Below is a glossary of terms often used in the investment industry, it is by no means exhaustive so please feel free to contact us if there is something you would like explained further or included.

Some terms are linked to pages where we have more in-depth explanations

A style of portfolio management whereby the portfolio has a fund manager who actively selects investments in a particular market trying to achieve better return than the index the fund is benchmarked against. Different managers will have different selection and sell tactics trying to ‘beat the market’. Our picking an investment page will give further explanation.

A measure of an investment’s performance relative to that of its benchmark. Alpha measures the excess return that a fund achieves over its benchmark for the same level of risk. It is an indication of the extra value a manager’s activities have contributed.

The weightings of different assets which together form an investor’s portfolio. The main asset classes are fixed interest, equities, alternative assets and cash. An investor may adopt a strategy whereby he or she aims to balance investment risk and return by allocating proportions of their portfolio according to their risk level, investment objective and time horizon. For example, an investor may allocate 25% of their portfolio to fixed interest securities, 40% to UK equities, 25% to overseas equities, 5% to alternative assets and 5% to cash. Asset allocation is closely linked with diversification (see below).

This is the measure by which a mutual fund, security or investment manager will be measured against. Benchmarks are important when evaluating the performance of an investment.  A fund will select its own benchmark that is relevant to what they are investing in thereby providing a good reference for evaluation. Often funds will benchmark against an index of similar market/sector for reference.Note that funds that have niche investment strategies may struggle to find an appropriate index to benchmark themselves against. You can also use our research centre for investments to identify the best options for you and also our articles on how to measure investment return and how to assess investment risk.

An estimate of an investment’s volatility relative to that of its benchmark. If beta is higher than 1.0, an investment is more volatile than its benchmark; if beta is lower than 1.0, an investment is less volatile than its benchmark. For example, if shares in a FTSE 100 company have a beta of 1.2 and the FTSE 100 index rises by 5% over the course of a calendar month, the company’s share price should theoretically rise by 6% over the same period of time.

The difference between the bid price (the price a seller receives) and the offer price (the price a buyer pays) of an investment. A equity is an example of an investment with bid-offer pricing. The bid-offer spread reflects initial charges and dealing costs. For example, if ordinary shares in MegaCorp have a bid price of 20p and an offer price of 21p, the bid-offer spread is 1p.

A statistical measure of how two investments behave in relation to each other. Correlations are expressed as coefficients, numbers which range between -1 and +1. Perfect positive correlation (+1) implies that as the price of investment A moves up or down, the price of investment B will move to the same extent in the same direction. Perfect negative correlation (-1) implies that as the price of investment A moves up or down, the price of investment B will move to the same extent in the opposite direction. A correlation of 0 implies that investments A and B are uncorrelated.

A strategy whereby an investor holds a wide variety of investments with the aim of reducing risk and increasing returns from their portfolio. In a well-diversified portfolio the positive performance of some investments will compensate for the negative performance of other investments. The benefits of diversification are greatest when investments within a portfolio are not strongly correlated (see above). Diversification is closely linked with asset allocation (see above).

A dividend is where a company distributes part of its earnings to its shareholders. The value of the dividend is normally denoted as an amount per share. The size of the dividend is decided by the board of directors, deciding how much to pay out to shareholders and how much to retain in the company. In the UK it is usual for companies to pay a dividend every 6 months.

Investments whereby an investor owns a portion of a company whose shares are traded publicly on a stock exchange. Different types of shares are available, the most common being ordinary shares. For example, if an investor owns 1,000 ordinary MegaCorp shares whilst there are a total of 1,000,000 ordinary MegaCorp shares in existence, the investor owns 0.1% of the equity of MegaCorp.

This is a classification of shares where the declared dividend belongs to the seller rather than the buyer, this status will be allocated to a stock if the company confirms that a person has received the dividend payment. A stock trades as ex-dividend on or after the ex-divdend date. The person who owns the security on the on ex-date will be awarded the payment regardless who currently holds the stock. After the ex-date is declared the stock normally drops in value by the amount of the expected dividend.

Debt investments whereby an investor loans money to a bond issuer for a fixed period of time at a fixed interest rate. Bonds are often held in portfolios by fund managers. The issuer (typically a company or government), the interest rate and the maturity date are key factors. For example, MegaCorp 5% 2020 would be a bond issued by MegaCorp promising to pay the bondholder 5% per annum up to and including the year 2020, when the bond matures and the bondholder is repaid. Bond prices vary as they trade in the market.

Exchange Traded Funds are open-ended investment fund that are bought and sold on exchanges, similar to stocks, rather than through an investment manager. For more information for breakdown of types of funds.

A fund that is managed with the aim of holding assets that are expected to grow in value and provide capital gains. These funds are, in general, meant to provide higher returns but with greater risk.

The aim of an income fund is to provide the investor with a periodic income rather than capital appreciation. These types of funds will typically hold a mixture of fixed interest assets and dividend-paying stocks.

In technical terms an index is a statistical measure of changes in a representative group of individual data points. When used in reference to economics and funds it refers to a group of equities compiled together through a particular selection process allowing observers to evaluate and try predict economic trends in that particular market or sector. Different indexes will weight what is included on different metrics. For example, the most well known in the UK would be the FTSE 100 which is a share index of the largest 100 companies by market capitalisation listed on the London Stock Exchange with the highest market capitalization, but you might not have heard of the Sensex which is the Bombay Exchange Sensitive Index made up of the 30 largest and most actively traded companies on the Bombay Stock Exchange.

