A
Alpha - A measure of the performance of an investment relative to a benchmark index.
Annualised rate of return - The average annual return over a period of years, taking into account the effect of compounding.
Appreciation - The increase in value of an asset.
Asset allocation - The process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, to balance risk and reward according to an individual's goals, risk tolerance, and investment horizon.
Asset class - Securities with similar features. Common asset classes include stocks, bonds, real estate, commodities, and cash.
Average maturity - The weighted average time until the securities in a bond portfolio or fund mature. It is an important measure because it indicates the sensitivity of the portfolio to interest rate changes; longer average maturity typically means higher sensitivity to interest rate fluctuations.
B
Balanced fund - Funds that seek both growth and income in a portfolio.
Bank of England (BoE) – The central bank for the United Kingdom. It is responsible for monetary policy, banking supervision, issuing currency, and supporting financial stability. It plays a crucial role in managing the country's economy through these functions, ensuring stability and growth while serving as the government's banker.
Bear market - A period in which the prices of securities, such as stocks, decline by 20% or more from recent highs and remain low for a prolonged period. The opposite of a bull market.
Benchmark - A standard, usually an unmanaged index such as the MSCI World Index, used for comparative purposes in assessing performance of a portfolio or mutual fund.
Beta - A measure of an asset's volatility compared to the overall market. It indicates how much the price of the asset is expected to move relative to market movements. Here's how to interpret beta:
- Beta = 1: The asset's price is expected to move with the market.
- Beta > 1: The asset’s price is more volatile than the market, meaning it is expected to move more than the market.
- Beta < 1: The asset’s price is less volatile than the market, meaning it is expected to move less than the market.
- Beta < 0: The asset’s price moves in the opposite direction to the market.
Blue chip stock - A share in a large, well-established, and financially sound company with a history of reliable performance and stability. These companies typically have a strong market presence, are leaders in their industries, and often pay regular dividends.
Bond - A bond acts like a loan made by an investor to a borrower, typically a corporation or government. The bond issuer borrows funds from the bondholder and, in return, agrees to pay periodic interest payments (coupon payments) and repay the principal amount (face value) on a specified maturity date.
Bond fund - A mutual fund that invests exclusively in bonds.
Bull market - Any market in which prices are advancing in an upward trend. The opposite of a bear market.
C
Capital gain - The positive difference between a security's purchase price and its selling price.
Capital loss - The negative difference between a security's purchase price and its selling price.
Capitalisation - The market value of a company, calculated by multiplying the number of shares outstanding by the price per share.
Cash equivalent - A short-term money-market instrument, such as a Treasury bill, of such high liquidity and safety that it is easily converted into cash.
Common stock - Securities that represent ownership in a corporation; must be issued by a corporation.
Corporate bond - A long-term bond issued by a corporation to raise capital.
Corporate social responsibility (CSR) - The practice where businesses participate in initiatives that benefit society. CSR involves companies taking responsibility for the impact of their activities on the environment, consumers, employees, communities, and other stakeholders.
D
Default - Failure of a debtor to make timely payments of interest and principal as they come due or to meet some other provision of a bond indenture.
Distribution schedule - A schedule of when a mutual fund will distribute dividends and capital gains.
Diversification - The process of owning different investments that tend to perform well at different times to reduce the effects of volatility in a portfolio, and also increase the potential for increasing returns.
Dividend - A dividend is a portion of a company's profit paid to shareholders.
Dividend yield - Annual percentage of return earned by a mutual fund. The yield is determined by dividing the amount of the annual dividends per share by the current net asset value or public offering price.
Dollar cost averaging - An investment strategy where an investor regularly buys a fixed dollar amount of a particular investment (such as stocks or mutual funds) regardless of the asset's price at the time. The key principle of dollar cost averaging is that by investing a fixed amount consistently over time, the investor buys more shares when prices are low and fewer shares when prices are high. This approach aims to reduce the impact of market volatility on the overall purchase price and potentially lower the average cost per share over time.
E
ESG - ESG stands for Environmental, Social, and Governance. It refers to a set of criteria that investors and other stakeholders use to evaluate a company's operations and its impact on society and the environment.
- Environmental (E): This aspect focuses on how a company manages its impact on the environment. It includes considerations such as climate change policies, carbon footprint, resource use efficiency, pollution and waste management, and environmental risks and opportunities.
