Glossary
Our glossary is designed to help you wade through the investing waters. Whether a strong swimmer or new to the pond, we’re here to help you navigate investing terms, big or small.
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A
Acquisition
An acquisition happens when one company purchases the majority, or all of another company’s shares to gain control of that company.
Active Investing
Active investing is an investment strategy where investors and fund managers invest in a selection of investments with the aim to achieve a better return than the wider market index or benchmark. Compare and contrast with passive investing.
B
Balance Sheets
A balance sheet is a snapshot of what a company owns and owes at a certain point in time. Learn more about how balance sheets work and how to read them.
Bank of England
The Bank of England is the central bank of the United Kingdom, responsible for maintaining price stability through its Monetary Policy Committee.
Base Interest Rate
A base rate is the interest rate central banks, like the Bank of England (BoE) in the UK, will charge commercial banks and building societies for loans. The base rate is also known as the bank rate or the base interest rate.
Bonds
A bond is a fixed-income investment where investors lend money to governments or companies for a set period of time in return for regular interest payments.
Budget
The Budget is the UK government's annual announcement of financial policies, including tax changes and spending plans for public services like schools, police, and healthcare. It's usually delivered by the Chancellor of the Exchequer in the House of Commons in Autumn but can also take place in Spring to allow time for tax changes.
C
Capital Gains Tax
Capital Gains Tax (CGT) is a tax that can be due when you sell something that’s increased in value, or you transfer it outside of your estate, e.g. to another person or into a trust. It can apply when selling or transferring lots of different assets, like shares or property. It’s only the gain in value that may be subject to tax, not the total value of the asset.
Cash equivalents
Investments and assets that can be converted into cash at short notice and are easy to trade. Companies use them to meet any short-term financial needs. They usually generate slightly more interest than cash. They can be short-term bonds, government bonds like treasury bills or some GILTs, or Certificate of Deposit’s (savings accounts with a fixed interest amount and term).
Commodity
A commodity is a basic raw material or agricultural product that can be bought and sold such as copper, oil and coffee.
Compound Interest
Compound interest is the interest added to the balance of a loan or cash deposit, including any interest added in a previous period. This can build over time, as interest is compounded on interest.
Consumer Price Index
The consumer price index (CPI) is a measure of inflation. CPI measures how much the price of a basket of goods (such as food and beverages) and services (such as bus fares and gym memberships) has risen over time.
Currency Risk
Currency risk is the chance of losing money from a change in exchange rates. For example, if the pound strengthened against the US dollar, any US investments would be worth less when converted back to pound sterling.
D
Deflation
Deflation is the decrease in the general price level for goods and services. It happens when the inflation rate falls below 0%.
Depreciation
Depreciation is an accounting method that measures how much value physical assets lose over time which helps companies manage their money and financial accounts – it means ‘lower in price’.
Derivatives
A financial derivative is a contract between parties that has a value based on an underlying asset. Find out more about derivatives.
Developed markets
Shares in 'developed markets' include companies based in developed economies, like the US, UK, Japan and Australia. Developed markets have high potential for growth and are generally considered riskier than bonds, but less risky than emerging markets. Higher-risk investments tend to have more ups and downs than lower-risk investments.
Dividends
A dividend represents a fraction of a company’s profits that’s paid out to shareholders as a reward for investing in their company.
E
Earnings Per Share
Earnings per share (EPS) is a way to evaluate a company’s profitability which shows the amount of profit attributable to each share in issue. [Profits available to shareholders (p) / number of shares in issue].
EBITDA
Earnings before interest, taxes, depreciation, and amortisation (EBITDA) is an accounting method to calculate a company’s total profits (or earnings). It’s used as a rough and ready measure of the cash a business generates – cash that can be invested in the business, used to pay debts or returned to shareholders.
