Wealth management glossary
We’ve written this guide to help make investment literature easier to understand and to clarify some of the more common terms. Emphasis has been placed on clarity and brevity rather than attempting to cover every complexity. We hope you find it useful and simple to digest. We have made every effort to ensure that the terms are accurately described, however, the descriptions are not definitive and they may differ from other interpretations used.
A – C
Absolute return strategy
An absolute return investment strategy aims to deliver positive returns whatever the market does, rather than simply aiming to outperform a benchmark index.
An investment management approach where a manager aims to beat the market through research, analysis and their own judgement. See also Passive management.
Investments outside of the traditional asset classes of equities, bonds and cash. Alternative investments include property, hedge funds, commodities, private equity, and infrastructure.
For a period of greater than one year, a measure of the level of return that has been achieved on average each year.
Broad groups of different types of investments. The main investment asset classes are equities, bonds and cash. Non traditional asset classes are known as alternative investments. However, an asset can be anything with commercial or exchange value owned by a business, institution or individual. This could include cash, real estate, art or vintage wines.
Defined by a prolonged drop in investment prices — generally, a bear market happens when a broad market index falls by 20% or more from its most recent high. The reverse of this is a bull market, which characterised by gains of 20% or more.
A standard, (usually an index or a market average) that an investment fund's performance can be measured against. Many funds are managed with reference to a stated benchmark.
A high-quality and relatively low-risk investment. The term usually refers to stocks of large, well-established companies that have performed well over a long time. The term originally comes from poker, where the blue chips are the most valuable.
Provide a way for governments and companies to raise money from investors for current spending requirements. In exchange for an upfront payment from investors, a bond will typically commit the issuer to make annual interest payments and to repay the initial investment amount on maturity at a specified date in the future.
Bottom up investing
Investment based on analysis of individual companies, whereby that company's history, management, and potential are considered more important than general market or sector trends (as opposed to top down investing).
When the price of an asset or security rises continuously. The commonly accepted definition is when stock prices rise by 20%. Traders employ a variety of strategies, such as increased buy and hold and retracement, to profit off bull markets.
A bond issued by a company.
Correlation is a measure of how securities or asset classes move in relation to each other. Highly correlated investments tend to move up and down together while investments with low correlation tend to perform in different ways in different market conditions, providing investors with diversification benefits. Correlation is measured between 1 (perfect correlation) and -1 (perfect opposite correlation). A correlation coefficient of 0 suggests there is no correlation.
Bond issuers can pay to have their bonds rated by a number of credit ratings agencies including Standard & Poors, Moody's and Fitch. The credit rating is designed to give investors an indication of the quality of the bond, providing a professional assessment of the risk that the issuer may default on interest and capital repayments. Credit ratings are subject to regular review and can and do change.
An assessment of a borrower's ability to repay debts and the likelihood of default. Ratings are expressed through letter grades and help investors and lenders evaluate credit risk.
The risk that a bond issuer will default on their contractual obligation to make interest payment to investors.
Reducing or removing the risk of incurring losses through currency movements. This is typically achieved through the use of derivatives such as futures or options.
The annual income from an investment, expressed as a percentage of the current price. For example, if a bond that is worth £100 gives you an annual income of £6, the current yield is 6%.
D – F
The risk that a bond issuer will not be able to meet their debt payments and subsequently default on their contractual obligation to investors.
Financial contracts that derive their value from an underlying asset, used for speculation, hedging, and gaining exposure without owning the underlying asset.
Discretionary investment management
A service where a professional portfolio manager has the authority to make investment decisions on behalf of a client. Decisions will be based on the client's objectives and risk tolerance.
Creating a portfolio from a range of different assets. This reduces the risk of loss through exposure to any individual asset and can help to reduce overall portfolio risk where assets have a low correlation.
The annual dividend per share divided by the current share price. It is useful for comparing investments. For example, if a company's shares are trading at £100 and the annual dividend is £5, the dividend yield is 5%. However, if the company's shares are £200, the dividend yield is just 2.5%.
A draw down is usually quoted as the percentage between the peak and trough of an investment during a specific period. It can help to compare an investment's possible reward to its risk. Alternatively, when investing in certain types of funds, particularly venture capital funds, it can also refer to when an investor commits to invest a sum of money but doesn't give it all to the fund manager immediately. The fund manager makes the investments and draws down money as required.
