Improving understanding of financial terms
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
Worryingly, only 38% of adults understand what inflation is, according to the Organisation for Economic Cooperation and Development (OECD)’s study. With this in mind, we created the following jargon buster with a selection of poorly understand terms to help improve your overall financial understanding:
Capital is another word for the money you initially invest.
Capital gains tax
For specific types of investment, you may have to pay capital gains tax on the profit your investment generates. 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.
When a company needs to raise funds to help them achieve a particular aim, corporate bonds can be offered. 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.
Investors can also take advantage of government bonds or gilts. They work in a similar way to corporate bonds and are used to fund borrowing.
If you invest across multiple areas instead of just one, you will have diversified your investments. 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.
Benefits of diversification include improved risk management and the reduced impact of market uncertainty.
The Financial Times Stock Exchange (FTSE) is responsible for monitoring the performance of companies and indices that trade on the London Stock Exchange. A number of lists are available, with each showing the fluctuations in share prices over time.
Over a timeframe, inflation describes how the price of goods and services has increased. It is measured as an annual percentage change and can impact interest rates and share prices.
Individual Savings Accounts (ISAs) are popular as they offer a tax-free or tax-efficient mode of saving. 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.
You can set money aside for later life through contributing to a pension. 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 GOV.UK website.
Stocks & Shares
Investors can purchase stocks, which allows them to gain a share in a particular 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 make a profit from the stocks and shares they buy. Usually, stock and shareholders receive a proportion of the company’s profits on an annual or bi-annual basis in the form of dividends.
How your investment performs now and in the future is described by the term yield. 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.
To further improve financial knowledge in the UK, we established the True Potential Centre for the Public Understanding of Finance (PUFin) through a partnership with The Open University. A number of free financial courses are available remotely to help improve Britain’s understanding of finances on a general and personal level and to date, 200,000 people have enrolled on the courses.