The total gain or loss (as a percentage) that an investment realises over a given time period.
A common share classification, also referred to as a stock dividend, where additional shares are given in lieu of (or as an addition to) cash dividends to shareholders. It is more tax efficient than dividends, as the reinvested income is only liable for capital gains tax once the shares are sold.
Portfolio management strategy that utilises at least one fund manager, who makes investments with the objective of outperforming a comparative benchmark.
The sum of the differences between the percentage weight of each security in a portfolio and the percentage weighting in a benchmark or comparator index.
Association of Investment Companies. This is a collective association that represents the interests of UK investment companies, such as investment trusts, venture capital trusts and other closed-ended funds (see closed-ended investment company).
Alternative Investment Market (AiM) is the London Stock Exchange's global market for smaller, growing companies.
A Fund that invests in equities without regard to whether a company is characterised as small, medium or large.
The excess return generated by an investment versus a particular benchmark.
Annualised return (%)
An annualised total return is the geometric average amount of money earned by an investment each year over a given time period.
Annualised volatility is a statistical measure of the dispersion of returns for a given security or market index for each year over a given time period.
The distribution of assets across a variety of geographic regions, asset classes or sectors in order to reflect an investor's appetite for risk versus reward.
A method of classifying financial assets by their attributes. Types of asset class include stocks/shares, fixed income/bonds, cash, property and commodities.
The investments and cash held by an investment trust company or fund.
Bank of England
The UK’s central bank, responsible for the country’s monetary policy. It is owned by (and accountable to) the UK government, but is independent in the way that it operates on a day-to-day basis.
A market in which prices fall over an extended period.
A target against which investment performance is measured. A benchmark is usually an index or the average performance of other similar funds.
Shares are sold via the stock exchange at the bid price. This price is determined by supply and demand.
The shares in companies with the highest status as investments that have a large market capitalisation.
A form of loan paying a generally agreed rate of interest over a fixed term, with the principal paid at maturity. Bonds may be issued by governments or companies. Bonds can generally be traded on the stock market and therefore may trade above or below their issue price.
As a form of restriction, a floor provides a limit for a particular activity or transaction to which it must adhere. The floor functions as a lower limit.
The amount of return an investor earns on a bond holding.
A method of investing in which the investor picks stocks based on the individual merit of each company, rather than the sector or economy in which that company operates.
A market in which prices rise over an extended period.
Investment trusts have the ability to buy-back a certain proportion of their shares to improve shareholder value – usually to narrow the discount. Shareholders will be asked to vote each year so that the fund manager can exercise this right as and when it is deemed suitable.
Capital at risk
The risk associated with the loss of some or all of the capital invested in a financial security.
Capital Gains Tax (CGT)
A tax charged on gains arising from the sale of assets. There is a CGT exemption limit set each tax year and any gains up to that will not be taxable.
The growth in value over time of a specific investment, which is usually taken as a percentage.
A means of measuring performance that excludes any income/dividend income by only taking into account the change in value of the investment over time
The different amounts and types of ordinary and preference shares that are in issue for an investment company.
In real estate investing, the value of a freehold or leasehold asset.
A measure of a firm's capital value, which is calculated by multiplying the amount of outstanding shares by the current share price.
Highly liquid investments that are low risk, usually low return and are short term in nature – typically no more than 90 days. These include Treasury bills, short-term government bonds, certificates of deposit, commercial paper and other money market securities.
Relatively safe, liquid assets. Cash investments include Treasury bills, money-market funds, and short-term certificates of deposits.
Closed-ended investment company
A collective investment scheme, such as an investment trust, with a fixed number of shares. Closed-ended investment companies are traded on the stock exchange.
Collective investment scheme
An investment scheme in which money from more than one investor is pooled into a single fund or trust. Unit trusts, investment trusts, and open-ended investment companies (OEICs) are all types of collective investment schemes.
The conversion price is the price per share at which a convertible security, such as convertible bonds or preferred shares, can be converted into common stock. The conversion price is set when the conversion ratio is decided for a convertible security.
A bond that can be converted into a pre-determined amount of a company's share at (or before) an agreed expiry date.
