Clarifying the meaning of complex financial terms helps demystify investing, making it more accessible to everyone regardless of their experience level.
Whether you're just starting out or have been investing for years, knowing these terms can help you make better decisions, understand the investments you're considering and communicate more effectively about your financial goals.
This glossary is designed to be straightforward and easy to use, serving as a handy reference that you can turn to whenever you encounter a term that's unfamiliar or unclear.
Absolute return fund: An investment vehicle that aims to achieve positive returns in all market conditions through a variety of strategies, including short selling, leverage and derivatives, targeting steady gains independent of broader market movements.
Active management: A strategy where fund managers actively make investment decisions to outperform a benchmark index, relying on market research, timing and individual security selection, often resulting in higher fees and varying performance outcomes.
Alpha: Describes a fund's ability to beat the market or its benchmark index, representing the excess return of an investment relative to a benchmark. It's a measure of a fund manager's skill in generating returns independent of market movements.
Alternative investments: Non-traditional assets like real estate, commodities, hedge funds and private equity, offering diversification and potential for higher returns but also featuring higher fees, less liquidity and greater complexity.
Annual management charge (AMC): A fee deducted from an investment fund's assets to cover management and operational services.
Annualised return: The compounded rate of return earned by an investment over a period, scaled down to a one-year period. It's used for comparing the performance of investments over different time frames.
Asset allocation: The strategic distribution of investments across various asset classes to balance risk and reward, based on an individual's goals, risk tolerance and investment horizon, serving as a crucial element in managing investment risk and optimising returns through diversification.
Asset class: Investments with similar characteristics and market behaviours, essential for diversification and strategic asset allocation in investment portfolios, offering a foundation for balancing risk and pursuing specific financial goals.
Asset management: The professional management of assets to achieve specified investment goals for investors, involving strategies for growth, income and risk mitigation, while also playing a key role in the efficient allocation of capital in the economy.
Balanced fund: A portfolio that combines stocks, bonds and cash to offer investors a diversified mix of income, capital appreciation and reduced volatility, tailored for those with moderate risk tolerance. This traditionally takes the form of a 60/40 portfolio (split 60% in stocks and 40% in bonds).
Bear beta: Measures a stock's or fund's performance relative to a benchmark during bear markets. It's useful for understanding how an investment behaves in a downward trending market.
Bear market: A period in which securities prices fall by 20% or more from recent highs, reflecting widespread pessimism and negative investor sentiment.
Benchmark: A standard or index against which the performance of an investment or fund is compared, providing a means to evaluate effectiveness and guide strategic planning.
Beta: A measure of a stock's or fund's volatility in relation to the overall market. It's crucial in portfolio management for understanding an asset’s risk compared to market risk.
Bid to bid: Describes the method of valuing a fund's units based on the bid price, which is the price at which an investor can sell units back to the fund manager.
Blue chip stocks: Large, financially stable companies known for their long history of stable earnings and reliability. They are favoured for their potential to offer steady returns, lower risk and dividends.
Bonds: Fixed-income securities that represent a loan from an investor to an issuer, providing periodic interest payments and the return of principal at maturity. They offer income, diversification and risk mitigation, though they carry interest rate and credit risks.
Bottom-up investing: An approach focused on analysing individual companies' fundamentals to identify undervalued or high-growth potential stocks.
Bubble: A market condition in which the price of an asset or group of assets inflates to levels that far exceed their intrinsic value. This occurs when excessive investor enthusiasm and speculation drive prices higher
Bull beta: The opposite of bear beta – it measures a stock's or a fund’s performance relative to a benchmark during bull markets.
Bull market: A period of rising financial market prices, driven by factors such as economic strength, investor confidence and optimistic expectations.
Bull/bear beta ratio: Derived by dividing the bull beta by the bear beta of an investment, this ratio provides insight into how an investment performs in different market cycles.
Closed-end fund: A fund with a fixed number of shares traded on stock exchanges, where share prices are determined by market demand and can trade at a premium or discount to the net asset value.
