A to Z of Savings and Investments

Active Fund Management

This style of management, as opposed to passive fund management, is based upon active research and analysis and conscious decision making. This will typically be appropriate to the fund mandate, i.e. rules and objectives, both in terms of style, e.g. growth, income, value, etc. and approach, e.g. top down, bottom up, etc.

Assets Classes

The types of underlying instruments one may invest into in accumulating an investment portfolio, specifically cash, fixed interest (Gilts & corporate bonds), property (commercial & residential) and equities (stocks & shares).

Bear market

A market condition in which share prices are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses and selling continues, pessimism only grows.

Benchmark

The yardstick against which performance is measured. This may be a competitor, a fund, bank deposits, an alternative asset class, an indices or sector average.

Bid and Offer Price

Shares, units in Unit Trusts etc. are bought at one price and sold at another. The higher (buying) price is called the Offer Price and the lower (selling) price is called the Bid Price.

Bid-Offer Spread

This is the difference between the price that an investor would pay to purchase units and the price that the company issuing the units would pay on the same day to purchase units from investors who wished to sell their holding. Essentially the difference between the Offer price and Bid price. This is typically around 5%.

Blue Chip

This originally originates from the highest value chip in a game of Poker, but is often used to describe shares in a large and well regarded company of very high quality and standing.

Bonds

A loan agreement or debt instrument, under which the issuer borrows a sum of money from the investor and promises to repay the original consideration at the end of an agreed period of time. In return the investor receives compensation, typically a fixed interest rate or coupon, for the duration. There are many different bond variants.

Bottom Up Management

Stocks and shares are selected on their own merits and their class or sector is not relevant. Bottom up managers are often called stock pickers.

Bull Market

A market condition in which share prices are increasing. Widespread optimism causes the positive sentiment to be self-sustaining, with investors anticipating further increases, consequently buying continues, optimism grows pushing share prices higher.

Capital Gains

This is the profit made on the disposal or transfer of an asset or investment.

Capital Gains Tax (CGT)

This is the tax that is due on the profit enjoyed on disposal or transfer of an asset or investment. Gains in excess of the annual exemption, which is presently £11,700 (2018 / 2019), are added to income within that tax year. Any gains falling within the basic rate Income Tax band are subject to CGT at a rate of 10% and any excess falling above the higher rate Income Tax threshold is chargeable at 20%. Residential investment properties, often known as buy to lets, carry an 8% surcharge, taking the rates to 18% & 28% respectively.

A limited form of relief known as Entrepreneurs Relief is available for the disposal of certain business assets, up to the value of £10 million. Where this relief is available, the tax rate reduces to 10%.

Some assets such as a personally owned main residence and investments such as Individual Savings Accounts (ISAs) for example are exempt from CGT.

Collective Investments

A form of investment where the investor has his investment pooled with that from other investors into a fund with the total sums involved being invested and managed by a fund manager. Typically these are open ended funds such Open Ended Investment Companies (OEICs) or unit trusts or closed ended investment trusts.

Commission

Amount paid by a financial institution such as an insurance company or investment house to an intermediary such as an IFA for business placed. Following the implementation of the Retail Distribution Review on 1st January 2013, commission is no longer permitted on new transactions, being replaced with fees, either charged explicitly or implicitly ‘facilitated’ within any investment.

Commodity

There is a vast array of commodities. They can be agricultural products such as wheat, barley, beans, grains, tea, coffee, etc or raw materials such as metals, wood, or any other physical substance that investors buy or sell.

Corporate Bonds

Similar to Gilts, these are bonds that are issued by companies seeking to raise finance, usually as an alternative to bank lending. In exchange, the company promises to return your money, usually on a specified maturity date, and pays a fixed rate of interest or ‘coupon’ until the maturity date. Such bonds are issued by companies with differing credit ratings and because of this there is a greater risk to capital than investing into Gilts. This additional risk is usually rewarded with a premium to the coupon over that payable by a Gilt of the same term. Companies with poorer credit ratings will generally need to offer even higher coupons to reflect the correspondingly greater risk of default.

Deferred Annuity

Where a premium is paid in return for annuity payments that will commence at a date in the future.

Derivatives

A collective term for financial instruments such as futures, options and warrants.

Discretionary Investment Management

This is an approach to managing an investment portfolio whereby an investor delegates day-to-day responsibility to a professional investment manager. They then have the power to make changes to the portfolio without prior permission from the client, subject to the investment manager acting at all times in accordance with a formally agreed and specific mandate. This will usually include reference to the client’s attitude to and tolerance of investment risk.

Distribution

Payment of investment income generated by a fund. This can be paid in cash or reinvested in the fund.

Dividends

A taxable payment given to shareholders out of the company’s profits. These are usually paid in cash but can take the form of shares. In 2018 / 2019 a £2,000 dividend allowance applies (reduced from £5,000 previously), whereby the first £2,000 of dividend income is taxed at 0%. Additional dividend income up to the basic rate Income Tax threshold is taxed at 7.5% and any above this is taxed a higher rate of 32.5% Additional rate Income Tax payers are subject to a rate of 38.1%.