- Social (S): The social component examines how a company manages relationships with its employees, suppliers, customers, and the communities where it operates. Key issues include labour practices, human rights, diversity and inclusion, community relations, health and safety, and product responsibility.
- Governance (G): Governance refers to the systems and structures that guide the company's decision-making processes and how it is governed. It encompasses aspects such as board composition and independence, executive compensation, shareholder rights, business ethics, transparency, and risk management.
Equities - Often referred to as stocks or shares, equities represent ownership in a company. When an investor purchases equity in a company, they become a partial owner and acquire a proportional claim on the company's assets and earnings.
Equity fund - A mutual fund that invests exclusively in equities.
European Central Bank (ECB) - The central bank for the euro and administers monetary policy within the Eurozone. The ECB's primary tasks include maintaining price stability in the euro area, conducting foreign exchange operations, and issuing euro banknotes. It plays a crucial role in setting interest rates and managing the money supply in the Eurozone economy.
Exclusions - An investment process that excludes specific investments or classes of investment from the investment universe based on certain criteria. For example, certain industries, such as defence, tobacco or fossil fuel producers, can systematically be excluded from investment.
F
Fixed income – Often used interchangeably with ‘bonds’, fixed income investments provide a fixed periodic return on an investor's principal amount.
Fund - A pool of money from a group of investors in order to buy securities. The two major ways funds may be offered are (1) by companies in the securities business (these funds are called mutual funds); and (2) by bank trust departments (these are called collective funds).
G
Green bonds - A type of fixed-income instrument that is specifically earmarked to raise money for climate and environmentally friendly projects.
Growth investing – An investment strategy that focuses on stocks of companies and equity funds where earnings are growing rapidly and are expected to continue growing.
Growth stock - Typically a well-known, successful company that is experiencing rapid growth in earnings and revenue, and usually pays little or no dividend.
Growth-style funds – Funds that focus on future gains by investing in equities with earnings that outperform the current market.
I
Impact investing - A sustainable investment style that seeks to generate measurable positive social or environmental impact alongside financial return.
Index - An investment index tracks the performance of many investments as a way of measuring the overall performance of a particular investment type or category. For example, the S&P 500 or FTSE 100.
Inflation - A rise in the prices of goods and services, often equated with loss of purchasing power.
Interest-rate risk - The possibility of a reduction in the value of a security, particularly bonds, resulting from a rise in interest rates.
Investment grade bonds - Bonds that have been assigned a credit rating indicating a relatively low risk of default by a recognized credit rating agency, such as Standard & Poor's, Moody's, or Fitch. These bonds are considered safer investments compared to bonds with lower credit ratings (often called "high yield” bonds).
L
Large-cap stocks - Companies with market values greater than $10 billion.
Liquidity - The ability to have ready access to invested money.
Long-term investment strategy - A strategy that looks past the day-to-day fluctuations of the stock and bond markets and responds to fundamental changes in the financial markets or the economy.
M
Management fee - The amount paid by a mutual fund to the investment advisor for its services.
Market price - The current price of an asset.
Market risk - The possibility that an investment will not achieve its target.
Market timing - A risky investment strategy that calls for buying and selling securities in anticipation of market conditions.
Maturity - The date specified in a note or bond on which the debt is due and payable.
Maturity distribution - The breakdown of a portfolio's assets based on the time frame when the investments will mature.
Mid-cap stocks - Companies with market values between $3 to $10 billion.
Morningstar ratings – A system for rating open- and closed-end mutual funds and annuities by Morningstar Inc. of Chicago. The system rates funds from one to five stars, using a risk-adjusted performance rating in which performance equals total return of the fund.
Mutual fund – A fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities or money market securities.
P
Par value - Par value is the amount originally paid for a bond and the amount that will be repaid at maturity. Bonds are typically sold in multiples of $1,000.
Portfolio - A collection of investments owned by one organisation or individual and managed as a collective whole with specific investment goals in mind.
Portfolio holdings - Investments included in a portfolio.
Premium - The amount by which a bond or stock sells above its par value.
Price-to-book - The price per share of a stock divided by its book value (net worth) per share. For a stock portfolio, the ratio is the weighted average price-to-book ratio of the stocks it holds.
