Stocks and shares jargon explained

Don’t know your OEIC from your FTSE? Don’t let terminology put you off investing

Felicity Hannah - Virgin Money Living Mentor

by Felicity Hannah | Independent Money Mentor

Award-winning personal finance and consumer affairs journalist


When you decide to start investing in the stock market the jargon can be seriously off-putting. It’s all too easy to feel like a Muggle at Hogwarts when everyone else is reciting incantations like ETFs, multi-asset funds and gilts.

The good news is that the more you read, the more these terms make sense.

They’re not actually hugely complicated, you just need this easy to follow glossary.

Accumulation funds

When you buy into a fund you receive ‘units’ or ‘shares’ in that fund, the number depending on how much (£) you put in. These units come in two types; accumulation or income, based on what happens with any income the fund earns. These are usually listed as ‘Acc’ or ‘Inc’ after the fund name. With accumulation units, any income received is reinvested back into the fund. It literally accumulates. With Income Units, the income is periodically paid out to you as cash, although you can elect to reinvest it should you wish.


Actively managed funds

Funds where the individual investments (such as company shares) are hand-picked by a professional fund manager. The cost is usually higher than a ‘Passively managed fund’ but they offer the potential for higher returns. However you should be aware they can underperform in the broader market too (if the wrong shares are picked).


Annual management charge (AMC)

The cost of running the fund, paid to the company managing the fund. It is a percentage of the amount you have invested in the fund. Please note that there can be other charges and the ‘Ongoing Charges Figure’ can be higher.


Bonds

A bond is essentially an IOU, issued by companies and governments in order to raise money. When you buy one, you are effectively lending money to the issuer of the bond. You will receive interest and the ‘par value’ will be paid back when the bond reaches maturity. Note, as bonds are bought and sold by investors, the amount paid for a bond could be higher or lower than the ‘par value’. This means that in addition to interest, a capital gain or loss can also be made, although values do not go up and down as much as shares. Government bonds are known as Gilts.


Diversification

This term refers to spreading your money around different types of investments; shares, bonds, property etc. to reduce risk. Bluntly, it means not putting all your eggs in one basket. A diverse portfolio of investments means that your money is not tied to the success, or failure, of one type of investment/market.


Dividends

When you own shares in a company, as part-owner you are entitled to a share in the profits of the company. It is at the discretion of the company if any profits are paid out but many companies are proud of making regular payments to shareholders in the form of dividends. A Fund investing in lots of different companies will collect the dividends which can be paid out or reinvested (see also Accumulation / Income units).


Ethical investment

Some investment funds market themselves as being ethical or socially responsible. It may mean refusing to invest in tobacco or weapons, or avoiding companies that generate the most pollution. Each such Fund will have it’s own investment policy and you would need to review the Fund’s Key Investor Information Document to find out more about the specifics for each Fund.


ETFs

This stands for Exchange Traded Funds. They can be fairly low-cost investment funds that track a particular Index. An ETF is traded in the same way as shares on a stock exchange, meaning the price can change throughout the day.


Fixed-income

You may see Bonds (including Gilts) referred to as fixed income investments. This is because unlike shares, a bond has a pre-determined pay out or interest rate. So the income they pay is ‘fixed’ unlike dividends from shares, which can rise and fall and be stopped at any time. Bonds and gilts, which are essentially company and government loans are usually over a fixed period, perhaps 5, 10, 30 years for example.


FTSE

Pronounced ‘Footsie’, this has nothing to do with under the table feet flirtation, originally stood for the Financial Times Stock Exchange, although is now better known by its acronym. It is a set of stock market indices that shows the aggregate performance of companies on the London Stock Exchange. Think of it as a league table for big companies. The FTSE 100 is made up of the 100 largest publicly quoted companies, the FTSE 250 is made up of the next-largest group and the FTSE All-Share represents 98% of all eligible UK companies.


