Financial terms: a jargon buster

Less than 50% of adults understand what ‘inflation’ means, according to findings from the Organisation for Economic Cooperation and Development (OECD).

In an effort to improve the public’s understanding of financial terminology, stocks and shares ISA provider True Potential Investor has created the following jargon buster.

The brand’s parent financial services group, True Potential LLP, has established the True Potential Centre for the Public Understanding of Finance (PUFin) in partnership with the Open University. Free financial courses are available to study remotely, of which 200,000 people have enrolled to date.

Bonds

Should a company be working towards a particular goal, they may offer corporate bonds to investors to help raise the funds they need. 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.

Government bonds or gilts are also offered. They work in a similar way to corporate bonds and are used to fund borrowing.

Capital

The funds you invest is often referred to as capital.

Capital gains tax

Capital gains tax is an amount that is deducted from the profit you make on specific types of investment. 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 involves investing in multiple areas rather than 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.

This process allows you to better manage the risks of your investment, reducing the impact market uncertainty could have.

FTSE

FTSE or The Financial Times Stock Exchange keeps track of how companies and indices are trading on the London Stock Exchange. A number of lists are available, with each showing the fluctuations in share prices over time.

Inflation

The growth of the price of goods or services over a given timeframe is termed inflation. It is measured as an annual percentage change and can impact interest rates and share prices.

ISA

Commonly known as ISAs, Individual Savings Accounts provide a tax-free or tax-efficient saving method. 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

Financial planning for later life can be done with a pension. The money you place in the pension fund is invested with the aim of growing it by the time you retire.

Types of pension include:

  • 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

Investors can purchase stocks, which are shares in a company. 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.

Usually, investors will sell these stocks and shares for a greater price than they originally paid, in order to make a profit. Normally, stock and shareholders receive a proportion of the company’s profits on an annual or bi-annual basis in the form of dividends.

Yield

How your investment performs now and in the future is referred to as yield. 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.