Investment Glossary
Do you know your alpha from your beta? How about the difference between bulls and bears? Is it best to be bottom-up or top down?
If any of those terms leave you scratching your head, then you’re not alone. The investment world is full of jargon.
But if you want to start growing your money, you need to speak the language. Here, we explain some of the most used words and phrases that you’re likely to come across.
[{"title": "Active management","description": "Where a professional fund manager chooses the companies and amount they want to invest in them, instead of simply copying a stock market index, such as the FTSE 100."},{"title": "Active share","description": "This shows how different a fund is to its reference index. A fund that has no holdings in common with its reference index will have an active share of 100%, and a fund that has exactly the same holdings as the reference index will have an active share of 0%."},{"title": "AIM","description": "The Alternative Investment Market, is a sub-market of the London Stock Exchange (LSE). It has fewer regulations than the LSE and was introduced to help smaller companies raise capital by listing their shares there."},{"title": "Alpha","description": "This is a word commonly used to describe a fund manager's skill. Alpha is the excess risk-adjusted return of a fund over and above its chosen benchmark. The higher a fund manager's Alpha, the better their performance is."},{"title": "AMC","description": "Annual management charge - the annual fee the fund provider charges to manage a fund. It is shown as a percentage, for example 0.75%."},{"title": "Annualised returns","description": "This is when returns are converted into an annual rate. Returns covering a period of more than one year are averaged to present a return for a 12- month period."},{"title": "Asset","description": "Anything that has a value that can be converted into a cash price."},{"title": "Basis point (bps)","description": "This is a precise financial measurement that's often used to explain interest rate movements more accurately and eliminate confusion. One basis point is equal to one hundredth of 1% (i.e., 0.01%)."},{"title": "Bear market","description": "This describes a situation when a market has fallen by 20% from its peak. A fall of this magnitude often takes a few weeks or months to occur and signals a period when investors typically feel very pessimistic. It is the opposite of a bull market."},{"title": "Benchmark","description": "A standard against which a fund is compared, usually the average of its peer group or a stock market index. For example, a fund investing in UK equities may be benchmarked against the FTSE 100 index."},{"title": "Beta","description": "A word used to describe the measure of a fund's volatility in comparison to the market. A beta score above 1 means the fund is more volatile than the overall market, while a beta score below 1 means it is less volatile."},{"title": "Book value","description": "The accounting value of a company's assets less its liabilities. It is the expected value of a firm if it were to sell all the assets on its balance sheet and cover its outstanding debts and obligations."},{"title": "Bond","description": "Like a loan or IOU, bonds are issued by companies or governments to finance projects and operations. They pay a regular income and, unless the company or government goes bust, the initial investment will be repaid on a specific date in the future. Generally, the riskier the bond, the higher income they will pay."},{"title": "Bottom-up","description": "A management style where the manager prioritises individual stock selection over industry, sector or wider economic factors."},{"title": "Bull market","description": "When prices are rising and the value of the market is going up, over a long period of time. It is usually also a time when an economy is strong, and investors are feeling confident. It's also the opposite of a bear market."},{"title": "Call option","description": "An agreement that gives an investor the right, but not the obligation, to buy a company, bond, commodity, or other instrument at a specified price, within a specific time period. In return for this right, the seller, or option 'writer', receives a payment from the buyer. The value of a call rises when the underlying asset increases in price."},{"title": "Callable bond","description": "A bond, which can be bought back by the issuer prior to its maturity date. The issuer will usually 'call' the bond if interest rates fall and they can re-issue the bond at a cheaper rate. The call feature is an advantage for the issuer and consequently investors will demand a higher yield as compensation to hold these bonds."},{"title": "Capex or Capital Expenditure","description": "The money invested by a company to acquire, or upgrade fixed, physical, non-consumable assets such as property, plants, buildings, technology, or equipment."},{"title": "Capital gain","description": "Simply put, this is the profit you make from the sale of your investment."},{"title": "Capital loss","description": "The opposite of a capital gain. Importantly, it's only a loss if you sell the asset. The value of investments can fluctuate, and it might become a capital gain in the future!"