How to invest: Common investment terms you should know explained IN FULL | Personal Finance | Finance
Financial investments are one of the best ways to maximise your savings, but doing so doesn’t come without risks. With the UK tax rise looming closer, now is the perfect time to get to grips with the basics of investing – and understanding the common jargon is key. From bonds to funds, there are a whole range of terms that you should know before beginning your investment journey, but what exactly do they mean? Express.co.uk spoke to Emma Keywood from investing app, Dodl.co.uk to find out.
How to start investing
Smart investing can allow your money to outpace inflation, which is currently causing a cost of living crunch that many Brits will be feeling.
Investments can come in a range of different formats with everything from stocks and shares to trusts and funds on offer to potential investors, but how can you choose the right platform for your money?
Make a plan
Speaking exclusively to Express.co.uk, Emma Keywood, Senior Product Manager for Dodl.co.uk said: “Think about what you are investing for. Is the goal to pay off your mortgage, or for a university fund for the kids, or maybe just for your own retirement?
“Most people will find themselves investing for a variety of possible goals, but if you lay them out at the beginning, that will really help you make decisions and keep you on track.”
READ MORE: Investment warning as markets brace for volatility
Start slow
Keeping things simple to begin with is the safest way to manage your finances while learning the ropes of the investment industry.
Start by choosing a platform to invest with – there are plenty of opportunities out there so take a good look at what’s on offer and how it would fit your lifestyle.
Emma recommends looking for a platform which offers all the accounts you might need over time, such as an ISA, pension, or Lifetime ISA.
She added: “Also consider the level of support and guidance the platform offers, particularly if you are just getting started and need some help deciding how and where to invest.”
What are the benefits of investing?
Investing can be a great way to put your money to work and potentially build some substantial wealth, beyond sub-par savings accounts.
While it’s still important to have a savings account, it really is only part of the story in the current economy.
Emma explained: “Smart savers will start by building a sizeable emergency savings pot and, after a few months, will start to invest in the financial markets for longer-term savings like a house deposit or a new car.”
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What are the most important investment terms to understand before investing?
Investment jargon can be meaningless when you are unaware of the implications on your own finances, but understanding these common terms can make it even easier to secure the right investment for you.
ISA
Individual Savings Accounts or ISAs enable you to save or invest without paying any tax on the interest you receive or any investment gains.
You can currently pay in up to £20,000 each year.
Junior ISA
This is an individual savings account that allows you to save for your child’s future.
You can currently pay in up to £9,000 a year for each child and the account becomes theirs when they turn 18.
Lifetime ISA
This type of ISA can be opened between the age of 18 and 39 and accept payments of £4,000 a year.
A key benefit of the lifetime ISA is that you gain a Government bonus of up to £1,000 (25 percent of the amount you invest), making it ideal for saving for key life events.
Pension
A pension is a retirement savings product through which you can hold a wide range of investments, with income and investment gains being tax free.
You can pay in up to £40,000 or 100 percent of earnings each year and receive tax relief from the Government – that means for every 80p you put in, the Government adds 20p.
Capital gain and loss
Capital gain is the money you made between buying and selling an investment, while capital loss is the money you lost between buying and selling an investment.
Bear and bull markets
A bear market is what investors call the market when stock prices drop, whereas a bull market is what investors call the market when stock prices rise.
Risk
Investments with higher risk carry a greater risk of loss than lower-risk investments, but also a greater potential for gains.
Asset allocation
An asset allocation is the proportion of your money you allocate to different types of investment such as shares, bonds, property and cash.
The proportions you choose will also depend on your attitude to risk, investment goals and time frame.
Diversification
Diversification essentially means that you don’t put all of your eggs in one basket and is a vital part of asset allocation.
Rebalancing
You may find that if some of your investments have done particularly well or badly, and you need to buy or sell some investments that your portfolio remains aligned with your willingness to potentially lose money on investments.
Stocks and Shares
When you invest in a company via a stock exchange, you own a share in that company and become a shareholder.
When you become a shareholder, you then own a portion of the company which is proportionate to the amount of shares you own.
As the value of the company goes up or down, so will the value of your shares – you may also be entitled to a share of the company’s profits if it decides to pay a dividend.
Dividends
Some companies will pay out part of their profits to their shareholders as cash or shares, otherwise known as dividends.
Bonds
When companies or governments need to raise money, they issue bonds.
You are lending money to the company and in return it promises to pay a fixed amount of interest on a regular basis until the end of the agreed term.
Funds
Funds are a way of investing in a broad range of companies via one product and can come in a range of different forms.
Active approach funds mean the fund manager is actively selecting the investments within the fund.
Passive approach funds means the fund invests in a certain stock market or section of a stock market or a specified theme, such as healthcare.
What are the main types of fund?
Open-Ended Investment Company – OEICs
- Run by a fund manager
- Investors buy units in the fund through the manager rather than the stock exchange
- Investments can be made in everything from company shares to bonds or property
- These funds can take an active or passive approach to investing
Investment Trusts
- These funds are listed on the stock market
- You buy a share in them like you would with other companies listed on a stock exchange
- The fund manager then manages a portfolio of investments on behalf of all shareholders
- Investments can be made in everything from company shares to bonds or property
- Investment Trusts use an active approach to investing
Exchange-Traded Funds
- ETFs are traded on a stock market
- Take a passive approach to investing by tracking the value of a whole stock market or a sub-section of a market
- They can also invest in specialist themes such as technology, healthcare or clean energy