A form of loan issued by a company in order to raise capital and an alternative to issuing stock through a rights issue. Bonds pay a fixed rate of interest over a fixed term, with the principal repaid at maturity.
The annual interest rate stated on a bond when it’s issued, which is typically paid out in installments every six months.
The Consumer Price Index is a measure of inflation. The index measures the weighted-average cost of a basket of goods and services to a typical consumer.
A contract agreed between a borrower and a lender, whereby the former receives capital in exchange for repayment to the lender at a future date. The lender will generally receive periodic interest payments.
Credit default swaps (CDS)
These are a type of insurance contract that pay out when a company or government defaults on its debts. The holders of such contracts view it as a protection, or ‘hedge’ against default.
An independent assessment of a company’s or government’s ability to pay its debt. Credit ratings are provided by rating agencies; changes to a company’s or government’s rating can dramatically affect the price of its bonds.
A type of risk in relation to debt instruments, whereby the rating of the borrower may decrease, which will make the debt instrument fall in price.
When two bonds share similar characteristics, such as maturity, but differ in credit quality, then this is the difference in yield between them.
Current yield is an investment's annual income (interest or dividends) divided by the current price of the security. Current yield represents the return an investor would expect to earn, if the owner purchased the bond and held it for a year. However, current yield is not the actual return an investor receives if he holds a bond until maturity.
Buying and selling of assets.
In relation to debt, when a borrower fails to make either interest or principal payments to a creditor.
The actual risk that a borrower will default.
A delta is a ratio, sometimes referred to as a hedge ratio. It compares the change in price of an asset with the change in price of a derivative or option based on that same asset. A delta can be either positive or negative.
A contract between two parties that derives its value from the performance of the underlying entity. This underlying entity can be an asset, index or interest rate.
Countries with high per capita income, prolonged economic growth, strong financial security and highly developed infrastructure. This allows for more efficient financial markets, fluid movement of capital and open access to investors.
Diluted Net Asset Value
A method of calculating the net asset value of a company after taking into consideration any outstanding convertible loan stock, warrants or options which are assumed to be exercised by the holders, so increasing the number of shares among which the assets are divided.
When the share price is lower than the Net Asset Value (NAV), it is referred to as trading at a discount. The discount is expressed as a percentage of the Net Asset Value.
The way that payments of dividends, income or interest are paid out to holders of a particular financial security.
The amount of income paid out by a investment trust to holders of units of the trust. It is calculated as a percentage of income relative to the net asset value of the trust.
A portfolio construction technique where investors spread the risk by investing in a variety of different assets, which should have low correlations with each other.
Diversified Growth Fund (DGF)
Investment funds that invest in an array of different securities and seek to achieve capital growth over the long term while maintaining a low risk profile.
Regular income paid to shareholders by the company they invest in. Typically, it is taken from the profit or cash reserves of the company.
The annual dividend income per share received from a company divided by its current share price. Put simply - how much income you're getting out of the company for the capital you've got locked up in it.
Debt Management Office
Not to be confused with maturity, duration measures the sensitivity of a bond (or a bond portfolio) to changes in interest rates. Bonds with longer durations are generally more sensitive to interest-rate movements.
The risk to a bond (or a bond portfolio) when interest rates change is known as duration risk, or interest-rate risk. When interest rate rise, bond prices generally fall. A portfolio manager manages duration risk within a fixed-income portfolio.
Duration to put
Is the duration of the bond to the next exercise date of an option – also known as the option adjusted duration.
Department for Work & Pensions
Earnings per share
A relative valuation (or probability) measure, which calculates the current earnings of a company or investment trust divided by the number of ordinary shares.
Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company's operating performance.
The fluctuations in economic activity experienced by an economy over a period of time. It is generally characterised by four phases: boom; peak; recession; and recovery.
Effective duration is a duration calculation for bonds that have embedded options. This measure of duration takes into account the fact that expected cash flows will fluctuate as interest rates change.
The length of time it takes for a bond to reach maturity, taking into consideration that certain actions, such as a call or refunding, may cause some bonds to be repaid before they mature.
