A

1. Investment of £100 grows by 5% in the first year
2. You then have £105 at the start of year 2, this then grows by a further 3%, so at the beginning of year 3 the investment is worth £108.15. This is the effect of compounding.
3. So a growth of £8.15 on £100 over 2 years is actually an annual compound return of 4% per year, not 8.15% divided by 2.

B

C

You may have to pay capital gains tax on any profits over a set allowance when you sell assets such as shares or property. You are allowed to make gains up to a certain amount each tax year which are exempt from tax. Everyone has their own allowance so couples can make gains before they have to pay the tax. If your profits come to more than your allowance you only have to pay tax on the excess over the tax free limit.

Some gains you make are exempt from capital gains tax. These include gains from the sale of your car, Personal Equity Plans and Individual Savings Accounts. Also, you do not have to pay capital gains tax when you sell your home provided certain conditions are met.

D

When a company pays money (dividends) to its shareholders.

The spreading of investment funds among classes of securities and localities in order to distribute and control risk. This is a fundamental law of investment meaning simply: "don’t put all your eggs in one basket".

The amount of a company’s after-tax earnings which it pays to shareholders.

The return on share investment, calculated by dividing the dividend rate by the market price of the share.

During pension sharing, section 29 of the Welfare Reform and Pensions Act 1999 (WRPA 99) makes provisions for the creation of a pension debit against the member’s pension rights and for the former spouse to become entitled to a pension credit equal to the amount of the debit.

As a result of a pension sharing order the former spouse will be entitled to a pension credit being equal to that in value to the pension debit against the member’s pension rights.

E

When a member starts to take his/her pension before the normal retirement date of the scheme.

A measure of a company’s performance, calculated by dividing the company’s net operating profit after tax divided by the number of shares in issue.

A ratio calculated by dividing a company’s earnings per share by its current share price. The reciprocal of the price earnings ratio.

An investment portfolio is said to reside on the “efficient frontier” if it is expected to produce returns greater than other portfolios (i.e. with different asset mixes) of the same or lesser risk, where risk is defined as the standard deviation of the returns. In order to calculate an efficient frontier, future investment returns and their standard deviation need to be known. These are, of course, unknown and need to be estimated from past market data. However, there is no guarantee that the past will be a suitable guide to the future and so efficient frontiers cannot be determined with certainty.

Another name for Shares held in a company.

The value of an asset (e.g. a property) less any money owing on it (e.g. loans/mortgages).

An investment fund that invests in Shares in UK or overseas companies. International Equity Investment Funds invest either within developed economies or within emerging markets

The difference between the rate of return available from risk-free assets (such as government bonds) and that available from assuming the risk inherent in more volatile investment such as shares.

When a pension in payment is automatically increased at regular intervals by a fixed percentage rate or the increase of a specific index such as the Retail Price Index (RPI).

An investment approach which takes into account considerations other than solely the financial return potential of particular investments. An ethical portfolio might, for example, avoid investing in alcohol or tobacco.

A payment made that is not legally necessary under the terms of a contract. It is usually made because of a moral obligation and no legal liability is admitted by the payer when making an ex gratia payment.

The return achieved by a security over and above that obtained from a risk-free asset (such as a short-term government bond) held over the same period.

The price of the currency in terms of another currency.

The risk that the value of an investment may be diminished by movements in the exchange rate on a foreign currency.

A term meaning "without dividend" which denotes a share price which is quoted on the basis that the seller, not the buyer, is entitled to the current dividend on the share. (As opposed to Cum Dividend).

Individual(s) or Company(s)who are appointed in a will to deal with the wishes of the deceased, in administering their estate.

This is the extension of a company's intranet out onto the Internet, for example, to allow selected customers, suppliers and mobile workers to access the company's private data and applications via the World Wide Web. This is in contrast to, and usually in addition to, the company's public web site which is accessible to everyone. The difference can be somewhat blurred but generally an extranet implies real-time access through a firewall of some kind. Such facilities require very careful attention to security but are becoming an increasingly important means of delivering services and communicating efficiently.

F

The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuer. Face value is ordinarily the amount that the issuer promises to pay at maturity and is not an indication of current market value.

A person or organisation entrusted with the responsibility of managing, holding or investing assets in the best interest of the owner of the assets. Trustees of pension funds are fiduciaries in respect of the members of their funds.

An occupational pension scheme where the final pension an employee receives is linked to the size of their final salary. They are also referred to as Defined Benefits schemes.