Emerging markets
Shares in 'emerging markets' include companies based in emerging economies, like Taiwan, India and Brazil. Emerging market shares have a higher potential for growth and are generally higher risk – with more ups and downs - than shares in more developed countries.
ESG Investing
ESG is an investment approach that takes Environmental, Social and Governance factors into account alongside more traditional financial factors.
European Central Bank
The European Central Bank (ECB), and its Governing Council, set the monetary policy (like key interest rates) for the European Union and for all countries that use the Euro, called the Eurozone.
Exchange Traded Funds (ETFs)
ETF stands for exchange traded fund, this is a collective investment which aims to track a particular index, stock market or commodity.
F
Federal Reserve
The Federal Reserve is the central bank of the United States. It controls monetary policy, contains systemic risk and provides payments services for the US.
Fiscal Policy
Fiscal policy is set by the government which outlines the plan for borrowing and spending and taxes.
Funds
A fund is a collective investment that pools together money from lots of individual investors. Learn more about the different types of mutual funds and how they work here.
G
Gearing
Gearing is the ratio of a business’s or investment trust's capital in relation to its borrowing. If a business is taking part in gearing, it resorts to borrowing money to fund operations. Gearing is commonly used with investment trusts where the company borrows to increase the potential for a gain from an investment. Gearing increases exposure to risk.
Government Bonds (gilts)
Government bonds are a type of debt instrument where an investor lends money to the government. Most pay a fixed level of interest for the duration of the bond and repay the initial lump sum to the investor when the bond matures. UK government bonds are also known as gilts.
Growth investing
Growth investing is an investment strategy focused on companies, typically newer or smaller, expected to experience above-average earnings growth compared to others in their sector or market.
Emerging companies can provide impressive returns if they succeed in breaking into the market. However, this comes with a higher level of risk compared to investing in more established, stable stocks.
H
Hedge
Hedging is a strategy used to provide a level of certainty and shelter against the risk of financial loss. It’s a technique that can be used by investors and fund managers to try to reduce the risks associated with things like currency movements in financial markets.
I
Inflation
Inflation measures how much the price for goods and services has gone up over time.
Initial Public Offering (IPO)
An initial public offering (IPO) is when a company lists its shares on the stock market for the first time. It’s sometimes called ‘going public’.
Investment Trust
An investment trust is a type of fund set up as a public limited company (plc), so its shares can be bought and sold on a stock exchange.
J
Junk Bonds
Junk bond is a term used to describe bonds that have been rated as high risk by a credit rating agency. Investors will expect to receive higher rate of interest for the added risk.
K
L
Leverage
Financial leverage is the process of borrowing money in the form of debt to increase the potential reward from an investment opportunity.
M
Market Capitalisation
Market capitalisation is simply the total number of shares in issue multiplied by the latest share price. This provides the total market value for a company’s listed shares and acts as an indicator for the overall size of the company.
Market Correction
A market correction is when a stock market or index falls by 10% or more from its most recent peak.
Monetary Policy
Monetary policy is a set of actions central banks or governments can take to help control how much money is in the economy and how much it costs to borrow money. The main aim of monetary policy is to keep the prices of things low and stable.
N
Net Asset Value
Net asset value (NAV) is a term used to describe the underlying value of a company minus any liabilities (debt). This term is common with investment trusts. If an investment trust is trading below its NAV, it’s said to be trading at a discount. If the opposite is true, the investment trust is trading at a premium.
O
Open-ended Investment Companies (OEICs)
Open-Ended investment companies (OEICs) are a type of fund where investors’ money is pooled together in one single investment. This is called a collective investment. OEICs are managed by a professional fund manager who invests in a range of underlying investments, such as shares and bonds.
P
Passive Investing
Passing investing is an investment strategy where investors aim to match the performance of a particular stock market index or benchmark. It’s possible to do this by investing in passively-managed funds called index tracker funds and exchange traded funds (ETFs). Compare and contrast with active investing.
