GLOSSARY

Active investment: A strategy where an investor (often a fund manager) makes active decisions about where, when and how to buy, sell, or hold equities, bonds or other financial instruments. It is distinct from passive investment, by which a benchmark, such as the FTSE 100 Index, is duplicated and tracked.

 

AIM: Formerly the Alternative Investment Market, AIM is part of the London Stock Exchange. Launched in 1995 with just 10 companies, it lists smaller fledgling firms that can enjoy more regulatory flexibility compared with the larger companies on the main market, such as those in the FTSE 100. In the UK, some AIM shares are free from inheritance tax if held for more than two years.

 

Alpha: A measure that indicates how a fund has performed when compared with its benchmark (often an index such as the FTSE 100) when adjusted for the risks taken. Alpha is often expressed as a percentage versus the performance of its benchmark.

 

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

 

Assets under management (AUM): The total value of the assets, including cash, held within a fund or managed as a whole by a fund management company. 

 

Bear market: A market that is undergoing a prolonged fall or weakness driven by pessimism and negative sentiment. Technically, if a market falls 20%, it is 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.

 

Beta: A measure of how closely an investment tracks the performance of its respective market. 

 

Black swan event: A rare event with unexpected consequences that are severe and widespread. Examples include the dotcom crash in 2000; the Global Financial Crisis of 2008 and the COVID-19 pandemic. It could also be a natural event such as a major catastrophe. Investors can help to protect their portfolios against black swan events by diversifying their portfolios and investing in funds managed by professional managers who are informed about financial markets. Such events could also be viewed as good buying opportunities because financial markets generally over-react initially to them, making assets cheaper, and invariably recover at some stage.

 

Blue chip: Denotes the biggest stocks listed on an exchange. The term derives from poker, where blue betting chips are traditionally of higher value than white or red ones.

 

Bond: 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 often have a set term to “maturity”, when the loan must be repaid, although some bonds never mature.  Bonds are also known as fixed interest securities.

 

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. The difference between an investment trust’s share price and NAV results in it trading at a premium (when the price of the shares is above NAV) or at a discount (when the price of the shares is below NAV).

 

Bottom-up: Refers to an investment process, or approach, used by fund managers. Stocks are selected by analysing companies based solely on their investment quality and potential, regardless of their wider industry conditions and the macro-economic backdrop.

 

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

 

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 is a bull market.

Capital return: Reflects the return on NAV, excluding any dividends reinvested.

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

Closed-ended: A type of investment vehicle in which the number of shares or units are fixed at any given time. Investment trusts are examples of this, with investors having to buy or sell shares to invest or divest. Investment trusts can growth their capital base through new issues and can conduct share buy-backs to shrink it.

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.

Corporate bond: An IOU, or debt, issued by businesses to raise cash. Corporate bonds, like government bonds, pay interest (the ‘coupon’) and usually have a set maturity period. Generally, companies pay interest in two instalments a year, although this can vary.

Coupon: A coupon is the term used for the interest paid periodically 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.

Default risk: The probability that a borrower, including individuals, countries or companies, cannot pay a debt. Agencies such as Fitch ratings, Moody’s and Standard & Poor’s, provide credit ratings on companies and governments.

 

Deflation: Deflation is when the prices of goods and services decline. 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 in future.

 

Derivative: A complex financial instrument that is a contract between two or more investors. Its value is determined by the fluctuating prices of underlying assets. Typically, these assets are stocks and bonds, but they can be linked to currencies, commodities and interest rates.

 

Discount: An investment trust trades at a discount when its share price is less than its net asset value. Given investment trusts are traded on the stock exchange, their share prices can fluctuate, based on demand and supply. 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.

 

Diversification: Investing in a spread of assets to reduce risk. A portfolio invested in one company for example risks losing all its assets if that company goes bankrupt.

 

Dividend: The payout to shareholders of a company that shares its profits with its investors. They are usually paid quarterly, twice a year or annually.

