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Improving Our Understanding Of Financial Terms

02 May 2018

Committed to improving the UK’s financial understanding, True Potential LLP has established a partnership with the Open University to create the True Potential Centre for the Public Understanding of Finance (PUFin). A number of free financial courses are available remotely to help improve Britain’s understanding of finances on a general and personal level, with some 200,000 people already benefitting from them.

With 38% of adults not knowing what ‘inflation’ means, according to findings from the Organisation for Economic Cooperation and Development (OECD), it’s clear that the UK’s financial knowledge needs work. To help, stocks and shares ISA provider True Potential Investor has provided the following jargon buster.

Bonds

Corporate bonds are provided by companies to help them fund a particular goal they may have. 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.

Improving Our Understanding Of Financial Terms

Government bonds or gilts, which are issued by the government, are also available. They work in a similar way to corporate bonds and are used to fund borrowing.

Capital

Capital describes the funds you invest initially.

Capital Gains Tax

Specific types of investment may lead you to pay capital gains tax, which is the tax payable on any profit generated from your investment. 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.

Diversification

Rather than investing in just one area, diversification involves investing across multiple areas. 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 doing so, you can better manage risk and reduce the effects of market uncertainty.

FTSE

Companies or indices trading on the London Stock Exchange have their performance 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

Inflation means how much the price of goods and services has grown over a time period. It is measured as an annual percentage change and can impact interest rates and share prices.

ISA

Individual Savings Accounts (ISAs) allow people to save in a tax-free or tax-efficient way. 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

Pensions help many people prepare for retirement through setting money aside. 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 purchases stocks, which are shares in a company. 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 their stocks and shares for more than what they bought them for. Usually, stock and shareholders receive a proportion of the company’s profits on an annual or bi-annual basis in the form of dividends.

Yield

Yield describes your investment’s performance at present and in the future. 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.

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