},{"title": "Cash flow","description": "The net amount of cash and cash equivalents being transferred in and out of a company. Cash received signifies inflows, and cash spent signifies outflows."},{"title": "Contrarian investing","description": "An investment style in which investors go against the herd. Contrarians typically invest in out of favour companies. Also see value investing."},{"title": "Convertible bond","description": "A bond, issued by a company, that may be converted into shares in that company for a pre-stated price."},{"title": "Compounding returns","description": "The rate of return, usually expressed as a percentage, that represents cumulative gains or losses on your original investment over a set period."},{"title": "Coupon","description": "The interest you receive from a government or corporate bond."},{"title": "CPI or Consumer Price Index","description": "An index that measures the overall change in consumer prices based on a representative basket of goods and services over time. It is the metric often used to measure inflation."},{"title": "Credit rating","description": "An assessment of the credit worthiness - or ability to pay interest on loans - of a borrower. Assessment is undertaken by a credit ratings agency such as Standard and Poor's, Fitch or Moody's."},{"title": "Cumulative return","description": "The aggregate performance of a fund or company. For example, company X had a cumulative return of 20% over the past three years."},{"title": "Cyclical","description": "This describes an industry or company that is sensitive to the business cycle. Revenues are generally higher during times of economic prosperity, but lower during times of contraction or recession."},{"title": "Derivatives","description": "A derivative is a contract between two or more parties, the value of which is determined by fluctuations in the underlying asset. The most common forms of derivatives are futures contracts and options."},{"title": "Diversification","description": "This is when you spread your investment over several different assets, sectors or geographies."},{"title": "Dividends","description": "Payments made by companies (or funds) when they share profits with their shareholders."},{"title": "Dividend Yield","description": "A ratio that shows how much a company pays out in dividends each year relative to its share price."},{"title": "Duration","description": "A term used when describing the average time to maturity of a bond measured in years. The longer the duration, the more sensitive the bond is to changes in interest rates."},{"title": "Engagement","description": "This is when fund managers or fund management firms have proactive, targeted dialogue with companies or other industry stakeholders in order to make known areas of concern with the aim of encouraging tangible, positive change."},{"title": "EPS or Earnings Per Share","description": "The profits of a company attributed to each share, calculated by dividing profits after tax by the number of shares. EPS serves as an indicator of a company's profitability."},{"title": "Equities","description": "Also known as shares or stocks. Companies around the world issue shares and investors can buy (and sell) those shares. You don't own part of the company, as such - you can't just walk in a take a desk or a computer - you own some of its equity and can vote on how the company is run."},{"title": "ESG or Environmental, Social and Governance","description": "These are the three key factors when measuring the sustainability and ethical impact of an investment in a business or company."},{"title": "ETF or Exchange-traded fund","description": "This is an investment vehicle, the units of which are traded on a stock exchange. An ETF can hold a range of assets such as stocks or bonds. Most ETFs track an index, such as the FTSE All share or the S&P 500, so they are typically passive investments."},{"title": "Free Cash Flow","description": "The cash generated by a company from its normal business operations after subtracting any money spent on capital expenditures."},{"title": "FTSE","description": "The Financial Times Stock Exchange - the FTSE Group is home to several market indexes. The most well-known is the FTSE 100, which refers to the UK's 100 largest listed companies by market capitalisation."},{"title": "GDP or Gross domestic product","description": "The total value of all things made, and all services provided in a country within a certain time frame, like a year. It's used to track the overall health of the economy."},{"title": "Gearing","description": "This refers to the ratio of a company's debt relative to its equity, expressed as a percentage. It shows the extent to which the company's operations are funded by lenders versus shareholders. When it is used in conjunction with an investment trust, it is referring to the amount of money the trust has borrowed to buy extra shares or assets."},{"title": "Greenwashing","description": "When companies say one thing and do another when it comes to their environmental promises - for example using misleading or exaggerated claims."},{"title": "Hedging","description": "This is when a manager tries to reduce risks to a fund from adverse movements in interest rates, markets, currencies or share prices. Similar to 'hedging your bets'."