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Investment Jargon – ETFs, diversification, rebalancing… The investment world is full of jargon that at first seems impossible to decipher. However, we’re here to help! Below you’ll find a list of common terms that will help you understand the investment industry (and make you sound like a financial wizard around the dinner table).

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A

What is an Asset class?

An asset class is a particular type of investment. Because there are so many different investments on the market – you can buy shares in literally thousands of companies – it makes life easier if these are grouped together. Asset classes include bonds, equities (shares), real estate and commodities.

What are Assets Under Management (AUM)?

Assets Under Management (AUM) is the total funds managed by a financial institution, such as a bank, portolio manager, hedge fund or financial advisor on behalf of their clients. AUM may also be referred to as Funds Under Management. A managers AUM often fluctuates in line with the market value of their investments and therefore often changes. Financial institutions may disclose their AUM in order to provide an indication of their relative size versus competitors and also as a measure of evaluating their performance.

B

What is a Bear?

A Bear is an investor that has a negative outlook on the future performance of a particular asset or market as a whole. A Bear will hold a pessimistic view and believe prices are likely to fall. For example, an investor who is bearish on the performance of Apple stock thinks the company is overvalued and will seek to profit from a fall in the share price of Apple.

What is a Bear Market?

A Bear market is a market in which prices are decreasing and investor sentiment is negative. The negtive sentiment caused by Bearish investors can be self-sustaining as declining prices results in further negative sentiment and selling, in turn causing prices to fall even further.

What are Bonds (aka fixed-income)?

A bond is a type of investment where an investor loans money to a business or government for a defined period of time. Just like a mortgage, the borrower (i.e. the business or government) has to pay back the money at a variable or fixed interest rate. Companies may use this money to invest in a new factory, for example, whereas government may use this to fund a new school.  Bonds are attractive to online investment managers because they give a steady income and government bonds in developed economies are generally low risk.

What is a Bull?

A Bull is an investor that has a positive outlook on the future performance of a particular asset or market as a whole. A Bull will hold a optimistic view and believe prices are likely to rise. For example, an investor who is bullish on the performance of Apple stock thinks the company is overvalued and will seek to profit from a fall in the share price of Apple.

What is a Bull Market?

A Bull market is a market in which prices are increasing and investor sentiment is positive. The positive sentiment caused by Bullish investors can be self-sustaining as rising prices results in further positive sentiment and selling, in turn causing prices to increase even further.

C

What is Capital?

Capital is a broad term used to refer to money or other forms of assets. It is often used to describe available cash held in bank accounts but also includes other forms of assets, such as, shares held in a company or property owned. The amount of capital held by an individual or company can be a sign of financial health.

What is a Capital Gain?

A capital gain is the profit made from the sale of an asset or investment. For example, if you invest £100 with an online investment manager, and when you withdraw your account is worth £120, you have made a capital gain of £20. When people talk about capital gains tax, this would only be applied to the £20 in the example (not the full £120).

What is a Cash ISA?

A cash ISA is just like any other savings account, except you never have to pay tax on it. Everyone in the UK over the age of 16 receives an ISA allowance at the beginning of each tax year (April). For the 2017/18 tax year the ISA allowance is £20,000. There are lots of different types of Cash ISAs with most high-street banks or building societies offering ISA accounts. Examples of different types of Cash ISAs include, Easy-Access ISAs, where you can withdraw money whenever you like, or Fixed Rate ISAs, where you get a guaranteed, often higher, interest rate where your money can’t be taken out until a specified time.One important point to remember is that if you pay money into your cash ISA and then withdraw it, it will still count towards your ISA allowance amd you’ll lose the ability to save tax-free on the money you’ve withdrawn.

What are Commodities?

A commodity is usually a raw material or physical substance such as oil, gold, wood, orange juice and pork bellies (!). Each commodity tends to be the same as another regardless of who produced them – meaning that one barrel of oil has the same characteristics (and therefore value) as another barrel of oil. As with real estate, commodities allow online investment managers to invest in the value of a tangible asset rather than a pure financial product – diversifying away their risk.

