The A To Z of Investments
Following on from our popular A to Z series, which has so far featured the ‘A to Z of Mortgages’ and the ‘A to Z of Pensions’, we decided it was about time to give you a clear insight into the world of investments.
A
Active Management
This is one of two strategies when it comes to investment management, the other being passive management. Active management refers to investment funds that are run and managed by either a professional fund manager or investment research team. They will be responsible for, on your behalf, making all the investment decisions; such as when to buy and sell assets and which companies to invest in.
The benefit of active management is that the fund manager or investment team will have extensive knowledge of the whole of the investment market and will be able to make tactical decisions, with the aim of delivering a return on your investment. They will be able to move your investments to expose or shield you to changes in the market. This strategy can also be known as Active Investing.
Annuity
An annuity may be purchased with a lump sum from pension funds at retirement. Traditionally annuities have had the attraction of providing a fixed income in retirement that cannot vary. Recently annuities have become less popular due to low interest rates.
Asset
When investing you will often hear advisers and accountants refer to ‘assets’; this is simply a resource that is owned or controlled by an individual, corporation or company that have a financial value, for example cash, land or a trademark.
The three most common asset classes - a current asset, a fixed asset or an intangible asset.
Asset Class Categories
A wide-ranging group of securities or investments which have similar financial characteristics are described as an Asset Class. The four main asset classes are cash, shares, property and fixed-interest securities.
Assets Under Management (AUM)
Often abbreviated to AUM, assets under management is the term used to describe how much of a monetary investment an investment company looks after/is managing.
B
Bear Market
You may have heard the term ‘Bear Market’ in the news rather frequently in the early part of last year; it refers to a period where the price of equities consistently fall and in the background, there is an underlying pessimistic attitude.
As a result, investors are more inclined to begin selling shares rather than buying, in anticipation of further losses, causing the market to fall further.
Blue Chip
Blue chip describes shares in a high-quality company, the term originates from the game of poker where the blue chip has the highest value.
Bull Market
A Bull Market is the opposite of a Bear Market, as they take an optimistic view of the market, or as some call it ‘bullish’. Traditionally a Bull Market will follow a period of pessimism and turn the market on its head.
C
Capital Gains
This is the profit made when you sell an asset that has increased in value since you initially bought it. The amount that the asset has gained is subject to capital gains tax, find out more about how capital gains tax works please check the Governments guide to Capital Gains Tax.
Corporate or Government Bonds
A bond is a type of investment, where money is loaned by an investor to a company or government. The funds are borrowed for a set period of time; variable or fixed rate interest will be applied. Government bonds are also known as GILTS.
Current Asset
A current asset is an asset which generally has a short life span so it can be easily converted into cash such as stock, fixed deposits or inventory.
D
Dividends
A dividend is a percentage of a company’s earnings that are paid to its shareholders, these are most commonly paid in cash however companies can sometimes pay in stocks.
E
Ethical Investing
When an individual chooses to invest their capital within a company that is in line with their own personal views, from their religious to environmental beliefs. For example, a person who feels strongly about animal rights would chose not to invest in a cosmetics company that tests products on animals.
F
Fixed Asset
As the name suggests, fixed assets are purchased for the long term and cannot be converted to cash quickly. Some examples of fixed assets are land, building or machinery.
FTSE
FTSE, which is pronounced as ‘Footsie’, stands for Financial Times Stock Exchange and refers to the British stock markets indices which reports on how companies listed on the London Stock Exchange are performing.
Fund Manager
A fund manager’s duties will involve researching and implementing investment strategies and managing investment portfolios on behalf of a financial institution.
G
Gilts
Issued by the HM Treasury, a Gilt is a bond which is traditionally considered to be low risk. The United Kingdom Debt Management Office has provided a guide to Gilts and the different types of Gilts which you can read here.
H
Hedge Fund
A hedge fund uses monies that come from many individual investors and are pooled together, usually as private investment limited partnership. This pooled money within a hedge fund will then use a wide range of strategies to earn a return for their investors. Hedge funds are not subject to the same regulation as mutual funds and other investment vehicles.
Hedging
This is a type of risk management strategy, it is used to limit or offset the probability of a loss which may occur from market fluctuations.
I
Illustration
A fund manager or financial adviser will be able to provide you with an estimation of the returns you may get from an investment. This will be based upon projected growth rates. These will be reflective of the affect or impact of charges.
Independent Financial Adviser
A person who has undertaken professional exams in financial services so that they can offer individuals advice on their financial decisions. An independent financial adviser will not be tied to any one financial product or lender, rather they will have access to the whole of market so that they can advise the most appropriate for the client’s circumstances.
Intangible Asset
Assets classed as intangible are not physical objects, they are things such as trademarks, patents or copyrights.
Investment Bond
This is a type of investment issued by an insurance company which enables an individual to invest a lump sum, typically the minimum sum required is £5,000. The money is invested into a variety of available funds and the term of the investment. The return on an investment bond will depend on the performance of the investment funds.