},{"title": "Index fund","description": "This is another name for a passive investment - instead of choosing which stocks or assets to invest in, the manager simply replicates an index like the FTSE 100 or the S&P 500."},{"title": "Investment fund","description": "A type of investment that pools the money of lots of different investors and provides a broader selection of opportunities at a more easily accessible price. There are different types of funds, for example open-ended, close-ended, exchange traded funds (ETFs) and hedge funds."},{"title": "IPO or Initial Public Offer","description": "When shares are offered to the public prior to being traded on a stock exchange for the first time."},{"title": "Junior Debt","description": "When bonds are issued they have a scale ranging from secured debt (loans secured against something) through to junior debt, which has a lower priority for repayment if something goes wrong. So, in the event of a bankruptcy, for example, junior debt can only be paid after the claims of secured creditors and senior debt obligations have been satisfied. Because it is riskier, junior debt often has a higher yield than senior debt. Another name for junior debt is subordinated debt."},{"title": "Junk Bond","description": "A junk bond is another name for a high yield bond. It’s a corporate bond that has a lower credit rating as compared to an investment-grade bond but it offers a higher interest rate."},{"title": "KPI","description": "A key performance indicator (KPI) is a value that measures to what extent an organisation is achieving its business objectives."},{"title": "Liquidity","description": "This refers to how easy it is to quickly buy or sell an asset at a price reflecting its current value. If an asset is illiquid, it is hard to do this."},{"title": "Market cap","description": "This is the size of a company. It's calculated by multiplying the number of shares available by their price on the stock market. For example, a company with a million shares priced at £10 each would have a market capitalisation - or market cap - of £10m. Companies are commonly grouped according to their market cap size: small cap, mid cap, large cap, and mega cap."},{"title": "NAV or Net Asset Value","description": "The total assets of a fund or company minus all liabilities and prior to charges. Net asset value per share is calculated by dividing this figure by the number of ordinary shares/units in issue."},{"title": "Net Zero","description": "Achieving a balance between emitting carbon and absorbing carbon from the atmosphere. This balance, or net zero, will be achieved when the amount of carbon added to the atmosphere is no more than the amount removed."},{"title": "OCF or Ongoing charges figure","description": "This is a fund's operational costs over the course of a year. The OCF includes the annual management charge and other costs such as registration, regulatory, audit and legal fees. Importantly, it does not include transaction costs or performance fees."},{"title": "Operating Margin","description": "Measures how much profit a company makes on a pound (or relevant currency) of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax."},{"title": "Operating Profit","description": "A company's gross income less operating expenses and other business-related expenses, such as wages, cost of goods sold (COGS) and depreciation."},{"title": "Overweight","description": "This refers to when the percentage of an individual stock, sector, or geography is higher in a fund than in its relevant benchmark. For example, a fund may have 20% in utilities companies, but the benchmark only has 4%."},{"title": "Passive management","description": "This replicates an index like the FTSE 100, and you invest in a company without consideration as to its future prospects. Passive funds are sometimes referred to as tracker funds."},{"title": "P/B or Price-to-Book Ratio","description": "Measures the market's valuation of a company relative to its book value. It is calculated by dividing the company's stock price per share by its book value per share."},{"title": "P/E or Price-to-Earnings Ratio","description": "This is another valuation measure, this time calculated by dividing the current share price by the last published earnings per share (net profit divided by the number of ordinary shares). The 'P/E ratio' gives investors a quick and easy way of seeing how a company is priced relative to its peers (with a higher P/E being more expensive), although it should not be relied upon by itself."},{"title": "PMI or Purchasing Managers' Index","description": "An index of the prevailing direction of economic trends in the manufacturing and service sectors. A PMI reading of less than 50 represents a contraction while a PMI above 50 indicates expansion."},{"title": "Portfolio","description": "This can refer to one of two things. It is either being used as another word for 'fund' or it is a way of describing the collection of assets in which you invest. So, if you invest in five funds, you have a 'portfolio' of five funds."},{"title": "Private equity","description": "Shares in companies that are not listed on a stock market."},{"title": "QE or Quantitative easing","description": "When a central bank increases the money supply to encourage lending and investing. It buys bonds to push up their prices and bring down long-term interest rates."