What is Compound Interest?

Compounding is one of the most important factors to understand when investing your money. It’s the concept of earning interest on your interest, rather than solely on the money you have invested. For example, let’s say you invest £1,000 into an account with an annual interest rate of 5%. At the end of the year, you will have made £50 in interest, so you will now have a total £1,050 in your account. If you don’t withdraw any of your money in the following year, your interest payment will be 5% of £1,050, which is £52.50. Whilst this is not a huge increase in absolute terms, if you leave your interest untouched and keep adding to your savings, this can add up to a huge amount over time. (If you left that initial £1,000 untouched for 10 years at a 5% interest rate, you would have £1,628 vs £1,500 if you withdrew your interest payment every year).

What is Credit Risk?

Credit risk refers to the risk that a borrower will default on a loan. This includes the risk a borrower will be unable to repay either the interest or principal component of the loan that is owed to the lender (or creditor).

What is a Custodian?

A custodian is an organisation tasked with keeping investors’ assets safe. This means the custodian will ensure your investments are safe even if the online investment manager goes bust. Each online investment manager has a different approach to custodians (some are international) so it’s best to check directly if this is of particular interest to you.

D

What is Digital investment manager/digital wealth manager?

Digital wealth managers build and manage personalised investment portfolios. You choose the amount you want to invest and your risk tolerance, and the digital wealth manager invests the money into a suitable portfolio. Digital wealth managers replace face-to-face savings and investment management with a low-cost, tax-efficient and hassle-free way to intelligently invest and grow your savings with the help of financial experts. Digital wealth managers allow you to invest money and monitor your investments 24/7 online or in-app. You can learn more about digital wealth managers in our free eBook.

What is a Diversified Portfolio?

A diversified portfolio is the financial equivalent of not having all your eggs in one basket. It is an intelligent selection of investments that, when grouped together, is designed to reduce risk and minimise losses. The rationale is that, by investing in a number of unrelated products, if one falls in value then this loss will be offset by the positive gain in the value of another.

What is a Dividend?

A dividend is the distribution of profits made by a company to its shareholders. A company that makes profit often chooses to re-invest a portion of this to help grow the business and pay out the remainder as a dividend to shareholders. Both public and private companies can pay dividends. Dividends of listed companies are typically paid annually or semi-annually. See our more in-depth article on dividends here.

What is a Dividend Yield?

A Dividend yield is calculated as the annual dividend per share divided by the company’s share price. Those companies that have a higher dividend yield are often called Yield Stocks, as opposed to Growth Stocks, who tend to have a lower dividend yield and re-invest a greater amount in the business.

E

What is an ETF?

An ETF, or exchange traded fund contains a number of different investments. For example, they could contain investments in many Australian companies, or mirror the ups and downs of the FTSE100 (the stock market that tracks the 100 largest businesses in the UK). These are popular with online investment managers for a number of reasons – a single ETF covers a wide-range of investment (so you are not reliant on the fortunes of a single company or asset), they have low fees (which means the online investment managers can pass savings onto you) and they are liquid (i.e. they are cheap and easy to trade at high volumes because there are lots of buyers and sellers).

What is Efficient Market Hypothesis (EMH)?

Efficient Market Hypothesis, or EMH, is a theory that stock market efficiency makes it impossible to beat the market because the share price always incorporates and reflects relevant information. You can see more information on Efficient Market Hypothesis here.

What is the Efficient Frontier?

The Efficient Frontier is an economic concept which refers to the investment portfolios that produce the highest return for a specific level of risk. Some online investment managers use this theory to underpin the portfolios they build for investors.

The Efficient Frontier is an economic concept which refers to the investment portfolios that produce the highest return for a specific level of risk. Some online investment managers use this theory to underpin the portfolios they build for investors.

What is an Equity/equities?  

Equity refers to ownership in a company. Having an equity stake means you are a shareholder and own part of that particular company. The most widely understood form of equity is in public companies, those companies that are listed on stock exchanges where anyone can buy or sell shares. Although only those companies that are publicly listed can be traded by anyone, all companies have equity holders who are the legal owners of the business.

