Jargon Buster
The world of investment jargon can be a confusing one. This jargon buster will help you better understand some of the terms used in investment and clarify some frequently used phrases.
Alpha and beta
Alpha is a measure of how much value a manager adds to a portfolio and compares its performance against a benchmark, such as an index or market average. A passively managed portfolio invests in an index or benchmark without trying to beat it – the return is called beta.
AMF, TER and OCF
Investment management companies charge an Annual Management Fee (AMF) to pay the investment manager, financial adviser and distributor. The Total Expense Ratio (TER) was introduced to give a more comprehensive idea of fees. TERs were replaced with Ongoing Charges Figures (OCF), because the word ‘total’ could be misleading. OCF is designed to provide the most accurate measure of what it costs investors to invest in a fund.
Account charge + Fund manager charge = Ongoing charge
Asset allocation
This is how a portfolio apportions its money between asset classes and markets. For example, a fund may combine shares, bonds and cash, and the weightings for each vary according to the investment aims and risk appetite of the investor.
Bottom-up / top-down
A bottom-up investment strategy analyses individual companies’ potential to increase their dividends and share price. Top-down strategies find the best sectors or industries to invest in by analysing economic trends.
Bulls and bears
A bull market is one in which prices are rising or are expected to rise. The opposite is a bear market, which is characterised by falling prices and pessimism.
Cable
Traders refer to the exchange rate between the British pound sterling and the US dollar as cable. It comes from the time when transactions between the pound and dollar were executed via a cable under the Atlantic Ocean.
Derivatives
Financial instruments, such as futures, options and swaps, derive their value from other underlying financial instruments. A future, for example, is an agreement to buy or sell an asset on a specific date in the future at a price agreed today. If the value of the asset rises, the purchaser stands to make a profit.
Market capitalisation
This is a measurement of a company’s size and is calculated by multiplying the number of shares by the share price.
Current Stock Price x Shares Outstanding = Market Capitalisation
Short selling
This refers to the selling of assets that you have borrowed from a third party and then buying them back at a later date to return them to the lender. The seller hopes to profit from a decline in the price of the assets between the sale and repurchase.
Unit trusts and OEICs
Two of the most popular types of fund are unit trusts and open-ended investment companies (OEICs). Open-ended means that the number of shares in the fund increases as money goes in and decreases as it goes out. A unit trust is an open-ended pooled investment vehicle, divided into units. When more money is invested in the fund, more units are created.