If you’re new to investing, then getting to grips with some of the terminology can be daunting.
The good news is that many investment terms are simple to grasp, especially once you understand the basics. Besides, you don’t need to understand much of the jargon to get started in investing and potentially maximise your long-term returns.
To help you get started, here’s a simple explanation of 19 common investment terms.
For a rundown of some more advanced investment terms, check out our article Investing jargon explained.
A-H
Asset
An asset is essentially an item of particular value that’s owned by an individual or company. For example, an asset may be tangible, such as a house, car, jewellery, equipment, or land, but it can also refer to financial holdings such as shares, investments, deposits and intellectual property (such as copyright).
Bonds
If you invest in bonds, you lend money to the government or a company for a set period of time in exchange for interest. Your money is repaid at a fixed date, when the bond “matures” and pays out. Government bonds are also known as gilts in the UK.
Capital gain
Your capital gain refers to the profit you make when you sell shares or a buy to let property, for example, for more than you originally paid. You must pay Capital Gains Tax (CGT) on this profit if it exceeds your annual CGT allowance. Read more about this in our article What is Capital Gains Tax and how do I pay it?
Commodity
A commodity is a basic physical resource such as oil, gas, coffee, sugar, metals and so on. You can invest in physical commodities such as gold, or invest by buying shares in commodity companies or funds such as exchange-traded funds (ETFs).
Compound interest
When you invest, your returns may be powered by compound interest. Think of this like a snowball rolling down a hill, as when your returns are reinvested, they also earn returns. This is the power of compounding, and makes a huge difference to returns over the long term.
Crypto / Cryptocurrency
Digital currencies such as bitcoin are essentially virtual cash that aren’t traded as a physical asset like bank notes. Instead, you hold crypto as a speculative investment that you hope to profit on. You can read more in our article Understanding Bitcoin and other cryptocurrencies.
Dividend
Dividends are essentially a portion of company profits paid as income to shareholders usually once or twice a year, with the amount each shareholder receives being proportional to the number of shares they have. The amount paid out per share is known as the “dividend rate”. Learn more in our article How are dividends taxed?
Environmental, social and governance
Also known as sustainable investing, ESG refers to investing that specifically attempts to prioritise environmental, social and governmental factors, such as investing only in green industries. Read more about sustainable investing in our article What is an ethical investment ISA?
Fund
A type of investment where your money is pooled with that of other investors and invested in dozens of companies.
An “active” fund is run by a fund manager who makes the investment decisions on your behalf, choosing which companies to invest in. A “passive” fund is usually lower cost and tracks a particular stock market index such as the FTSE 100.
I-Z
Index
An index is a collection of companies of a particular size on the stock market. For example, the UK’s FTSE 100 is the index of Britain’s 100 biggest companies, whereas the FTSE 250 consists of the next largest 250 companies, and the FTSE Small Cap index consists of companies that are smaller in size.
Inflation
Inflation, or the rising cost of living, refers to the increase in the price of goods and services. It can be measured through different rates, such as the Consumer Prices Index (CPI) and Retail Prices Index (RPI). Read more about how inflation works in our article What does inflation mean for my money?
Individual Savings Account (ISA)
An ISA is a type of account in which you can hold savings or investments without paying any tax on interest or growth received. You can only pay a certain amount into your ISA or ISAs each year, known as your ISA allowance (£20,000 in the 2023/24 tax year). Read more about how ISAs work and all the different types in our article Everything you need to know about ISAs
Instrument
An investment instrument essentially refers to any kind of financial arrangement that promises some kind of return to the holder or recipient. This covers everything from savings accounts to stocks and shares.
Investment platform
An online service or website that enables you to trade shares or funds and hold your investment accounts, such as ISA/SIPP or general trading account.
Portfolio
Your investment portfolio is essentially all of your investments, including funds, individual shares, or/and buy to let properties. A portfolio is considered to be “diversified” if it contains a range of investments across different regions and asset types.
Shares
Also known as stocks or equities, shares are units of ownership in a company, meaning the more shares in a company you own, the more of that company you own. Buying and selling shares is one of the most common forms of investment.
Stock market
The stock market is the marketplace through which publicly-listed companies list their shares for sale to investors.
Value investing / value shares
Value shares are shares in a company that investors believe are underpriced – in other words, selling for less than their actual value. Value investing is the process of buying these shares in the belief that the price will rise when the stock market revalues them.
Yield
The amount you receive each year for holding a particular investment, such as dividends from a share or interest from a bond.
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