Our investing glossary

Investing is meant to be interesting, but sometimes jargon can be a barrier to understanding. If you want to get more engaged with your investments, our jargon list can help you understand the terms you're likely to come across, and serve as your go-to investment dictionary.

Also look at our beginners' guide to investing to help you get started.

A

Active Investing

A hands-on investment management approach that sees managers use their knowledge of financial markets to pick investments that are expected to increase in value. Active managers make regular changes to their investments with the goal of outperforming a benchmark index.

Stock pickers are also active investment managers that pick and trade in shares of different firms.

Asset Allocation

Distribution of your money (funds) into different asset classes such as equities, bonds, cash or cash equivalents. Your asset allocation in particular refers to the mix of investments you own and their proportions. The allocation of funds to different investment types is flexible, and depends on your risk appetite and expected growth timelines. For managed portfolios, the investment team (portfolio managers) will decide which assets make up your portfolio and change these according to their views on the assets.

Asset Class

Investments are often grouped into categories – called asset classes – based on certain characteristics that they share. The most commonly known asset classes are cash, equities and bonds, but may include real estate, commodities and others.

B

Bear Market

A market scenario with prolonged periods of declining asset prices (20% or more from previous highs). Investors' pessimistic sentiments in such markets, can result in selling of assets such as shares and lowering stock prices. Ultimately this low investor confidence may also result in a vicious cycle.

Some famous bear markets occurred during the Wall Street Crash, the Global Financial Crisis and the coronavirus outbreak.

Bid-Offer Spread

The difference between the price at which a seller is willing to sell (ask/offer) and a buyer is willing to buy (bid) a given security.

The difference is where the selling organisation or trader makes money. It is similar to the buy and sell price differences at a foreign exchange counter. Say you’re buying £1,000 in euros. When you buy it, you’ll pay the offer price, let’s assume it’s €1.30, giving you €1,300 in total. If your holiday were suddenly cancelled, you would have to switch your euros back to pounds at a bid price. As this is usually lower than the offer price, it’s unlikely you’d get your initial £1,000 in full at the exchange kiosk.

Similarly, if a share’s bid price stands at 99p, and the offer price is 101p, the bid-offer spread would be 2p. Buying shares with a low bid-offer spread is important when investing as it reduces the transaction costs when trading your investments.

Exchange-Traded Funds (ETFs) generally have a low bid-offer spread and can be traded easily and quickly at high volume.

Bonds

Bonds are a form of debt. They are 'issued' by companies and governments around the world. This means the company or government is asking to borrow from investors, usually for a fixed term.

Bonds typically pay a return to investors in the form of coupons, until such time as the bond 'matures' and the sum initially borrowed from the investors is returned. Because bonds should represent a predictable flow of returns, they are often considered to be lower risk than equities. Historically, bonds have returned less than equities over the long-term. They are also more sensitive to interest rate changes and expectations for future inflation.

Bull Market

A prolonged market scenario during which prices rise (20% or beyond), typically as a result of a positive investor outlook. When investors feel particularly confident about the economy and expect companies to perform well, asset prices will often rise.

C

Capital Gains Tax (CGT)

CGT is the tax you are required to pay when you sell or ‘dispose’ of an asset for a profit, or 'gain'. A capital gain is, broadly speaking, the difference between the price you paid for something and the price you sell it for. The tax you pay is on the gain only – not the total sale price.

Your taxable gains are those gains that exceed your annual CGT allowance (the annual exempt amount). However, certain investments are exempt, for example you don't pay CGT on any gains made in ISAs, personal equity plans, UK government gilts and premium bonds.

How much CGT you pay on your investments held elsewhere, above your annual CGT allowance, depends on your tax bracket. We explain this further in our tax investing guide.

It also depends on the tax efficiency of your chosen investment. Tax rules vary by individual status and may change.

Commodities

Commodities – another asset class – are the raw materials used in the production of many consumer or industrial goods and services. Examples include gold, copper, coffee and many more. They can fluctuate in value due to changes in supply and demand. Some investors trade in commodities seeking to generate returns from the fluctuations in their value.

Historically, the price of commodities has been very volatile, responding quickly to changes in the political and economic environment and the market forces of supply and demand.

Compound Returns

Compound returns refers to the concept that any growth a portfolio generates is earned on both the original sum invested and any growth accrued in previous invested years/months.

If, for example, income generated in a portfolio is reinvested, rather than taken from the portfolio, compounding can materially increase your overall return.

Here’s our guide to principles of investing.

Correction

A correction is typically defined as a decline of around 10% to 20% (from a recent peak) in the price of an asset, security or financial market. Market corrections are less severe than 'bear markets’, which is a term for larger, longer-lasting market setbacks.

These periods can be brief or sustained, but it’s so-named because, historically, the fall often “corrects” and returns prices to their longer-term trend.

D

Derivatives

Derivatives are financial contracts typically used for the management of risk and more speculatively by some investors. There are four main categories of derivatives: futures, forwards, options and swaps. Made between two or more parties, their value fluctuates based on the price/rate/credit spread of an underlying asset/currency/index.

