Investment Jargon Buster
Investment jargon explained. In this post, we explain everything from ‘asset classes’ to ‘default risk’.
Assets: anything an individual, company or fund owns which has economic (tradable) value.
Asset classes: Groups of securities or investments with similar characteristics that behave in a similar fashion and are subject to the same laws and regulations. The most common ones are Cash, Shares, Property & Fixed Interest Securities.
Bond: is an IOU for a loan to a government or company. Usually for a fixed term and with a fixed rate of return paid to the investor at fixed intervals until the loan is repaid. Sometimes called Fixed Interest Securities.
Commodities: bulk goods traded on an exchange. Examples include gold, silver and platinum; iron, steel and tin; grain, coffee and sugar.
Consumer Price Index (CPI): periodically measures the price of a basket of goods and services purchased by households, used to give an indication of UK inflation.
Default risk: the risk that the bond issuer will not be able to repay the interest or initial investment to the investor.
Developed market: an established market economy, with sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets.
Diversification: a policy of reducing your exposure to any one particular asset or risk. This usually involves selecting a range of asset classes which do not move in perfect synchronisation with each other.
Dividend: a distribution of profits to shareholders. Each share is allocated a percentage of the distribution.
Emerging markets: less developed economies generally characterised as transitioning from a restricted or controlled economy to a free-market economy, with increasing economic freedom, and gradual integration into the global economy.
Equity: a share in the ownership of a company
Fiscal policy: government policies that seek to influence the domestic economy including tax rates, interest rates and spending policies.
Fixed Income Security: a loan to a government or company, usually for a fixed term and with a fixed rate of return paid to the investor at fixed intervals until the loan is repaid.
Investment trust: Set up as companies with a fixed number of shares and like any listed company the shares trade. Allows you to pool your money with other investors to get access to range of assets through a single investment.
Mutual fund: allows you to pool money with other investors to purchase stocks, bonds and other securities.
OEIC (Open Ended Investment Company): this is a collective investment fund. Managers pool investors’ money to buy shares, bonds cash, property and other investments. The number of shares in circulation varies depending on demand from investors.
Retail Price Index (RPI): Like the CPI, this tracks changes in the cost of a fixed basket of goods over time. However, the RPI also includes housing costs, such as mortgage interest payments and council tax, as well as TV licence and road tax costs.
Risk: the chance that an investment will lose value or that its return will be less than expected.
Structured deposit: a portfolio that offers a degree of protection to capital whilst offering the potential for higher returns. The higher the risk to capital, the greater the potential return.
Volatility: a risk measure that describes the degree to which performance varies over time and thus an indication of one’s ability to predict whether performance is going to be positive or negative.
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