Individuals who give advice about all aspects of finance. Financial advisers can advise and sell products for a range of insurance companies and investment companies. Generally, the companies pay them commission when they sell a product although they may assign part of that commission to their client. There are also financial advisers who do not take commission but charge a fee to their clients instead.

Referring to income which remains constant and does not fluctuate, such as income derived from bonds, annuities etc. Any debt security which has a fixed flow of income is known as a fixed interest security.

The financial service industry’s regulator. One of the principal aims of the regulator is to protect the consumer.

Free Standing Additional Voluntary Contribution – Non compulsory payments made by a member of an occupational pension scheme who wants to boost their retirement benefits but keep it separate from their occupational fund.

An index of the Share prices of the 100 largest companies (by market capitalisation) in the UK.

An index of the Share prices of over 800 leading companies and Investment Trusts on the London Stock Exchange. See also FTSE 100 Index.

Pension policy where the only premium received is the Department of Work and Pensions rebate.

A pool of money normally set apart for a purpose, for example, a pension fund to provide benefits under a pension policy.

Analysis of share values based on factors such as sales, earnings and assets that are “fundamental” to the enterprise of the company in question. These factors are considered in light of current share prices to ascertain any mispricing of the shares.

The professional company responsible for the day to day running of a fund.

The monetary value of a fund, calculated by adding up the value of its underlying assets. The price of units in a Unit Trust, for instance, is worked out from the value of all its holdings divided by the number of units issued.

An obligation to make or take delivery of a specified quantity and quality of an underlying asset at a particular time in the future and at a price agreed when the contract was executed.

G

A measure of indebtedness, i.e. the extent of borrowing as against the equity held by a person or company in an asset. The ability to increase exposure by investing in futures contracts without making the underlying cash available. See also Leverage.

Is a transfer of goods or property to another party. There are limits to the amount of gifts you can make without any tax liability.

A loan to the government usually with a fixed rate of interest and usually over a specified period of time. The original amount is usually repaid at the end of the loan period

Low risk investment with high security.

The total before deductions have been taken away.

A measurement of the aggregate goods produced and services provided within an economy over a year and excluding income earned outside the country. Considered one of the main yardsticks of the health and vitality of an economy. See also Gross National Product.

The amount of interest you receive without any Income Tax taken out

An economic statistic which includes GDP plus any income earned by residents from their overseas investments, minus income earned within the domestic economy by overseas residents. See also Gross Domestic Product.

The seven major capitalist powers: Canada, France, Germany, Italy, Japan, UK and US.

One who seeks capital gain from expected further growth in company earnings. Typically, growth investors care less about price/earnings ratios and other valuation measures and more about earnings growth.

Stocks whose earnings have grown at an above-average rate over a number of years and which are expected to continue to grow at a high rate for some time to come.

A Guaranteed Pension amount paid, as a condition of contracting out of SERPS under a Final Salary Scheme up to and including 5 April 1997 from which point different rules apply.

H

The principal Hong Kong Share Price Index.

The published overall inflation rate, unadjusted for non-economic factors, as opposed to underlying inflation.

The practice of undertaking one investment activity in order to protect against loss in another e.g. selling short to nullify a previous purchase. While hedges reduce potential losses, they also tend to reduce potential profits.

A type of investment portfolio under which the fund manager is authorised to utilise a number of higher risk investment techniques, including using derivatives, short selling and borrowing funds to generate a higher return.

The highest rate of Income Tax in the UK, which is currently 40%.

Company which controls another company usually by owning 50% or more of its Shares.

I

An example of the potential growth rates a customer can expect to receive from an investment. The growth rates used are set by the FSA, the industry’s regulator. It is important to remember that the actual return received could be higher or lower than those shown on the illustration.

The design of a portfolio to achieve a target level of return in the face of changing reinvestment rates and price levels. This is done by combining short and long-term bonds in the same portfolio to produce a predictable rate of return regardless of movements in interest rates.

Money received by an individual as a salary, or from investments. Cash deposits and Bonds will provide income in the form of interest. UK Shares will, in most but not all cases, provide income in the form of twice-yearly dividends. The most notable exceptions are the high growth, ‘new economy’ stocks that came to prominence in the late 1990s which generally do not pay dividends. This income is subject to Income Tax.

See unsecured pension.

A portfolio consisting of securities whose principal attractiveness lies in the steady income they provide.

Tax paid by individuals on income received over a certain threshold. The amount paid will depend on the amount earned and unearned during a tax year period.

Unit held within a Unit Trust that pays out to investors as an income, instead of being reinvested.