},{"title": "Quantitative tightening","description": "This is the opposite of quantitative easing. A central bank will either sell bonds or let them mature, in effect removing money from the economy. This leads to higher interest rates."},{"title": "Quartile","description": "A fund's performance relative to its peers is often referred to in terms of quartiles. For example, a first quartile fund is one whose performance ranks it within the top 25% of all funds in that sector."},{"title": "Recession","description": "When the economy contracts for at least two consecutive quarters."},{"title": "REIT","description": "A real estate investment trust (REIT) is a listed company whose primary activity is property investment. REITs own many types of commercial real estate, for example, offices, warehouses, hotels, hospitals and shopping centres."},{"title": "Return","description": "Another word for the profit on an investment, or the performance of an investment."},{"title": "Risk","description": "In investment terms there are many types of risk and, just as in our everyday lives, risk is also very subjective. A risk to one person is not a risk to another. But for many investors, the biggest risk is that they could lose all their money."},{"title": "ROIC or Return on invested capital","description": "A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments."},{"title": "Spread","description": "A bond or yield spread refers to the difference in the yield on two different bonds or two different classes of bonds. This is usually the difference between a government bond and a corporate bond."},{"title": "Stock market index","description": "A stock market index is made up of a number of different companies. The FTSE 100, for example, is a list of the UK's largest 100 listed companies."},{"title": "Stock-picker","description": "Someone that selects specific companies in which to invest. Their task is to learn all about the businesses they're considering, analyse their finances and decide whether they are worth investing in."},{"title": "Top-down","description": "This is when a fund manager takes into account the wider economic and market picture before allocating money to individual stocks."},{"title": "Turnover","description": "A measure of trading activity within a fund, indicating how active a manager has been in buying and selling the assets held within the portfolio. Neither high nor low turnover is necessarily good or bad and the number will generally just reflect the individual manager's investment style. For example, 100% turnover indicates that on average each stock is held for one year."},{"title": "Underweight","description": "This term refers to when the weighting of either an individual company, industrial sector or country in a fund is lower than that of its relevant benchmark index."},{"title": "Value investing","description": "Focuses on buying stocks that have good prospects, but which are out of favour with other investors. Typically, the shares are cheaper than the company's intrinsic value."},{"title": "Volatility","description": "How fast, and by how much, the price of a security, sector or market changes over a period of time. A price that often moves significantly will be considered to have a high level of volatility."},{"title": "Wall Street","description": "Wall Street is the name of the street where you can find the New York Stock Exchange. It has become synonymous with the financial world and America’s financial centre."},{"title": "XD","description": "When a company pays a dividend to its shareholders, it typically sets a date by which you must own the stock in order to be eligible to receive the dividend. After this date, the stock begins trading ex-dividend (or XD), which means that anyone who buys the stock after that date is not entitled to receive the next dividend payment."},{"title": "Yield","description": "A calculation of how much income an investment has generated in the form of interest (from cash or bonds), dividends (from shares) or rent (from a property) in relation to the price paid. The calculation is shown as a percentage."},{"title": "Yield curve","description": "The yield curve is a graph which plots interest rates for bonds which have different contract and maturity dates. Typically, bonds which mature sooner will have lower yields because investors' money is tied up for a shorter amount of time. However, this is not always the case. When the yield curve is inverted - longer-dated bonds have lower interest rates than shorter-dated bonds - it is a signal of recession."},{"title": "Zombie","description": "A zombie company or investment product is one which is able to continue operating but will not expand. Essentially, a zombie company is a company that is barely surviving. An example of a Zombie investment product is the Child Trust Fund. It continues to be in place for existing investors but cannot take on new members (it has been replaced by the Junior ISA)."},{"title": "Zero-coupon bond","description": "The main difference between a zero-coupon bond and a traditional bond, is that it does not make any periodic interest payments. Instead, the investment return is based entirely on the difference between the purchase price (which is usually significantly discounted) and the face value of the bond at maturity."}]
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