Jargon Explained

What is Investment Return?

Investment return is the gains (or losses) made on an investment. It can come from two sources, capital growth and income. Capital growth occurs when the market value of the investment asset increases. Income is the cash flow paid by an asset such as rent and dividends. The level of return is therefore shown expressed in terms of the performance of the assets.

What are Shares?

Shares are issued by companies to raise money and each share represents a proportion of the company. The value of the share will increase and decrease according to the demand for them.

You might also hear the term 'stock' - although the two terms have become interchangeable, 'stock' is actually an umbrella term that also includes bonds and fixed-interest securities.

People invest in shares in the hope of making money over the long term and they are generally happy to take some risk with their investment as a result.

What are Bonds?

Bonds are basically loans which you would make either to companies, in the case of corporate bonds, or to the government, in the case of government bonds (or gilts). During the term of the loan, the company or government pays you interest at a fixed rate before repaying the original loan at the end of the term – this final repayment is sometimes referred to as 'redemption'. The amount of interest you’ll receive depends on the likelihood of the company repaying it. Government bonds are seen as the safest bet, but generate the lowest level of interest. You can invest in bonds individually or via a fund,such as a unit trust.

Bonds usually pay a 'coupon' which is simply another name for the fixed rate of interest that the bond will pay before tax. Typically, interest is paid out every six months. The rate of interest is a percentage of the bonds 'nominal' value. The nominal value is the value used to calculate the interest payments and also the amount that is paid out on any redemption. The market price of the bond may be above or below the nominal value at any time.

The 'yield' is the interest paid before tax, calculated as a percentage of the bond’s market price. Sometimes called the 'running yield' of the bond.

What is meant by Diversification?

Diversification is simply spreading your investments across different asset sectors such as:

• Property
• Shares
• Bonds
• Cash

You can also diversify by using different investment managers. This can potentially reduce risk and improve consistency of returns.

Different asset sectors rarely rise and fall at the same time. If one investment performs poorly, diversification helps cushion the effect on your total portfolio.

What is a Unit Trust?

A unit trust is an investment fund shared by lots of different investors. It is an 'open-ended' fund which means the fund gets bigger as more people invest and gets smaller as people withdraw their money. The fund is run by a fund manager who makes the investment decisions.

For further information please see Unit Trusts and OEICs Explianed.

What is an OEIC? (Open Ended Investment Company)

The short answer is that they are like unit trusts. They invest in shares (and other types of investments). The main similarities and differences between OEICs and unit trusts are:

• OEICs package their investments into shares - not units
• The number of shares issued can rise and fall as shares are bought and sold (similar to units in a unit trust)
• OEIC units have a single price - there is no bid/offer spread
• Initial charges are not built into the share price but are set out separately

What is the Running Yield?

This tells you how much income is currently being paid from a fund as a percentage of the capital value. Therefore, this yield can give an estimate of income that you may earn over the next year if the investments in the fund continues to pay income at that rate.