Countries with a low per-head income compared to the developed world but with a functioning stock exchange. The potential for rapid growth makes emerging markets attractive for investors prepared to accept a higher level of risk. Emerging markets include Brazil, Russia, India and China. Other countries of significance include Mexico, Indonesia, South Africa, Poland and South Korea.
Shares in a company listed on a stock exchange. Shareholders are effectively the owners of the company and typically have the right to vote on company matters.
Environmental, social and governance. An investing criteria that screens investments to analyse the ethical impact of them in relation to the environment, society and corporate governance.
European Central Bank (ECB)
The institution in the European Union responsible for setting monetary policy for all European Union countries that use the euro.
Purchase of shares without entitlement to the most recently announced dividend.
Exchange Traded Fund (ETF)
An investment fund that is traded on an exchange and aims to offer investors low cost exposure to certain indices or targeted investment objectives.
The amount of risk allocated to a specific security, asset, sector or industry.
A type of share with a designated end date that is issued by an investment trust. It allows for shareholders to acquire the income generated by the trust throughout the timespan of the investment.
A trust whose main objective is to provide investors with a regular income from its investments.
A unit in an investment trust that seeks to dispense income – either interest or dividend – to holders of the unit rather than providing capital growth.
The annualised income from an investment, taken as a percentage.
A scale that measures relative changes in performance. A financial market index, such as the FTSE 100, is an imaginary portfolio of securities. The method for calculating changes in indices differs across financial markets.
A passive investment technique that attempts to mirror the performance of a particular benchmark, or sections of a benchmark, by purchasing assets in a similar weighting to the underlying benchmark. It is seen as a low cost way to gain exposure to the components of a benchmark without paying for active management. Index tracker funds are also exempt from stamp duty.
A type of fixed-income security in which interest payments are tied to a particular index, usually a consumer price index. (See also inflation-linked bond.)
Indirect property trust
A trust that invests in real estate vehicles such as property shares, property investment companies, REITs, limited partnerships or property unit trusts as opposed to the actual properties themselves.
A measure of the change in the average price level of a basket of goods and services in a particular economy.
The rate at which the general level of prices for goods and services is rising and, consequently the purchasing power of currency is falling.
The risk that an increase in inflation over time will erode the real value of an investment.
A type of index-linked bond that helps to minimise inflation risk by tying principal and interest payments to movements in inflation. So, when inflation rises, the nominal value of the bond also rises.
The information ratio (IR) is a measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns. The benchmark used is typically an index that represents the market or a particular sector or industry.
Initial public offering (IPO)
The initial sale of shares by a company on a stock exchange, whereby a private company becomes public.
The charge for the priviledge of borrowing money, typically expressed as annual percentage rate (APR). Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.
The amount that is owed from a specific amount of capital that is borrowed or saved, which is expressed as a percentage.
Interest rate duration
A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
Interest rate risk
The risk to a bond (or bond portfolio) of changing interest rates, which is determined by the particular bond’s sensitivity to interest rates. (See also duration risk.)
Interest rate swap
A type of forward contract traded over the counter in which two parties agree to exchange one set of future interest payments for another.
Investment Association (IA)
The organisation that acts as a representative for UK investment managers.
Investment grade bonds
A corporate bond that is rated as higher quality from a ratings agency and is deemed lower risk.
Real estate purchased as an investment rather than a place to live.
A public limited company that is listed on the London Stock Exchange and is a closed-ended fund. It exists to invest in the equity of other companies with the aim of producing a return for its shareholders.
Individual Savings Account (ISA) offers tax advantages for UK-based investors. Any returns earned are free from capital gains tax and no further income tax is paid.
An investment trust – or other legal entity – that undertakes the process of selling financial securities. It is also obligated to maintain the day-to-day administrative activities of operating the security.
The overall, aggregate factors within an economy that affect financial markets. Examples of which include the level of economic output, employment, inflation and investment in a given country or geographical region.
The date at which the lifespan of a financial security comes to an end, usually a fixed income instrument. Financial securities with a longer time to maturity will generally pay a higher coupon to compensate for the longer wait for principal repayment.
Companies of a medium size. In the UK for example, companies between £250 million to £2 billion in size are considered mid-caps and make up indices such as the FTSE 250 Index.
