Investments jargon buster

Wondering what stocks and shares are? Don’t know your bonds from your gilts? Don’t let terminology put you off investing.

When you start thinking about investing in the stock market, the acronyms and jargon can be hard to understand.

But don’t let terminology put you off. Check out the MoneyHub jargon-free guide, and you’ll soon see that investing is not as difficult as it seems.

Let’s start with the investment basics

• Investing
  Investing is when you put your money into something to make more money. You can invest in anything that might increase in value, such as shares, property, gold, oil or even coffee.
• Capital
  This is the money you’re investing.
• Assets
  Assets are the type of things your money buys when you invest. They can be all sorts of things like shares, bonds, gilts, commodities, property and cash. They can come from anywhere in the world.
• Bonds
  A bond is an IOU issued by companies and governments to raise money.
  When you buy a bond, you’re lending money to the issuer. You’ll earn interest on your investment over a set period. You should receive the face value when the bond reaches maturity (when the set time period ends).
  Typically, the value of bonds doesn’t go up and down as much as when your money’s invested in shares – so they’re often seen as more stable investments.
• Gilts
  Gilts are a type of government bond (called gilts in British English), but instead of lending money to a company, you lend it to the national government. As governments usually cannot go bankrupt, this makes them one of the least risky types of investments.
  They’re called gilts because the paper certificates originally had a gilded edge, so they were known as gilt-edged securities. True story.
• Shares
  A share buys you a tiny bit of a company. Owning just one share makes you a shareholder. The term ‘stock’ now means much the same as a share. But it’s a more general term to describe ownership of shares in multiple businesses.
  To buy and sell shares, you ‘visit’ the stock market to buy and sell shares with other investors. You’re most likely to have heard of the Nasdaq Baltic Stock Exchange. But, stock exchanges exist in many countries worldwide, like the NY Stock Exchange and the London Stock Exchange.
• Dividends
  When you own shares in a company, you’re entitled to a share in the profits they pay out. It’s at the company’s discretion if any profits are paid out – but many companies are proud of making regular payments to shareholders in the form of dividends, these type of shares are called dividend stocks. Dividends can be taken out as income or reinvested to buy more shares.
• Volatility
  This is the value an investment goes up and down relative to other assets.
  Typically, things like shares have more significant ups and downs (higher volatility) and are more likely to result in more considerable losses or gains in value.
  Bonds and especially gilts have fewer ups and downs (lower volatility) and are more likely to result in more minor losses or gains in value.
• Diversification
  This is one way of reducing the impact of value fluctuations. It’s all about spreading your money around different investments (like shares, bonds and property) to reduce risk. It means not putting all your eggs in one basket.
  Having a diverse portfolio means your money isn’t tied to the success or failure of one type of investment or market.

Understanding Investments: What is Investing?

Investing is the act of putting your money into something with the hope of making more money. It’s like planting and waiting for a seed to grow into a tree. The idea is to allocate your resources, typically money, into assets that have the potential to increase in value or generate income over time. This can help you achieve long-term financial goals, such as saving for retirement, buying a house, or making a big purchase.

There are various forms of investments you can consider:

• Stocks: When you buy stocks, you own a piece of a company. Stocks offer the potential for long-term growth as the company grows.
• Bonds: Bonds are like loans you give to companies or governments. In return, you get regular interest payments and the promise to return your money after a set period.
• Property: Investing in property, like rental properties or real estate investment trusts (REITs), can provide rental income and potential appreciation in property value.
• Mutual Funds: These are collections of stocks, bonds, or other securities managed by professionals. They offer diversification and professional management.
• Exchange-Traded Funds (ETFs): Similar to mutual funds, ETFs are collections of securities that trade on an exchange like stocks, offering flexibility and diversification.

By understanding these different forms of investments, you can make informed decisions that align with your financial goals.

What are investment funds?

