Investment


Frequently used terms

 

Accelerator
An ‘accelerator’ is a ‘cohort programme’ offered by corporations, universities and ultra-high- net-worth individuals to a number of people who may have a ‘promising’ idea. The programme offers a predetermined package of support, eg: finance, resources and mentoring, for a fixed period of time to ‘accelerate’ development of the ideas and sort the ‘grain from the chaff’.

Actively managed investment fund
An investment fund managed on a day-to-day basis by a dedicated fund manager. The fund manager constantly monitors and analyses the fund’s performance and, using their knowledge and expertise, sell and buy shares as they deem beneficial. Theoretically, actively-managed funds should perform well and aim to deliver a return above a benchmark fund – they need to as a fund manager is an expensive asset to finance.

AIM(-listed)
‘AIM’ is an acronym for the ‘Alternative Investment Market’, a sub-market of the London Stock Exchange that allows small, growing companies to raise capital through stock market investment. Launched in 1995, it now lists over 3,600 companies and is one of the principal sources of investment opportunity for venture capital trusts.

Alternative(s)
An asset class containing a number of ‘alternative’ assets including ‘commodities’ which was the original title for the class. An alternative is a homogenous / standard product that can be traded in bulk; the class includes contemporary items such as foreign currencies, digital bandwidth, asset leasing and social and renewable-energy infrastructure projects.

Angel investor
High-net-worth individuals who invest their own funds, usually in an ‘early stage’ opportunity, to help get the new venture off the ground. Angel groups pool their members’ funds which can increase the investment offered and / or spread the risk across several members. ‘Angels’ often withdraw after this initial phase, selling their stake to another investor who may have a broader, more preferential offer, eg: a corporation that wants to bring the idea to market for their own benefit.

Asset
Something that can either be bought or sold as an investment opportunity. Assets are classified as being ‘real’, if they have physical form, such as property and alternatives / commodities, whereas cash, bonds and equities are termed ‘financial’. Assets with similar characteristics are grouped together into ‘asset classes’.

Asset class
Groups of assets with similar financial characteristics. There are five generally accepted classes: cash and money; fixed-income securities, property, equities and alternatives. In addition, there’s a variety of unique, standalone assets such as art, antiques, collectibles and cars, high-value items which don’t fit into one of the five primary classes.

(Attitude to) risk
‘Risk’ is at the heart of every investment strategy as, potentially, the greater the risk you are prepared to take, the greater the potential return you may receive. But how much risk are you really prepared to take? This is usually assessed by a simple, yet revealing, psychometric test that determines your ‘attitude to risk’ – the result having a direct bearing on which investment funds are recommended to you by your investment adviser.

Bond (corporate or government)
Sometimes called a fixed-income security, a bond is an IOU issued by an organisation when it receives money from an investor. If the organisation is a company, it’s called a ‘corporate bond’; if it’s the UK government, it’s called a ‘government bond’ or ‘gilt’. Bonds are rated by credit agencies, eg: Standard & Poor’s, making investors aware of the level of risk they face.

Capacity for loss
Could you afford to lose your entire investment portfolio? Your financial health may remain unaffected – alternatively, losing everything could be a financial catastrophe. Knowing your ‘capacity for loss’ is as important as knowing your ‘attitude to risk’ and will directly affect how much capital you should place under investment.

Cash ISAs
A cash saving scheme which, in its basic form, could be considered as a step up from a bank savings account. Although interest rates and terms are similar, any interest earned is tax free. As with savings accounts, providers usually offer a range of cash ISAs that have a variety of features such as fixed or variable interest rates, instant or flexible access and minimum account balances.

Child Trust Fund
A relatively short-lived, tax-free saving scheme sponsored by the government in an effort to incentivise parents to save for their children’s future. Launched in 2005, HMRC sent parents a monetary voucher for each child born between 1 September 2002 and 1 January 2011; the intention being that parents would use the voucher to open a Child Trust Fund account. The scheme closed on 1 January 2011 being replaced by Junior ISAs on 1 November 2011.

Commodity
Once an asset class in its own right, the term ‘commodities’ is now used for a subclass of the ‘alternatives’ asset class. Commodities are a group of around 50 raw materials or primary agricultural products: ‘hard commodities’ are something that is mined, eg: gold, oil and natural gas, whereas ‘soft commodities’ are agricultural products, such as coffee, sugar and wheat.