Markets in Financial Instruments Directive II. The updated version of the European Union regulatory law on the management of investment goods and services throughout the European Economic Area.
Modified duration is a formula that expresses the measurable change in the value of a security in response to a change in interest rates. Modified duration follows the concept that interest rates and bond prices move in opposite directions.
A policy action taken by governments or central banks to influence how much money is in circulation or how much it costs to borrow. Typically, monetary 'easing' is used to stimulate economic activity, whilst monetary 'tightening' is used to control the rate of inflation.
A financial research and asset management company that provides analytical tools and data for financial markets.
Morgan Stanley Capital International. A global supplier of indices and various portfolio risk and performance analytics tools.
An investment that utilises various asset classes such as shares, bonds, cash and alternatives to group them together into a single portfolio.
An investment technique whereby a portfolio consists of investments in other specialised funds, run by different managers, in order to maintain strong diversification.
Highly liquid assets that can be easily transferred into cash, such as bank deposits, Treasury bills and certificates of deposit.
The total amount after costs, expenses and taxes are taken into account.
Net asset value
A key measure of the value of a company or trust – the total value of assets less liabilities.
Nominal rates duration
A measure of the sensitivity of the price of a bond or other debt instrument to a change in nominal interest rates.
A style of investment management in which a portfolio mirrors its benchmark through the purchase of securities that constitute the benchmark.
The specific date on which a dividend is to be paid out to shareholders.
An asset of value that is tangible and can be freely exchanged, such as property, equipment, inventory or physical commodities.
A Public Limited Company in the UK is a limited liability company, offering shares to the public and having an authorised share capital of at least £50,000.
The collection of investments held by an investor or a trust.
Shares in a company that have a higher claim on the assets and earnings than ordinary shares. Dividends for preference shares generally must be paid out before those to ordinary shares.
The difference between the higher price paid for a fixed-income security and the security's face amount at issue, which reflects changes in interest rates or risk profile since the issuance date.
Price/earnings ratio (P/E ratio)
A way to estimate the future earnings potential of a particular company or investment trust. It is calculated by taking the current price and dividing it by earnings per share.
A real estate investment regarded as the best in its class and location.
The original amount of capital loaned to an issuer of a bond, which is repaid at the maturity date.
Alternative investment in firms not listed on a stock exchange. Investors (which can include investment trusts or other funds) directly invest in private companies and then own a share of that company. Investors can also buy out public companies, which results in the delisting of public equity.
The sale of assets or securities directly to a private investor, or group of investors, rather than in a public exchange.
Profit & loss (P&L)
A financial accountancy report that lists all revenue, costs and expenses that a company has over a specific time period, usually three or twelve months. Also known as an income statement.
Property Expense Ratio (PER)
A real estate ratio used to determine the profitability of operating a particular property. It is calculated by taking the total operating expenses (minus depreciation) and dividing it by the total revenue generated from the property; a lower ratio indicates the property is run more efficiently and thus is more profitable for a real estate investor.
A document required by law to be published on the occasion of an issue of shares or fixed interest securities to the public. A prospectus gives details of the company and the issue.
Physical property, which includes land and the buildings on it. It also includes both above and below-ground rights, like crops or minerals.
Real rates duration
A measure of the sensitivity of the price of a bond or other debt instrument to a change in real interest rates.
Adjusted performance that takes into account the impact of inflation on a financial asset. For example, if inflation outpaces the total return over a time period, then the asset has a negative real return.
The income on an asset that takes into account the impact of inflation.
Real Estate Investment Trust. A form of indirect property investment by purchasing shares in a company that owns, manages or finances different types of real estate that produce an income.
Investment that looks to incorporate ESG factors into investment analysis and decision making.
The amount by which an investment may change due to a combination of capital growth and/or interest/dividend income. This is normally expressed as a percentage.
A method of raising extra capital through the issue of new equity shares. Existing shareholders can buy new shares in proportion to their current holdings, usually at a discount, or sell their rights to other investors.
The chance that there might be losses from an original investment, or the return deviates from what is expected.
The evaluation and understanding of investment risk, using strategies like diversification to mitigate its negative impact on a financial portfolio.
The amount over and above that of the 'risk-free' return. It rewards investors for engaging in investments considered 'riskier', for example buying corporate bonds in a company with a higher risk of default.