Equities as an asset class is one of the largest alongside fixed income securities (e.g. corporate and government bonds).

Equity investors buy shares in a company with the expectation that the company increases in value and their shares are worth more. Investors may also receive dividends whilst holding shares, which is their share of the companies profit.

What is an Exchange Traded Fund?  

Exchange Traded Funds (ETFs), which are similar to investment or mutual funds, hold portfolios of shares, commodities or other securities with the aim of tracking the performance of a particular market or index (e.g. FTSE 100). ETFs generally have much lower management fees and are more easily bought and sold than investment funds.

Investment and mutual funds, which are individually managed by an investment professional, tend to have significantly higher management fees and, unlike ETFs, are not traded like individual stocks and shares so are much more illiquid.

F

What is the FCA?

The FCA (formerly known as the FSA) is the Financial Conduct Authority. It is the primary financial regulatory body in the UK and aims to protect consumers from damaging activities by financial services firms. It has the power to investigate any organisation in the financial sector and can ban any financial product that is not in the interests of consumers. The good news is that every single one of the online investment managers we feature is FCA regulated.

What are Fees?

Fees are what online investment managers charge for various services. These differ from manager to manager, but you can see a breakdown of the most common fees charged here.

What is the FTSE 100?

The FTSE 100 is an index consisting of the 100 largest listed companies on the London Stock Exchange.

What is the FTSE 250?

The FTSE 250 is an index consisting of the next 250 largest listed companies on the London Stock Exchange behind the FTSE 100.

What is a Fund?

A fund is a pool of money that is invested into different asset classes. A fund’s money comes from many individuals, and presents a more cost-effective way of investing because the fees are spread across the fund’s investors  (if you tried to invest by yourself you would have to pay the same fees as the whole fund). Each fund has a specific objective – low growth (low risk), steady growth (medium risk), high growth (high risk) – and a fund manager to ensure this objective is met.

What are Fractional shares?

Fractional shares are exactly what they sound like – they are a fraction of a share. This is important for online investment managers because some shares can cost hundreds of pounds each, but an investor may only have a few hundred pounds in their account. This makes it difficult to build a truly diversified portfolio for many investors – so fractional shares enable online investment managers to buy a fraction of a share for as little as a penny, enabling the investor’s money to be spread over many assets instead.

What is FinTech? 

Fintech is an abbreviation of ‘financial technology’, an emerging area of finance where technology is at the core of providing the financial service. FinTech companies have been the driving force behind significant change, creating new business models and disrupting traditional financial services companies.

What are Fixed Portfolios? 

Fixed portfolios are those which are not actively managed by an investment team – rather, they are left to run their course as markets fluctuate up and down. This does not mean they are not as effective as a managed portfolio – an investment team often still constructs the initial portfolio and as the values of different assets change these are still rebalanced in order to keep your portfolio in line with your risk level. These fixed portfolios also tend to have lower fees than their managed counterparts.

Fixed portfolios are those which are not actively managed by an investment team – rather, they are left to run their course as markets fluctuate up and down. This does not mean they are not as effective as a managed portfolio – an investment team often still constructs the initial portfolio and as the values of different assets change these are still rebalanced in order to keep your portfolio in line with your risk level. These fixed portfolios also tend to have lower fees than their managed counterparts.

What is the FSCS? 

The FSCS is also known as The Financial Services Compensation Scheme. This is a compensation scheme that covers customers of authorised financial services companies. In short, this protects customers of authorised online investment managers – meaning if they collapse, investors may be entitled to compensation of up to £50,000 each.

I

What is an Index?

You may have heard the “Footsie” mentioned on the news. This is the nickname of the UK’s best-known stock market index – the FTSE 100, which groups together the 100 largest companies listed on the London Stock Exchange. There are many indices like this around the world, and they can be used by investors gauge business trends and growth in a particular sector or country. Online Investment Managers like to use indices as it means they can invest in multiple companies in one go, rather than relying on only one or two companies to perform well (which is much higher risk). Other well-known indices include the S&P 500 and Dow Jones in the USA.