Price-to-earnings (P/E) Ratio - A stock's price divided by its earnings per share, which indicates how much investors are paying for a company's earning power.
Principles for Responsible Investment (PRI) - A set of six voluntary principles designed to guide investors in incorporating environmental, social, and governance (ESG) factors into their investment practices. These principles were developed by an international group of institutional investors in partnership with the United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact.
Proxy - A shareholder vote on matters that require shareholders' approval.
R
Recession - A downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country's gross domestic product.
Redemption - Sale of mutual fund shares by a shareholder.
Relative risk and potential return - The amount of potential return from an investment as related to the amount of risk you are willing to accept.
Risk tolerance - The degree to which you can tolerate volatility in your investment values.
S
Sector - A group of similar securities, such as equities, in a specific industry.
Sector breakdown - Breakdown of securities in a portfolio by industry categories.
Securities - Another name for investments such as stocks or bonds.
Share - A unit of ownership in an investment, such as a share of a stock or a mutual fund.
Share classes - Classes represent ownership in the same fund but charge different fees. This can enable shareholders to choose the type of fee structure that best suits their particular needs.
Sharpe Ratio - A risk-adjusted measure that measures reward per unit of risk. The higher the sharpe ratio, the better.
Short-term investment - Asset purchased with an investment life of less than a year.
Small-cap stock - Companies with market values less than $3 billion.
Standard Deviation - A measure of the volatility or risk associated with a particular investment or portfolio. It quantifies the amount of variation of a set of returns from its mean (average) return
Stock - Also referred to as equities or shares, stocks represent ownership in a company. When an investor purchases stock in a company, they become a partial owner and acquire a proportional claim on the company's assets and earnings.
Stockholder - The owner of an equity of a company. Also referred to as a 'shareholder.'
Strategic Asset Allocation (SAA) - A long-term investment strategy that aims to balance risk and return by allocating a portfolio's assets according to an investor's financial goals, risk tolerance, and investment horizon. It involves setting target allocations for various asset classes based on their expected long-term returns and correlations with each other.
Sustainable Development Goals (SDGs) - A set of 17 global goals adopted by all United Nations Member States in 2015. They provide a framework for countries and organisations to address the world's most pressing challenges and achieve sustainable development by 2030. Each goal has specific targets for the next decade and covers a broad range of issues, including poverty, inequality, climate change, environmental degradation, peace, and justice.
Sustainable investing - Also known as responsible investing or socially responsible investing (SRI), sustainable investing refers to an investment approach that seeks to generate financial returns while also considering environmental, social, and governance (ESG) criteria.
T
Tactical Asset Allocation (TAA) – A TAA is a more dynamic investment strategy compared to strategic asset allocation (SAA). While SAA focuses on long-term asset allocation based on predetermined targets, TAA involves making short to medium-term adjustments to a portfolio's asset mix based on current market conditions, economic forecasts, and relative asset valuations.
Time horizon - The amount of time that you expect to stay invested in an asset or security.
Tracking Error – This measures the annualised standard deviation of the excess returns between a portfolio and its benchmark.
Treasury bill – Also known as T-Bills, Treasury bills are short-term debt instruments issued by governments, typically with a maturity of less than one year.
Treasury bond – Debt instruments issued by governments, typically with a maturity of more than 10 years.
Treasury note - Debt instruments issued by governments, typically with a maturity of between one and 10 years.
Turnover Ratio – The percentage of holdings in a fund that are sold during a specific period.
U
US Federal Reserve Board (The Fed) - The central bank of the United States responsible for conducting monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. It regulates and supervises banks, maintains the stability of the financial system, and provides financial services to depository institutions and the federal government.
V
Valuation – An estimate of the current worth of an asset, security, or company. It is crucial for investors because it helps them assess whether an investment opportunity is priced fairly, overvalued, or undervalued relative to its perceived worth.
Value investing - A strategy whereby investors purchase equity securities that they believe are undervalued. The investor can profit by buying these securities then selling them once they appreciate to their real value.
Value stock - Typically an overlooked or underpriced company that is growing at slower rates.
Value-style funds - Value-style funds typically hold company stocks that are undervalued in the market. Fundamentally strong companies whose stocks are inexpensive but trending upward may also be selected for value funds.
Volatility - The amount and frequency with which an investment fluctuates in value.