Derivative contracts relate to a particular investment – it could be related to the price of a company’s shares, or you can also have derivatives tied to bonds, commodities, interest rates and currencies.

Discretionary Fund Management

Managed investments that see a portfolio manager make discretionary buying and selling decisions on behalf of a client, within agreed limits. Managers typically charge a fee that is a percentage of the assets under management. In exchange, they put their investment expertise to good use.

Diversification

The process of spreading investments across various asset classes and sectors with the aim of reducing risk.

By not putting all eggs in one basket, you can manage risk and reduce the impact of prices dropping in any one area of your portfolio. It also means you can benefit from investment gains across many different investments.

Diversification can be across investment types – such as bonds, stocks and commodities – but you can also diversify across different industry sectors, currencies and countries. Although a sound investment practice, diversification does not eliminate risk entirely.

Dividend

Portions of a firm's excess earnings or cash reserves that are distributed to shareholders in the form of cash or stock. Firms may pay out dividends annually, twice a year, quarterly, or even more regularly, however, not all companies pay them. Dividends can also be stopped or lowered.

The amount you’ll receive depends on how many shares you hold. Investors typically buy shares in companies for two reasons: to hope to make a return by selling them at a higher price in the future, and to receive a regular dividend.

E

Emerging Markets

Countries whose economies are currently not at full development stage, but display promising growth potential in terms of economic growth, industrialisation and global business engagement for the coming future. The most well-known emerging market economies are the BRICS countries (including Brazil, Russia, India, China and South Africa).

Some investors monitor emerging markets closely as firms in these nations may display sudden share price surges should there be good economic growth in the region or an increase in global trade. However, they may also experience large declines, thereby making emerging markets often highly volatile and best suited for high-risk investment strategies.

Equities

Ownership stake in a firm which is attained through the acquisition of one or more shares. Equity holders (or stockholders) have a claim on a portion of the firm's profits, which may be distributed as dividends, and can potentially benefit from capital gains if the value of their shares increases.

Equities are popular with investors who are looking to make more money than they could through savings accounts or bonds, provided they’re prepared to undertake more risk as a result.

Exchange Traded Funds (ETFs)

An ETF is a fund that contains a basket of different assets (like stocks and bonds), and trades on an exchange, much like a stock.

They can provide investors with exposure to specific markets, regions, themes and sectors they may favour. Many ‘passive’ ETFs track well-known indices such as the S&P 500, which measures the performance of the 500 largest listed US companies. There are also ‘active’ ETFs, which involve investment decisions being made to achieve certain outcomes, such as outperforming their reference benchmark or generating income.

ETFs are our chosen investment vehicle given their diversification characteristics, typical low cost, transparency of underlying holdings, wide array of choice and they allow investment managers to be flexible when buying and selling holdings.

See our ETF guide.

F

FTSE – 100

Financial Times Stock Exchange or FTSE is an index (list) of the 100 biggest firms trading on the London Stock Exchange, and is pronounced as “footsie”. This index also has other versions such as FTSE 250 (tracks smaller companies), FTSE-All Share Index and more which are used to chart the fluctuations in company share prices over time.

Fund

A fund is a general term for a collective investment. This means many investors can pool their capital into one fund, allowing them to gain exposure to a greater range of assets than they could effectively achieve on their own. Funds can take a wide variety of forms and structures.

There are many types of funds and they may be managed actively or passively. (See Active investing, Passive investing)

Every investment fund has a particular objective, which could be steady growth or, alternatively, high risk for potentially larger rewards. The fund manager usually oversees and makes new investments, with the aim of generating profit for the investors, while also sticking to the objectives of that fund.

G

Gilts

Bonds issued by the United Kingdom government.

I

Index

An index is a group of assets, like stocks, that are put together to track and measure how a market or part of the economy is doing. Indices help show big trends, such as how businesses or industries are growing. Well-known indices include the FTSE 100 in the UK, the S&P 500 and Dow Jones in the US, and the DAX in Germany.

Inflation

The rate at which the average cost of goods and services increases over a period of time, resulting in a gradual loss of purchasing power.

Savers and investors particularly track inflation owing to its impact on firm performance (share prices) and an individual’s personal savings (interest rates).

Individual Savings Account (ISA)

Individual savings accounts, commonly known by the acronym ISA, have been available in various forms in the UK since 1999 and offer a tax-free or tax-efficient way to save money. The more commonly known types are; stocks and shares ISAs; innovative finance ISAs; Cash ISAs and Lifetime ISAs. There are also Junior ISAs for children.

J.P. Morgan Personal Investing offers a Stocks and Shares ISA, Lifetime ISA and Junior ISA, all available in different investment styles and risk levels.

O

Open Ended Investment Company (OEIC)

UK based investment funds that pool investor money in order to create flexible and diverse portfolios. These funds are designed so that often new shares can be created to meet demand.

By coming together with hundreds or thousands of others in a fund, small investors can get access to a much greater range of investment opportunities.

