Finance, Stocks, Shares & ISA glossary – A-Z Definitions – explained
When a fund manager makes proactive investment decisions to help maximise investment returns. Management charges tend to be higher on actively managed funds, than on passive funds which simply track a stock market index.
A fund in which the objective is to outperform the market average by actively seeking out stocks and shares that will provide better total return.
An accumulator fund automatically reinvests all income earned by an investor back into the fund. This is usually reflected in an increase in the unit or share price of the fund. Not suitable for income-seeking investors.
Annual management charge (AMC) /Annual charge
The fee you will pay for the management of an investment fund. These charges typically range from 0.75% to 1.75% of the value of the fund.
AER stands for Annual Equivalent Rate and shows the rate of interest a saver will receive over a year assuming their cash is left in the account for a full 12 months.
AIM stands for Alternative Investment Market: a market for small, young and growing companies operated by the London Stock Exchange. The purpose of the market is to provide smaller businesses with a flexible means of raising capital and gaining a stock market quotation.
The additional return generated by manager skill as opposed to general market movements. Historical alpha measures the returns achieved by active management over time.
APR stands for Annual Percentage Rate and shows the cost of borrowing and any associated fees that might be included. All lenders have to tell you what the APR is before you sign an agreement.
An investment planning technique where you divide your assets so they suit your objectives. So, if you are very risk averse, you might choose to put more of your money into cash and less into stocks and shares and bonds, while an investor with a strong appetite for risk might choose to put more of their money into equities, bonds and property and less into cash.
A statement showing a company’s assets, liabilities and shareholders’ equity at a particular point in time.
The main interest rate in the economy, set by the Bank of England, upon which others rates are based. It is often called the base rate, but since 2007 has officially been known as the bank rate.
The main interest rate in the economy, set by the Bank of England, upon which others rates are based. The official name for the base rate is the bank rate.
A prolonged period in which investment prices fall and there is widespread pessimism.
The measure of a stock’s price volatility in relation to the rest of the market. A beta of 1.0 indicates a stock that rises and falls in line with the overall market. A beta greater than 1.0 suggests wider swings, while beta less than 1.0 indicates a less volatile stock.
The price at which an investment can be sold.
The difference between the buying price and the selling price of an investment. The bid/offer price can either be quoted in pence, or as a percentage.
Term used to describe large, well-established, financially strong and internationally-recognised companies.
Extra interest paid on top of a basic rate of interest for a limited period of time. When the bonus period ends, the rate will drop back to the basic rate of interest.
Essentially an IOU. Investors receive a fixed income, but the price of the bond moves up and down until maturity and bonds can be traded like equities. Company bonds are known as corporate bonds, while government bonds are called gilts.
A market in which share prices are rising and there is widespread optimism, lasting anything from a few months to years.
Capital Gains tax
A tax on the profit or gain you make when you sell or dispose of an asset.
The increase in the value of an investment.
Units purchased at the beginning of a policy that have either a higher annual management charge than usual or may be subject to a portion of them being cancelled at regular intervals to recover expenses.
Tax-exempt Individual Savings Account which enables you to earn interest tax-free. There is a limit on the amount you can save into a cash ISA in any tax year. This limit is £5,100 for the 2010/2011 tax year, rising to £5,340 for the 2011/2012 tax year.
Contracts for Difference are derivative products designed for traders which allow you to make money on share price movements without buying the shares themselves.
A with-profits fund that has closed to new business. Different from a closed-end fund which is a collective investment scheme with a limited number of shares.
Essentially IOUs issued by large companies. Investors receive a fixed income, but the price of the bond moves up and down until maturity.
Raw products such as oil and metals such as gold, copper and zinc. Can also refer to agricultural commodities such as corn, wheat, coffee and cotton.
Interest that is paid both on the principal and the accrued interest, so effectively the interest that has been added also itself earns interest.
The Financial Express Crown Ratings are designed to highlight funds that have had superior, consistent performance in relation to risk and relative to their peer groups.
Crown Ratings are compiled using three key measurements of a fund’s performance – alpha, volatility and consistency – with each rated fund receiving 1, 2 or 3 crowns.
The opposite of inflation, a reduction in prices of goods and services which usually happens when there is a recession and economic activity slows down.
