15th May 2019 at 3:10pm
Who likes jargon? Not many of us, that’s for sure. After all, it can confuse things – and when it comes to savings and investments, that can make it harder for you to make the right choices for your future.
There’s a lot to understand, so we’ve put together 12 – yes, there are a lot out there – common investing terms and ‘busted’ them for you:
1. Investing… and saving
If you’re not sure what the difference is between ‘investing’ and ‘saving’, we can explain.
‘Investing’ is putting your money into something like a financial product, stocks and shares, property or a business, to try and make a profit in the future, although there’s no guarantee of that, and you could get back less than you paid in.
‘Saving’ on the other hand is where you put your money into a savings account, and you know the rate of interest which will be applied to the money you save. You’ll normally get back what you’ve saved plus interest on top.
You might not think you’re investing, but if you have a pension or some types of ISA, you are. So it’s vital to understand the difference.
Put simply, your pension is money that you – and your employer if you have a workplace pension – put aside for your future. In a modern, flexible pension, this is invested, giving your hard-earned money a better chance to grow than if it was just saved in something like a bank account. And because you get tax relief on what you contribute your pension can be a great way to save for later in life.
Your pension is normally invested in funds so its value can go down as well as up, and as mentioned above, you could get back less than was paid in. How and where it’s invested will affect this, so it’s important to understand where your money is invested and the choices you have. Find out more in How to choose and review your pension investments.
ISAs are 20 years old this year, and there’s more than £600bn in ISA accounts in the UK. But do you know what the letters actually stand for? It’s Individual Savings Account.
There are Cash ISAs – a bit like bank savings accounts which give you tax-free interest – and ISAs you invest through, called Stocks and Shares ISAs. These let you put your money into different types of investments, usually through funds.
You can learn more about ISAs in our article What’s an ISA, who are they for and when should I consider one? and our last jargon buster Farewell to financial jargon: 8 common money terms explained.
4. Investment risk
When it comes to investing, risk isn’t always a negative, so this is a useful term to understand. In fact, taking a bit of investment risk with your money could be crucial to help give it a better chance to grow more than inflation.
There are different levels and types of investment risk. And, with each comes a different potential benefit as well. With all investments the value can rise and fall. And there’s a trade-off – usually you have to accept higher levels of risk to achieve higher returns, which also means the potential for more loss.
The amount of investment risk you’re prepared and able to take might be very different to someone else, and may change with your circumstances. We have a questionnaire that can help you find out how you feel about investment risk.
Assets are types of investments, and they’re usually grouped into four main categories, or asset classes. These are equities (also known as stocks and shares), bonds, property and money market investments (including cash).
Experts generally agree that it’s a good idea to have a mix of assets, which is called diversifying – more on this below.
Read more about the different types of assets in our What you can invest in guide.
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 investment, so play an important part in many investment portfolios. But please remember that past performance is not 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 has issued it for an agreed period of time.
You’ll get regular interest payments in return. And at the end of the agreed period you’ll get back the original amount you paid.
Bonds aren’t risk free and unless you buy a guaranteed bond there’s a chance that you won’t get back what you paid in.
Although this one sounds complicated, diversification just means having a mix of investments – in other words, a ‘diverse’ range.
This can help to manage risk and means that the value of your investments should be less likely to change dramatically compared to being invested in just one. After all, who puts all their eggs in one basket?
A fund is a way of pooling the money you invest with other people’s. This allows you to invest in a wider range of options than if you invested direct yourself – and a professional fund manager will be doing the hard work for you.
There’s plenty of choice and you can find options that can help you diversify across different types of investments. You also have a choice of actively managed and passive funds, which we explain below.
10. Active and passive
Fund managers usually set a benchmark against which they can assess how the fund is performing or make decisions on what they will invest in within the fund. There are different types of benchmarks depending on the objectives of the individual fund, for example it could be a financial market index, such as the UK’s FTSE 100 ® (more on this below).
If a fund is ‘actively managed’, the fund manager decides which investments to select, in an ‘active’ attempt to beat the performance of the fund’s benchmark.
In contrast, passive funds (also sometimes called tracker or index-tracking funds) aim to follow the moves of the benchmark to give comparable returns.
11. Stock markets
These are where companies will 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 ® or the S&P 500 in the US. These give a measure of how the shares listed on stock markets are doing overall.
12. Bull and bear markets
It might 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 the prices in financial markets are going up. A bear market is when they’re falling.
Investing is usually a long-term commitment so be careful not to base your investment decisions on what markets are doing at any one moment: it could backfire and financial markets generally recover over time. You can read more in our article Brexit, market volatility and your investments.
If you have a good mix of investments – in other words, you’ve diversified – yes, it’s that word again – you shouldn’t need to make changes every time you hear about a ‘bull’ or a ‘bear’ on the news.
Now that we’ve taken some of the mystery out of the language of investing, you can learn more about investing basics and understanding how you feel about investment risk here or visit the Money Advice Service.
If you’re thinking about investing you may want to speak to a financial adviser – if you don’t have one try unbiased.co.uk. There is likely to be a cost for advice.
You can find out more about the protections that are in place for investors, including the Financial Services Compensation Scheme, on our Investor Protection page.
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 also have an impact on your tax treatment.
The information here is based on our understanding in May 2019 and shouldn’t be taken as financial advice.