Business Magazine

Key Financial Terms: Explained!

By Mountain Publishing @mountainpublish

A recent study carried out by the Organisation for Economic Cooperation and Development (OECD) has found that only 38% of adults know what ‘inflation’ is. Could this highlight a gap in Britain’s financial knowledge?

One financial group that is striving to improve financial understanding is True Potential LLP. The parent company of shares ISA provider, True Potential Investor, has established the True Potential Centre for the Public Understanding of Finance (PUFin) through its partnership with the Open University. Also on offer is a number of free financial courses, which 200,000 people have already taken advantage of.

Here, True Potential Investor busts the jargon to help develop our understanding:

Bonds

If a company needs to raise funds to help it achieve a particular aim, corporate bonds may be offered. 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.

Bonds and gilts are also available from the government. They work in a similar way to corporate bonds and are used to fund borrowing.

Capital

The initial funds that you invest are referred to as capital.

Capital gains tax

The profit you make through specific investment types could be subject to capital gains tax. Simply put, this is the tax you pay on the profit you make. 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

With diversification, you are able to invest in 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.

The main benefits of diversification are that you can manage risk and reduce the potential impact of market uncertainty more effectively.

FTSE

The performance of companies and indices trading on the London Stock Exchange is monitored by the Financial Times Stock Exchange (FTSE). A number of lists are available, with each showing the fluctuations in share prices over time.

Inflation

The growth in cost of goods and services over time is called inflation. It is measured as an annual percentage change and can impact interest rates and share prices.

ISA

ISAs (Individual Savings Accounts) are popular because they offer a tax-free or tax-efficient method of saving. 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

By contributing to a pension, you can financially prepare for later life. The money you place in the pension fund is invested with the aim of growing it by the time you retire. The three main types of pensions are:

  • 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

Investors are able to purchase a share in a company through 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.

Generally, investors purchase stocks and shares with the aim of later selling them on for a higher price. 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

The word ‘yield’ refers to how your investment has performed both now 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.


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