Learning the Lingo: Understanding Financial Terms

Learning the Lingo: Understanding Financial Terms

According to a study by the Organisation for Economic Cooperation and Development (OECD), just 38% of adults understand the term ‘inflation’. With this in mind, personal pension and investment specialist True Potential Investor has created the following jargon buster to help Brits better understand the key terms and improve their overall financial understanding:

Bonds

Corporate bonds are offered by companies who need to raise funds to meet a particular goal. 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.

The government also offers government bonds or gilts. They work in a similar way to corporate bonds and are used to fund borrowing.

Capital

Capital is another term for the initial funds that are invested.

Capital gains tax

Capital gains tax is the tax you pay on any profit you make on specific types of investment — your ‘capital gain’. 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

Diversification is the process of investing across multiple areas instead of focusing on just one. 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.

Diversification of your investments allows you to manage risk and reduce the impact of market uncertainty.

FTSE

The Financial Times Stock Exchange (FTSE) monitors the performance of a list of companies or indices trading on the London Stock Exchange. A number of lists are available, with each showing the fluctuations in share prices over time.

Inflation

The term inflation is used to describe how much the price of goods and services increases over a timeframe. It is measured as an annual percentage change and can impact interest rates and share prices.

ISA

Individual Savings Accounts (ISAs) offer a tax-free or tax-efficient way to save. 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

Pensions help you set money aside for later in life. The money you place in the pension fund is invested with the aim of growing it by the time you retire.

There are three main types of pensions:

  • 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

A stock is a share in a company that can be purchased by investors. 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.

With stocks and shares, the aim is to sell them on for a higher price than what was originally paid. 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

Yield is a term used to describe the performance of your investment both now and in the future. 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.

True Potential Investor’s parent financial services group, True Potential LLP, has partnered with the Open University to establish the True Potential Centre for the Public Understanding of Finance (PUFin). A number of free financial courses are available remotely to help improve Britain’s understanding of finances on a general and personal level.

To date, 200,000 people have enrolled on the courses. For information on how you can enrol, visit the True Potential Investor website.

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