The world of investment is filled with terminology, acronyms and other forms of jargon. Your financial planner should be able to explain everything in plain english, and you should be comfortable with the steps being taken as part of your investment strategy. However, for those of you looking to expand your vocabulary, here are some of the key words and phrases associated with investment…
This is when a professional fund manager selects stocks and other assets to be included within a portfolio. They will monitor the assets on a regular basis and will buy and sell them to take advantage of market changes when necessary.
This is the term given to a fund which is actively managed by a fund manager, as mentioned above.
An asset class is a grouping of investments that have similar characteristics and which are subject to the same laws and regulations. The assets within a class will often behave similarly to one another in the marketplace. For example, shares (equities) and bonds (fixed income) are both classes of asset.
This is the weighting of the portfolio towards certain assets (such as bonds, equities or funds), sectors and markets.
A bond is a fixed income instrument that represents a loan made by an investor to a borrower. Typically, a borrower will be part of the government or a business. Bonds are often used by borrowers to finance projects and operations.
The initial amount of money invested.
Diversification is the opposite of placing all your eggs in one basket. Maintaining a diverse investment portfolio helps to manage risk and mitigate the impact of volatility. You can diversify across different investment types, such as bonds, stocks and commodities. You can also diversify across different markets, sectors, currencies and countries.
A dividend is the reward from a portion of a company’s earnings paid to shareholders. They can take the form of cash payments, as shares of stock or other property.
Also known as shares, an equity is a holding in a company that entitles the holder to dividend payments and voting rights (though this might depend on the company).
Exchange traded funds (ETFs)
An ETF is a type of investment fund traded on stock exchanges, just like stocks. However, an ETF will hold a multitude of assets such as stocks and bonds. They will often track an underlying index such as a stock or bond index.
A fund pools together money from many people and puts it into different types of investment. There are a few different types of funds such as passive, active and exchange-traded funds. They usually have a particular objective, which could be steady growth or aiming to outperform an index such as the FTSE100.
Gilts are types of bonds and are usually fixed-income or linked to a particular index (e.g. the FTSE 100). They are issued by the government to raise money.
This is the return earned by lending money. Cash savings such as ISAs pay interest to the lender, but investments such as gilts and bonds do too.
A set of rules and procedures designed to guide the investor’s portfolio allocation in a way that meets their financial goals.
Further reading: What investment can do for you.
A market index provides a broad representative portfolio of different investments, such as the FTSE 100 index.
Open ended investment company (OEIC)
An OEIC is a type of investment fund based in the U.K that offers a professionally managed portfolio of pooled investor funds that invest in different equities, bonds and other securities. They’re referred to as “open-ended” because they can create new shares in line with investor demand. The fund will also cancel shares of investors who exit the fund.
Passive funds (also referred to as tracker or index funds)
The opposite of active funds. They are also referred to as index trackers or tracker funds. Passive funds closely mirror the performance of a particular index, such as ‘Global Equities’, often using software programs to replicate the market rather than relying on an individual fund manager.
This is the process of realigning the asset allocation within a portfolio, primarily used to safeguard an investor from being overly exposed to undesirable risks. A portfolio might also be rebalanced in line with the performance of a particular asset class within it.
A place where stocks and shares are bought and sold, such as the London Stock Exchange.
A type of investment fund that contains many individual investments. They allow for many people to come together to invest in stock markets around the world. They allow for investors to spread risk and access a wide range of investments. The trust is split into units, with different prices, and are created or cancelled when an investor enters or leaves the fund.
Prices will go up and down as time goes on. The volatility of an individual stock or fund refers to how much it rises and falls. If the price goes up and down rapidly within short spans of time, then it has high volatility. If the price rarely changes, it has low volatility.
So there you have it, a quick jargon buster for you to refer to as you begin your investment journey. For more information on developing a robust and diverse investment portfolio, feel free to get in touch.