A – Z Guide to Investments – Part 1
By Balance team, Jul 12 2017 10:25AM
Over the next couple of weeks, we’re talking investments. There’s a lot of industry jargon used by firms and in the financial papers, which you may or may not be familiar with, so we have put together an A - Z guide to understanding investment terminology. This is part one - we will post the rest of the investment ‘alphabet’ next week:
A is for Assets
Assets come in many forms but, essentially, an asset is a valuable item or resource where you can expect to see a future financial benefit due to its economic worth. Consider an asset as something which could generate cash flow at some stage – for example, it could be a Fixed Asset such as equipment and property, or a Financial Asset such as investments in assets and securities in other institutions.
B is for Bonds
Bonds are effectively loans, either to large corporations or to governments. They borrow the funds for a defined period. In return for this loan, a fixed or variable interest rate will be paid. Once the bond reaches the end of the defined period (matures) the original sum or loan will also be returned.
C is for Commodities
A commodity is a universally used economic product or material. Whilst examples include copper, gold, grain, beef, oil and natural gas the term now includes technology, e.g. mobile phone minutes and bandwidth. Commodities are traded in recognised contracts on international exchanges and goods must meet certain standards (called a ‘basis grade’). You can think of commodities as the building blocks for economic development and their prices will fluctuate with demand.
D is for Diversification
Diversification is a way of managing risk by using a variety of investments within a portfolio. The aim of diversification is to spread your investments so that you are not over exposed to one particular area. Concentrating your investments in one particular asset type, such as property or stocks and shares, is a risky strategy. By diversifying your investment strategy, your portfolio will have a lower associated risk. Long term investment strategies will benefit greatly from diversification, as over time, you will gain the benefits of a broad range of performance.
E is for ETF
ETF stands for Exchange-Traded Fund. There lots of ETFs which normally track an index, a commodity, bonds, or a group of assets like an Index Fund (see below). They can be bought and sold like a stock, and can often be a cheaper way of investing rather than putting money into an investment fund. Speak to a financial planner if this is something you are considering.
F is for Fund
A fund is a sum or source of money which is available or saved for a specific purpose. A fund could be set aside by a business, the government or an individual. Investors can place their money into different types of investment funds with the main aim of earning money. Funds come in all shapes and sizes and will offer various levels of risk for an investor. Some funds will specialise in a particular area, perhaps specific geographies or the size of company they will look to invest in. We will explore different types of funds throughout both parts of this blog article.
G is for Gilt
Gilts are bonds issued by the government (UK) and is denominated in British Pounds. Usually considered low-risk, there are two types: conventional gilts and index-linked gilts (indexed to inflation).
H is for Hedge Fund
A Hedge Fund consists of a variety of investments using pooled funds that use various strategies to earn a return for their investors. Hedge funds are usually set up as private investment limited partnerships to take advantage of specific market opportunities. Usually only available to accredited investors, hedge funds may be managed in domestic and international markets. Hedge funds are at the more complex end of the investment spectrum and we suggest they should only be considered by experienced investors
I is for Index Fund
An Index Fund is a type of fund (managed portfolio of stocks and/or bonds) with a portfolio that tracks a specific market index, e.g. the FTSE 100. Index funds will adhere to certain rules regardless of how the markets perform. Index Funds are a way to track an index and are usually much cheaper than active funds. We believe that this ‘passive’ style of investing is perfect for the majority of people looking to invest over the long-term. Talk to one of our financial planners for more information.
J is for Junior ISA
Junior ISAs are a tax-free savings account for children under the age of 18. They work the same way as normal adult ISAs, but the amount you can save for your children is £4,128. Under the scheme you can invest in either a Junior Cash ISA or a Junior Stocks & Shares ISA. Once the child turns 18 the JISAs converts into an adult ISA.
L is for Lifetime Cashflow Forecasting
Lifetime Cashflow Forecasting is a method by which incoming and outgoing cash projections are modelled around a person’s lifetime. This is effectively a way of simplifying the profile of your wealth to your very own personal circumstances. This would be an all-encompassing profile of you projected wealth tailored to feature everything from your current salary, to pension payments to perhaps a nice holiday for your 70th birthday. Lifetime cashflow forecasting really helps in making sense of how things will look later in life and allows you to plan more effectively Not just to ensure that you are financially stable but also able to feel confident about enjoying your money throughout your lifetime. It’s key aspect of what we do at Balance so please contact us if you would like to hear more.
We will continue with our A – Z guide to investments next week. In the meantime, if you have investments, or you’re looking to invest, then we hope the above information proves useful.
If you have any questions relating to this article or investing in general, please get in touch to speak to one of our financial planners.
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