What is Inflation?

Inflation is the general increase in the price level for good and services over time. This is important to be aware of, as it can impact interest rates on savings accounts, public confidence, and company share prices.

What is an ISA?

An ISA (Individual Savings Account) is a tax-free way to save or invest. There are a number of different ISAs with the most popular being Cash ISAs and Stocks and Shares ISAs. The returns with Stocks and Shares ISAs has historically been higher than Cash ISAs. To learn more information about Stocks and Shares ISAs, click here.

What is a Cash ISA?

You can setup a Cash ISA through a savings account with your bank and interest is free from tax, so all the interest you earn, you keep.

What is a Stocks and Shares ISA?

The majority of online investment managers allow you to invest through a Stocks and Shares ISA. You can put your Stocks & Shares ISA allowance into a range of investment products (shares, bonds, ETFs etc.) and any gains made are tax-free.

L

What is the LISA or The Lifetime Investment Savings Account/Lifetime ISA?

The LISA or Lifetime Investment Savings account is a type of ISA enables you to put up-to £4,000 in every year and the government will give you a 25% bonus on top (if you put in the maximum £4k by the end of the year, the state will give you another £1k). Sounds great, but there are two important considerations: you can only extract the money with bonus if you are buying your first home or if you are retiring aged 60 or over, and to open a LISA you must be 18 or over and under 40 to open an account. LISAs can either be Stocks & Shares ISAs or cash ISAs, and as with all ISAs, any gain you make is tax-free.

M

What is a Managed Portfolio or Fully managed portfolio? 

A managed portfolio is just that – managed by an investment team throughout the time you are invested. They will identify new opportunities for returns as they arise and also take action to prevent losses during major shocks to financial markets – for example, Brexit. This additional management generally means slightly higher fees – so take that into account when choosing between fixed and managed.

What is Market Capitalisation? 

The equity value of a listed company, calculated by multiplying the share price by the number of shares.

O

What is an Online investment manager?

Online investment managers build and manage personalised investment portfolios for individuals. After deciding how much you want to invest, your risk tolerance and your investment goals, the online investment manager invests your money into a suitable portfolio. Online investment managers replace traditional face-to-face investment management with a low-cost, tax-efficient and hassle-free service that enables investors to grow their savings with the help of financial experts. Online investment managers allow you to invest money and monitor your investments 24/7 online or in-app. You can learn more about online investment managers in our free eBook.

P

What is Passive investing?

Passive investment strategies aim to replicate the performance of a particular market or set of assets. The “passive” element refers to the fact that specific assets (e.g. shares of Apple) are not specifically bought or sold – rather, an entire basket of assets (such as an ETF – see definition above) that reflect the whole market are purchased and left to fluctuate with no intervention as the market moves.

What is Peer-to-Peer Lending?

Peer-to-peer lending allows people to borrow money directly from other people (their peers), bypassing the traditional banks. Both sides therefore receive a better rate, the borrower because they’ll pay less interest than they would with a bank, the lender because they typically higher interest.

What is a Portfolio?

A portfolio is a group of investments that can include anything from stocks and shares to cash in the bank. An online investment manager will create and managed a personalised portfolio for you based on your risk tolerance – taking away the pain and uncertainty of creating a portfolio from scratch.

What is Portfolio Management?

Portfolio management is the process of making investment decisions in-line with your investment objectives and in line with the level of risk you wish to take. Generally you should re-assess and rebalance your portfolio annually. Learn more about online portfolio investment here.

R

What is Real estate?

Real estate refers to property – but not just houses and office blocks. It includes undeveloped land, warehouses, retail buildings, flats, factories, mines, farms, underground mineral deposits, livestock and more. Real estate helps online investment managers diversify their portfolio away into tangible assets, helping to reduce the risk of a portfolio.

What is Rebalancing?

