Investment Glossary

To be able to make successful investments you need to understand how it works. This includes understanding the different terms used within the investment industry. Here is a glossary of investment terms.

Added Value – This is the performance of a security in excess of a given benchmark or index.

Annuity – An annual guaranteed payment paid out from an investment. These typically apply to pensions, where pensioners will be given a fixed sum every year for the rest of their lives.

Bond - A tradable loan issued by the borrower for a fixed time period. Interest payments are then made to the bond holder, with the amount based on the bond’s performance.

Broker – Someone who act as an intermediary between a buyer and a seller during an investment transaction. They are paid in the form of a commission, usually receiving a percentage of the value.

Capital Assessment – Where a bank or organisation assesses the risks it faces by evaluation the level of risk attached to different investments.

Capital Gains Tax – Capital gains tax is a form of taxation payable on most investments. It is paid on the profits of the sale of an asset.

Cash – This is the money a company has available to them. As well as physical cash, it includes any assets that can quickly be sold and turned into cash if required.

Cash Flow – The total value of cash that is being transferred in and out of a business.

Commission – A fee paid to a broker for buying and selling a security on someone’s behalf. The commission amount is typically a percentage of the value of the trade.

Commodities – Raw materials that are worth a value. This includes things such as oil and gold.

Compound Interest – This is a method of accumulating interest. Compound interest is where interest is paid on both the initial investment and on the growth that has occurred. This leads to an increasing value as time goes by.

Credit – Where a borrower receives finance and pays it back over a period time, with interest paid on the loan. A regular bank loan is the most basic example of this.

Credit Rating – A way of measuring the likelihood of a business or individual paying back a loan. This is based on previous credit record and is a way of financial institutions evaluating whether or not they should offer a loan to the potential borrower.

Default – When someone defaults it mean they have failed to make a financial obligation. So, if someone is not able to pay a loan or mortgage, they have defaulted on their loan or defaulted on their mortgage.

Deficit – In business terms this is the difference between the value of assets and the assets of liabilities, where liabilities add up to more than assets. A deficit amount is the amount a business is away from having the same value assets and liabilities.

Deflation – Also referred to as negative inflation, this means prices are going down.

Diversification – This is where investments are spread across several investment products, rather than being concentrated on one. This is done to reduce risk and means not all invested funds are lost if one investment fails.

Dividend – This is the amount companies pay to their shareholders every year. This is based on the profits that have been made since the previous year’s dividend.

Earnings - The net profit of a company that they can then pay to their shareholders.

Equity – A commonly used term used to describe ordinary shares.

European Central Bank (ECB) – A monetary union in Europe whose job it is to maintain stable inflation and growth in the financial markets in Europe.

Exchange Rate – The measure of the value of one form of currently compared to another.

Financial Services Authority (FSA) – An independent organisation that regulates the financial services industry.

Fixed Interest Bond – A bond where interest payments are specified at the beginning and remain the same until maturity.

Flotation – The first time a company’s shares are issued onto the stock market. When someone refers to a company being floated on the stock market it means their shares will be available on the stock market.

High Yield Bonds – These are bonds that are high in risk, but could potentially result in high rewards.

Inflation – The measure of the increase in prices.

Interest Rates – The percentage of a loan that is repaid in interest. So where there is a 5% interest rate, for example, the borrower is paying 5% on top of the loan. This is usually linked to the Bank of England base rate, though not at the same rate.

ISA – An ISA stands for Individual Savings Account and is an investment product where tax does not have to be paid on gains. The maximum yearly investment that can be made is £10,680. There are two types of ISA, a Cash ISA and a Stocks and Shares ISA.

Investment Trust – Investment trusts are limited companies whose business is to invest the funds of their shareholders. People buy shares in an investment trust, who then invests these funds, and pay a dividend to their shareholders based on performance.

Junior ISA – A version of the ISA, where parents can invest up to £3,600 a year on behalf of their child, who then has access to the invested total plus interest accrued from their eighteenth birthday.

Liquidity - The ease at which buying and selling can take place on the financial markets.

Loan – Money that is paid to an individual or company which must then be paid back over time. This will usually be paid gradually on a monthly basis over a set time period, with interest included in the monthly payments.

Market Capitalisation – The total market value of an entire company. All assets, including cash and assets, are taken into consideration.

Market Value – The price at which a security is trading and could be bought for.

Maturity – The length of time until the last interest payment of a bond will be redeemed.

Property Investment – When land or buildings are invested in with the intention to buy and sell for a higher price at a later date. Some make money through charging rent while the investment increases in value.

Retail Prices Index (RPI) – A measure of inflation which looks at the increase or decrease in retail prices.

Return – The percentage of income from an investment. So, if £100 was put towards an investment and it is now worth £120, that is a return of 20%.

Security – A security is a negotiable certificate that shows a debt or equity obligation.

Settlement – A payment or collection of proceeds that results in the end of a financial agreement. For example, a loan settlement mean the loan has been paid off and is now complete.

Share – A stake in a company. Shares are divided into portions, which are sold to investors.

Share Capital – The amount of a company’s funding that comes from the issuing of shares.

Short-Selling – Selling a security while prices are high with a plan to buy it again at a later date when it is at a lower price.

Spread – The difference in yield between two different bonds.

Stamp Duty – A form of taxation which is paid by a purchaser of certain assets, including property.

Total Return – The overall return on a stock or portfolio taking into account changes in capital values and income earned.

Valuation – A summary of an investment portfolio showing the value and value of everything they own.

Venture Capital (VC) – Where a company is invested in at its early stages. These companies can be invested in for relatively little, meaning potential for high returns. They are risky though, as there is no previous performance to base potential on, only expectation.

Yield – The percentage of return paid on a stock in the form of a dividend or the effective rate of interest paid.

Yield Gap – The difference in yield between different assets.

Andrew Marshall ©