How many people do you think understand the term ‘inflation’? Research from the Organisation for Economic Cooperation and Development (OECD) has found that just 38% of adults know what this means, clearly highlighting a gap in financial knowledge within the UK.
To help build this knowledge, stocks and shares ISA provider and investment specialist True Potential Investor has provided this jargon buster of financial terms. The company’s parent group, True Potential LLP, has established the True Potential Centre for the Public Understanding of Finance (PUFin) as part of a partnership with The Open University. A number of free financial courses are available remotely to help improve Britain’s understanding of finances on a general and personal level.
Since they launched, 200,000 people have studied the courses. For information on how you can enrol, visit the True Potential Investor website.
Should a company need to raise funds to help them achieve a particular goal, they may offer corporate bonds. To do this, some choose to issue bonds that investors can then buy. The money raised from the investment is held for an agreed number of years. At the end — also known as bond maturity — the investor receives the money they invested plus their guaranteed interest which was agreed at the start.
Government bonds and gilts are also available. They work in a similar way to corporate bonds and are used to fund borrowing.
The funds that you invest initially are generally referred to as capital.
Capital gains tax
On specific types of investment, you may pay capital gains tax, which is the tax you pay on the profit your investment makes. You may not need to pay capital gains tax — it depends on the amount of profit you make and whether you use the profit to buy new shares. More information can be found on the GOV.UK website.
Investing across multiple areas instead of just one is known as diversification. For example, you can diversify your investment across a range of investment types — such as shares or bonds, for example — as well as between industries, currencies and countries.
Through diversification and dividing your investment across different areas, you can better manage risk and reduce the impact of market uncertainty.
The performance of companies trading on the London Stock Exchange is monitored by FTSE, the Financial Times Stock Exchange. A number of lists are available, with each showing the fluctuations in share prices over time.
Inflation describes the increase of the price of goods and services over time. It is measured as an annual percentage change and can impact interest rates and share prices.
With ISAs — or Individual Savings Accounts — you can access a tax-free or tax-efficient method of saving. There are two main types of ISAs: cash ISAs and stocks and shares ISAs.
- Cash ISAs — similar to a typical savings account, cash ISAs do not require you to pay tax on any interest that is generated.
- Stocks & shares ISAs — with a stocks and shares ISA, the money is invested with the aim of growing the fund over time. You do not pay tax on dividends.
Pensions are used by many people to save for their retirement. The money you place in the pension fund is invested with the aim of growing it by the time you retire.
There are three main types of pensions:
- Personal pensions — a pension you arrange yourself, which you can contribute to whenever you want.
- Workplace pensions — this type of pension is arranged through your employer. Usually, you’ll contribute an amount each month, with your employer also contributing and the government contributing tax relief too.
- State pensions — a state pension is the amount you receive from the government once you reach State Pension age. Details on how much this is and eligibility can be found at the UK website.
Stocks & shares
Investors can purchase a share in a company by buying stocks. However, these stocks can be broken down into a number of shares, which can also be purchased by investors. Because of this similarity, the two terms are often interchangeable.
Investors aim to sell on their stocks and shares for a higher price to make a profit. Usually, stock and shareholders receive a proportion of the company’s profits on an annual or bi-annual basis in the form of dividends.
The performance of your investment now and in the future is referred to as yield. For example, if you received £5 in interest from £100 placed in a Cash ISA, your total yield would be 5% which is equal to £5.