Asset class refers to a group of financial investments with similar characteristics. The most common are stocks, bonds, foreign currencies, commodities, property and cash. Asset classes generally have different risk and return characteristics, and so spreading investments across various asset classes can help to diversify a portfolio.
Bid-offer spread is the difference between the prices quoted for an immediate sale (bid) and an immediate purchase (offer) for stocks.
Bond is a debt issued by corporations and governments to raise capital. Interest on the outstanding debt is paid to bondholders at specific intervals, with the principal amount of the loan paid on the bond maturity date.
Commodity is a raw material or agricultural product that can be bought or sold, such as copper, coffee and gold.
Correlation refers to the relationship between two or more investments. For example, two ETFs which both follow the FTSE 100 index will be highly correlated while bonds or gold are usually uncorrelated to equities and so are used to help to diversify a portfolio.
Dividend is a payment made by a corporation to its shareholders.
Compound returns - a compound return is the return which represents the cumulative gains (or losses) on an original investment over a certain period. For example, if you start with £1,000 and multiply this £1,000 by 1.1 five times, you will end up with £1,611 after five years which represents a 10% annual return and a total return of 61%!
The magic of compounding returns is that you are (hopefully) earning money not just on the initial investment but also on the profits generated each year. If held for a longish period of time your returns as measured against the size of your initial investment can look very exciting.
Diversification refers to building and maintaining a portfolio with differing (or uncorrelated) investments, such that they don’t all go up and down in value together. If a diversified portfolio is constructed, then the overall expected return may be maintained but the risk (otherwise measured by volatility) can be reduced. This effect is sometimes referred to as the only "free lunch" in investing.
Diversification also refers to not buying all your investments from just one provider or holding them all with just one company.
Many investors hold funds from different fund managers with the assumption that they are diversified, however these funds may actually own shares in the same underlying companies for example and so be potentially quite risky and in fact very non-diversified.
Exchange Traded Funds (ETFs) are low cost index funds which trade very similarly to stocks. ETFs can be bought and sold when the stock market opens. They cover a range of investment assets including stocks, bonds and commodities. For more information about ETFs, click here.
Expected return - the expected return of a particular investment is usually based on its recent historical performance and unfortunately can be highly unreliable and should be treated with healthy scepticism. There is a good reason why regulators require all providers to repeat that prior performance is no indication of future performance.
General savings rate - banks and building societies offer savings accounts, some with special introductory offers and some based on a minimum investment. Currently the general offer is around 1% per annum.
Index - most asset classes are indexed, which means that someone like FTSE calculates the share price of say the largest 100 companies listed on the London Stock Exchange and this becomes the FTSE 100 index. But indices are everywhere and cover not just the world’s stock markets but also the bond and commodity markets and many more. Many ETFs are designed to track these many indices, so the purchase of just one ETF can provide exposure to many individual companies or assets.
Index fund - an index fund is designed to match or track the components of a market index such as the FTSE 100. They typically provide broad market exposure with a low ongoing charge while sticking to strict rules no matter whether the market is going up or down.
Leveraged ETFs are designed to offer two or even three times the daily return of an underlying index. They are designed primarily for short term professional investors and are generally not suitable for long term investors.
Liquid - a liquid investment is one which can be quickly converted into cash with minimal impact on the value of your investment.
Money market - money market ETFs typically invest in short term government bonds and are intended to represent a safe and secure investment for cash with some income.
Mutual fund is a fund where all investors' money is pooled together and then invested typically in a broad variety of shares and other securities with the intent of delivering capital gains or income. The portfolio of a mutual fund is maintained to match a stated strategy and operated by an investment manager. Each investor owns a unit (or a number of them) which represent a fraction of the fund and their value is dependent on the NAV of the fund.
Net Asset Value (NAV) is the value of all the assets less the value of all the liabilities of an exchange traded fund or mutual fund at a certain date or time. For a mutual fund the NAV per share is worked out per day based on the market close price. ETFs which trade like stocks have their NAV calculated daily after the market close.
Ongoing charge - a fund's ongoing Charge (previously known as Total Expense Ration or TER) is intended to reflect the normal recurring costs associated with managing the fund and include the management fee together with any directors’ fees, audit and tax compliance, custody, administration, marketing and insurance expense.
Platform charge covers the cost of the administration of investments and for providing information as well as customer services cost.
Property - property ETFs are designed to offer a liquid and low cost exposure to the property asset class. They typically track property indices by investing in exchange listed real estate companies or real estate investment trusts around the world or in a specific country.
Sector - companies listed on stock markets are often divided into sectors representing key areas of an economy. These are usually defined as:
- utilities, such as electric, gas and water companies
- consumer Discretionary, such as retailers, media and apparel companies
- consumer Staples, such as food and beverages
- materials, such as mining, refining, chemical and forestry
Sector specific is when a fund takes into account exposure to a single sector. The performance will then be matched with the performance of the sector in which they are investing.
Stock is a security that signifies ownership in a corporation.
Volatility as it refers to an ETF or other financial instrument is generally used as an indication of risk, highly volatile ETFs therefore being more risky than low volatility ETFs.