 

Dividend yield. The annual dividend payable expressed as a percentage of the year end share price.

 

Duration: 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 in years, representing the time required for the investor to recover the present value of the cash flows of a bond.

Emerging market: A developing country that typically has a fast-growing economy. Examples include Brazil, Mexico and Russia.

 

Equities (also referred to as shares or stocks): These give the owner part ownership of a company, the right to a portion of the profits and a vote at annual general meetings. They usually trade on a stock exchange, where prices are determined by supply and demand.

 

ESG: Environmental, Social and Governance are the widely recognised criteria used to assess the ‘sustainability’ of an investment.

 

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

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.

 

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.

 

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 do so, usually as a result of going bust.

 

Fixed income: Another term for bond related investments. Fixed income assets are IOUs issued by governments and companies. They pay annual interest and normally repay the amount borrowed to the bond holder at the end of a fixed term, although some fixed income instruments are non-maturing.

 

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: Futures are a type of derivative commonly used in relation to commodities, currencies and stock markets. They involve purchasing an asset at an agreed price for delivery on a future date.

Gearing: The ratio of a company’s debt to the value of its ordinary shares. For an investment trust, it is the ratio of debt to NAV. This figure indicates the extra amount by which net assets, or shareholders’ funds, would move if the value of a company’s investments were to rise or fall.

Government bonds: IOUs, or debt, issued by governments 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.

Greenwashing: A play on the term ‘whitewashing’, this is the practice of providing misleading information about an investment, company or project to make it appear more environmentally friendly than it really is.

Gross gearing: his reflects the amount of gross borrowings in use by a company and takes no account of any cash balances. It is based on gross borrowings as a percentage of net assets.

 

Impact investing: Investing with the aim of bringing about positive and measurable Environmental, Social and Governance (ESG) results while delivering financial returns. This goes beyond just ‘negative screening’ or avoiding undesirable investments such as companies deemed to have harmful practices. Impact is usually measured with reference to the United Nations’ Sustainable Development Goals (SDGs).

 

Index: An equity index follows the performance of a particular group of shares on a stock market, often the largest - such as the UK FTSE 100 index or the US S&P 500 index. An index tracker fund will mirror the performance of a particular index.

 

Individual Savings Account (ISA): A tax-efficient savings tax wrapper for UK savers, where the gains and returns are tax-free.

 

Inflation: The percentage measure of a rise in prices, usually expressed in annual terms. In the UK, the Consumers Price Index is based on a basket of goods and services chosen to reflect the general cost of living. Inflation reduces spending power and beating it is a core aim for many investors.

 

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

 

Investment grade bonds: 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.

 

Investment trust: An investment trust typically operates as 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 capital, and are bought and sold on an exchange, such as the London Stock Exchange.

 

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.

 

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. Credit rating agency Standard & Poor’s classifies junk bonds as those rated ‘BB’ and below, while Moody’s classifies them as ‘Ba’ and lower.

Leverage: 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. Investment trusts can leverage but it is illegal for units trusts to do so.

 

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

M&A: A common phrase meaning Merger & Acquisition.  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.

 

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.

Net Asset Value (NAV). For an investment trust, the NAV is the value of total assets less liabilities. Liabilities for this purpose include current and long-term liabilities. The NAV per share is calculated by dividing the net asset value by the number of ordinary shares in issue (excluding shares held in treasury). For accounting purposes assets are valued at fair (usually market) value and liabilities are valued at amortised cost (their repayment – often nominal – value). An alternative, NAV with debt at market value, values long term liabilities at their market (fair) value.

 

Net gearing (or net cash). Net gearing reflects the amount of net borrowings invested, i.e. borrowings less cash and cash equivalents (incl. investments in money market funds). It is based on net borrowings as a percentage of net assets. Net cash reflects the net exposure to cash and cash equivalents, as a percentage of net assets, after any offset against total borrowings.