Earnings per share

A generally accepted indicator of the return on equity investments. Any figure quoted represents the total amount of a company’s earnings (after deductions) divided by the number of ordinary shares it has issued.

Equity or Equities

Another term for shares in a company.

Ethical Investments

Investments that are designed to conform to a particular set of moral, social, environmental or ethical principles. The main approaches to ethical investments are: –

Negative – avoidance of particular areas such as the arms trade, nuclear power / fuel, repressive regimes, the tobacco industry, anti-trades union activity, animal experimentation and third world debt/exploitation

Positive – actively seeking to invest in certain areas such as a good safety record, openness about activities, pollution control, energy conservation, production of recycling equipment and equal opportunities policy.

Ex-dividend

This is the time between the announcement and payment of the next dividend. Someone who invests when a share is ‘xd’, which is typically 4 to 6 weeks prior to the distribution is not entitled to the dividend.

Fixed Interest Securities

These provide regular fixed interest payments and include Gilts and corporate bonds.

FTSE or Footsie

A much used term for the Financial Time Share Exchange. There are a number of indices but the most commonly known is the FTSE 100 Share Index, the UK stockmarket’s main index. This measures the daily share price performance of the UK’s top 100 public limited companies (PLCs).

Fund

This is any investment vehicle that pools together the money of individual investors and invests it in keeping with a specific mandate of investment aims and objectives. These can be sector specific, e.g. Technology, Healthcare, etc, geographically specific, e.g. UK, European, Emerging Markets, etc., or proffer a specific style of management, e.g. small cap, mid cap, income, value, etc.

Fund Manager

A person who is responsible for investing money within a specified mandate, i.e. rules and objectives. Their primary aim is to outperform their sector of the market, by investing in a range of asset classes, which they believe will grow in value. Often supported by substantial resource in the form of researchers and analysts.

Futures contract

A contract to buy or sell an asset at a specified future date but at a price agreed on the date of the contract.

Gilts

Similar to corporate bonds, these are issued by the Government seeking to raise money to finance their expenditure plans. In exchange, the Government promises to return your money, usually on a specified maturity date, and pays a fixed rate of interest or ‘coupon’ until the maturity date. As there is a lesser risk to capital than investing into corporate bonds, particularly as far as the UK Government is concerned, the coupon is usually less than that payable by a corporate bond of the same term.

Hedging

A strategy used to offset investment risk, often via the use of futures or options.

Illustration / Quotation

A document or quotation estimating the returns you might get from an investment based upon standard actual growth rates or real rates of return. These take into account the affect or impact of charges.

Immediate Annuity

An annuity where payments commence straight away.

Investment Bond

Investment bonds are single premium life assurance policies and are essentially pooled investments offered by UK insurance companies, either onshore or offshore via their subsidiaries based in places such as the Isle of Man, Dublin and Luxembourg. The latter can have inherent taxation advantages over investing into UK bonds although the suitability of each is very much defined by an investor’s particular circumstances.

Investment Trust

An investment trust is a collective investment fund which, unlike an open ended OEIC or unit trust is ‘closed-end’, which means that it has a fixed number of shares that are traded like stock, often on many different exchanges. As a consequence, the value of units can be affected by supply and demand.

Individual Savings Accounts (ISAs)

Individual Savings Accounts or ISAs provide a tax efficient way of saving money.

There is currently a £20,000 (2018 / 2019) annual contribution limit available, which may be invested into qualifying deposit accounts and National Savings with the balance held in equities or collective funds such as unit trusts or investment trusts. Investors who hold ‘Cash ISAs’ presently are now able to transfer these into stocks & shares without the annual maximum contribution limit being affected or vice versa.

ISA funds can now be passed on to your spouse or civil partner following your death. So, for example, if you pass away with ISAs worth £250,000, your spouse or civil partner will receive a one-off ISA allowance worth £250,000 in addition to their annual allowance.

Junior Individual Savings Accounts (ISAs)

Individual Savings Accounts (ISAs) for children, known as Junior ISAs, are available, offering a tax-free way of saving for your child’s future. Junior ISAs are long term, tax-free savings accounts for children up to the age of 18. The money saved cannot be taken out until the child is 18. A child can have a Junior ISA if they are under 18 years old, live in the UK and are not entitled to a Child Trust Fund (CTF) account. A child cannot have a Junior ISA if they already have a CTF account. Children aged 16 can choose to open an adult ISA as well as a Junior ISA.

Maximum contributions are £4,260 (2018 / 2019), which may be invested into either a Cash Junior ISA or a Stocks & Shares Junior ISA. Funds may be transferred from one to another at any time.

London Stock Exchange (LSE)

Is one of the largest and most influential stock exchanges in the world, where many United Kingdom and overseas companies are listed such that investors may buy or sell their stock on the secondary market. The LSE was founded in 1801.