An asset that has a near-zero risk of default and has a defined future return. The most common example is US Treasuries, which are considered 'safe' because they are backed by the US government.
The potential (or expected) reward (return) for every unit you risk.
Retail Price Index. The main measure of inflation used for calculating indexation for capital-gains tax and on index-linked gilts and National Savings products.
Safe haven asset
Common examples include gold, Treasury bills, cash and certain currencies like the Japanese yen and Swiss franc. They are assets that are expected to at least maintain (or even increase) their value during periods of market volatility.
Investment trusts similar to each other in scope and objectives, which may have a particular focus on specific assets, regions or countries. A sector also refers to an industry or area of commerce in which a company operates, such as mining.
A general label for a tradable financial instrument that holds a certain monetary value. Examples include equities and debt instruments (like bonds), and may also include derivatives (like futures).
A designation given to common stocks or mutual funds that have differing benefits/drawbacks. The intention may be, for example, to attract different types of investors to the same mutual fund. Each share class will have it's own voting rights, fees and minimum investment amount.
The Sharpe ratio is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of total risk.
Speculating that the value of an asset will fall.
The purchase of a security with the expectation that the underlying asset value will fall over time. This is done by borrowing the security through a short option and selling it before repurchasing at a lower price to return to the lender.
Companies of a relatively small size. In the UK for example, a company with a market value of under £250 million would be considered small. These companies tend to exhibit higher volatility than large- or medium-cap companies, but can offer excellent growth potential.
The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative portfolio returns, called downside deviation, instead of the total standard deviation of portfolio returns which are used in a Sharpe ratio.
A central government's debt. It is a form of borrowing (either internally or externally) that a government uses to finance growth, typically issued in the form of bonds.
The spread is the term used to describe the difference between the offer price and the bid price.
The sensitivity of the price of a bond to changes in credit spread.
A government tax imposed on the buying of shares and property, which only applies to purchases and not sales. Stamp duty for share purchases is currently 0.5% of the value of the transaction.
A share of a company held by an individual or group.
A regulated financial market where traders can buy and sell different kinds of securities.
An investment approach that involves rotating between different types of investment, depending on the conditions of the market. The idea is to maximise returns on the basis that certain investments will do well (for example, income stocks) at certain times, while others (for example, growth stocks) will not.
Sub-investment grade bond
Refers to a class of bonds that are considered 'riskier' because they have a higher risk of default (and therefore rated lower by ratings agencies like Moody's). In order to compensate the investor for the risk, they have a higher yield.
The amount (generally expressed as a percentage of the net asset value) that adjusts for the transactional activities of investors within a fund, in order to protect other investors within the fund.
The adjustment of a fund's net asset value, which passes on the costs of trading to those investors who are buying or selling within the fund. The measure is designed to protect long-term investors from the costs incurred from the transactional activities of other investors within the fund.
Task Force on Climate-related Financial Disclosure
Top down investing
An investment approach that favours taking a macro view of the economy and using this to decide which sectors to invest in, rather than choosing stocks based on individual company performance. As compared to 'bottom-up investing'.
The growth in value of a share holding over a specified period, including capital growth, interest, dividends (assuming they are re-invested to buy additional units of the stock) and distributions.
A fund that aims to replicate the performance of a particular stock market index by buying all or a representative proportion of the stocks within that index. Tracker funds are passively managed.
A measure of how closely the performance of an investment portfolio follows that of the reference benchmark or comparator of the fund.
The cost involved when buying or selling a good or service. An example would be a broker's fee.
A debt security issued by the US government. They are generally perceived to have a near-zero risk of default.
This gives the holder the right to buy shares at a fixed time in the future for a price that is set when the warrant is issued; however, there is no requirement to do so.
Worst drawdown (%)
The worst observed loss from a peak to a trough of a portfolio, before a new peak is attained.
The annual dividend or income on an investment expressed as a percentage of the purchase price.
Yield to Best
The greater of the yield to maturity and yield to put for a convertible bond where the investor also has a put option back to the issuer (typically at par).
Yield to maturity (%)
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but it is expressed as an annual rate.