P

Passive Investing

An investment strategy which limits the active decisions or intervention of the investor (typically either an individual, fund manager or portfolio manager). Usually, passive investment funds track the performance of an index such as the FTSE 100 or a pool of investments to mimic its returns. The idea here is to spread risk and achieve long-term gains at a lower cost by attempting to reduce costs of buying and selling securities.

Pension

Schemes that enable you to invest money for later use in life (retirement). The idea is to build up a pot that will help to fund your desired lifestyle once you stop working. Contributing to a pension pot affords you a number of benefits and is often a tax-efficient way to invest owing to the tax relief on pension contributions.

There are three main types of pensions:

Workplace pensions: Both you and your employer usually pay in a fixed monthly amount
Personal or Private pensions: You pay in lump sums or monthly contributions as you see fit but there is no link to your employment status
State pensions: Funded by regular National Insurance contributions

One way that pensions can be structured is the defined contribution method. Here, the size of the pot depends on your contribution and/or that of your employer. This is the kind of pension we provide to clients. A defined benefit pension offers an income based on your final salary, years of service, or some other variable. It is becoming rare to find defined benefit schemes that are open to new entrants.

Portfolio

A financial portfolio is a collection of investments and can include anything from cash in the bank to company shares. Portfolios are either held by investors or managed by financial institutions.

How your own personal financial portfolio is made up will impact the amount of risk you are exposed to, and the potential money you might gain or lose.

Portfolio Rebalancing

Adjusting the weight (proportions) of different assets in a portfolio with the goals of managing risk while staying aligned with initial investment goals.

For instance, imagine you start a portfolio with half of your money invested in shares and half in bonds to match your tolerance for risk. Over time, certain investments will perform well and others less so. Let’s say that your shares go up in value by 10% and your bonds fall in value by 5%. Overall, you’re in profit, which is great. But your portfolio has become imbalanced and no longer matches your desired risk level because you’re now overweight in shares – it doesn’t have the same 50/50 value of stocks and bonds as it did at the start.

To get it back to its starting position, you need to sell some of your stocks and buy more bonds. This is where many investors struggle to stick to a disciplined approach because it is against their nature to sell the investments that have been doing so well for them and buy more of the ones that haven’t.

S

Security

The term securities once referred to paper certificates sent out to investors as proof of an investment.

Today, the term is used more broadly as a way of describing the most common types of investments – from stocks and bonds to stakes in commodities like oil and gold. An organisation that sells a security is known as the issuer.

Short Selling

Selling a security without owning it (borrowing), thereby speculating on a decline in price. Short selling or shorting is done in the hope of making a profit when the price of the given security falls.

For example, an investor borrows shares they believe will fall in value by a predicted date. The investor then sells the borrowed shares at market price in the hope they can buy them back later at a lower price and return them to the lender before pocketing the difference. Think “buy low, sell high,” only in the reverse order. Short selling is considered an extremely risky strategy and is something our portfolio managers never do.

T

Time-Weighted Return

Returns in a portfolio that are compounded together over sub-periods, while removing the impact of the inflows and outflows of money. Simple returns show the difference between what you've got at the end of the period and what you had put at the start, but time-weighted returns show the performance of an underlying strategy by taking cash flows out of the equation.

This method essentially breaks up the lifetime of your investment into shorter periods of time, then calculates the simple return for each period before putting them all together, thus smoothing out the distorting effect of contributions and withdrawals.

Tracker Fund (Index Fund)

An investment fund which is designed to mirror (track) the performance of a stock market index. These funds can be set up to track indices either closely (through complete replication of all investments) or partly.

Also see passive investing.

Trading Halt

Instances when trading is temporarily stopped for a given security or exchange. This is done either in anticipation of high impact news, preventing early receipt profiting, ahead of important announcements or to discourage excessive volatility.

The mechanism to halt trading on a stock exchange is sometimes called a circuit breaker or curb. These measures, which suspend trading for as little as 15 minutes, or as long as a day, are triggered by sharp, steep selloffs, and give investors time to digest the situation and help prevent panic-driven decisions.

V

Volatility

Volatility is a measure of standard deviation (spread) of returns. In other words, volatility of an asset relates to how much its price rises and falls. Assets regarded as highly volatile are likely to fluctuate in price over a short period of time, while the value of a low-volatility investment is generally more stable.

W

Wrapper (Tax Wrapper)

The term “wrapper” applies broadly to structures or accounts in which investments are held. A tax wrapper refers to a specific account type – such as an ISA or pension – which can provide different, often advantageous, tax treatment for the investments within.

Y

In general, yield is an indication of how much income an investment is generating per year, and is usually expressed as a percentage of the investment’s value.

For example, if you own a single share in a company that pays a 5p dividend each year, and the shares currently trade at £1.00 (100p), the dividend yield would be 5%.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down or up and you may get back less than you invest. Tax rules vary by individual status and may change. This is general information, not personalised tax advice. Pension/ISA/JISA/LISA eligibility rules apply. If you are unsure if investing is right for you, please seek financial advice.