At evestor, we want everyone to be able to access clear, simple and affordable financial advice.
But we know that the traditional world of finance has its own language full of technical jargon, which can make saving or investing for the first time a bit of a minefield!
So, we've set out to demystify some of the common financial terms and phrases that you might come across with our very own 'jargon buster'.
With any investment, there is an element of risk involved. Risk means exposing your money to potential loss, as investments can go down as well as up in value.
How much risk you take with your investments is up to you. Higher risk investment could mean greater returns but exposes you to greater potential loss than a lower risk investment. Lower risk investments are a safer option, with smaller chance of loss but usually smaller returns.
Whenever you read 'capital at risk' it serves as a reminder that you are putting your money – or your 'capital' – at risk of falling in value.
Stocks, shares and equity
The terms stocks, shares and equity mean the same thing – you own a part of the company. You can get different types of shares, which have different rights and benefits. Most investment funds, like the ones we offer at evestor, are made up of shares in many different companies. The value of shares can go up and down, and different shares have different levels of risk.
A pension is a way to generate income when you retire. Most people pay some of their income while they are working towards their pension. There are different types of pension, but one of the main benefits of most pensions is that the government will also add funds for you in the form of 'tax relief'. This means, for a basic rate tax payer, if you pay £80 into your pension you will get an extra £20, so a total of £100 will be paid into your pension.
Usually a pension manager will invest your funds, which means that the value of your pension pot, when you retire, depends on how your investments have performed.
An Individual Savings Account (ISA) is a way of saving or investing money without having to pay tax on any interest you earn. With traditional savings accounts, any interest earned can be taxed at between 20% and 45%, depending on your own personal tax rate.
There are two main types of ISAs:
- A cash ISA is very much like a normal bank account, but you don't pay tax on any interest earned.
- A stocks and shares ISA invests your cash in company shares. You won't pay tax on any profits made or dividends earned.
The annual fee that you pay to invest is typically calculated as a percentage of the value of your investment.
Our annual all-in fee, for example, is always less than 0.5%, varying between 0.46% and 0.48% depending on your portfolio. So, if you invest £10,000, you will never pay more than £50 in any 12-month period. We have no additional charges, even for our financial advice.
A dividend is a portion of a company's profits which can be paid to shareholders. The company's board of directors will generally decide whether to pay a dividend, and how much it should be, based on how well the company has performed that year. Dividends can be paid in different ways; in cash, by giving shareholders more shares or increasing the value of their investment (we call this reinvestment).
At evestor, we reinvest any dividends paid, which means your investment increases without you having to pay more in.
An investment fund is a sum or supply of money which belongs to many different investors. The fund is collectively used to buy assets, such as shares in companies, with the aim of making a profit if the value of the shares goes up.
An investment fund allows individual investors to invest money collectively to benefit from the advantages of working as part of a group.
A fund can invest in lots of different shares, so it isn't reliant on the performance of just one company. At evestor, we offer access to mutual funds.
A mutual fund spreads an investor's risk, by pooling cash from lots of individual investors to buy a wide range of assets. The mutual fund will usually have a risk rating, so investors can choose the fund that best suits their attitude to risk.
The assets could include things like shares, bonds, cash, and other things. If any of these assets earn money – such as paying a dividend or interest, or being sold for a higher value than it was bought at, then the profits are reinvested in the mutual fund; increasing the value of everyone's overall investment. Investors can choose to leave the fund at any time by selling their stake back to the fund.
At evestor, we often get asked what the difference is between the mutual funds we offer and an Exchange Traded Fund (ETF).
An ETF is very similar to a mutual fund, but investors can buy and sell shares in the fund on the stock market. Just like a mutual fund, the assets may include things like shares, bonds and cash, amongst other things. Unlike a mutual fund, if an investor wanted to leave the fund, they would have to sell their shares on the stock market.
At evestor, we think everyone should have the opportunity to make their money work for them by investing. Whether you're an experienced or first time investor, you shouldn't need a dictionary to understand your investment options!
If you have any questions or fancy a chat, get in touch with our support team or book a free appointment with one of our financial advisers through your evestor portal. Get started here.