In the stock market, an index is a device that measures changes in the prices of a basket of Shares, and represents the changes using a single figure. The purpose is to give investors an easy way to see the general direction of Shares in the index. Examples of stock market indices are the FTSE 100, FTSE All-Share, Nikkei and Dow Jones.

1. Making an adjustment to allow for the effects inflation can have on money formerly used to reduce the amount payable in Capital Gains Tax.
2. Another name for Index Tracking. An investment strategy designed to produce a rate of return in line with a specific financial index

A portfolio of securities structured in such a way that its value will closely follow a nominated market index, e.g. an equity index fund may be designed to track the FT/S&P All Share Index. There are three main methods in use; Replication, Stratified Sampling and Optimised Sampling.

A way of managing a fund. An index-linked fund simply follows as closely as possible the movement within a chosen market. It does not aim to outperform the market like active management does.

An increase in the level of prices of goods and services in the economy. It is typically measured by examining a basket of goods and services.

IHT is a tax that your estate pays at a flat rate of 40% on assets over a certain limit (the IHT threshold) that you leave on your death.

Any amount of money you give away outright will not be counted for the IHT if you survive for seven years after making the gift. If you die within seven years, taper relief on the amount will apply. This reduces the amount of tax due.

Some gifts are exempt for IHT altogether regardless of how soon you die after making them. They include gifts to your spouse and gifts to charities.

Referring to an activity which is conducted within an organisation rather than contracted out to an external party.

A charge made by an investment provider when you first take out an investment. This is to cover the cost of setting up the investment

The first sale of shares of a company to the public.

The illegal practice of trading in securities on the basis of “inside” or secret information which is not available to the public at large.

A tax levied on most non-life insurance policies.

A person covered by an insurance policy.

A company that offers an insurance policy.

A tax-free transfer between husband and wife under Inheritance Tax rules.

The return earned on funds which have been loaned or invested (i.e. the amount a borrower pays to a lender for the use of his/her money).

The amount of money a customer can earn on an investment. It is usually expressed as a percentage of the total sum invested.

The degree of movement in the price of a security, usually that of a bond, resulting from moves in interest rates.

An international organisation founded in 1947 to promote maintenance of equilibrium in the balance of payments among the various nations of the world. The functions of the IMF include the levying of quotas on member nations to create a pool of funds available to be loaned to nations facing balance of payments problems.

Without a valid will.

An asset acquired for the purpose of producing income and/or capital gains for its owner.

A financial expert trained to analyse the activities and future prospects and earnings of companies and securities for the purpose of investment.

This is a company whose main business consists of specific activities relating to investments. Examples of Investment Companies include stockbrokers and investment fund managers.

The general economic, political, legal and market conditions within which an investment is made.

Bonds which have a credit rating which is sufficient for them to be purchased by most institutional investors.

A contractual agreement between an investor and an investment manager stating the terms and conditions applying to management of the stated assets.

An organisation or individual that specialises in the investment of a portfolio of securities on behalf of individuals and/or organisations subject to the guidelines and directions of the investor. Investment managers offer both pooled investment products and segregated portfolios to a range of clients including pension funds, institutions and private investors.

The set of principles or systems used by investors to govern the way they manage portfolios. Sometimes confused with investment style, which tends more to be associated with the level of risk in the portfolio.

A company that invests in shares of other companies. When investing in an Investment Trust customers actually own shares in the Investment Trust rather than owning the shares it invests in. Investment Trusts are closed ended investment vechicles.

A person whose principal purpose is to invest money prudently and productively over the longer term with the investment objectives being achievement of a reasonable return and capital appreciation to preserve purchasing power. The opposite of a Speculator, who will sacrifice safety of principal for the possibility of larger gains.

Individual Savings Account – A savings vehicle that allows customers to invest in equities, life assurance policies or save in cash without having to pay tax on the returns gained from them. Reclassified as Stocks and Shares ISA or Cash ISA from April 2008, with new rules applying.

J

A high risk, high yield debt security rated below triple B.

K

A document that will contain key information on a financial product, such as:

1. An explanation of the purpose, commitment and risks involved, as well as answers to some of the most common questions asked.

2. Details of what the policy might be worth in future years.

3. Details and explanation of the charges made on the policy.

A life assurance policy to cover the death of a business’s key employee. It pays out a lump sum that is designed to cover the costs of finding and training a replacement as well as covering any loss of profitability.

L

The inception date of a fund.

A simple form of life assurance that pays out a lump sum if the policy holder dies within a specified time period

A synonym for gearing (e.g. using derivative investments to over-invest a portfolio).

Opposite of assets – i.e. debts. In the case of pension funds, a stream of obligations (pension payments).