Pound Cost Averaging
Pound cost averaging is a process of drip-feeding money into a particular investment over a period of time. The idea being that it can help reduce the impact of market ups and downs, and average the cost price you pay for an investment over time.
Price-to-book Ratio
Price-to-book (PB) ratio is a way to value a company by its book value, or the value of its assets minus liabilities. Book value tells you how much a company would be worth if it were liquidated today – at least in theory.
Most think a PB ratio over much more than one can signal a company is overvalued – it suggests investors are paying more than the underlying business is worth.
Key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
Price-to-earnings Ratio
The price-to-earnings (PE) ratio tells you how much investors are willing to pay for every pound of profit a company delivers.
Q
Quantitative Easing
Quantitative easing (QE) is a monetary policy tool where central banks purchase government bonds or other financial assets to increase money supply and stimulate economic activity. This is often referred to as ‘printing money’.
R
Recession
A recession is when gross domestic product (GDP) shrinks for two consecutive quarters. It’s a measure of the overall size and health of a country’s economy over a period of time. Essentially, when a country’s economy is shrinking.
Responsible Investing
Responsible investing is a catch-all term that describes a desire to use your investments to benefit society as well as yourself. It encompasses everything from using Environmental, Social and Governance (ESG) factors to identify business risks and enhance long-term returns to investing in companies that make a positive, measurable impact on the environment and society.
Rights Issue
A Rights Issue is where existing shareholders are given the opportunity to buy a set number of new shares in the company they own. These new shares are often available at a discount to the existing share price, to encourage investors to take part.
S
Shares
Shares represent part-ownership of a company. As a shareholder you own a ‘share’ of the business, and the monetary value attached to it, which can be sold to other investors.
Share Buybacks
Share buybacks are when a company buys back a certain proportion of its shares. They’re also known as share repurchases.
Short Selling
Short selling involves borrowing shares from a stockbroker or investment bank, selling them on the stock market, with the hope of making a profit by buying the shares back at a lower price in the future.
Stagflation
Stagflation is caused by a combination of stubborn and high inflation, high unemployment, and slow or stagnant growth to an economy.
Stock Market
The stock market is a collection of publicly-listed companies where their shares are listed on stock exchanges around the world, which acts as a trading platform for investors to buy and sell investments like shares or bonds.
Stock Splits
A stock split is when a company chooses to split existing high value shares into a larger number of lower value new ones. Learn more about what stock splits are and how they work.
Supply and Demand
The law of supply and demand is the economic theory which explains the relationship between the production (supply) and the buyer’s need (demand) for an item.
T
Takeover
A takeover is a process where one company makes a successful bid to take control or buy another. Learn more about how they work and the different types of takeovers.
U
Underwriting
Underwriting is a service offered by investment banks to a company wishing to raise money by a sale of shares on the stock market. Underwriters take on the financial risk of this process by agreeing to buy any unsold shares in exchange for a fee. It can be seen as a type of insurance policy for companies looking to sell shares.
V
Value investing
Value investing is a strategy where investors look to buy shares at a price which isn’t reflected as their true worth. In other words, they are 'cheap' or at a discount to what the true share price should be.
Volatility
Volatility is a measure of how much something fluctuates. In the investing world, volatility is a measure of an investment’s risk level. The higher the volatility, the higher the risk and the likelihood you could get back less than you invested.
W
Warrant
A warrant is one type of derivative that gives an investor the right, but not the obligation, to purchase the underlying security at a pre-determined time and price. Warrants are issued by companies and trade on the stock market as securities in their own right.
X
Y
Yield
A yield measures any income from an investment over a set period of time, such as dividends from shares or interest from bonds.
Z
Zero Coupon Bond
A zero coupon bond is a type of bond that doesn’t pay a fixed interest payment. Instead, the bonds are sold at a discount to their par value. The difference between the ‘discount’ value and ‘par’ value is the rate of return the investor can expect to receive.