Wednesday, February 21, 2018

Financial Terms Jargon Buster



In a study carried out by the Organisation for Economic Cooperation and Development (OECD), it was found that just 38% of adults know what ‘inflation’ means. True Potential Investor’s jargon buster has been created to help improve our knowledge of important financial terms. Take a look to find out more:


Bonds


When companies want to raise funds to meet a business goal, they may offer corporate bonds. 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 available. They work in a similar way to corporate bonds and are used to fund borrowing.


Capital


Capital refers to the funds that you invest initially.


Capital gains tax


For any profit you make on specific types of investment, you could pay tax on it — known as capital gains tax. 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


If you diversify your investment, you invest across 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. 






Through diversification, you can manage risk and protect your investments against the impact of market uncertainty.

FTSE


FTSE stands for the Financial Times Stock Exchange. It monitors how companies and indices are performing during trading on the London Stock Exchange. A number of lists are available, with each showing the fluctuations in share prices over time.



Inflation


Inflation describes how a price for goods or services had increased over time. It is measured as an annual percentage change and can impact interest rates and share prices.

ISA


ISAs — or Individual Savings Accounts — are a tax-efficient savings method.

Cash ISAs and stocks and shares ISAs are two popular ISA types: 

  • 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 

Through a pension, you can put money aside for your retirement. The money you place in the pension fund is invested with the aim of growing it by the time you retire.

Pension types 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 GOV.UK website


Stocks & shares


Stocks allow investors to purchase a share 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.

Investors purchase stocks and shares with the aim to sell them for more than what they paid. 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 describes the performance of an investment 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.

Financial services group True Potential LLP, of which True Potential Investor is a part of, has partnered with the Open University to improve financial knowledge in the UK. As well as establishing the True Potential Centre for the Public Understanding of Finance (PUFin), a number of free financial courses are available remotely.

200,000 people have already benefited from these courses. For information on how you can enrol, visit the True Potential Investor website.


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