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The first rule of Bronni’s Investing Club is that I’m not a financial adviser, the second rule of Bronni’s Investing Club is you can both lose AND gain money when you invest, there is risk involved.
One of the most daunting things about starting off in the world of investments is the sheer mass of new terms and definitions you’ll come across. Companies tend not to be very good at explaining what it all means, and heck, I’ve even read some “simplified” Twitter threads that were 99% jargon. Here I’ve tried to explain some of the more common investing terms. Don’t worry, I’ve totally skipped the ones you’d only need to know if you’re Gordon Gecko.
Shares
A share is a part of a company or financial asset. Share prices change all the time, but the amount of shares you own doesn’t. So you could buy 4% of a share for £10, and then check again and you’re now able to sell it for £12 or maybe £8. It’s still 4% of a single share though.
Stocks
We aren’t talking about OXO here, lads. A stock is pretty much the UK name for a share. Americans also sometimes call them equities.
Bonds
A bond is a loan, or part of a loan that you can invest in. Your money is used to lend an organisation money, and they should pay is back with interest. Bonds are generally considered to be less risky than stocks, because people do tend to pay loans back. If you need help remembering, a bail bond is a type of loan for bailing people out. Bond = loan.
Gilts
A gilt is a bond, but you’re loaning the UK government money. If you’re lending the US government a few quid it’s called securities. Confusing, and basically irrelevant but these terms do pop up.
Broker
Pretty much broker/brokerage = shop where you can buy investments. The company you have your stocks and shares ISA with is a broker, your pension provider is a broker, Leonardo di Caprio in The Wolf of Wall St is a broker. They make their money by charging you a platform fee, it could be a percentage or a fixed monthly amount.
Inflation
Put the lilo away, inflation is all about how much the cost of goods and services go up by each year. It pretty much tells you what the purchasing power of your money is. So £1 in a savings account is still £1, even though a Mars bar might be 90p now instead of 85p when you put that £1 in. So really, the value of that money has gone down. It’s why you should invest your money into something that could go up in value, rather than letting your money languish as cash.
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Fund
A fund is a group of stocks and/or bonds put together by a human being or a robot that you can invest in. It means by owning a bit of a fund you might now own microscopic tiny pieces of a lot of companies. Funds can be grouped geographically, by big companies, smaller ones, ethical ones, or different industries. The bonus of funds is that they tend to have lower fees than just picking and choosing your own shares. They also somewhat protect you from being at the mercy of how well an individual country, stock or bond does, because if one crashes, usually others will go up, so it isn’t so volatile. Read more about funds in my article.
Wrapper
No, I’m not talking about 50 Cent here, a tax wrapper is how you hold your investments. If you just invest through any old account, you could end up paying tax on your profits. Using a tax wrapper is very smart. Your wrapper could be your pension or an ISA, or a Lifetime ISA. I’ve done a whole article about different wrappers here.
Asset class
Stocks are an asset class, bonds are an asset class, property is an asset class, Forex is an asset class, precious metals are an asset class.
Portfolio
This isn’t GCSE art, a portfolio is just the investments you have.
Balance
Important men in suits like to talk about “balancing your portfolio”. It’s sort of rubbish, in my opinion. It’s the idea that there’s a magic formula to having just the right percentage of shares from different asset classes and geographic locations so you’re protected from crashes, while still being able to get good results. This is how investment managers make their money, rich people will pay them to slightly tweak their investments on an ongoing basis. If you’re mainly investing in funds you won’t really need to do this so much.
Diversification
Same thing as balance really. If you invest, try and spread what you’re invested in across different countries and industries. Your portfolio could just be 10 oil companies, then someone invents a way to make plastic from banana leaves and invents a jet engine that runs on electricity and you’re screwed. But oil could be having the year from hell, and even though you are invested in oil companies, some of your funds are based in India and they’re having a bumper year because of the banana leaf thing! So it’ll even itself out, hopefully.
Dividend
You might remember this word from Monopoly, but a dividend is the money a company pays its shareholders when it makes a profit.
FTSE
FTSE (pronounced footsie) stands for the Financial Times Stock Exchange. So the FTSE 100 Index is the UK’s top 100 companies based on the value of their shares. The FTSE 250 is the top 250. Looking at these indexes can give you an idea about the wider state of the UK economy.
ISA
This stands for Individual Savings Account. You can save a maximum of £20k per financial year into your ISA/s and you won’t have to pay tax on your profits.
Fees
There are all sorts of fees associated with investing. There are admin fees and stamp duties that result from buying and selling individual stocks, there are platform fees that pay towards the running of the company you use to buy your investments with like Vanguard, Fidelity, MoneyBox, Hargreaves Lansdown etc and there are management fees that reward investment managers when you buy into their fund. If you buy a fund put together by a computer, the fees are usually lower. When you try and buy a share or fund, the fees should be made clear in a fee illustration.
Investment factsheet
Every time you come to buy an investment, your platform should provide you with a factsheet. It shows you the past performance of your share, and if it’s a fund, what the fund’s made up of. For example, it could have a list of the 10 companies that make up the biggest proportion of the fund, the different industries within the fund or a map of which countries or continents each percentage of the investments are based. It’s worth a read.
Market timing
This is when people think they have a sixth sense about when they should invest. Insider trading is illegal, and nobody really knows when a stock is about to skyrocket. At the end of the day it’s not market timing it’s time in the market. You should be prepared to keep your money in the stock market for a while. Things do go up and down, but the general trend is usually upwards, so be brave and stick it out.
Need even more investment terms broken down for you? Try out Investopedia’s investment dictionary.
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