Managed Fund

Every fund is managed in some capacity. However a fund that is called a ‘Managed Fund’ is a pooled investment fund which generally invests in more than one asset class with the asset class proportions being set by the fund manager. These are often risk rated and can fall into categories such as Defensive Managed, Cautious Managed, Balanced Managed, Flexible Managed, Stockmarket Managed or Adventurous Managed. Indeed some providers offer a range of managed funds which are numbered to reflect their corresponding risk rating.

Market Capitalisation

The value of a company as measured by the total stockmarket value of its issued and outstanding shares. This is arrived at by multiplying the number of shares by the current price of a share. It is also used to indicate the size of a company.

Market Value Adjustment (MVA)

An MVA is a penalty that reduces the value of a With Profits investment in keeping with the value of the underlying assets. This is designed to protect the interests of long term investors remaining in the fund, thereby ensuring that those encashing only receive the true value of their investment. These are applied in times when the asset values unexpectedly decrease by more than the manager forecasts or has allowed for. They are not commonplace, however, one should be aware that they could apply without prior notice and for a prolonged period as the fund manager deems necessary. MVAs are not typically applied on death, maturity (if a fixed term investment) or to meet certain regular withdrawals.

Maturity Date

The date upon which a payment will become due at the end of a specified term. This may be relevant to an insurance policy or investment or can also be relevant to a corporate bond or Gilt.

Maturity Value

The amount payable to the insured at the maturity date of a policy or bond or gilt.

Offshore Funds

Collective Investment funds that are based overseas, often in ‘tax havens’ in order to gain tax advantages.

Open-Ended Investment Companies (OEIC)

A collective investment structured as an investment company that works in a similar way to a Unit Trust except that an OEIC is a limited company.

Option

An option gives the holder the right to buy or sell a given quality of a specified property at an agreed price at or before a specified date. As it is only a right to and not an obligation, the holder can choose to exercise it, let it expire or even sell it.

Personal Equity Plan (PEP)

A tax efficient investment plan which was superseded by the introduction of Individual Savings Accounts (ISAs) back in April 1999. In April 2008 the regulations were merged and PEPs effectively became ISAs.

Portfolio

The collective name for a number of different investments which between them are designed to achieve an investor’s overall objectives but where the individual components of the collection may have different roles to play.

Preferred Stock

This is stock holding in a company that gives the preferred stock holder a prior claim, in the event of bankruptcy.

Price/Earnings Ratio (P/E)

This is calculated by dividing the market price of a company’s ordinary shares by its Earnings per Share figure. This reflects the market’s expectation of the future earnings of a company in relation to its current earnings, thereby providing an indication of its performance potential.

Primary Market

The process by which a company first issues shares, or stock, to the public or institutions. Subsequent trades are effected on a Secondary Market or Stock Exchange.

Quartile

Most UK funds are grouped into sectors and each sector is divided into four quarters (quartiles). The halfway point is called the median. All funds endeavour to provides returns in excess of the median. In an ideal world, the real objective is to be consistently in the top 25% of all funds in that particular sector, which would be referred to as 1st Quartile.

Reversionary Bonus

This is the annual bonus added to the value of your With Profits policy each year.

Secondary Market

The market where securities, stocks and shares are traded after they have been initially offered to the public via the primary market. Most trading is done in the secondary market. Examples may include the London Stock Exchange (LSE) or New York Stock Exchange (NYSE).

Securities

Another name for stocks and shares but can also apply to any approved or registered products such as bonds.

Shares

Shares are issued by a company to raise money and in return grant part ownership of the company. Most shares are listed on a stock exchange, which makes them easier to buy and sell. Also known as Equities.

Stock Exchange

A forum for the buying and selling of listed securities, stocks and shares on the Secondary Market.

Stocks

Units of ownership in a company represented by shares.

Terminal Bonus

Additional bonus that may be paid under a With Profits policy upon enchashment, maturity or upon the death of the policyholder.

Top Down Management

The management style that reflects the choice of asset class first, next the sector and then finally the individual stock selection.

Unit Trust

A trust based investment where the investor has an investment pooled with that from other investors into a fund with the total sums involved being invested and managed by a fund manager. Typically these are open-ended fund and the portfolio of investments is structured in a way that allows investors to buy and sell in the form of units.

Warrant

This is a security issued by a company, allowing you the right to acquire ordinary shares.

With Profits

With Profits funds have historically been a popular concept for more cautious investors. The underlying asset mix is usually a combination of all the main asset classes, with some cash and property but predominantly fixed interest and equities. Their principal aim is to allow investors to participate in the potential rewards of the stock market, whilst ironing out the volatility and potential pitfalls. Clearly full participation in the growth is not achievable via these funds, as an element of the performance has to be held in reserve to offset against those years where returns are not so healthy. The result is a steady consistent return, which is obtained via application of annual bonuses and terminal bonuses.

Yield

The amount of annual income generated on an investment, expressed as a percentage against the price of the investment. Yield can also be referred to as Rate of Return.