Compound annual growth rate (CAGR): A measure that calculates the mean annual growth rate of an investment over a specific period, offering a smoothed and standardised way to compare the performance of various investments by accounting for compounding effects.
Consumer prices index (CPI): The average change over time in the prices paid by consumers for a basket of goods and services, serving as a key indicator of inflation or deflation and influencing monetary policy.
Corporate bonds: Fixed-income securities issued by companies to finance their operations, offering investors regular interest payments and the return of principal at maturity.
Correction: A temporary decline of 10% to 20% in the prices of financial assets from recent highs, often seen as a natural adjustment mechanism within market cycles.
Credit rating: An assessment of the creditworthiness of a borrower, ranging from AAA (highest quality) to D (default), issued by credit rating agencies. It influences borrowing costs and investment decisions by indicating the risk level of default.
Decile: A statistical measure used in finance to categorise funds, stocks or other assets into 10 percentage-point bands based on performance metrics like return or risk.
Deflation: A decrease in the general price level of goods and services in an economy, which can lead to reduced consumer spending and economic slowdown.
Developed markets: Countries with advanced economies, characterised by high GDP per capita, mature financial market, and strong regulatory systems, offering investors stability and lower risk but potentially lower growth compared to emerging markets.
Discount to NAV: Occurs when the market price of a fund's shares is lower than its net asset value per share, potentially indicating an investment opportunity but requiring careful consideration of underlying factors and market conditions.
Diversification: Spreading investments across a variety of asset classes, industries and other categories to minimise risk and volatility in a portfolio, aiming to achieve more stable and consistent returns over time.
Dividend: A payment made by a business to its shareholders from its profits, as a way to distribute earnings back to investors.
Domicile: Refers to the legal jurisdiction under which an investment fund or company is established, influencing the fund's legal and tax obligations.
Dow Jones: A historic, price-weighted stock market index that tracks 30 large, publicly-owned companies in the United States.
Downside capture ratio: Evaluates a fund's performance relative to a benchmark during market downturns, quantifying how much of the benchmark's negative performance the fund captures.
Downside risk: Focuses solely on negative returns, evaluating the potential loss in an investment's value during unfavourable market conditions.
Duration: A measure used in fixed income investments to indicate how much a bond's price is expected to fluctuate with changes in interest rates, expressed in years and reflecting the bond's sensitivity to interest rate movements.
Earnings: A company's net income or profit after all expenses have been deducted from total revenue, fundamental for evaluating a company's profitability.
Emerging market: An economy characterised by rapid industrialisation and growth, offering high potential returns but accompanied by higher volatility and risk.
Equity: An ownership interest in a company or property, typically through stocks or shares, providing investors with potential for profit sharing and capital appreciation.
Exchange traded fund (ETF): A fund that holds a diversified portfolio of assets and is traded on stock exchanges like individual stocks, typically tracking an underlying index.
FTSE 100: A stock market index representing the 100 largest UK companies listed on the London Stock Exchange. A key indicator of the UK stock market's performance.
FTSE 250: The 250 next largest companies listed on the London Stock Exchange after the FTSE 100. A key indicator of the mid-cap segment of the UK stock market.
FTSE 350: A stock market index that merges the FTSE 100 and FTSE 250 indices, representing the 350 largest companies listed on the London Stock Exchange.
FTSE All Share: An extensive stock market index representing the performance of all eligible companies listed on the London Stock Exchange's main market, providing a broad and diversified benchmark of the UK stock market for investors seeking exposure to the entire UK equity landscape.
FTSE SmallCap: Represents small-cap companies listed on the London Stock Exchange, ranked outside the top 350 by market capitalisation.
Fund: A pooled investment vehicle managed by professionals that allocates collected capital from multiple investors.
Fund house: An asset management company that pools money from investors to create and manage investment portfolios, offering professional management and diversified investment opportunities.
Fund manager: A professional responsible for managing the investment portfolio of a fund, making decisions on asset selection and strategy to achieve the best possible returns for investors.
Fund of funds: An investment strategy that invests in a portfolio of other funds rather than directly in individual securities.