Abbreviation for London Interbank Offered Rate, the interest rate at which major international banks in London will lend cash to each other, and thus an indicator rate for international lending.

An insurance policy which pays out a lump sum on the death of the policy holder

A pool of money held by a Life Company into which all life assurance policy holders’ premiums are paid and all claims are made from.

The ability of an investment to be easily converted into cash with little or no loss of capital and with minimum delay. An example of a highly liquid asset is a short term bank bill, while property is a relatively illiquid investment. For many securities, the degree of liquidity depends on the depth of the secondary market for that security. Also refers to the maintenance of cash and reserves by a financial institution to fund withdrawals by depositors, unit holders or clients.

The risk that an investment may not be easily converted into cash with little or no loss of capital and with minimum delay.

A market where selling and buying can be accomplished with ease, due to the presence of a large number of interested buyers and sellers willing and able to trade substantial quantities at small price differences.

Lipper Models are based on Lipper's Asset Allocation Analysis process. This Asset Allocation Analysis (AAA) provides a monthly peer survey, covering in excess of 2,800 life & pension and unit trusts, detailing their investment mix and geographical asset allocation.

For an investment manager, the funds asset allocation will provide a performance differential to the benchmark index as well as the funds peer sector. Understanding the allocation of the funds within the peer sector will give the investment manager the ability to measure the potential risk of out or under performing relative to its peers. Hence, AAA enhances the asset allocation decision to take account of the funds performance against its peers.

A company whose shares are traded on the stock exchange and are able to be bought and sold by members of the general public.

A Share which is quoted on a Stock Exchange. Specifically in the UK, this would be a listing on the main market (as opposed to the unlisted securities market or the third market).

Loan Stock

A security bearing a fixed rate of interest. The capital (the amount loaned) is repaid after a given period of time.

Long

In relation to foreign exchange and share trading, referring to an ownership position in which the trader has bought more of a particular security than he or she has sold.

Long Position

An excess of purchases over sales of the relevant investment instrument.

Long Term Care Bonds

An investment bond that is designed to cover the costs of care in old age. Can be used to cover residential home cost as well as expenses incurred when care takes place within the home.

Lower Earnings Limit

The minimum amount which must be earned in any pay period before National Insurance becomes payable.

M

Macroeconomics

Economic analysis concerning broad trends and influences on the economy, such as the interaction of fiscal and monetary policies, GDP, balance of payments etc. As opposed to Microeconomics which focuses on individual units such as companies and markets to assess their influence on the economy.

Managed Fund

Managed funds are generally made up of a spread of other specialist funds so spreading the risk.

Mandate

The agreed objectives given by an investor to his or her investment manager, often including a benchmark, guidelines as to sector exposures and prohibited investments.

Marginal Tax Rate

The tax rate applied as someone moves from up from one tax band to the next.

Market Capitalisation

The sum of the total amount of various securities issued by a corporation, multiplied by the current market price of those securities.

Market Cycle

A business cycle concerned specifically with rises and falls in market activity, as measured by an index.

Market Level Indicator

An index comparing the values of fixed interest securities and Shares, used in determining State scheme premiums

Market Price

With reference to a security, the last reported price at which the security sold. Alternatively, the highest price which a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.

Market Risk

Risk that relates to the market as a whole and therefore cannot be diversified away simply by holding a greater variety of securities. See also Systematic Risk.

Market Timing

The purchase or sale of securities on the basis of shorter-term price patterns and temporary market opportunities as well as judgements of underlying value. An extremely difficult thing to get right consistently.

Market Value

The value of an asset to a third party on the open market.

Market Value Reduction (adjustment)

A reduction in the value of a claim on a Unitised With-Profits Bond in order to reflect fairly the movement of assets underlying the policy.

Matching

The arrangement of assets, and the return from those assets, to meet future liabilities and obligations.

Maturity

Maximum gain

Maximum Loss

The Maximum Loss represents the worst possible return, over a minimum of three months within the performance period.

Median

The value (rate of return, market sensitivity, etc) that exceeds one-half of the values in the sample and is exceeded by the other half. The median is always the middle value, as distinct from the mean, which represents the average value. For example, if five items cost £20, £80, £100, £300 and £500 respectively, the median value would be £100, whereas the mean or average would be £200.

Member

A person who has been admitted to membership of a pension scheme and is entitled to benefits under the scheme.

Member Choice

Microeconomics

Economic analysis dealing with individual companies or markets and their impact on the economy, as opposed to macroeconomics which focuses on broader influences and trends.

Middle Band Earnings

Earnings between the lower earnings limit and upper earnings limit.