Inflation is the rate at which general level of prices in a goods and services increases. Inflation erodes the purchasing power of a currency, a high inflation rate will mean the real purchasing power of a currency will decrease. In the UK the Bank of England’s aim is to maintain an inflation rate of 2% and to measure it they use the Consumer Price Index (CPI). The CPI is a virtual basket containing hundreds of commonly purchased goods and services, including items such bread, pints of beer, clothing, television subscriptions, monitoring how these prices change.

For example, if the inflation rate is 3% then a loaf of bread costing £1 in a given year will cost £1.03 in the following. This shows that the fall in the implicit value of the money purchasing the services and goods as they increase in price.

Individual Saving Account, an ISA is a tax efficient way of saving or investing. Unlike with a normal savings account where you pay income tax on any interest you earn and ISA allows you to retain any earnings from investments. The UK government outlines how much users are allowed to invest into an ISA each tax year.

An investment trust is a vehicle for investing money are close ended funds in which there is a limited number of shares available, their price is largely determined by the supply and demand for them. For more information and for breakdown of types of funds

This is the market value of all the companies outstanding shares. The calculation is made by taking the current share value and multiplying this by the total number of outstanding shares. Thus if MegaCorp was valued at £10 a share and there was 1 million outstanding shares its market capitalisation (often referred to as market cap for short) would be £10 million. Outstanding shares refers to all the available shares held or sold on the open market, including those held by company employees themselves or institutional investors.

The greatest difference between the peak and trough values of an investment over a particular period of time. For example, if over 10 years the price of an investment varies as follows:

The peak and trough values used to calculate the maximum drawdown of the investment would be 130p and 80p respectively. The maximum drawdown is (130p-80p) / 130p = 38.5%. The subsequent peak of 150p is excluded from this calculation because the drawdown commenced at a peak of 130p.

Multi-manager investment funds are named appropriately, funds that have multiple managers in them. The idea of the fund is to provide the investor with a one stop shop for investment by providing additional layering of diversification. There are two variations of multi-manager funds. The first being a ‘fund of funds’, these are where the fund manager holds other managed funds in their portfolio, hoping these managed funds will provide them with specialisation and exposure to different markets or sectors. The second is ‘manager of managers’, in these funds a manager has bought in external managers to provide specific expertise in particular areas of investment for constructing your portfolio.

The potential drawback to multi-manager funds is that may have higher costs and  expensive fees because you are effectively paying two levels of fees.

Open Ended Investment Company are a variation of the older unit trust. It is a professionally managed collective fund. With an OEIC the manager must create and redeem shares to meet the supply and demand of investors. For more information and for breakdown of types of funds.

Measures of the costs associated with operating and managing an investment such as a Unit Trust. The total costs incurred over the past 12 months are divided by total assets, resulting in a percentage figure. Includes the annual management charge (AMC), distribution costs, audit costs and regulatory fees. Excludes any entry or exit charges, dealing charges and brokerage costs. The principal difference between the OCF and the TER is that the OCF excludes performance fees whilst the TER includes performance fees.

A style of portfolio management that involves replicating or mirroring a market index, it is associated with mutual and exchange-traded funds. Due to no active management these funds generally have lower OCF. Our picking an investment page will give further explanation.

This is a statistical measure representing the percentage of an investments movements that can be attributed to movements in the benchmark index. The value ranges from 0 – 100. If a particular investment has an R-squared value of 100 it means that all movements made by it are completely explained by the index, a value between 85 to 100 indicates the fund’s performance patterns have been in line with the index.

A measure of an investment’s excess return over a specified ‘risk-free’ rate (such as a 10-year government bond yield) per unit of risk taken on. Sharpe ratios are useful when comparing very similar investments and undiversified assets; the investment with the highest Sharpe ratio has generated more return per unit of risk. There is no absolute definition of a ‘good’ or ‘bad’ Sharpe ratio.

Self Invested Personal Pension are tax efficient saving accounts available in the UK. SIPPs allow individuals to invest their money in a wide range of investments including stocks, bonds, mutual funds and ETFs. The investments held in a SIPP can only be accessed at the age of 55 years old.

A Unit trust is an open ended investment vehicle allowing the management company to create new units on demand or cancel units when investors sell. They are valued and bought and sold at one point during the day. For more information and for breakdown of types of funds.

A statistical measure, general the standard deviation, of the dispersion of returns for a given investment over a particular period of time. Volatility refers to the amount of uncertainty and the possible size of change in an investments value. An investment with low volatility means its value does not change dramatically, with changes of value occurring at a steady pace. The value of an investment with a higher volatility will dramatically fluctuate in value in either direction over a short period of time.

A valuation measure which focuses on the income paid out by an investment. Yield calculations differ across asset classes. For equities, yield is calculated by dividing dividend per share by the current share price. For example, if MegaCorp pays an annual dividend of 12p per ordinary share and its current share price is 300p, the current dividend yield is 12p / 300p = 4%.

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