• Fund
  This is where a large amount of money is pooled and used to invest in shares, bonds, and property. You might also see these as ‘investment funds’ or ‘mutual funds’.
  Because a fund invests in so many different things, the risk each investor takes is reduced. This is also known as ‘diversification’ – see above.
  Another great benefit of investing in a fund is that all the investors share the costs, so each investor’s fees could be lower than if they had invested alone.
• Fund of funds
  This refers to funds where the money is invested in many other funds. This approach is another way to broaden the range of assets invested in to reduce risk.
• Multi-asset funds
  Now that you know a bit about assets and funds, the name is a giveaway. These funds are invested in various assets, such as equities, cash, and bonds.
  This spreads the risk between several markets, giving investors greater diversity than a fund investing in a single type of asset.
• Tracker fund
  This is a fund that aims to track a particular stock market index (in other words, match its performance). Different tracker funds work in various ways – but they tend to replicate the performance of every share or bond in a particular index (like the FTSE 100). A tracker fund is a passively managed fund.
• Passively managed funds
  These are funds where the individual investments (like company shares) follow a particular market (eg FTSE 100), rather than being hand-picked by a professional fund manager.
  The returns are closely aligned with the index or market being tracked – without the potential for higher (or lower) returns. These funds usually cost less than an actively managed fund.
• Actively managed funds
  These are funds where the individual investments (like company shares) are hand-picked by a professional fund manager.
  They usually cost more than a passively managed fund but have the potential for higher returns. Of course, they can also underperform if the wrong shares are chosen.
• Income funds
  The objective of these funds is to pay out any income received from the assets held. They are usually listed as ‘Inc’ after the fund name.
• Accumulation funds
  The objective of these funds is to grow your investment. Any income received from the assets held is reinvested back into the fund, where it accumulates (or builds up).nThey are usually listed as ‘Acc’ after the fund name.
• Fund manager
  You guessed it. This person or people run an investment fund and set its investment strategy. They also arrange for assets held in the fund to be traded to keep investments aligned with the fund’s strategy.

Fees and charges

• Ongoing charges figure
  The ongoing charges figure is designed to help you compare how much you’ll pay for one fund versus another. It covers all the costs and overheads of running the fund, including the ‘annual management charge’ and additional expenses detailed below.
• Annual management charge
  The cost of managing investments is called the annual management charge (AMC), a percentage of the money you’ve invested collected by the fund manager. It’s often shortened to AMC and usually makes up most of the ongoing charges figure.
• Additional Expenses
  This is part of the ongoing charges figure. It covers any additional expenses incurred by the fund manager that aren’t covered by the annual management charge.
• Platform fee
  In the investment world, a ‘platform’ is an online service that lets you buy, sell and manage your investments – Lightyear, LHV, Wise, Estateguru and Funderbeam are investment platforms.
  Most platforms charge a fee to provide the service. Depending on the provider, you might see this called a service fee, administration fee or account fee (we call it an ‘account charge’).
• Initial and withdrawal fees/charges
  If you invest in a fund, the fund manager may charge you entry and exit fees and other charges.
• Performance fees
  In some funds, performance fees may be charged in addition to the annual management charge. The amount you pay will be based on the fund’s performance compared to a benchmark set by the fund manager.
• Dilution levy
  If an individual investor buys or sells many units, this could impact the fund’s value. To protect the remaining investors from the costs incurred, the investor may be charged a ‘dilution levy’.

Investment Risks and Returns

Investing always comes with some level of risk. The value of your investment can go up and down, and there’s a chance you might not get back the full amount you invested. However, investments also offer potential returns, which can help your money grow over time.

Understanding the relationship between risk and return is crucial. Generally, higher-risk investments offer higher potential returns, while lower-risk investments are more stable but offer lower returns. For example, stocks can provide significant growth but come with higher volatility. Bonds, on the other hand, are more stable but usually offer lower returns.

By balancing risk and return, you can create an investment strategy that suits your financial goals and risk tolerance.

Investment Risk

Risk management is a vital part of investing. It involves identifying, assessing, and mitigating potential risks to minimise losses. Here are some strategies to help you manage risk:

• Diversification: Spread your investments across different asset classes, such as stocks, bonds, and real estate, to reduce exposure to any particular market or sector.
• Asset Allocation: Divide your portfolio into asset classes to balance risk and potential returns. For example, allocate a portion of your portfolio to stocks for growth and another portion to bonds for stability.
• Regular Portfolio Rebalancing: Review and adjust your portfolio to align with your investment goals and risk tolerance. This might involve selling some investments and buying others to maintain your desired asset allocation.

By implementing these strategies, you can manage risk and increase the likelihood of achieving your investment goals.

Investment Essentials

To be a successful investor, it’s essential to understand some key concepts:

• Compound Interest: This is the process of earning interest on both the principal amount and any accrued interest over time. It’s like a snowball effect, where your money grows faster as it earns interest on interest.
• Dollar-cost averaging involves investing a fixed amount of money regularly, regardless of the market’s performance. It helps reduce the impact of market volatility and can lead to more consistent investment growth over time. In the Eurozone, this is called Euro-cost averaging.
• Tax Efficiency: Considering the tax implications of your investments can help you minimise tax liabilities and maximise after-tax returns. This might involve choosing tax-advantaged accounts or assets that generate lower taxable income.

Let us know if we missed any terms!