Reclassified as either Stocks and Shares ISA or Cash ISA from April 2008, with new rules applying.

Minimum Contributions

Contributions payable to an appropriate Personal Pension or Stakeholder Pension by the Inland Revenue in respect of a member who has contracted out of SERPS or the State Second Pension. This could also refer to minimum contribution levels that can be paid into a financial product.

Minimum Income Guarantee (MIG)

A means-tested benefit that helps individuals on low incomes at retirement. If you apply, the Department of Work and Pensions assesses your income and decides whether you get a top-up.

Modified Duration

Momentum

The tendency of an asset price to keep moving in the same direction, either upwards or downwards.

Money Market

The market for trade in short-term securities such as Bills of Exchange, Promissory Notes and Government and Semi-Government bonds. Participants in the money market include banks and other financial institutions, life offices, stockbrokers, pension funds and Government authorities. See also Capital Markets.

Money Purchase Schemes

An occupational pension scheme where the contributions made by the employer and employee are set and the final pension an employee receives depends on the size of their fund on retirement. This final fund is then used to buy an annuity. Also referred to as Defined Contribution schemes

Moody’s

American credit rating organisation – operates in similar fashion to Standard & Poor ‘s.

Mortgage Indemnity Insurance

Insurance that covers the mortgage lender, in the event that the property is repossessed and its value when sold does not cover the remaining loan.

MSCI Index

Abbreviation for Morgan Stanley Capital International Index, a series of country indexes of equity prices. The MSCI World Index is one standard for comparisons of international equity performance, although there are others, including the Frank Russell and Financial Times indices.

Mutual Fund

N

National Insurance Contributions Office (NICO)

National Savings

Negotiable Instrument

Net

Net Asset Value (NAV)

Net Interest

New Issue

Any type of security issued to raise additional money. Offerings are made to existing shareholders, through rights issues or entitlements and/or to non-shareholders. Proceeds may be used for retiring debt, for acquisition or for working capital.

Nil Rate Band

The first threshold in the value of an estate on which the IHT rate levied is nil.

No Claims Bonus

A reduction in an insurance premium because the customer has a claim free record.

Nominal Value

The face value of something e.g. a Share issue

Nominee

An individual or company in whose name a security is registered to be owned, although the real (or beneficial) ownership is actually held by another party. Nominee companies are often used by share investors who for some reason wish their identities to remain undisclosed or who simply require another party to manage (or hold as custodian) their investments.

Non Contributory Pension

An occupational pension where the employee does not make any type of contribution. It is entirely funded by the employer.

Normal Retirement Date

Refers to the date when benefits can normally be taken from a pension scheme, as defined in the rules of the plan.

Not Contracted Out

Someone who has not contracted out of State Second Pension.

O

OBSR Fund Ratings are determined on the premise that the fund selection process should, whilst taking past performance into consideration, ascribe greater weight to identifying the factors which will affect future performance. This process demands a much stronger emphasis on a qualitative examination of funds. Ratings awarded are AAA, AA or A.

There are several key factors which lead to the final OBSR Rating determination. These are:

• Strength of investment process and length of time it has been in place

• Continuity of investment personnel

• Investment style that has proven durable over time

• Clearly defined investment objectives

• Strong and consistent past performance record

• Favourable risk adjusted returns

The OBSR Ratings are determined following in-depth qualitative and quantitative analysis with the emphasis more focused towards qualitative appraisals.

Occupational Pension Scheme

A pension scheme provided by an employer for its employees. Occupational pension schemes are mainly "defined benefit" or "defined contribution".

Off Balance Sheet

Referring to financial commitments or liabilities that do not generally appear in a company’s balance sheet (e.g. operating leases or derivative contracts).

Offer

Offer To Bid

Compares the original purchase cost or offer price –usually of a Unit Trust –with its bid price, the price you receive if you sell.

Offer To Offer

Compares the original purchase cost or offer price – usually of a Unit Trust – with its current offer price.

Off Market

Relating to a transaction which occurs outside a formal market – e.g. transactions in unlisted securities or transactions involving listed shares which were not executed on a stock exchange. Off market transactions are conducted through negotiation rather than an "auction" system.

Offshore

Basically, anywhere out of the country not within the authority of the Inland Revenue.

Offshore Sector

Ombudsman

OPAs

Open Ended Investment Company (OEIC)

OEICs have been familiar in continental Europe and Offshore for some time. They are now permitted in the United Kingdom and a number of unit trusts have been converted into OEICs.

Basically, the OEIC is an investment company where shares can be created or cancelled to match demand, in a way