Making sense of jargon can help you feel more in control, and more confident when making decisions about your investments. So we’re back with eight more investment jargon terms to bust.
Your portfolio is made up of the collection of investments or assets you have, such as stocks and shares, bonds and cash.
You could manage the portfolio yourself, or you might have a financial adviser or investment professional to do this for you.
We talked about asset classes in part one, so we’re going to explain them in more detail in this part – starting with equities.
Equities, or stocks and shares, are what many people think about when it comes to investing. When you buy shares, you effectively become a part owner of that company – a shareholder.
Historically, equities have generated higher returns over the longer term than most other types of investments, so they can play an important part in many investment portfolios. But please be aware that past performance isn’t a guide to future performance, so there’s no guarantee they’ll do so in the future.
Bonds are usually described as loans to institutions, such as governments and companies, that need to raise money. So when you buy a bond, you’re giving your money to the government or company that’s issued it for an agreed period of time.
Bonds aren’t risk free, and unless you invest in a guaranteed bond, there’s a chance that you won’t get back what you paid in.
A fund is a way of pooling the money you invest with other people’s money. This allows you to invest in a wider range of options than if you invested directly yourself – and a professional fund manager will do the hard work of ongoing management for you.
There’s plenty of choice when it comes to funds, including options that help you diversify across different types of investments. You also have a choice of actively managed or passive funds, which we explained in part one.
The two most common types of ISAs are Cash ISAs, which are a bit like a bank savings account and give you tax-free interest, and ISAs you invest through, called Stocks and Shares ISAs. These let you put your money in different types of investments, often through funds.
There are different levels of risk involved with each ISA type. Your money is generally more secure in a Cash ISA since your money isn’t exposed to any investment risk, but you’re more likely to see your money grow over time with a Stocks and Shares ISA. Although that’s not guaranteed as the value of investments can go down as well as up and you may get back less than was paid in.
This may sound a bit ‘Wall Street’, but bull and bear markets can affect any money you’re investing for the future, so it’s worth understanding what they are. A bull market is where financial markets are going up in value, while a bear market is when they’re falling. The substantial market falls we saw in March last year are an example of a bear market. And you may have seen the value of your pension plan or other investments fall as a result.
What’s important to remember is that investing is a long-term commitment (usually more than five years), so be careful not to base decisions on what markets are doing at any one moment. It could backfire, and history shows us that financial markets generally recover over time. Investments like your pension savings are usually invested over a much longer time period, so holding out could actually give your money more of a chance to recover in value.
If you have a good mix of investments – in other words you’re diversified – you shouldn’t need to make changes every time you hear about rising or falling markets.
These are where companies list their shares, and people can buy and sell them.
You may also hear people refer to a stock market index, such as the UK’s FTSE® 100 Index or the S&P 500 in the US. These give a measure of how the shares listed on stock markets are doing overall.
The rate of inflation is the level at which prices for goods and services increase over time. It’s an important consideration if you’re looking to save or invest because it can affect the purchasing power of your money.
For example, if you save your money into a bank or cash ISA where the interest rate is lower than the rate of inflation, you could effectively lose money. This is because, as the price of goods and services rise over time, eventually your money won’t be worth as much in real terms because you won’t be able to buy as much with it.
Hopefully you’ll now feel more confident when you hear these terms being used. And don’t forget to read part one if you haven’t already.
Remember, it’s always best to speak to a financial adviser before making any big decisions about your investments. If you don’t have an adviser, you can find one at unbiased.co.uk. There’s usually a charge for getting advice.
The value of investments can go down as well as up and may be worth less than was paid in. Tax and legislation may change. Your personal circumstances and where you live in the UK will also have an impact on your tax treatment.
The information here is based on our understanding in July 2021 and shouldn’t be taken as financial advice.