A measure of a bond investment's sensitivity to changes in interest rates. The longer the duration, the more sensitive it is. Calculating 'duration' for a fixed income investment such as a bond is a complicated sum. It takes into account the current value of the bond, the coupon or interest payment, the book cost, and the number of years the bond has left to run. Put simply, the higher the duration number the higher the potential return (and the greater the risk).
The percentage change in a company's earnings per share, generally measured over one year.
The earnings per share divided by the current market price.
Describes a country or economy that is becoming more advanced, usually by means of rapid growth and industrialization. These markets may carry higher risks due to political instability and currency volatility.
An investment service where the client makes investment decisions without receiving any advice or recommendations from a financial professional. The client takes full responsibility for their investment decisions.
Types of investment that pay investors fixed interest or dividend payments until their maturity date. At maturity, investors are repaid the principal amount they invested. Government and corporate bonds are the most common types of fixed-income products.
A subset of emerging markets that are considered less established and less developed. These markets are typically smaller, less liquid, and less accessible than traditional emerging markets.
A standardized contract to buy or sell an asset at a predetermined price and date in the future.
G – I
A bond issued by a government.
Gross redemption yield
The total return you could receive on a bond including the interest or coupon plus any capital growth.
A collective name for funds targeting absolute returns through investment in financial markets and/or applying non-traditional portfolio management techniques. Hedge funds can invest using a broad array of strategies, ranging from conservative to aggressive.
High yield bond
A speculative bond with a credit rating below investment grade. Generally, the higher the risk of default by the bond issuer, the greater the interest or coupon.
The distributions declared over the past 12 months expressed as a percentage of the mid-market price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on the distribution. So, for example, if a bond has paid £10 over the last year, and the current price is £100, the historic yield is 10%.
The distribution of income to unit holders of pooled funds in proportion to the number of units held.
Bonds where coupon and capital payments are linked to movements in inflation. The inflation measure used is specified beforehand.
A data series that track the performance of a group of assets or a market. They provide benchmarks for comparing investment performance and help investors track trends and make informed decisions.
The provision of personalised advice based on the analysis of a client’s financial situation, goals and risk tolerance.
Investment grade bonds
The highest quality bonds as assessed by a credit ratings agency. To be deemed investment grade, a bond must have a credit rating of at least BBB (Standard& Poor's) or Baa3 (Moody's).
An investment trust is a closed ended collective investment scheme with a limited number of shares that pools together assets of a number of different investors with the aim of increasing flexibility and lowering costs. They are companies that trade in their own right which means that the price of the shares are subject to supply and demand. Unlike an open ended fund, the manager does not have to deal with fund flows and therefore never a forced seller/buyer.
ISA (Individual Savings Account)
An ISA is basically a type of tax-free savings account. There are two main types, a Cash ISA and a Stocks and Shares ISA. You can put money into a Cash ISA and you don't pay tax on any interest you receive. Invest in a Stock and Shares ISA, and you don't pay tax on any further dividends or capital gains.
J – M
See Market capitalisation.
The use of borrowed funds, either directly or through the use of a financial instrument, to increase investment returns.
Invested money being readily available. For example, mutual funds are liquid because their shares can be redeemed for current value (which may be more or less than the original cost) on any business day.
A strategy, used primarily by hedge funds, that involves taking long positions (buying a holding) in stocks that are expected to increase in value and short positions (borrowing a stock you don't own and selling it in the hope of repurchasing it at a lower price to return to the stock lender) in stocks that are expected to decrease in value.
A measure of a company's size, calculated by multiplying the total number of shares in issue by the current share price. Companies are commonly grouped according to size as small cap, mid cap or large cap. There is no consensus on the monetary boundaries of these ranges but as a rough guide in the US market: large cap is over $10 billion, mid cap is $2 billion–$10 billion and small cap is $250 million–$2 billion.
Refers to the date on which the principal amount of a loan, bond, or other financial instrument becomes due and is repaid to the investor.
See Market capitalisation.
A professionally managed collective investment scheme that pools money from a large number of investors.
N – P
The National Association of Securities Dealers Automated Quotations (NASDAQ) system is owned and operated by the National Association of Securities Dealers. NASDAQ is a computerised system that gives brokers and dealers quotes for securities traded over-the-counter, as well as for many New York Stock Exchange-listed securities.
