We hope you find this archival article enjoyable. Please keep in mind that investment, pension, and tax regulations can change often, so some information may be outdated. However, we aim to provide you with useful information.
The finance and investment realm can sometimes feel bewildering, overloaded with jargon. It doesn’t have to be this way.
At Nutmeg, we prioritize simplicity. Investing should be engaging, informative, and easy to grasp. To assist you, we’ve compiled a list of investment-related terms and phrases with straightforward explanations. Additionally, we offer a beginner’s guide to investing to help you get started.
If there are any specific terms or expressions you’d like us to include, feel free to tweet us @thenutmegteam.
A-Z Glossary of Investing Terms
Active Investing
Active investing involves an investment manager utilizing their market knowledge to select investments expected to appreciate in value. Often referred to as “stock pickers,” these managers routinely adjust their investments.
Asset Allocation
Asset allocation refers to how your investments are divided among various types of assets, such as stocks, bonds, and commodities. For instance, you might hold a portfolio consisting of 50% equities and 50% government bonds, with your allocation influenced by your risk tolerance and investment timeline.
Asset Class
An asset class categorizes investments. The primary asset types include cash, stocks, and bonds, with many additional categories available.
Bear Market
A bear market describes a period of declining stock prices, typically defined as a 20% drop over two months, leading to a cycle of lack of confidence among investors and further selling pressure.
Bid-Offer Spread
The bid-offer spread is the difference between the highest price buyers are willing to pay (bid price) and the lowest price sellers will accept (offer price). This spread enables market makers to profit from buying and selling transactions.
Bonds
Bonds are debt instruments issued by companies or governments to raise capital. Investors lend money for a fixed period in exchange for interest payments, with the principal returned at maturity.
Bull Market
A bull market occurs when investors are optimistic about economic growth, resulting in rising stock prices. Typically, a market is considered bullish when prices increase by 20% or more without significant declines.
Capital Gains Tax (CGT)
Capital gains tax applies to profits made from selling assets for more than their purchase price. Certain investments, like ISAs, are exempt from CGT.
Commodities
Commodities include raw materials, such as oil, gold, and agricultural products. Prices can be volatile, influenced by various economic factors.
Compounding Interest
Compounding interest refers to the process of earning interest on both your original investment and the accumulated interest from previous periods, significantly increasing your overall returns when left to grow over time.
Corporate Bonds
Issued by companies to obtain financing, corporate bonds provide investors with a fixed interest return. However, if the issuing company fails, investors may lose their principal.
Market Correction
Typically defined as a decline of 10-20% in a stock index, market corrections can be brief or protracted but often signal a return to longer-term trends.
Derivatives
Derivatives are financial contracts whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies.
Diversification
Diversification involves spreading your investments across various asset classes to manage risk. By not concentrating your investments in one area, you can mitigate potential losses.
Dividends
Dividends are payments made by companies to their shareholders, typically derived from profits. Investors may purchase shares for the potential of capital gains and regular dividend income.
Emerging Markets
Emerging markets are developing countries with potential for significant economic growth, like Brazil, Russia, India, and China (the BRIC nations). While they offer high return potential, such markets can also be volatile.
Equities
Equities, or shares, represent ownership in a company. Investors often seek to profit from price appreciation and dividend payments.
Exchange-Traded Funds (ETFs)
ETFs consist of a collection of investments designed to mirror the performance of specific indices. They allow investors to spread their risk across multiple assets efficiently.
Discretionary Fund Management
This investment management strategy assigns authority to a portfolio manager to buy or sell assets on behalf of clients within pre-defined parameters.
FTSE 100
The FTSE 100 (“Footsie”) is an index of the largest 100 companies on the London Stock Exchange, providing a gauge of stock performance.
Fund
A fund pools money from multiple investors to invest in different asset types and is typically managed actively or passively, with specific growth objectives based on the fund’s strategy.
Gilts
Gilts are bonds issued by the UK government, generally considered low-risk investments due to government backing.
Government Bonds
These bonds are issued by national governments to finance expenditures, offering lower risk but stable returns.
Index
An index is a collection of investments used to track market performance, which can inform investment strategies based on overall market trends.
Inflation
Inflation is the rate at which the general level of prices for goods and services rises over time, impacting savings and investment performance.
Individual Savings Accounts (ISAs)
ISAs are tax-advantaged accounts allowing individuals to save or invest without incurring tax on interest or capital gains. Nutmeg provides stocks and shares ISAs, Lifetime ISAs, and Junior ISAs.
Open-Ended Investment Company (OEIC)
OEICs allow multiple investors to pool their funds and invest in a broad range of assets, providing diversification and shared investment opportunities.
Passive Investing
This investment strategy aims to replicate the performance of a specified index over time, promoting diversified investment without frequent trading.
Pensions
Pensions are retirement savings plans that allow individuals to invest money over their working life, benefiting from tax relief to support their financial future.
Portfolio
A portfolio is a collection of various investments held by an individual, influencing the overall risk and potential returns.
Portfolio Rebalancing
This process involves adjusting your portfolio to maintain your desired investment strategy and risk level, ensuring that asset allocations remain aligned with your goals.
Securities
Securities refer to financial instruments, including stocks, bonds, and commodities, traded in markets to raise capital.
Short Selling
Short selling is a speculative investment strategy that involves borrowing shares to sell immediately, with the intention of buying them back at a lower price before returning them to the lender. It carries significant risk.
Stocks and Shares
These terms typically denote ownership in a company, where investors aim to buy at a lower price and sell at a higher price, benefiting from price appreciation and dividends.
Time-Weighted Returns
Time-weighted returns measure investment performance while accounting for contributions and withdrawals, offering a clearer perspective on overall performance.
Tracker Fund (Index Fund)
These funds aim to mimic the performance of a specific index, offering broad market exposure and lower management fees compared to actively managed funds.
Trading Halt
A trading halt temporarily suspends trading on a security or within an exchange, often in response to significant market movements or pending news.
Unit Trust
Unit trusts are collective investment schemes that allow investors to pool their money, providing access to diverse investment opportunities and risk spreading.
Market Volatility
Market volatility refers to fluctuations in investment prices. High volatility suggests pronounced price swings, while low volatility indicates more stable investments.
Wrapper
A wrapper is a financial product that consolidates various investments for particular tax advantages or streamlined management, such as ISAs and pensions.
Yield
Yield measures how well an investment generates income relative to its cost. Unlike returns, which report past performance, yield focuses on future expectations, including dividends and interest.
If you have any additional terms or concepts you’d like to see included, please tweet us @thenutmegteam.
Risk Warning
As with all investments, your capital is at risk. The value of your portfolio with Nutmeg can fluctuate, and you may receive less than your initial investment. Past and future performance indicators are not reliable indicators of future results. Tax treatment is subject to individual circumstances and may change over time.
Let me know if you need any changes or additional information!