Financial Terms Jargon Buster
Stocks and shares ISA specialist True Potential Investor, along with its parent company True Potential LLP, is committed to improving financial knowledge. Below, you can find explanations of some of the core financial terminology:
Bonds
Should a company need to raise funds in support of a particular goal, they may issue corporate bonds, which can be bought by investors. 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 available. They work in a similar way to corporate bonds and are used to fund borrowing.
Capital
The initial funds invested is referred to as capital.
Capital gains tax
Specific types of investment may be subject to capital gains tax; this is the tax you pay on any profit your investment makes. 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
The process of investing across areas rather than in just one is called diversification. 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.
The diversification approach helps to manage risk and reduce the scale of the impact caused by market uncertainty.
FTSE
FTSE is the abbreviation given to the Financial Times Stock Exchange. It is responsible for monitoring the performance of companies which trade on the London Stock Exchange. A number of lists are available, with each showing the fluctuations in share prices over time.
Inflation
Inflation shows the growth in the price of services and goods over time. It is measured as an annual percentage change and can impact interest rates and share prices.
ISA
Individual Savings Accounts or ISAs provide a tax-free or tax-efficient savings 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
Pensions are used as a way of financially preparing for retirement. 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
To purchase a share in a company, investors can buy 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.
The aim is for investors to sell the stocks and shares for a higher price to generate a profit. 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 refers to the performance of your investment currently 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.
Research by the Organisation for Economic Cooperation and Development (OECD) found that only 38% of adults know what is meant by the term ‘inflation’. To help address this lack of financial knowledge, True Potential LLP has partnered with the Open University to establish the True Potential Centre for the Public Understanding of Finance (PUFin).
In addition, the group has made a number of free financial courses available, which have been attended by 200,000 people so far.
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Category: Financial Education