Fund manager

The person or people who run an investment fund and implement the investment strategy. These people are inquisitive and analytical. They buy companies which they believe will outperform over time and they may or may not wear a power suit and shout a lot.


Gilts

These are the UK government version of bonds (see Bonds and Fixed Income above). A little investment trivia for you: originally, the paper certificates had a gilded edge and so were known as gilt-edged securities.


Income funds

This refers to a fund that has an objective of generating income and will invest accordingly, for example bonds or company shares with a good history of paying dividends, property etc. There are many different types of income fund, so ensure you check the factsheet and Key Investor Information Document, to see how a particular fund is invested, to determine whether it is suitable for your needs.


Income Units

When you buy into a fund you receive ‘units’ or ‘shares’ in that fund, the number depending on how much (£) you put in. These units come in two types; accumulation or income, based on what happens with any income the fund earns. These are usually listed as ‘Acc’ or ‘Inc’ after the fund name. With Accumulation Units, any income received is reinvested back into the fund. It literally accumulates. With Income Units, the income is periodically paid out to you as cash, although you can elect to reinvest it should you wish.


Investment trusts

An investment trust is a company listed on a stock exchange, but whose business is to invest in other companies. As they invest in lots of companies, they are an alternative to a mutual fund/ unit trust. As a company, they have the ability to borrow money in order to invest. Also as they trade on the stock exchange, the value of the Investment Trust may be more or less than the value of the companies they themselves have invested in (known as a premium or discount). For these reasons, investing in Investment Trusts can be more risky and takes a bit more research on behalf of the investor. However like mutual funds, they offer a great way of spreading your money across lots of different companies with relatively small sums of money.


Multi-asset funds

The name is a bit of a giveaway: these are funds that invest across many different types of assets including equities, cash or bonds etc. That means they give an investor greater diversity than a fund investing in a single type of asset. Again, it is a method of spreading risk between several markets.


Mutual funds

Unit Trusts and OEIC’s are the most common type of mutual fund in the UK. A mutual fund is made up from a pool of monies collected from different investors who have all bought into that particular fund. The monies are then invested in a wide range of investments allowing individual investors to gain access to very diverse portfolios with relatively small sums of money. They also take away all the hassle of managing investments in lots of different companies.


OEIC

Stands for an “open-ended investment company”, which is a Mutual fund structured as a company. They differ from Investment Trusts in that they are ‘open-ended’ meaning new shares / units are created / cancelled to meet demand. This means they do not trade at a premium or discount and the value is always representative of the underlying shares / bonds held by the OEIC.


Passively managed funds

Funds where the individual investments (such as company shares) follow a particular market, rather than being hand-picked by a professional fund manager. The cost is usually lower than an ‘Actively managed fund’. The returns will be closely aligned with the Index / Market being tracked without the potential for higher (or worse) returns.


Portfolio manager

The person or people responsible for making decision regarding investments and carrying these decisions out.


Pound cost average

This works when you decide to pay a set amount into an investment account or ISA each month. When prices are high you get fewer units and when prices are low you get more. This is a drip-feed approach and it means you spread the risk of your investment over time and average out the market ups and downs.


Shares

These are essentially units of ownership in a company, usually very small units unless it’s a very small company. You literally buy a share of that company as firms raise capital. Stock has come to mean much the same as a share, but in fact it is a more general term used to describe ownership of shares in more than one business.


Stock market

A place where stocks / shares are bought and sold, such as the London Stock Exchange.


Tracker fund

A Fund whose objective is to track a particular stock market index. Different tracker funds operate in different ways, but generally they buy every share or bond within a particular index, such as the FTSE 100.


Unit trusts

A unit trust is a type of investment fund which pools the money of individual investors to purchase shares in a range of companies. The fund manager creates units which investors buy and the value of those units go up and down depending on the underlying value of the shares it is invested in. It is called an open ended fund as it means investors can buy an unlimited number of units.

Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.