Net Asset Value per share (NAV) is the current dollar value of a single mutual fund share, also known as share price. The fund's NAV is calculated daily by taking the fund's total assets, subtracting the fund's liabilities, and dividing by the number of shares outstanding. The NAV does not include the sales charge. The process of calculating the NAV is called pricing.
Non-UCITS Retail Schemes (NURS) are funds set up and managed in accordance with FCA regulations for such schemes. NURS rules allow funds to access additional asset classes over and above UCITS.
An Open Ended Investment Company is a type of collective investment scheme. It is open ended, so the number of shares in the fund goes up as money is put in and goes down as it is taken out.
This refers to a pooled investment vehicle, such as a unit trust or OEIC that can issue unlimited numbers of units or shares. This means the number of units or shares in the fund goes up as money is put in and goes down as it is taken out.
When you buy an option, you have the right (but not the obligation) to buy a particular asset at an agreed price, on or before the date when your option expires.
When a portfolio or fund has a greater percentage of one asset class, sector, geographical region or stock than the index or benchmark that it is measured against.
A style of investment management that aims to replicate the performance of a set benchmark. See also active management.
The ratio used to compare a company's share price with its book value (the book value is the actual value of the company assets minus its liabilities). It can be abbreviated as the P/B ratio.
Equity securities of companies that are not listed on a public exchange. Transfer of private equity is strictly regulated; therefore, any investor looking to sell his/her stake in a private company has to find a buyer in the absence of a marketplace.
Q – T
The return generated by an investment, having been adjusted for the effects of inflation. If an investment grew in value by 5% return over one year, and the rate of inflation was 2%, the real return would be 3%.
The repayment of the principal sum at maturity of an investment.
The yield is the return earned on a bond. The redemption yield allows for any gain or loss of the original capital, which is paid back on the date of maturity. The return on a bond if it is held to its maturity date, reflecting not only the interest payments a bondholder will receive, but also the gain/loss made when it matures. Yield calculations on bonds aim to show the return as a percentage of either its nominal value or its current price.
Risk premium (plural: premia)
The extra return over cash that an investor expects to earn as compensation for owning an investment that is not risk free, so its value could go down as well as up. There are some risk premia where the extra return expected is over and above the return earned from another risk premium. For example, the small company share risk premium is the extra return an investor expects to receive over and above the return from large company shares as compensation for investing in higher risk small companies.
General term for an equity or debt instrument issued by a government or company.
A risk-adjusted measure that measures reward per unit of risk. The higher the sharpe ratio, the better. The numerator is the difference between the Fund's annualized return and the annualized return of the risk-free instrument (T-Bills).
Short selling (also referred to as shorting, taking a short position, going short)
Selling assets that you have borrowed from a third party, and then buying them back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase.
See Market Capitalisation.
Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.
an investment strategy which finds the best sectors or industries to invest in, based on analysis of the corporate sector as a whole and general economic trends (as opposed to bottom up investing).
Total expense ratio (TER)
The total fees involved in managing and operating a fund. The TER included the annual management fee and other charges, for example legal, admin, and audit costs. Following the introduction of KIIDs, TERs have been replaced with OCFs.
The total return on an investment, including any capital appreciation (or depreciation) plus any income from interest or dividends. It is measured over a set period, and is given as a percentage of the value of the investment at the start of that period.
U – Z
UCITS (Undertakings for Collective Investments in Transferable Securities)
UCITS funds are authorised funds that can be sold in any country in the EU. UCITS III regulations allow funds to invest in a wider range of financial instruments, including derivatives.
When a portfolio or fund has a lower percentage weighting in an asset class, sector, geographical region or stock than the index or benchmark against which it is measured.
A statistical measure of the fluctuations of a security's price. It can also be used to describe fluctuations in a particular market. High volatility is an indication of higher risk.
A measure of the income return earned on an investment. In the case of a share, the yield is the annual dividend payment expressed as a percentage of the market price of the share. For property, it is the rental income as a percentage of the capital value. For bonds, the yield is the annual interest as a percentage of the current market price.
The difference in yield between different types of bonds (for example, between government bonds and corporate bonds).
Yield to maturity
The rate of return anticipated on a bond if it is held until the maturity date.