Financial Jargon Buster

The world of Financial Services can be tricky to navigate, so we’ve come up with a few definitions that we hope will help you along the way. Your Financial Adviser will be happy to explain anything you don’t understand – and please don’t be afraid to ask us!

Active Management
A type of investment approach that attempts to generate returns in excess of the market.

AER (Annual Equivalent Rate)
The annualised compound rate of interest applied to a cash deposit or to a loan. AER takes into account the timing of interest rate payments. For example, a quoted annual rate of 10% paid quarterly would have an AER of 10.38%. This is also sometimes known as the Annual Effective Rate or Effective Annual Rate.

AIM (Alternative Investment Market)
Established by the London Stock Exchange, it is the junior market for smaller company shares.

Annuity
A plan that you purchase using your money from your existing pension pot(s) or your own funds, which in turn will guarantee to pay you a set amount for either a specific term or the rest of your lifetime. The amount you receive will depend on how much you put in and the percentage required for your spouse’s pension should you die first. Others factors effecting the payments are the health of all parties and any escalation of pension benefits that may be required.

Asset Class
An asset class is a group of securities that have similar financial characteristics, behave similarly in the marketplace and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).

Bear Investor
An investor who believes that the price of a security or the overall market will decline so they sell shares, hoping to buy them back at a lower price at a later date.

Beneficiary
The beneficial owners of trust property or those who inherit under a will.

Bonds
Interest bearing securities which entitle holders to annual interest and repayment at maturity. Commonly issued by companies and Government.

Bull Investor
The opposite of Bear. An investor who believes the market or the price of a security will rise and makes investment decisions accordingly (buys shares in the hope of selling them at a higher price at a later date).

Capital Gains Tax
Tax payable by individuals on profit made on the disposal of certain assets.

Capped Income Drawdown
This is no longer available to new investors. The maximum amount of income that can be taken from the fund is restricted and regularly reviewed to reflect age and fund size. New pension contributions can usually be made to this type of contract.

Clean Price
The quoted price, excluding any interest that has accrued from the last interest payment date.  Accrued interest is added on afterwards and this is known as the ‘dirty’ price.

Closed Ended
Collective Investment Schemes organised as companies which are a fixed size as determined by their share capital. Commonly used to distinguish investment trusts (closed-ended) from unit trusts and OEICs (open-ended).

Collective Investment Scheme
A fund run by a professional manager that enables investors to pool their money. The manager selects the investments and the investors share in any increase (or decrease) in their value.

Commodities
Items including oil, sugar, wheat and copper. Derivatives of commodities are traded on exchanges (eg Oil futures).

Defined Benefit Pension
Also know as final salary pensions. These pay an income directly to you – usually a portion of the salary you were earning when you left.

Defined Contribution Pension
With these schemes you save money into a pension pot, which is invested. Then when you retire, you convert those savings into an income by purchasing an annuity or entering into income drawdown.

Dividend
Distribution of profits by a company.

Duel Pricing
Involves using the markets ‘Bid’ and ‘Offer’ prices of the underlying assets to produce separate prices for buying and selling shares in the fund.

Equities
Another name for shares. It can also be used to describe the amount the value of a house exceeds any mortgage or loans secured to it.

ETF (Exchange Traded Fund)
A type of collective investment scheme that is open-ended but traded on an investment exchange, rather than directly with the funds managers.

Fixed Interest Securities
A tradeable negotiable instrument, issued by a borrower for a fixed term, during which a regular and predetermined fixed rate of interest – based upon a nominal value – is paid to the holder until it is redeemed and the principal is repaid.

Flexible Drawdown
This allows for the fund to be withdrawn in any amounts and removes the income restrictions that apply to capped drawdown.

Fund Supermarket
An internet-based service that provides a convenient way of investing in collective investment funds by allowing a variety of funds to be purchased from a number of different management groups in one place.

Futures and Options Fund
A type of authorised unit trust which invests partially in derivatives.

Gilts
Long- and Short-term fixed income bonds issued by the UK government and traded on the London stock exchange.

Hedge Funds
A high risk investment vehicle which uses advanced and aggressive investment financial techniques in order to make maximum gains.

IHT (Inheritance Tax)
Tax on the value of an estate when a person dies.

Income Drawdown
Pension income drawdown is the name given to the facility to continue to keep retirement savings invested with the ability to take regular income from the fund rather than purchase an annuity.

Investment Bonds
A single-premium life-assurance policy in which a fixed sum is invested in an asset-backed fund.

Investment Trust (Company)
A company, not a trust, which invests in a diversified rage of investments.

ISA (Individual Savings Account)
A wrapper in which cash, stocks and shares can be held and benefit from tax concessions.

Mutual Funds
A type of professionally managed collective investment, that pools money from many investors to purchase securities.

NS&I (National Savings and Investments)
A Government agency that provides investment products for the retail market.

OEIC (Open-ended Investment Company)
Collective investment vehicle similar to a unit trust. Also described as an ICVC (Investment Company with Variable Capital).

Passive Management
An investment approach that aims to track the performance of a market index ie FTSE100. Employed in markets that are believed to be price-efficient.

Platforms
These are on-line services such as fund supermarkets and wraps that are used by intermediaries to view and administer their investment clients portfolios.

REIT (Real Estate Investment Trust)
An investment trust that specialises in investing in commercial property.

Risk
Investment risk is defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment, so your attitude to risk will influence the kind of investment you will be willing to choose.

Settlor
The creator of a trust.

SIPP (Self-Invested Pension Plan)
This is a type of UK government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).

Tax Wrapper
Products that offer tax advantages with pre-defined Government limits.

Tracker Fund
A fund that tries to mirror the performance of a chosen index and is therefore a passive investment strategy.

Trustee
The legal owners of trust property, who owe a duty of skill and care to the trusts beneficiaries.

Trusts
A legal contract in which one or more people, known as settlors, give other parties, the trustees, the right to hold assets for the benefit of others known as beneficiaries. Trusts come in many forms with their own advantages and disadvantages. The type of trust selected depends upon the objectives of the settlors.

Unit Trust
A system where money from investors is pooled together and invested collectively on their behalf into an open-ended trust.

Wrap
A Wrap account is a means of consolidating and managing an investor’s portfolio and financial plans. Wrap services are offered by many financial institutions. Often Wrap services are offered for a fee or a series of charges.

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