The world of investments is a complex one, something often made more confusing by the jargon-filled language the financial industry uses. There is good news though, as the meaning behind these confusing terms are often much easier to understand than you might think.
As part of Talk Money Week 2024, we’ve brought together 10 commonly used terms that are used in the world of investments, and have demystified them using clear and understandable language. Read on to learn more.
1. Collective investments
These are investments that allow you to pool your money with other investors when buying shares or units. This allows you to access to a wider wide range of investment funds.
Collective investments are usually overseen by an investment manager who tracks and analysis performance, and then looks for opportunities to enhance it. Examples of a collective investment, which are also known as collective investment trusts, include:
- investment trusts
- unit trusts
2. Open-ended investment company
Known as an OEIC, these are also collective investments. They are also ‘open-ended’, which means the amount of shares the OEIC can hold isn’t limited. As such, new shares can be created to meet investor demand.
As the OEIC’s shares are not traded on the London Stock Exchange, their price is determined by the value of the assets being held within the fund.
3. Investment trust
In the UK, an investment fund is also structured like a company with its shares being listed on the London Stock Exchange. They are known as a ‘closed ended’ fund, which means its value depends on the level of demand for the shares being held within it, not the trust’s performance.
4. Closed-ended fund
This is an investment fund that has a fixed number of shares. Its value increases or decreases depending on demand for the shares held within it, not the performance of the underlying investments.
This means the fund’s value can be at a premium (above the net asset value of the fund), or at a discount (below it). An Investment Trust is also a closed-ended fund.
5. Bond
When you buy a bond, you’re effectively lending money to a company or government. In return you receive interest payments that are known as ‘Coupons’, which are normally paid twice a year. Bonds issued by the UK government are called Gilts.
At the end of the agreed term, you receive all of your initial investment back without any growth. The incentive provided by Bonds is the Coupon payments, which provide a return over time.
While bonds are seen as lower risk, they still an element of risk. This means, for example, that you will not get your investment back if the company goes bankrupt.
6. Dividends
The name of the payment shareholders receive when a company makes a profit. Dividends can taken by investors as an income, or they can be reinvested to boost the value of an investment.
7. Index tracker
These investments follow the performance of a specific index, such as the FTSE 100. Also known as ‘tracker’ or ‘passive’ funds, they typically replicate, rather than beat, the performance of the index they’re following.
8. Managed funds
Also known as ‘actively’ managed funds, these are investments that are overseen by a fund manager. They carry out constant analysis to assess the fund’s performance, and then buy and sells shares, bonds and other investments to create better returns for the fund.
Sometimes, fund managers specialise in certain areas, such as small-cap stocks or Environmental, Social and Governance (ESG) funds.
9. Liquidity
This refers to how easily an investment can be turned back into cash. Different types of investments are more liquid than others, so for example, property is typically more difficult to sell than shares in an investment fund.
10. Yield
An investment’s ‘yield’ measures its return over time. To calculate it, you normally take the income you received from the investment and turn it into a percentage of the price you paid for it or its current price.
Get in touch
At AFH, we understand the importance of using clear, understandable language when talking about investments. Our success has been built on ensuring that we explain investments in a way that educates and informs our clients in a jargon-free way, so that they’re equipped to make better decisions.
If you have investments but are confused about the terminology being used in any literature you receive, please give us a call. We can be contacted on 01527 577775, or feel free to speak to one of our advisers, we’d be happy to help.