Correlation
The comparative way that assets react to changes in the financial markets. Some assets follow the market (‘positive correlation’), whereas others move in the opposite direction (‘negative correlation’). Typically, property and alternatives show negative correlation to bonds and equities.

Crowdfunding
A relatively new phenomenon, crowdfunding uses the internet to help entrepreneurs raise money themselves; aggregating a small investment from many individual investors can result in a considerable amount of capital. Doing so means the entrepreneur can control how much equity is exchanged. In addition, having ‘many investors’ demonstrates wide support for the idea and provides a wide and varied network of potential mentors.

Distribution
See Dividend.

Diversify
The best of way of mitigating investment risk is to invest in more than one asset and in more than one asset class. ‘Not putting all your eggs in one basket’, no matter how tempting, spreads an investor’s capital and reduces the level of risk they may be exposed to. Creating a ‘diverse portfolio’ [of investments] is possibly the most important investment rule to follow.

Dividend
A payment made by a company to its shareholders; it’s a ‘distribution’ of the company’s profits. Dividends are paid periodically, usually quarterly, half-yearly or annually.

Exchange traded fund (ETF)
An investment fund traded on a stock exchange in the same way as a share is traded. Most ETFs ‘track’ a stock exchange ‘index’ and are sometimes known as ‘tracker’ or ‘index’ funds. Most are passively managed which results in low transaction and management costs; they are usually very tax efficient and are becoming the most popular type of exchange traded product.

Equity
In accounting terms, equity is the value of a company’s assets less its liabilities. In very simple investment terms, a company can offer part, or all, of its equity for sale – when it does so, the equity available is referred to as ‘stock’ which is then purchased in the form of shares. See Stocks and shares.

Enterprise Investment Scheme (EIS)
A UK-government venture capital scheme designed to help SMEs raise financial backing by offering investors tax relief as a reward. There are, in fact, two schemes: the ‘principal’ scheme, the EIS, is designed to help new companies grow, whereas the Seed Enterprise Investment Scheme (SEIS) is designed to precede the EIS by specifically helping to get new, start-up companies ‘off the ground and ‘up and running.’

Gilt
A government bond (see Bonds).

Help to Buy ISA
A variation of the basic cash ISA. The Help to Buy ISA (‘HTB ISA’) is specifically designed to help first-time home buyers and is available only to those who are not already homeowners. The incentive to open a HTB ISA is a 25% government-funded bonus if the ISA is used to pay the deposit on a first home purchase. HTB ISAs have been superseded by Lifetime ISAs and will not be available after 1 December 2019.

Index fund
See Exchange traded funds.

Index (stock market)
A stock market index is a way of measuring the value and performance of the stock market by dividing the companies listed into groups to make analysis possible. A typical stock market index is the Financial Time Stock Exchange 100 – the ‘FTSE 100’ – which lists the 100 largest companies listed on the London Stock Exchange. Stock market indices are often used as ‘benchmark indices’ for actively managed investment funds.

Individual Savings Account (ISA)
Almost always referred to by its acronym, an ISA is a retail saving or investment scheme that allows UK residents to save or invest money without incurring a tax liability. There are five types of ISA: cash ISAs, Help to Buy ISAs, stocks and shares ISAs, Innovative Finance ISAs and Lifetime ISAs. There is also a junior version of the cash and stocks and shares ISAs.

Innovative Finance ISAs
Sometimes known as ‘peer-to-peer lending investments’, Innovative Finance ISAs (IFISAs) are used to lend money through the growing ‘Peer-to-Peer’ (P2P) lending market accessible via FCA-regulated websites known as ‘peer-to-peer lending platforms’. IFISAs generally have higher rates of return than cash and S&S ISAs, something that highlights the fact that the loans have higher risk profiles.

Investment bond
An investment bond is a ‘single-premium’ life insurance policy and is used for investment purposes rather than for life insurance. Investors pay a lump sum which is then invested in a range funds; any profit either being paid on a periodic basis or reinvested in the fund. Traditionally, investment bonds were invested into ‘with-profits’ funds but, since the 1970s, insurance companies have been offering ‘unit-linked’ funds as an alternative.

Investment trust
Unlike an investment fund, an investment trust is formed and listed as a company meaning that investors buy shares in the company rather than investing in a fund. The number of shares available is limited so investment trusts are referred to as being ‘closed-ended’ whereas investment funds, with no limit to the number of units they can issue, are termed ‘open-ended’ funds.

