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The Language of Investment and Savings

Published 06/11/2019 13:20:00, by Marina Maher

By John Lavery


I recently met a client who was intending to invest some of their terminal grant upon leaving the Service but, who when doing some initial research (very commendable!) became quickly baffled by the language and definitions used.  So I thought it might be helpful to have a glossary of some of the more popular nouns, adjectives and phrases used:

APR
Annual Percentage Rate is the interest for a whole year, allowing borrowers and savers to better understand and compare deals.

Asset Class
A collective term for assets of a similar type – the main classes are equities(shares), bonds, cash and property

Bond
This is a debt investment.  An individual loans money to an issuer, such as a company or government and in exchange the issuer will pay you a pre-determined rate of interest, known as the coupon, and return the capital on a specified date.

Budget Deficit
The annual amount a government has to borrow to meet the shortfall between current receipts (tax received) and spending.

Budget Surplus
Where a government’s income exceeds expenditure. 

Compounding
The ability of an asset to generate earnings which are then reinvested in order to generate their own earnings, resulting in faster investment growth.

Credit Score
A three digit number calculated from your credit history and used by lenders to determine your credit worthiness (how much risk is associated with lending an individual money or assets).

Diversification
A method of portfolio allocation and management aimed at balancing risk and return by spreading investments across different sectors.

Dividend
A payment from a company made to its shareholders.  If a company issues a 10p dividend, investors receive 10p for every share of that company that they hold.

Dividend Yield
This is a ratio that indicates how much a company pays out in dividend each year in relation to its share price – often expressed as a percentage.

Earnings per share (EPS)
This is a common way of expressing a company’s profits.  It is calculated by dividing annual company profits after tax by the number of shares issued.

Equities (more commonly known as Shares)
This is a stake in a company which gives the holder ownership rights and represents a claim on a proportionate share of that company’s assets and profits.

Gilts
These are bonds issues by the British Government to meet a budget shortfall.  They are usually considered low-risk investments but that usually also means a low rate or return.

Inflation
This is the general increase in prices of goods and services and the fall in purchasing value of currency.

Interest
The return earned on funds which have been loaned or invested – ie the amount a borrower pays to a lender for the use of their money. 

Mortgage
A loan taken out for the purchase of property – typically for 25-30 years.  This is a secured loan which means that the lending institution can take ownership of the property and sell it if repayments are not maintained.

National Debt
The total amount of money that a government owes to purchasers of UK Gilts.

National Insurance
Contributions made by individuals and employers to qualify for certain benefits and national services.

Pension
The amount of money, saved up through a person’s lifetime (through personal, employers and National Insurance contributions) that can be accessed in retirement.

Reward
This is the return on any investment.  This includes income from the investment and/or capital growth (increase in value).

Risk
The chance that an investment’s actual return will be different than expected.  Risk includes the possibility of losing some or all of the original investment.
 

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