## Contents

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

#### A

#### B

#### C

Collective investments

Commodities

#### D

Deflation

Diversification

Dividends

Dollar cost averaging

#### E

Economic climate

Euro cost averaging

Expected return

#### G

#### H

#### I

Inflation

Investment

Investment portfolio

Investment property

Investment trust

#### N

#### O

#### P

Personal allowance

Portfolio

Pound cost averaging

#### R

#### S

Salary Sacrifice

Shares

Stocks

Stock market

#### T

#### U

*Alternatives*

A varied selection of investments which don’t fit into traditional investment categories (*cash*, *bonds*, *shares/stocks*, *property*, *commodities*). They tend to be specialised and can be very high risk, high reward. It is possible to lose well in excess of your initial capital with them.

*Annuity*

A financial product, usually offered by insurance companies, which guarantees to pay a predetermined level of income in exchange for a lump sum. Payments typically cease on the policy holder’s death. Variations exist including options for the income to increase in line with inflation, to guarantee payment to a spouse until their death or to a dependant for a set period of time.

*Asset*

A holding which has economic value. In investment terms one would aim for the asset to provide income, capital growth or a combination of the two.

*Bonds*

Loans made to governments, government bodies or companies. Typically they pay a fixed rate of interest (*coupon*) on a bi-annual basis for a set period. At the end of the term (*maturity*) the final *coupon* and the *principle* (initial amount loaned) is repaid.

*Collective investments*

Where numerous investment holdings are held in one place on the behalf of a group of investors. They are typically managed by one person. Due to the pooling of resources this can allow for greater diversification and cost savings when compared to an individual wishing to mimic the portfolio. The two main schemes are units trusts and investment trusts.

*Commodities*

Homogeneous goods we require such as metals, oil, gas, coffee etc.

*Diversification*

The practice of holding investments which exhibit different performance characteristics thereby allowing offsetting. Their performance may be heavily influenced by the current and expected *economic climate*. Strong performance of one asset offsets a poor return from another. The result should allow a drop in volatility with no necessary loss in *expected return* if done correctly.

*Dividends*

Part of the net profits made by a company which is paid out to shareholders. The remainder of the net profits is re-invested in the company with the aim of creating capital growth.

*Economic climate*

The perception of current and future growth prospects for a given region. This encompasses factors including job prospects, wage growth expectations, and credit availability. This therefore will effect how people save and invest among other financial matters.

*Expected return*

*Expected return* equals the sum of all probabilities multiplied by their outcomes.

For example, if a coin was tossed 5 times and there was a chance of winning €20 per time then the expected return = €50 despite this outcome not being feasible. The calculation is;

Expected return for 1 coin toss | = 50% chance of €0 + 50% chance of €20 | |

= (0.5 x €0) + (0.5 x €20) | ||

= €10 | ||

Result options for 2 coin tosses | = (0.25 x €0) + (0.25 x €20) + (0.25 x €20) + (0.25 x €40) | |

= €20 | ||

… Expected return for 5 coin tosses | = 2^5 or 32 possible outcomes | |

= (1/32 x €0) + (5/32 x €20) + (10/32 x €40) + (10/32 x €60) + (5/32 x €80) + (1/32 x €100) | ||

= €50 |

*Gilts*

Gilts are bonds issued by the UK Government. They are denominated over different terms with the promise of paying a rate of interest, usually on a bi-annual basis, along with the principle at the end of the term.

The **Gilt Index Yield** is the annual income expressed in percentage terms based on the current price and the income due to be paid until the end of the term. Assuming the current price of a gilt is £105, face value is £100 and has a coupon of £10 and is due to mature in one year then the Gilt Index Yield is 4.76% i.e. £5 capital loss (£105 paid less £100 due) + £10 = £5 divided by price paid of £105

*Hedge funds*

Companies that can take *short* positions. Shorting an asset is selling an asset that you don’t own. They can therefore profit when markets go down as well as up.

