Investment Glossary: Your A-Z Of Terms & Acronyms

Accumulation shares/units: shares or fund units where any income earned is reinvested in buying additional shares or units, rather than being paid out as cash.

Active investment or active management: an ‘active’ fund manager takes a hands-on approach to stock picking, aiming to outperform a stated benchmark or index.

Adventurous (portfolio or investor): taking on more risk and volatility in the short term with the objective of achieving greater potential returns over the long-term, for example, investing in emerging industries or markets. 

Alternative Investment Market (AIM): AIM is a sub-market of the London Stock Exchange, which allows companies to raise capital with a lower level of regulatory requirements than the main market.

Asset allocation: the proportion of the different types of assets (shares, bonds, property and cash) a fund invests in.

Balanced or cautious funds: funds that invest across equity and non-equity investments, such as bonds and cash, to provide a modest return while protecting against stock market downturns. Balanced funds are usually categorised by the proportion of share-based investments, being 0-35%, 20-60% and 40-85%.

Bank or Base interest rate: the rate that a central bank, such as the Bank of England, charges to lend money to commercial banks.

Bear market: a prolonged period of falling share prices (usually defined as 20% or more from a recent high) which often corresponds with an economic downturn. A bear market is the opposite of a bull market.

Benchmark: an index or peer group against which the performance of a fund or investment trust is compared. The index may be broad-based (e.g. UK All Companies or the MSCI World Index), or narrow (e.g. US technology stocks or precious metals).

Bitcoin: a decentralised cryptocurrency that can be sent directly between two parties, without needing an intermediary such as a bank. 

Blue-chip: a company that is reputable, financially stable and well-established in its sector. 

Bonds: a debt instrument where an investor lends money to a company or government for a set period of time, in exchange for interest payments. Once the bond reaches maturity, the investor’s money is repaid. 

Bull market: a market in which prices are rising, or are expected to rise, often lasting for months or years. A bull market is the opposite of a bear market, where prices are falling.

Capital gain: the profit you make if you sell shares or investments for a higher price than the price you paid.

Capital gains tax: a tax charged on the capital gain, or profit, you make from selling assets such as shares or property. This tax is not incurred until the asset is sold. 

Capital growth: the increase in the value of your capital (the amount of money you invest). 

Commodities: physical resources such as oil, gas, copper, sugar, wheat and precious metals.

Consumer price index (CPI): an index that measures the change in price that consumers pay for a basket of goods and services.

Defensive assets: these include fixed-interest investments such as bonds and gilts, alongside cash-based investments. They aim to provide stable returns over the long-term with relatively low volatility. 

Defensive asset allocation: investing in a higher proportion of more defensive assets, such as bonds and cash-based investments, typically with a lower allocation to share-based investments, with the objective of reducing risk and volatility.

Defensive companies and sectors: these aim to provide regular dividends and/or stable earnings regardless of economic and stock market conditions. Examples include utilities and consumer staples such as food and healthcare.

Diversification: a strategy to invest in a range of asset classes, geographic regions or industry sectors to spread the risk of one asset underperforming, reduce overall volatility, and increase potential returns over time.

Dividend: a payment to shareholders, usually in cash, which provides a source of income (in addition to the potential for capital growth via any increase in the share price). A company may also pay a one-off special dividend to return surplus cash to shareholders.

Dividend yield: the return paid to shareholders in the form of dividends based on the current share price. Dividend yield is calculated as the dividend per share (which can be historic or forecast) divided by the current share price.

Earnings per share (EPS): the profit after tax of a company divided by the number of shares. 

EBIT: earnings before interest and tax, which measures the profitability of a company before paying any interest or tax due.

EBITDA: earnings before interest, tax, depreciation and amortisation, which is a measure of the underlying profitability of a company.

Emerging markets: countries whose financial markets and economies are less developed than countries such as the UK and US. Emerging markets include Brazil, India, Mexico, Taiwan and Turkey.

Environmental, social and governance (ESG): also known as ‘socially responsible investing’ or ‘sustainable investing’, ESG refers to investing which prioritises environmental, social and government factors in deciding which companies or sectors to invest in. 