Fund of hedge funds (FoHF): An investment vehicle that invests in a diversified portfolio of hedge funds. It provides broader diversification, risk management and potentially lower investment minimums.
Geographic focus: The specific countries or regions where a fund predominantly allocates its assets. This focus can be single country, emerging market, regional or global, influencing the fund's risk and return profile.
Gross domestic product (GDP): The total value of all goods and services produced within a country over a specific period, serving as a primary indicator of economic health and growth.
Gross total return: The total return on an investment before the deduction of any fees or expenses, including capital gains, interest and dividends.
Growth investing: A strategy aimed at capital appreciation by investing in companies expected to grow significantly faster than their peers or the overall market.
Hard landing: An economic slowdown or recession following a period of growth, often as a result of actions taken to curb inflation.
Hedge fund: A private investment fund open to accredited investors, employing a wide range of strategies to generate high returns.
High water mark: Refers to the highest peak in value an investment fund has reached, crucial for calculating performance fees.
Historic value at risk (historic VAR): A risk management tool estimating the potential loss in value of an investment based on historical data.
Historic yield: The income generated by an investment over a past period, typically a year, as a percentage of the investment’s value.
Hurdle rate: A predefined benchmark in fund management that a fund must exceed before the manager can charge a performance fee.
Index fund: A fund that aims to replicate the performance of a specific market index, offering investors cost-effective, diversified exposure to broad market segments or sectors.
Inflation: The annual rate at which the general level of prices for goods and services rises.
Inflow: The movement of money into a fund from investors.
Information ratio: Measures the performance of an investment manager relative to a benchmark, adjusted for the risk taken.
Investment focus: The specific areas or themes a fund targets with its investments, which can vary widely.
Investment trust: A publicly traded company that pools investor capital to invest in a diversified portfolio of assets. This is a closed-ended fund structure.
Jensen's alpha: A performance measure representing the average return on a portfolio over and above that predicted by the Capital Asset Pricing Model (CAPM).
Kurtosis: Describes the shape of a distribution's tails in relation to a normal distribution, used to assess the risk of investments.
Legal structure: Refers to the legal organisation of an investment vehicles and the regulations governing them.
Leverage permitted: The extent to which an investment fund or vehicle is allowed to use borrowed money or financial derivatives to increase returns.
Market capitalisation: The total market value of a company's outstanding shares, calculated by multiplying the share price by the number of shares.
Maximum drawdown: A measure of the largest single drop from peak to trough in the value of a portfolio or an investment.
Maximum gain: The highest cumulative return achieved by an investment over a continuous period without recording a loss.
Maximum loss: The most significant cumulative decline experienced by an investment over a continuous period without recording any gain.
MSCI AC World: A global equity index representing the performance of large and mid-cap stocks across 23 developed and 24 emerging markets, offering a benchmark for global stock market performance.
MSCI World: A global equity benchmark that tracks the performance of large and mid-cap stocks in 23 developed countries, covering about 85% of the market capitalisation in these regions.
Multi-manager: An investment approach allocates investor funds across several specialised managers to diversify across different strategies, asset classes and management styles.
Nasdaq: Both a leading global electronic stock market for trading securities and a key benchmark index for US technology and growth stocks, known for its comprehensive coverage of the tech sector and potential for high volatility and returns.
Negative periods: Refers to the frequency of negative monthly returns an investment experiences.
Net asset value: The per-share value of a fund's assets minus its liabilities, serving as a primary measure for assessing the value and performance of investment fund shares.
Nikkei 225: A price-weighted stock market index representing 225 biggest companies on the Tokyo Stock Exchange.
Offer to bid: The difference between the selling price (offer price) and the buying price (bid price) of shares in a mutual fund or other investment vehicles.
Omega: A risk-return performance measure of an investment portfolio, assessing the probability of achieving a certain level of return.
Ongoing charges figure (OCF): Quantifies the total annual costs of operating a fund, expressed as a percentage of the fund's average net assets.
Open-ended fund: A fund that continuously issues and redeems shares based on investor demand, with its share price determined by the net asset value (NAV).