 

Nominal return: The return delivered by an investment before taking account of inflation/deflation, taxes and investment fees over a specified period and expressed as a percentage.

Ongoing Charges Figure (OCF): The OCF captures fees incurred for operating an investment trust throughout 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 and the cost of servicing any debt.

Passive investment: A strategy in which a benchmark, such as the FTSE 100 Index, is duplicated and tracked. Funds using this strategy, sometimes known as tracker funds or index trackers, are often run by robots (or algorithms) rather than fund managers making active investment decisions.

 

PE Ratio: The Price to Earnings Ratio is a common method of valuing a company. It is calculated by dividing a company’s share price by its earnings per share.

 

Pound cost averaging:  A strategy by which investors can diversify their risk across time. Investing a substantial lump sum in one go can run the risk of subjecting the whole capital to a market fall soon after. Regular monthly investments, for example, can help smooth exposure to fluctuations in the market.

 

Premium: The difference between an an investment trust’s share price and its NAV, when the former is higher. For example, an investment trust’s shares can trade at a premium to its actual net worth if it is in high demand.

 

Private equity: Shares held in a company that is not listed on a public stock exchange. Individuals and other entities such as companies and funds can hold private equity.

 

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 its latest results in a bid to manage shareholder expectations.

 

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. QE typically involves a central bank purchasing government bonds.

Real return: A measure in percentage terms of the return delivered by an investment that takes account of the impact of inflation or deflation, taxes and investment fees over a specific period. It can be calculated by subtracting the inflation/deflation rate, tax and investment fees from the nominal return.

Responsible investing: An approach to investment that integrates environmental, social and governance (ESG) considerations within the decision-making.

Return: The return generated in a period from the investments.

Rights issue: The action by which 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.

Risk: Risk means different things to different people. For an equity portfolio, it typically refers to the potential for that portfolio’s returns to differ from the return of a comparator such as a government bond, interest rate or an equity index. In statistical terms, a return far above a comparator may be considered just as risky as a return far below. For an individual investor, risk may mean the loss of capital and/or income.

S&P 500: An equity index that tracks the performance of the 500 largest companies listed on US stock exchanges. It is the country’s main stock index.

 

Securitisation: The process of creating an investment that is secured against an underlying illiquid asset or group of assets. For example, debt from mortgages could be packaged together and the related securities could then be traded in the market.

 

Security: A financial asset such as a bond or equity that can be traded. Strict definitions of what constitutes a security can vary, depending on the jurisdictions in which the security is traded.

 

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 they can redeem an allocation of their shares at a premium to the current market value. By reducing the number of shares in issue, the aim is to increase the value of shares still outstanding.

 

Shareholder: A person, company or organisation that owns shares in a company.

 

Shares in issue: The total number of shares currently attributable to a company.

 

Sustainable investment: An approach to investment that integrates Environmental, Social and Governance (ESG) considerations within the decision-making.

 

Sustainable Development Goals (SDGs): Established in 2015 by the United Nations General Assembly, the 17 SDGs are inter-linked global goals by which to achieve a better and more sustainable future for all of humanity by the year 2030. They are usually used as the basis by which to measure the effects of impact investing.

 

Swap: A derivative contract in which two parties agree to swap the investment returns from two instruments. Common swaps include currency and interest rate swaps.

Top-down: 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.

 

Total return:Total return is the theoretical return to shareholders that measures the combined effect of any dividends paid together with the rise or fall in the share price or NAV.

 

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

 

Volatility: Volatility is sometimes used interchangeably with risk but ultimately refers to how much and how quickly an asset class moves up and down within a certain timeframe. The more and the faster it moves, the more volatile an investment considered to be.

Yield: The income received from an investment, such as a fund, bond or dividend-paying share.

 

Yield curve: A line on a graph that 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 reflects market expectations and it can be analysed for signals of future changes in interest rates and economic activity.