A Guide to Financial Terms
Shockingly, under 40% of people know what ‘inflation’ means, according to a study by the Organisation for Economic Cooperation and Development (OECD).
Taking strides to improve financial knowledge in the UK is True Potential LLP, the parent company of shares ISA provider, True Potential Investor. Through a partnership with the Open University, the financial services group has created the True Potential Centre for the Public Understanding of Finance (PUFin). In addition, they provide a number of free financial courses, which have helped 200,000 people to date.
Here, True Potential Investor provides their guide to financial terms:
Bonds
When a company needs to raise funds in support of a particular goal, they may offer corporate bonds. To do this, some choose to issue bonds that investors can then buy. The money raised from the investment is held for an agreed number of years. At the end — also known as bond maturity — the investor receives the money they invested plus their guaranteed interest which was agreed at the start.
Government bonds and gilts are also available. They work in a similar way to corporate bonds and are used to fund borrowing.
Capital
The money you invest initially is referred to as capital.
Capital gains tax
When specific types of investment make a profit, you may have to pay capital gains tax on the profit made. You may not need to pay capital gains tax — it depends on the amount of profit you make and whether you use the profit to buy new shares. More information can be found on the GOV.UK website.
Diversification
Investing across multiple areas instead of just one is named diversification. For example, you can diversify your investment across a range of investment types — such as shares or bonds, for example — as well as between industries, currencies and countries.
By doing so, diversification helps you better manage risk and the impact market uncertainty can have.
FTSE
FSTE stands for the Financial Times Stock Exchange, which is responsible for monitoring the performance of trading companies and indices on the London Stock Exchange. A number of lists are available, with each showing the fluctuations in share prices over time.
Inflation
Inflation is how much a price has increased over time. It is measured as an annual percentage change and can impact interest rates and share prices.
ISA
ISAs — or Individual Savings Accounts (ISAs)— are a tax-free or tax-efficient saving method. There are two main types of ISAs: cash ISAs and stocks and shares ISAs.
- Cash ISAs — similar to a typical savings account, cash ISAs do not require you to pay tax on any interest that is generated.
- Stocks & shares ISAs — with a stocks and shares ISA, the money is invested with the aim of growing the fund over time. You do not pay tax on dividends.
Pensions
You can save for later life with a pension. The money you place in the pension fund is invested with the aim of growing it by the time you retire. Main pension types include:
- Personal pensions — a pension you arrange yourself, which you can contribute to whenever you want.
- Workplace pensions — this type of pension is arranged through your employer. Usually, you’ll contribute an amount each month, with your employer also contributing and the government contributing tax relief too.
- State pensions — a state pension is the amount you receive from the government once you reach State Pension age. Details on how much this is and eligibility can be found at the UK website.
Stocks & shares
Investors can purchase a share in a company by buying a stock. However, these stocks can be broken down into a number of shares, which can also be purchased by investors. Because of this similarity, the two terms are often interchangeable.
Investors aim to make a profit on their stocks and shares, trying to sell them for more than their original purchase price. Usually, stock and shareholders receive a proportion of the company’s profits on an annual or bi-annual basis in the form of dividends.
Yield
The performance of your investment now and in the future is known as the yield. For example, if you received £5 in interest from £100 placed in a Cash ISA, your total yield would be 5% which is equal to £5.
Category: Financial Planning