Outflow: The withdrawal of money by investors, leading to a decrease in assets under management (AUM).
Passive management: An investment strategy focused on replicating the performance of a specific index or benchmark with minimal trading, aiming for cost-efficiency and simplicity.
Percentile: A statistical measure indicating the value below which a given percentage of observations fall.
Performance fee: A fee charged by some funds or investment managers contingent on the fund's or manager's performance.
Platform: An online service that facilitates the buying, selling and management of financial assets by individual investors.
Portfolio: A collection of diverse financial assets held by an investor, designed to achieve specific financial goals through a balance of risk and return
Premium to NAV: Occurs when a fund's shares trade above their net asset value, indicating higher market demand or positive investor sentiment.
Price return: The change in the price of an investment, not including dividends or other earnings.
Price-to-book ratio (P/B ratio): A valuation metric that compares a company's market price to its book value per share, offering insights into whether a stock is undervalued or overvalued relative to its net assets.
Price-to-earnings ratio (P/E ratio): A valuation metric that compares a company's current share price to its earnings per share, indicating how much investors are willing to pay per pound of earnings.
Quartile: A statistical term used in finance to describe a division of observations into four defined intervals, commonly used to rank the performance of funds within sectors.
Quintile: A statistical measure dividing a set of observations into five equal parts, used for ranking and comparing the performance of funds within sectors.
Recession: A significant and widespread downturn in economic activity, marked by declines in GDP, income, employment and sales.
Recovery period: The time taken for an investment or a portfolio to recover its value after a significant drop or market downturn.
Redemption charge: A fee charged by some mutual funds and investment trusts when an investor sells or redeems shares.
Relative return: The return of an investment compared to a benchmark or a market index.
Return: The profit or loss on an investment, expressed as a percentage of the initial investment.
Return on equity (ROE): A financial ratio that measures how efficiently a company generates profit from the equity invested by its shareholders, indicating a company's profitability and operational efficiency.
R-squared: Represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index.
S&P 500: A market-capitalisation-weighted index of 500 of the largest US publicly traded companies. A key benchmark for US large-cap equities.
Share: A unit of ownership in a company, entitling the holder to a portion of the profits and voting rights, traded on stock exchanges.
Sharpe ratio: A measure used to calculate the risk-adjusted return of an investment.
Short selling: An investment strategy where an investor borrows and sells shares they expect to decline in value, aiming to buy them back at a lower price for a profit.
Skewness: Refers to the degree of asymmetry of a distribution, typically of investment returns.
Soft landing: A scenario where an economy slows down just enough to prevent excessive inflation without triggering a recession.
Sortino ratio: Assesses the risk-adjusted return of an investment, focusing only on downside volatility.
Stock market: A network of exchanges where shares of publicly-held companies are bought and sold, providing companies with capital and offering investors opportunities for ownership and profit.
Top-down investing: A strategy that begins with analysing macroeconomic trends to guide sector and stock selection, aiming to capitalise on economic cycles and global events.
Topix: A comprehensive stock market index in Japan, tracking the performance of all companies listed in the First Section of the Tokyo Stock Exchange based on market capitalisation.
Total expense ratio (TER): Represents the total costs associated with managing and operating an investment fund.
Total return: A measure that captures the overall performance of an investment, including all forms of returns.
Tracker: An investment fund or security designed to replicate the performance of a specific index.
Tracking error: Used to determine how closely a portfolio follows its benchmark index.
Treynor ratio: Evaluates the risk-adjusted return of an investment portfolio, using beta instead of standard deviation.
Unit trust: A collective investment scheme that pools money from many investors to invest in a diversified portfolio, offering units that represent a share of the fund's holdings.
Upside capture ratio: Evaluates how well a fund performs relative to a benchmark during market upturns.
Value investing: A strategy focused on purchasing stocks that are undervalued relative to their intrinsic value, based on an analysis of the company's fundamentals.
Volatility: Refers to the degree of variation in the price of an investment over time.
Yield: A measure of the income return on an investment, such as interest or dividends received.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.