Investment glossary

Use this glossary of key investment terms to help you understand how to make an investment and choose the right investment for you.

Annuity

When you come to retire you have the option of buying an annuity, which converts your existing pension fund into an income for life. An annuity is an annual payment or receipt and it is normally used to provide a retirement income. 

There are a number of different types of annuity. They can include:

Lifetime annuities – which provide you with an income for life, and can continue payments to a beneficiary, such as a spouse, partner or child, in order to provide them with an income after you die.

Fixed-term annuities – this provides an income for period of time, usually up to ten years, followed by a ‘maturity amount’.

Asset class

Where you make an investment you have to decide where you want to put your money. The most common asset classes are shares, bonds, property and cash deposits. Different asset classes have different types of risk and reward. For example, if you are looking for a low risk asset class you might want to keep your money in cash in a savings account. If you are willing to take more risk in order to potentially earn a better return, you could consider shares as an asset class for your investment.

Base Rate

The base rate is the rate charged by the Bank of England to other banks and other lenders when they borrow money. This influences the interest rates charged for mortgages, loans and other types of credit. When the base rate is low, savings and mortgage rates are likely to be relatively low too. When the Bank of England increases the base rate, mortgage lenders and banks tend to pass on the rise by increasing the mortgage rate they charge to customers.

Blue chip

An informal term used to refer to shares or a company that are financially stable (not likely to fail) on the stock market. Blue chip companies tend to be large, established companies.

Broker

An agent who acts as an intermediary between buyers and sellers, usually for payment of a commission.

Capital

The money you initially invest in a business or the amount of money you have to make an investment.

Capital growth

This is any increase in the original amount you invested, after costs, charges and depreciation.

Compound interest

This is the cumulative effect of earning interest on your savings and leaving your interest in the savings account. If you leave your interest to grow, the effect of compound interest can be significant as you are earning interest on interest.

Diversification

When you are putting together a set of investments, it is a good idea to spread the risk by having your money in a number of different asset classes. This is known as diversification. By spreading the risk, you are trying to make sure that if one asset class performs badly, the whole of your portfolio is not affected. 

Dividend

A payment made to shareholders/unit-holders from a company/investment group. Some companies pay regular and substantial dividends and these are particularly popular with investors who are looking for regular income.

Dividend Allowance

The Dividend Allowance is the amount of dividends you can earn from stocks and shares in any one tax year before you have to pay any additional tax. In the 2020 to 2021 tax year the Dividend Allowance for each adult individual is £2,000.

Equities

Another name for shares. Where you buy equities you are buying shares. There are different ways of buying equities – you can buy shares in individual companies, or buy a fund that invests in a variety of different companies and spreads the risk.

Inflation

An increase in the level of prices of goods and services in the economy. It is measured by examining a typical basket of goods and services. Inflation can have a detrimental effect on your investments, particularly money held in cash, because high inflation erodes the real buying power of your money.

Liquid asset

An asset that can be quickly, easily and inexpensively turned into cash. Property is not a liquid asset, for example, because it takes time and money to sell it and realise its value.

Open Ended Investment Company (OEIC)

A type of pooled investment fund, open-ended investment funds can create new shares or cancel existing shares in issue.

Ordinary shares

A class of share usually associated with UK stock market investments. Shareholders have the right to receive distributed profits and vote at annual general meetings.

Paper loss

Also known as unrealised loss, this is where an asset or investment has decreased in value before you come to cash it in, i.e. your investment is worth less 'on paper'.

Pension

In simple terms this is an income plan for income to be received during retirement. Pensions can be a very good way to save for the future. The government gives tax relief on pension contributions in order to encourage you to build up a retirement nest egg. Tax relief on pension contributions is particularly valuable for higher rate taxpayers.

Personal allowance

The amount of income an individual can earn free of tax. The amount is set in the Budget and unveiled by the Chancellor of the Exchequer each financial year.

Personal savings allowance

The Personal Savings Allowance (PSA) is the amount of money you can earn in interest from savings accounts before you have to pay tax on it. In the 2020 to 2021 tax year this allowance is £1,000 if you are a basic rate taxpayer.

In other words, you can earn up to £1,000 on your savings before you have to pay any tax. For higher rate taxpayers, the allowance falls to just £500 a year, and for those people who pay additional rate tax, the PSA falls to zero.

Pooled investment

Many people putting their money together into a single investment fund. This enables individual investors to buy into a fund which is much more diversified and therefore lower risk.

Portfolio

A collection of investments that can include any or all asset types. When you are constructing an investment portfolio you should think about your attitude to risk and reward, and how long you intend to hold the investment for.

Tax wrapper

Tax breaks that an investor can 'wrap' around their investment, so that they can are sheltered from paying some or all tax on it. The most common tax wrappers are ISAs and pensions. If you are wondering what is a tax wrapper, it can be any form of tax break that shields your investments from tax. When you are thinking about a pension for example, this is the tax wrapper meaning that you receive tax relief when you make your pension contribution.