Getting to grips with financial language – words Alexa Wang

An OECD study has found that just 38% of adults know what ‘inflation’ means. Financial services group True Potential LLP — and parent company of shares ISA provider True Potential Investor — is aiming to improve the country’s financial understanding.

Through a partnership with the Open University, the group has been able to establish the True Potential Centre for the Public Understanding of Finance (PUFin). 200,000 people have also benefitted from a number of free finance courses that have been made available.

Here, True Potential Investor provides an overview of financial language and what it means:

 

Bonds

When a company needs financial support to meet a particular goal, they may offer investors corporate bonds. 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.

Bonds and gilts are also available from the government. They work in a similar way to corporate bonds and are used to fund borrowing.

Capital

Capital is another way of referencing the initial funds you invest.

Capital gains tax

For specific investment types, you may need to pay tax on any profit you make — this is called capital gains tax. You may not need to pay capital gains tax however — 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

When you invest in multiple areas instead of just one, it is called diversification. For example, you can diversify your investment across a range of investment types — such as shares or bonds — as well as between industries, currencies and countries.

Diversifying investments enables more effective risk management, helping to mitigate the impact of market uncertainty.

FTSE

The companies and indices that trade on the London Stock Exchange have their performance monitored by the Financial Times Stock Exchange (FTSE). A number of lists are available, with each showing the fluctuations in share prices over time.

Inflation

Over a given timeframe, inflation describes how the price of goods or services has increased. It is measured as an annual percentage change and can impact interest rates and share prices.

ISA

Known commonly as ISAs, Individual Savings Accounts (ISAs) provide a tax-free or tax-efficient savings vehicle. 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

You can start preparing for later life with a pension. 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 share in a company can be purchased via stocks. 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.

To generate a profit, investors endeavour to sell their stocks and shares for a higher price. 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 that refers to the performance of an investment both at present 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.

Getting to grips with financial language – words Alexa Wang

 

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