The world of investments is a complex one, something often made more confusing by the jargon-filled language the financial industry uses. There is good news though, as the meaning behind these confusing terms is often much easier to understand than you might think.
If you’re struggling with the explanations provided with your investments, read on as we demystify 10 commonly used financial terms from the world of investing.
1. Collective investments
This allows you to pool your money with other investors so that you can buy more shares or units and access a wider range of funds. They are usually overseen by an investment manager who tracks the investment’s performance and looks for opportunities to enhance it.
Examples of a collective investment, which are also known as collective investment trusts, include an:
- Investment Trust
- Unit Trust
- Open-Ended Investment Companies.
2. Investment Trust
In the UK, this is a type of fund that’s structured like a company and listed on the London Stock Exchange. These are ‘closed ended’ funds, which we will look in more detail next.
3. Closed-ended investment fund
An investment fund that issues a fixed number of shares. As a result, its value increases or decreases depending on demand for the shares that it holds, not the performance of the underlying investments.
This means the fund’s value can be at a premium (which is above the net asset value of the fund), or at a discount (below it).
4. Open-Ended Investment Company
Often referred to as an OEIC, this is an investment fund that’s also structured like a company. They are ‘open-ended’, which means they’re not limited in the amount of shares they can hold, so can fluctuate in size.
The price you pay to invest in the fund is determined by the value of the assets being held within it.
5. Bond
With a bond you’re effectively lending money to a company or government. In return you receive interest payments twice a year that are known as ‘Coupons’, and then at the end of the agreed period you should receive your initial investment back.
As bonds are an investment, you should always remember that they carry risk. This means, for example, that you won’t get your investment back if the company goes bankrupt.
Bonds issued by the UK government are called Gilts.
6. Dividends
This is the name given to the payout given to shareholders when a company makes a profit. Dividends can provide you with an income, or they can be reinvested to boost the value of your investment, which in turn, helps to boost its long-term growth potential.
7. Passive funds
An investment that aims to trace the performance of a specific index, such as the FTSE 100. Also known as an ‘index tracker’ or ‘tracker funds’, this type of investment aims to duplicate (rather than beat) an index’s performance.
8. Managed funds
Also known as ‘actively’ managed funds, these are investments that are overseen by a fund manager. The manager carries out constant research and analysis to assess its performance, and then buys and sells shares, bonds as well as other investments in a bid to generate superior returns.
9. Liquidity
This refers to how easily (and quickly) an investment can be turned back into cash. Different types of investments are more liquid than others. For example, selling shares in an investment fund is usually quicker and easier than selling commercial property.
10. Yield
Your investment’s ‘yield’ measures its return over a set period of time. To calculate it, you typically take the income you receive and turn it into a percentage of the price you paid for the investment, or its current price.
Get in touch
At AFH, we understand the importance of using clear, understandable language when talking about investments. Our success has been built on ensuring that we explain investments in a way that educates and informs our clients in a jargon-free way, so that they’re equipped to make better decisions.
If you have investments but are confused about the terminology being used in any literature you receive, please give us a call. We can be contacted on 0333 010 0008, or feel free to speak to one of our advisers, we’d be happy to help.
Thursday 29 August 2024