Rebalancing is the process ensuring the investments in your portfolio match your initial investment goals and risk tolerances. For example, if you initially owned a portfolio that was 50% stocks and 50% bonds, and the stocks went up in value whilst the bonds decrease in value, you could sell some stocks and buy some bonds in order to bring back the 50:50 balance. Whilst it may seem counter-intuitive to sell what is performing well and buy what is not, this is proven to be the best long term strategy to help you reach your personal goals.

What is a Return?

The return is the gain or loss in the value of a portfolio of investment over time. This is usually expressed as a percentage. For example, if you invest £100 into a portfolio with an online investment manager, and after a year that same portfolio has is worth £110 without you adding any more money yourself, you have made a 10% return.

What is a Robo-advisor?

There’s no exact definition of what a robo-advisor is because it covers a broad spectrum of companies who all offer slightly different services. This is why it’s important to compare them! You may also know robo-advisors by different names – at WealthDunk we call them “online investment managers”, but you may have also heard “digital wealth manager/advisor”. In essence, robo-advisors take the pain and uncertainty out of investing by constructing an investment portfolio that matches your needs. They replace face-to-face savings and investment advice with automated online guidance, and allow you to monitor your investments 24/7. And all of this at the fraction of the cost of a traditional financial advisor. You can learn more about robo-advisors here and the different fees that they can charge here.

What is Risk?

Risk is the chance that an investment’s return will be different than what is expected. This means that the higher the risk, the higher potential return you can make on your investment. However, it also means you have a higher potential loss if things do not go your way. It is therefore important that you take your time when deciding your risk level.

S

What is a Share Dividend? 

A share dividend is an amount of money paid out to shareholders of a company, often on a regular basis. In more detail, if you own a share in a business, this means you’re essentially part-owner of the company. When this company makes a profit, its board of directors will either reinvest it into the growth of the company, or decide to distribute a portion of it to part-owners – or shareholders – such as you. Therefore, in its most simple form, dividends are an investor’s cut of a company’s profit.

For many investors, dividends make up a large proportion of the return that comes from owning stock in a company – in fact, it is one of the only ways that an investor can make a return from owning stock without having to sell it. Online investment managers invest in funds that own both dividend-paying and non-dividend-paying stocks – for the stocks that do pay dividends, the online investment manager will usually reinvest that money into the fund rather than make a cash payout to you in order to continue growing your portfolio value over the long term.

What is the Sharpe ratio?

The Sharpe Ratio is a calculation that measures risk vs return. The higher the Sharpe Ratio, the better. Some online investment managers use the Sharpe Ratio to help them build portfolios and project returns at different risk levels.

What is Smart Beta?

Smart Beta ETFs are a variation on traditional Exchange Traded Funds. Ordinarily, an Exchange Traded Fund will contain a number of different investments, such as shares in all of the UK’s biggest public companies, and each company will make up a percentage of the ETF according to the the value of the company. For example, if a traditional ETF contained only 2 companies, one of which was worth £75m, and the other was worth £25m, company A would make up 75% of the portfolio and company B would make up 25%.

However, with a Smart Beta ETF, different measures are used to determine the percentage of the fund allocated to each company. For example, it could be the volatility of the stock, the amount of dividends the business pays, or even how reliable the business model is. Some online investment managers deposit money into smart beta ETFs as they believe they will provide better returns for their customers.

What are Stocks/shares (aka equities)?

Shares (aka stocks) are units of ownership in a company. The share can deliver value to investors in two ways: firstly, if the value of the company increases, so does the value of the share. Secondly, many companies distribute a share of the profits (called a dividend) to shareholders in the form of a cash payment. Online investment managers use these due to their liquidity (i.e. they are easy to trade because there are lots of buyers and sellers). To learn more information about Stocks and Shares ISAs, click here.

What is the S&P 500? 

The S&P 500 is an index consisting of the 500 largest listed companies in the United States.

T

What is a Tax year? 

A tax year is the 12-month period that dictates how much tax you owe and what tax allowances you are entitled to. In the UK, this runs from April 6th to April 5th the following year. In the case of online investment management, this is important to know as the tax year dictates when your ISA allowance (which lets you get tax-free gains on your investments) renews.