Junior ISA
A tax-free saving scheme introduced in November 2011 as a successor to the Child Trust Fund scheme. Junior ISAs work in the same way as ‘adult’ ISAs although there are some significant differences: they have to be opened and then managed by a parent/guardian until the child reaches 16; children are limited to a single cash and single S&S ISA; the annual allowance in tax year 2018-2019 is £4,260 (rising to £4,368 in tax year 2019-2020). The contents of the ISA are ‘locked in’ until the child reaches age 18.

Lifetime ISAs
The Lifetime ISA was introduced as a more flexible way to save for both home purchase and retirement and will, consequently, supersede the Help to Buy ISA from 1 December 2019. As with the HTB ISA, the government pays a 25% tax-free bonus into the account but, with the scheme now re-designed to also cover retirement, the bonus is paid on a monthly basis. The scheme is only available to those aged 18 to 39.

Multi-asset investment funds
Although investing in a fund helps to create a diverse portfolio, funds can be quite focused, often concentrating on a specific stock market, asset class or market sector. Multi-asset investment funds address this by, as their name suggests, spreading their investment across a range of asset classes.

Multi-manager funds
The success of any actively managed fund is determined by the knowledge and expertise of the fund’s manager. However, fund managers cannot be experts across all asset classes and have a tendency to specialise in what they know best which inevitably affects the fund’s diversity and balance. Multi-manager investment funds mitigate this by using a team of specialist fund managers either directly (‘manager of manager’) or indirectly (‘fund of funds’).

Net asset value (NAV)
The value of an entity’s assets less the value of its liabilities. In terms of a fund it’s the total market value of all the shares held by the fund, including cash, less any liabilities, divided by the number of units – so it’s the fund’s market value per share. It’s the price that investors buy (the ‘bid price’) and sell (the ‘redemption price’) shares in the fund.

Open-ended investment company (OEIC)
A collective, open-ended investment fund formed as a company, rather than a trust (as is the case with a unit trust). The fund represents a unique collection of ‘underlying assets’ – what the fund’s money is invested in – and is managed by a fund manager. As an investor you buy ‘shares’ in the fund, each share being based on the fund’s net asset value. (See also Unit trusts.)

Passively managed (investment fund)
An investment fund which is not managed by a dedicated fund manager; typically, ETF / tracker funds are passively managed. Not having a fund manager reduces investment costs but brings potentially serious weaknesses as, without a fund manager, passively managed funds can be vulnerable to sudden changes in the market.

Personal Equity Plans (PEPs)
A tax-privileged investment account introduced in 1985 to encourage equity ownership, PEPs were superseded by ISAs when they were introduced in 1999. In 2008, PEP accounts were automatically converted to stocks and shares ISAs.

Platform
An interactive online service that consolidates an individual’s investment portfolio. Platforms are offered by financial services providers and allow the client, or their financial adviser, to see and manage their portfolio. Platforms vary in sophistication, ranging from a basic information consolidation tool to one that allows buying, selling, profiling and planning.

Portfolio drift
Differences in asset performance can affect the balance between a portfolio’s asset classes, potentially resulting in a change to the portfolio’s overall risk profile – for example: the success of one asset class may shift the portfolio’s risk profile from, say, medium to high risk. It’s important to monitor a portfolio’s asset class balance to ensure that portfolio drift is neither detrimentally influencing the favoured level of risk or compromising the portfolio’s overall success.

Private equity
When a company offers shares in its stock (equity) via a stock exchange, it is said to be publicly listed. Private equity is not publicly traded; private equity investment is generally made by a private equity firm, venture capital firm or angel investor. See also Stocks and shares.

Private equity
When a company offers shares in its stock (equity) via a stock exchange, it is said to be publicly listed. Private equity is not publicly traded; private equity investment is generally made by a private equity firm, venture capital firm or angel investor. See also Stocks and shares.

Return (on investment)
A very simple method of measuring the gain or loss made by an investment in relation to how much was invested. ‘Return on investment’ (ROI) is usually expressed as a percentage and is calculated by dividing net profit by the cost of investment, eg: if you receive £97.50 net profit on an investment of £1,250.00, the ROI is 7.8%. Although simple, it provides a quick method of evaluating and comparing investment efficiency.

Securities
A security is a ‘tradeable financial asset’. What constitutes a security varies from country to country but, in the UK, the FCA has a very specific definition which is available at www.handbook.fca.org.uk/handbook/glossary/G1061.