*Inflation *or *deflation*

The rate of change, expressed as an annualised percentage, of a basket of common goods and services. It should show the rate by which average costs are increasing (*inflation*) or decreasing (*deflation*)

*Inflation* of 3% means that goods worth €100 will cost €103 in one year’s time

*Deflation* of 3% means that goods worth €100 will cost €97 in one year’s time

*Investment*

The process of purchasing an asset with the expectation that it will grow in value. This increased value can come from income generation, capital appreciation or a combination of the two

*Investment portfolio*

A group of investments held by one entity (usually either a company, financial institution or individual)

*Investment property*

Residential (private) or commercial (shops, factories etc) premises purchased mainly to make a profit

*Investment trust*

A form of collective investment whereby a fixed number of units (shares) are sold at the outset for a predetermined price in the beginning. These are also known as *closed-ended* investments. Since the shares are traded in the normal manner they can go through periods where they are priced higher and lower than the underlying investment value (known as Net Asset Value or NAV).

*Net present value*

Expressing future income streams in today’s currency by using a discount rate. The discount rate accounts for the time value of money (€100 today is worth more than €100 in 5 years time), the uncertainty of future cash flows and opportunity costs.

*Opportunity costs*

The cost of pursuing one action at the expense of another. It is returns that would have been generated if the other course was pursued.

For example, investing 100% in shares results in an opportunity cost for all other asset classes. If bonds outperform shares by 5% over a defined term then this is the opportunity cost.

*Personal allowance*

Your personal allowance is the amount of money your are entitled to earn per year without being liable to income tax. The exact level is dependent upon your circumstances and should be available via Her Majesty’s Revenue & Customs (HMRC) if unknown.

*Pound (euro/dollar) cost averaging*

The practice of investing on a regular basis, usually monthly, which will result in the accumulation of wealth at a fair value. This can allow you to capitalise when markets and investments drop in value because they don’t have to rise back to their peak for you to benefit.

Example, If you purchased 1000 shares at a cost of €1 each as a lump sum (single payment) then their price has to increase for you to see any profit.

Alternatively, if you only bought 500 shares for €500 and then the price dropped by half your initial stake would be worth €250. However, you can now buy twice as many shares for your remaining €500 so you will have 1500 shares in total. The price then only has to rise to €66.67 for you to be profitable.

*Real return*

The return rate of an investment expressed as a percentage after *inflation* is accounted for. For example, if inflation is 2% and an investment returns 7% the *real return* is 5%.

*Salary Sacrifice*

An arrangement between an employee and an employer where the former forgoes a portion of their salary in return for a given benefit (usually non monetary). A common option is to receive (additional) pension contributions in exchange for a reduced income. This benefits both parties since it reduces their national insurance contributions (UK income tax in all but name). The savings in tax is then split between the employer and employee according to their agreement.

*Shares* (aka *stocks*)

Certificates that give the holder (*shareholder*) part ownership (*share*) of a company. This entitles them to a split of any *dividends* (income) paid out and the underlying value of the firm. In the event of liquidation *shareholders* cannot lose more than they invested.

*Stockmarket*

An exchange where shares are bought and sold.

*Tax year*

The UK tax year, also known as *fiscal year*, runs from the 6th of April to the 5th of April. For example, tax year 2015/2016 is from the 6th of April 2015 to the 5th April 2016

*Top marginal rate*

This income is added to all other forms of taxable income you have for the year and is charged tax at the applicable highest possible rate.

For example, to work out the tax due on £20,000 which is charged at the *top marginal rate* where tax rates are 20% up to £40,000 and 40% thereafter we have to know the level of all other forms of taxable income. If this is only £30,000 from an annual salary then the tax liable is;

£30,000 + £20,000 = £50,000

£10,000 is above £40,000 and is charge at 40% i.e. £4,000

The rest is below £40,000 and is charged at 20% i.e. £2,000 (for the remaining £10,000 out of £20,000)

Total tax liable on the £20,000 = £4,000 + £2,000 = £6,000

*Unit trusts*

A form of collective investment whereby investors buy into the fund which then will then use the money to purchase assets on their behalf. The opposite occurs for sell orders. In reality, the buy and sell orders are amalgamated with the difference resulting in whether assets are bought or sold. These are also known as *open-ended* investments.