ISAs
One of the more commonly known ways to save money, the Individual Savings Account (ISA). This allows an individual to save a set amount of money free from tax (the amount will be dependent on the tax year). The ISA limit for a cash ISA in the 2017/2018 tax year is £20,000.
J
Junior ISA
The junior ISA is a type of ISA which has been set up to offer a way to save for your child’s future – tax free. Money saved from an ISA cannot be taken out until the child reaches the age of 18. A junior ISA has traditionally always had a lower limit than a cash ISA, for the 2017/2018 tax year the limit will be £4,128.
K
KDW
We are a firm of independent financial planners, based in St Albans, who have been providing bespoke financial advice to our clients since 1978. We are ‘whole of market’ and help our clients to choose an investment strategy that reflects their current situation, ambitions and attitude to risk.
L
Lifetime ISA (LISA)
Scheduled to launch on 6th April 2017, the LISA has been designed to help people save towards either retirement or a deposit for their first property. To open a LISA, you will need to between the ages of 18 and 40. At the end of each year a 25% bonus will be payable on the amount saved, with the limit being £4,000 per annum. At the time of writing very few providers are offering the LISA.
London Stock Exchange (LSE)
The London Stock Exchange is the largest in Europe and the main stock exchange in the UK, located in the City of London. The movements of the London Stock Exchange reflect the performance of the market.
M
Market Capitalisation
This refers to the total market value of outstanding shares. To work out market capitalisation you would need to multiply the outstanding shares by the current market price of a single share.
Maturity Date
Your maturity date will be the end date of your chosen investment, on the maturity date the final interest due will be paid.
Maturity Value
This is the amount which is payable on the maturity date.
Multi- Asset Fund
A combination of investments which diversifies a portfolio by selecting assets from different classes, to reduces the risk and protect the potential return.
O
Offshore Funds
A fund that is established outside of the UK and is regulated by another country’s authorities. As the investments are not regulated by the UK government, there may not be as much in the way of legal protection in place than if the investment was made in a UK fund. Offshore funds can have tax advantages.
Option
In investment terms, an option is the contract which gives the buyer the right to buy or sell a set number of shares for a specified price within a certain time period.
P
Passive Management
As previously mentioned there are two main approaches to investment strategy, Active and Passive. Funds that are passively managed are run by a computer and simply track a particular market, buying all or the majority of assets in that market which will give you a return that reflects the performance of that market.
Personal Equity Plan (PEP)
Prior to the introduction of ISAs in 1999, a PEP allowed personal investors to invest a limited sum without liability or tax. However, these are no longer available as ISAs have replaced them.
Portfolio
An investor with a collection of investments would refer to them collectively as their portfolio.
Q
Quarterly Earnings Report
Every 3 months’ public companies will file a report to show their performance, including net income, net sales and earnings per share. This allows investors to understand if the company is worth investing in.
R
Return on Investment (ROI)
ROI is used to measure how well an investment has performed and is measured by a percentage. This is calculated by dividing the net profit by the cost of the investment and multiplying by 100.
S
Securities
Investment securities are simply an alternative name for stocks and shares. However, it can also describe any approved or registered products such as government bonds.
Shares
Investors purchase shares from a company that provide them with a percentage of ownership, thus meaning the purchaser of the shares is entitled to a percentage of the profits (in line with the number of shares that they own) and any dividends.
Stocks
Another term used to describe owning a percentage of a company.
T
Trade Investment
When a company acquires stocks or shares in another company it is called a Trade Investment. There are a number of reasons a company may consider a trade investment, including to cement a trade relationship or to begin the process of a takeover or merger.
U
Unit Trust, OEIC and GIA
These refer to collective investments in which the investor purchases units of an investment. The funds may distribute dividends or be reinvested.
V
Venture Capital
Venture capital investments provides start-up companies with finance from an investor, the start-up will be deemed to have long-term growth potential. This provides start-ups with essential funds.
W
Where to start?
Without an in-depth knowledge of the markets and different investment strategies
It can be impossible to know where to begin with your first investment. It is recommended that you speak to an independent financial adviser to discuss your approach and the strategies appropriate to you.
X Marks the Spot
If you would like to discuss the different investment opportunities with us, then you can find us at Centurion House, 136-142 London Road, St Albans, Hertfordshire, AL1 1PQ.
Y
Yield
The income generated on an investment each year is expressed as a percentage and can be referred to as yield or rate of return.
Z
Zero Stress
At KDW we understand it can be daunting trying to navigate the world of investments which is why our advisers work with you to make sure that we find an investment strategy that is right for you.
We hope that you have found this guide useful. If you would like to get in touch with us to find out more about investing, please do not hesitate to contact us.
We offer no obligation complimentary consultations.
Tel: 01727 85 22 99
Email: mail@kdw.co.uk
2nd Floor Centurion House, 136-142 London Road, St Albans, Hertfordshire, AL1 1PQ.
PAST PERFORMANCE IS NOT NECESSARILY A GUIDE TO FUTURE PERFORMANCE. THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM CAN FALL AS WELL AS WELL AS RISE AND YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED.