Investing your money can be a great way to grow your funds, but it can be an intimidating prospect, as there’s a lot of jargon to get to grips with.
This article reveals some of the most popular terms and what they mean so that you can start your investment journey with confidence.
Want some extra guidance? It’s a good idea to talk to a financial adviser if you want help building your investment strategy and portfolio.
Unbiased can connect you with your local financial expert, regulated by the Financial Conduct Authority (FCA).
Alternative Investment Market (AIM)
This was created by the London Stock Exchange to help smaller firms raise money for future growth. Companies that list on AIM usually try to raise between £1 million and £50 million via an initial public offering and can be riskier than other investments.
A fund manager decides what a fund invests in, based on their knowledge and experience, and aims to outperform a specific benchmark.
The ask price is the lowest amount a seller will accept for an asset.
This is when you decide how much of your money to invest in different asset classes, including cash, property, bonds and equities. It can spread investment risk and help you take advantage of higher-growth assets, as well as target returns in a set timeline.
This is also known as the ‘bank rate,’ which is the interest rate the Bank of England pays to commercial banks that hold money with them. The base rate is important as it impacts the rates banks offer on savings or to borrow money.
A bear market is defined as when a stock market index falls by more than 20% from its peak over a sustained period due to negative investor sentiment, or even a potential recession.
This is the highest price someone is willing to buy an asset for.
These are fixed-interest investments. If you invest in a bond, you’re loaning money to a company or the government for a fixed amount of time, usually to help them raise money. When this ends, you should get back the amount you loaned plus interest on top.
This is the value of a company’s assets minus its liabilities, and is often used to determine how much a company is worth.
A bull market is the opposite of a bear market. It’s defined as when stock markets rise by over 20% from their peak and is usually driven by high investor confidence and a strong economy.
Dubbed the ‘eighth wonder of the world,’ compound interest is interest that you earn on your interest. It’s an easy way to potentially supercharge your savings and investments.
Consumer Price Index (CPI)
The Office for National Statistics (ONS) releases CPI data every month, which uses the price of specific goods and services to measure inflation. This basket of goods and services is updated annually to reflect changing tastes and habits in the UK.
A dividend is a payment made by a company to its shareholders, and is a share of the company’s profits. If a business doesn’t make a profit, it cannot pay a dividend.
This metric shows how much a company pays out in dividends relative to its share price. You can work out the dividend yield by dividing the overall dividends by the share price.
It’s a good idea to have a diversified investment portfolio, which means investing in various assets, such as stocks and bonds, as well as investing in different sectors and countries.
Earnings before interest, depreciation and amortisation (EBITDA): While this term is quite lengthy, it is a metric that looks at a company’s net income. So, it looks at the profitability of a company without considering the operating expenses.
Earnings per share (EPS)
This is another metric that can be used to find out how profitable a company is. To find out the EPS, you divide the company’s profit by the number of shares. A higher EPS is good as the business is considered to be more profitable.
These are regions or countries where the economy is experiencing higher economic growth compared to developed markets.
Environmental, social and corporate governance (ESG)
ESG investing helps you invest in companies that meet certain criteria around their environmental impact and how they operate. For example, the company might have measures to limit carbon emissions and anti-corruption policies.
Exchange-traded funds (ETFs)
These are passive funds that tend to track performance of a stock market index, offering access to bonds, stocks and other assets for a lower fee than active funds.
You may have to pay an exit fee when you sell or transfer investments to another company. It’s worth checking for any fees before you start investing to avoid any unpleasant surprises.
This is when investment trusts borrow money to buy more shares or assets to benefit from a potential rise in the value of a particular share or area. Gearing can boost the value of your investments but also make losses worse if share prices fall.
Gilts are bonds issued by the UK government, which usually pay a fixed coupon and have a set maturity date.
Growth investors seek out companies that are likely to benefit from higher growth compared to other businesses in the same sector by focusing on revenue and earnings. If a company has strong growth potential, its share price may also rise quickly.
This is a strategy short and mid-term investors use to protect themselves against unpredictable market movements as they hold two or more positions at the same time. Hedging may help you offset losses from one position with gains from the other. Traditionally investors are advised to take a long-term view and invest for at least a few years, so they can ride out market volatility.
This is the increase in the price of goods and services over time. The Bank of England aims to keep inflation at 2%, but it has exceeded this target in recent years.
Initial public offering (IPO)
This is when a company goes public and lists on a stock exchange to raise capital for future growth. An IPO offers investors the opportunity to buy shares in the company.
An investment platform allows you to buy and hold assets online, including shares, funds and bonds. Some offer ready-made portfolios, individual savings accounts (ISAs) and self-invested personal pensions (SIPPs).
Before you invest, it’s a good idea to consider the risks. With investing, the value of your assets could rise and fall. While some investments are riskier and more volatile than others, they have the potential for higher returns. You should take into account your financial goals and how long you want to invest when considering your risk appetite, whether it’s low, medium or high.
Individual savings account (ISA)
There are various ISAs to choose from. You pay no tax on interest earned with a cash ISA. With a stocks and shares ISA, you pay no tax on income or capital gains tax on profits. The annual ISA allowance is currently £20,000.
A limit order is when you ask for an asset to be bought or sold at a specific price.
Lump sum investing
This is when you invest a large amount of money in one go, so your money is invested as soon as possible.
Market capitalisation (market cap)
This reveals how much a company is worth. To work out the market cap of a company, you multiply the number of outstanding shares by the share price. Some indexes, like the FTSE 100, determine a company’s inclusion based on its market cap.
You can use passive funds to track the performance of a specific market index or sector. As these are operated automatically, there’s no fund manager, so you’ll have lower fees.
Price earnings (P/E) ratio
This reveals whether a company’s shares are seen as cheap or expensive, as it shows how much you are paying for each pound of profit. To find out a company’s P/E ratio, you divide the share price by the earnings per share.
Pound cost averaging
You invest small amounts of money on a regular basis. Pound cost averaging can be useful because you may end up buying when prices are low and can help navigate volatility.
A recession is when an economy contracts over two consecutive quarters, as revealed by the gross domestic product, which measures the size and health of a country.
Self-invested personal pension (SIPP)
A SIPP is similar to a traditional personal pension but offers more flexibility as you can access a wide number of investments.
Stop loss order
A stop loss order can limit losses, so, you can have a share sold if it falls to or below a trigger price.
Value investors buy stocks that are trading at a significant discount compared to their intrinsic value. There are many metrics to use to find out if a company is undervalued.
While there’s much to understand before investing, it can be rewarding. If you would like to develop an investment strategy or optimise your portfolio to potentially drive higher returns, financial advice can help.
Unbiased can connect you to an independent financial adviser that is regulated by the Financial Conduct Authority (FCA) and can help you achieve your goals.