Equities (shares): a security or share that provides ownership rights to a company. Equities are often categorised by geographical region (e.g. the UK, US and global) or by size of the company (e.g. small, mid or large market capitalisation). 

Equity fund: a fund that invests primarily in shares. Equity funds are principally categorised by income or growth investment objectives, company size, sector and/or geography.  

Ex-dividend: the day that the share starts trading without the value of the next dividend payment. The ex-dividend date is usually one or more business days before the record date. If you purchase a share on or after the ex-dividend date, you will not receive the next dividend payment.

Exchange rate: the value of a country’s currency against that of another country. For example, how many US dollars or Euros you would receive for every £1 of sterling.

Exchange-traded fund (ETF): a collective investment that tracks a specific index, sector, commodity or other asset in order to replicate its performance. ETFs can be bought and sold on a stock market, in the same way as shares.

Exit charge: also known as a ‘redemption charge’, an exit fee may be charged when an investor sells shares or units in a fund.

Expense ratio: the amount, expressed as a percentage of the total value of fund assets, that investors are charged to cover a fund’s operating expenses and management fees.

Foreign currency risk: the risk of losing money due to an unfavourable movement in exchange rates. For example, if you held shares in US dollars and the pound strengthened against the dollar, your shares would be worth less in pounds sterling.

FTSE (Financial Times Stock Exchange) 100: also known as the “Footsie”, this is a share index composed of the largest 100 companies listed on the London Stock Exchange by market capitalisation. 

FTSE 250: an index of the 250 largest companies by market capitalisation, excluding the constituents of the FTSE 100 index.

FTSE All Share: the aggregation of the FTSE 100, 250 and Small Cap Indexes, representing nearly 99% of UK listed shares by market capitalisation.

FTSE Small Cap: this comprises around 270 companies outside the largest 350 companies by market capitalisation.

Fund: a fund is a pool of money collected from investors that is invested in a range of underlying assets by the fund manager. Two of the most common types of fund in the UK are unit trusts and open-ended investment companies (OEICs).

Fund manager: the person responsible for implementing a fund’s investment strategy and investing the fund’s assets.

Gilts: bonds issued by the UK government, most of which have a fixed-cash payment (known as a ‘coupon’) every six months until the gilt matures. The government also issues index-linked gilts with payments adjusted in line with inflation.

Growth funds: funds invested in stocks with the potential for a high level of earnings growth, which should result in share price growth over time.

Growth investing: an investment strategy focused on shares with the potential for growth in profits and share price.

Growth share or stock: a company experiencing rapid growth in earnings and revenue and typically reinvesting surplus cash into the business, rather than paying dividends. 

High net worth individual: This is someone with significant liquid assets who has the capacity to build and maintain an investment portfolio.

IA Sector: the Investment Association (IA) divides sectors into broad groups to allow funds with similar characteristics to be compared. There are over 50 sectors based on assets and their geographic focus, for example, UK Equity Income, Property, Global and Targeted Absolute Return.

Income: money paid out from an investment, including interest from bonds or dividends from shares.

Income shares/units: shares or units where income is paid out in the form of cash to investors (rather than being reinvested as with accumulation units).

Index: a group of shares or other financial instruments that represents a specific sector or asset class. For example, the FTSE 100 Index measures the combined value of the shares of the 100 largest companies by market capitalisation on the London Stock Exchange. Indices are often used as a benchmark to measure fund performance.

Inflation: inflation refers to the increase in the price of goods and services over time. There are various different measures of inflation, including the Consumer Prices Index and the Retail Prices Index.

Interest rate: the percentage annual return provided to investors for lending money, including savings accounts and bonds, or charged to individuals borrowing money, such as a loan or credit card.

Investments: shares, bonds, property or other assets, whether owned directly or indirectly via an investment fund.  

Investment trusts: public listed companies that hold and manage a portfolio of investments. Their shares can be bought and sold on the stock exchange.

Junk bonds: these are debts issued by companies or governments which are at high risk of default, either by not paying their interest or repaying their capital at maturity. Levels of interest…