An economic depression is where a country’s economy shrinks by more than 10%, as measured by their Gross Domestic Product (GDP).
Financial instrument that has no intrinsic value itself, but instead its value is based on the expected future price movements of the asset to which it is linked, such as a share or currency.
The number of times that a company could pay its annual dividend from its earnings.
Financial markets of developing countries with a short operating history, so usually higher risk than more established markets in the developed world.
Enterprise Investment Scheme
Tax break for people buying shares in unquoted companies. You get tax relief at 20% and don’t pay any tax on profits so long as shares are held for five years.
Another term for stocks and shares.
The rate at which one currency may be converted into another.
Exchange traded fund
A fund which tracks and index, commodity or basked of assets but which can be traded like a stock.
Equity income fund
A fund that invests primarily in the equities of companies with good records of paying dividends so as to produce a high level of income for investors.
Financial Services Authority – the regulator of all providers of financial services in the UK.
The Financial Services Compensation Scheme which compensates investors in the event of the failure of authorised firms. The scheme covers insurance companies, deposit-takers and investment firms.
Fixed Income investment
Type of investment that yields a regular or fixed return.
When a company opts to allow its shares to be bought and sold by anyone through the stock exchange.
Fixed Rate Individual Savings Account which pays a fixed rate of interest for a set period of time. As with other ISAs, returns are tax-free, but you usually can’t get access to your money during the fixed term.
The Financial Times Stock Exchange 100 index tracks the performance of the top 100 UK companies by market value.
FTSE All Share
The Financial Times Stock Exchange All Share is an index of all companies listed on the London Stock Exchange.
Manager in charge of running a unit trust, investment trust or other investment such as a pension fund who decides what shares, bonds or gilts the fund should buy or sell.
A fund is made up of a variety of different types of investment, so, for example, a UK fund might consist of the shares of a wide range of different UK companies.
Measure of how risky a fund is. The higher the fund risk, the more volatile the performance is likely to be and the greater the chance of an investor losing some of their money.
A fund supermarket offers the ability to invest in funds online and view all your investments in one place. Fund supermarkets also often offer discounted initial charges.
Bonds issued by the British government.
The return on your investment before tax has been deducted.
Guaranteed income bond
Type of investment which pays a fixed income, and is usually issued by insurance companies. The income is paid with tax basic-rate taken off the interest and this cannot be reclaimed by non-taxpayers.
Hedge funds aim to make money whether the market is moving up or down and do this using a variety of complicated investment techniques. One of the most common techniques they use is known as ‘selling short’, where managers sell stock they do not own in the hope that they can buy it when the price is lower.
Hedging against investment risk means managers or investors aim to make money and also reduce potential losses at the same time. Hedging techniques generally involve the use of complicated financial instruments known as derivatives.
Independent financial advisor offering advice and products from all companies rather than selling those from one particular firm.
A statistical measure of the changes in a portfolio of stocks representing a portion of the overall market.
An investment where the return rises or falls in line with inflation.
Also referred to as a passive fund, tracker funds hold all the stocks in a particular index such as the FTSE 100. There is no fund manager, instead the proportion of shares in each company is allocated by computer and it will alter as the index weightings change. Therefore, the performance of a tracker will mirror that of the index it is tracking. However, there is an annual management charge which means the return will always be slightly lower than the index.
For example, if you invest in a FTSE 100 tracker that has an annual fee of 0.5% and the FTSE 100 rises by 10% over a year, the fund would only go up by 9.5% because of the fee.
An Individual Savings Account is a tax-free wrapper which enables you to save in cash and/ or stocks and shares up to a set limit each year. Returns are free of income and capital gains tax.
Charge imposed by a fund management company when you make an investment. The initial charge can be up to 5.5% of the amount you invest (it varies depending on the fund). However, if you invest via a fund supermarket or discount broker, this may be lower. Also often known as the front-end load.
These are sold by life insurance companies and allow you to invest in a variety of funds. They are designed to produce medium to long term capital growth, but can also be used to give you an income.
A form of collective investment which is effectively a company that buys shares in other companies and is quoted on the Stock Exchange. Investors’ money is pooled together from the sale of a fixed number of shares which a trust issues when it launches.
Initial Public Offering. This is the first sale of stock by a private company to the public.