estate | Another word for property. |
| Redemption Yield | A percentage measurement of annual bond income that also includes any anticipated profit or loss on the bond price between now and redemption. |
| Reduction in Yield | A figure that insurance companies must show for each product to illustrate the impact that all of their chages will have on potential investment returns. |
| REIT | Real Estate Investment Trust, a type of investment company that invests primarily in property. |
| Rental Yield | The amount of annual rent received from a property divided by its value. |
| Residential Property | Property where someone can live, e.g. a house. |
| Rights Issue | Gives existing shareholders in a company the chance to buy more shares in that company. |
| Risk Premium | The amount of extra interest companies with a less than perfect credit rating must pay on their bonds to compensate for the additional investment risk (compared to gilts). |
| SAYE | Save As You Earn, a scheme lasting three or five years that allows employees to buy shares it their employer, with security and potentially at a discount. |
| Scrip Dividend | When a company pays a dividend in extra shares rather than cash. |
| Share Incentive Plan | A SIP provides a tax efficient way for employees to own shares in their employer. |
| Share Options | When an employer gives employees the option to buy shares in the company at a fixed price in future. |
| Soft Commodities | Commodities that are grown, e.g. corn. |
| Sovereign Debt | IOUs issued by the governments. They pay a fixed rate of interest until repaying the money on an agreed date. |
| Spot Price | The cash market price for a physical commodity that is available for immediate delivery. |
| Stag | Someone who buys shares at an IPO in the hope they can sell at a profit as soon as trading starts. |
| Stock Market | A market where shares are traded. It provides a way for buyers to find sellers (and vice-versa) and determine the market price for a share. |
| Stockbroker | Someone who buys and sells shares on behalf of their client. They earn income by taking a commission or fee per transaction. |
| Stocks & Shares ISA | Annual allowance that offers long term tax-free growth and interest on investments, plus no further tax on dividends. |
| Stop Loss | Stockbroker will automatically sell your shares if they fall below a price you specify. |
| Structured Product | A type of investment that is manufactured to try and meet certain risk and return criteria, protected plans are a popular example. |
| Tenant | Someone who rents a property from a landlord. |
| Top-Slicing | The method by which the amount of tax owed, if any, is calculated when an investment bond is surrendered or matures. |
| Total Expense Ratio | TER. Shows an investment fund's total annual charges. Includes the annual management charge and all other annual costs paid by the fund. |
| Tracker Fund | An investment fund that tries to replicate a specific index rather than being run by an active fund manager. |
| Tracking Error | A statistic that measures how accurately a tracker fund tracks an index. It's the standard deviation of the difference between the fund and index returns. |
| Traded Endowment Policy | A second hand endowment policy, can offer reasonable value for investors and a better deal for sellers than if they surrendered the policy. |
| Unit Trust | A type of investment fund, your money is combined with that of other investors and used to buy a number of different investments, with the resulting fund being split into equal units. |
| Value Shares | Shares that appear cheap based on their current prospects. |
| VCT | Venture Capital Trust. A type of investment fund that invest in very small companies. Potentially high risk but benefits from tax advantages. |
| Warrant | The option (but not obligation) to buy shares in an investment trust at a fixed price on either a fixed date or range of dates in the future. |
| Weighted Index | An investment index where a company's weighting is based on either their share price (price weighting) or size (market weighting). |
| With-Profits | A type of investment fund run by insurance companies. In theory they smooth out investment ups and downs by holding back some profit in good years to distribute in bad years. |
| Yield Compression | Refers to falling rental income yields on commercial property. Usually caused by rising property values. |
| Yield Curve | A graph that shows how the yields on bonds vary depending on the length of time until redemption. |
| Zero Coupon Bond | A corporate bond that pays no interest. They're instead issed at a 'discount' price which increases over time to a redemption price. |
| Zeros | Zero dividend preference shares. The part of a split capital investment trust that offers no income but a pre-determined capital return at wind-up. |