Seed capital
The term used to describe the type of investment often needed by a potential ‘early-stage’ start-up company; it’s the initial finance used to get things up and running – to help it ‘grow from an acorn (seed) into an oak tree’. It can be a very high-risk situation, the investment usually coming from an ‘angel investor’ with some knowledge of both the person and an insight into the idea they want to develop.

Social Investment Tax Relief (SITR)
The not-for-profit sector’s equivalent of the Enterprise Investment Scheme, SITR helps provide the sector with a mechanism with which it can raise investment income. Although it shares the same concept as the EIS, ie: offering tax relief to investors, it isn’t so generous: new companies can use the EIS to raise £5 million per year / £12 million in their lifetime, whereas organisations using SITR are limited to just £1.5 million in their lifetime.

Stocks and shares
When a company offers part, or all, of its equity for sale, the equity made available is referred to as ‘stock’, and this is divided into a finite number of ‘shares’ which can then be purchased through a stock market (or exchange). Buying shares in the company gives the buyer, who becomes a shareholder, partial ownership of the company and entitles them to receive ‘dividends’, which is a portion of the company’s profits. The shareholder can trade the shares they hold: if the company is doing well, demand for its shares may raise their value so the shareholder may sell them for more than the price they originally paid and make a profit. Alternatively, the value of the shares may fall, meaning the shareholder will make a loss if they decide to sell them.

Stocks and Shares ISAs
Stocks and shares ISAs are very different to cash ISAs – it’s not saving money, it’s investing it. The money you put into your S&S ISA is invested in ‘qualifying investments’ such as corporate and government bonds, stocks and shares and unit trust and investment funds. As with cash ISAs, there’s no tax liability – you don’t pay capital gains tax, you don’t pay interest earned on bonds and there’s no tax on any dividends you may receive.

Tax-advantaged venture capital schemes
Recognising the importance of venture capital investment to the economy, these are a clutch of four government-created schemes designed to help new SMEs start up or grow by using tax relief as an incentive for investors. The schemes are: the Seed Enterprise Investment Scheme (SEIS); the Enterprise Investment Scheme (EIS); Social Investment Tax Relief (SITR) and venture capital trusts (VCT).

Tax-Exempt Special Savings Accounts (‘TESSAs’)
A TESSA was one of several tax-free savings accounts. Introduced in 1990, it was intended to complement personal equity plans (PEPs) but was phased out after the introduction of ISAs in 1999. The original capital could be transferred into a special, TESSA-only ISA (‘TOISA’).

Tracker fund
See Exchange traded funds / ETFs.

Unit trust
A collective, open-ended investment fund formed as a trust, rather than a company (as is the case with an OEIC). The fund represents a unique collection of ‘underlying assets’ – what the fund’s money is invested in – the fund being managed by a fund manager. As an investor in the fund you buy ‘units’, each unit being based on the fund’s net asset value. (See also Open-ended investment companies / OEICs.)

Venture capital
Often referred to as ‘VC’, venture capital is an investment made to provide financial backing to a ‘start-up’ company that is thought to offer high growth potential but is both too small and too risky to be able to raise the finance it needs from the commercial capital market, eg: banks. Despite the risks, venture capital is one of the most important sources of investment finance and an essential component of a healthy economy.

Venture capital trusts (VCTs)
These are closed-ended, collective investment schemes (funds) that are listed on the London Stock Exchange specifically to invest in small, UK-based SMEs. VCT fund managers are limited to companies that are either unlisted on the London Stock Exchange or listed on its sub-market, the Alternative Investment Market (AIM). As with other tax-advantaged schemes, investors are eligible for both income and capital gains tax relief.

Wrap (account)
Not to be confused with ‘wrappers’ (see below), a wrap is a type of platform. Wraps come in a variety of guises including ‘virtual‘, or ‘shallow’, wraps that consolidate data and provide a single valuation of an individual client’s assets, through to more sophisticated platforms that offer access to a wide range of investments and can receive income and pay fees. A ‘corporate wrap’ is used by employers to provide HR benefits to its employees.

Wrapper
As the name suggests, a wrapper is a financial product that holds cash and investments – S&S ISAs and pensions (especially SIPPs) are typical wrappers. The wrapper holds the various investments together, allowing them to be managed in a tax-efficient manner. They may also be used to buy shares in investment companies, particularly on behalf of children, when they may be known as a ‘share plan’, ‘investment scheme’ or ‘saving scheme’.

 

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