Glossary of investments terms

A

Active management:

Buying undervalued assets in each asset class, or selling overvalued ones. Active fund managers aim to outperform the market by identifying stocks that could collectively produce better returns than the overall market (or target index). Active management involves regular monitoring and assessment so investment decisions can be made and, as a result, active managers tend to charge higher fees than passive managers.

Alpha:

See Methodology

Alternative asset:

These assets fall outside the three traditional asset types (cash, stocks and bonds). They help to diversify a portfolio, as they usually rise and fall at different times from conventional assets. Since they’re non-traditional investments, they don’t tend to move in the direction of the stock market. However, there are also disadvantages:

•    They’re more difficult to add to a portfolio.
•    They’re generally viewed as less easy to trade or liquidate than regular assets.
•    Some alternative assets eg investments in infrastructure-related projects may take decades to gain value. Investors considering alternative assets generally use specialist funds that can provide liquidity even if the underlying asset is a very long term holding.

Find out which Alternative assets are available through the CAF Investment Account.

Alternative Investment Market (AIM):

A sub-market of the London Stock Exchange, AIM is the global market for smaller and growing companies and is designed to give these companies the freedom to trade with more regulatory flexibility than the main market.

Asset:

Any possession that has a value in an exchange between two parties.

Asset allocation:

A process used to diversify your investments. By investing in several completely different types of asset, the idea is that if the value of one asset happens to be going down, hopefully at the same time another will be increasing in value.

Asset class:

A broad group of securities or investments that tend to behave similarly, and are subject to most of the same market forces. There are three main asset classes: equities or stocks, fixed-income securities or bonds, and cash equivalents.

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B

Base rate:

The interest rate set by the Bank of England for lending to other banks. It’s usually used as the benchmark for interest rates.

Bid-offer spread (bid-ask spread):

The difference between the prices quoted by a Fund Manager or stockbroker for the sale (bid) and the purchase (offer) of certain funds, stocks or other assets.

Funds can be either single- or dual-priced. Dual-priced funds have an offer price at which you buy, and a lower bid price at which you sell. A single-priced fund is bought and sold at the same price, but can be subject to other costs, depending on the timing and value of the transaction.

Bond:

When a company or government issues a bond, it borrows money from the bondholders to invest in its operations. In exchange, the bondholder gets back the amount it originally invested on a specified maturity date – although it can fluctuate in value between investment and maturity

In addition, the bondholder usually has the right to receive coupons or payments of interest. Generally speaking, a bond is tradable though some - such as savings bonds - are not. The higher the interest rate on a bond is, the more risky it's likely to be. Interest-bearing bonds pay interest periodically. Bonds issued by the UK Government are also known as Gilts.

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C

Capital growth:

The increase in capital value, excluding all income generated.

Capital volatility risk:

Any change (up or down) in the total value of your charity's assets. See Volatility.

CC14:

Produced by the Charity Commission, this guidance document sets out the basic principles that should be followed for the investment of charitable funds.

Certificated asset:

Holding physical share certificates, rather than keeping them electronically in CREST.

Charity-specific fund:

Pooled investment funds designed specifically for charities. They allow investors with similar financial and charitable goals to invest as a group and benefit from lower costs and lower minimum investment levels. Some charity-specific funds are regulated and authorised by the Charity Commission. See also Common Investment Funds.

Close price:

The final price after post-market trading has completed.

Closed-end fund:

A closed-end fund is issued with a fixed number of units, for a specified period of time, after which further sales are closed. The investor must buy or sell units at the price that was listed when they were created.

Common Investment Fund (CIF):  

Similar to unit trusts, these are set up specifically for charities. They are usually charities in their own right and are regulated by the Charity Commission rather than the FCA.

Complex investments:

A complex investment may involve liabilities for the investor that exceed the cost of buying the investment. There may not be as many opportunities to dispose of or redeem the investment at publicly-available prices, and it may be difficult for the average retail investor to find publicly-available information on the investment’s features. They may also find information about the investment harder to grasp, which may mean that they don’t have sufficient understanding to enter into it.

Examples of complex investments are Structured products, Covered warrants and Leveraged Exchange Traded Funds (ETFs). Derivatives are also considered to be complex investments.

If you haven’t traded complex investments through your CAF Investment Account before, one of your Authorisers will need to complete an appropriateness assessment to check that your trustees (or equivalent) have the necessary experience and skills to understand their terms and be comfortable with their suitability for your organisation.

Corporate bond:

A bond where the lender is a company, rather than a government. These are seen as more risky than government bonds, so the borrowing costs (and therefore the coupons paid) can be significantly higher.

Covered warrants:

These allow the investor to buy or sell a specific amount of equities, or other financial products, at a specified price on a specified date. They’re issued by financial institutions, rather than companies, and can trade on a number of stock exchanges.

Credit rating:

These are issued by a number of credit rating agencies that assess the quality of debt securities and the financial soundness of organisations as a whole. Credit rating agencies usually have access to unpublished and usually confidential details of company accounts. The two largest credit rating agencies are Standard & Poors and Moodys.

Credit rating agency:

Specialises in assessing the risk of an organisation becoming insolvent.

CREST:

An electronic settlement system.

 

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D

Derivative:

These are financial instruments whose value is dependent on, or comes from, price movements in other specific assets. These could include currencies, equities, equity indices, fixed-income indices, interest rates, bonds and/or any combination of these assets.

Direct investment or holding:

These are shares or bonds held in the name of an organisation or individual.

Diversification:

Investing across a range of investments in order to spread and minimise risk. In a well-diversified fund, if one investment performs poorly, better performance from the rest of the portfolio could help to reduce the risk of loss.

Diversification risk:

Investors who want to spread and minimise risk diversify their investments across a range of asset classes and regions. That's because investments that are too concentrated in one particular area can create a risk of losing money if that area is hit by poor performance. See Diversification.

Dividend or dividend payment:

The distribution of part of a company's earnings to shareholders, in the form of a main dividend and an interim dividend. The amount is decided by the Board of Directors and is agreed by shareholders.

Drawdown:

Accessing your funds by withdrawing money as and when you need it.

Duration:

A method of estimating a bond's price volatility, expressed as the weighted average term-to-maturity of all the bond's remaining cash flows - interest and principal.

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E

Equity:

An ordinary share in a company. Equity holders (or shareholders) benefit from the profits and assets of a company, but also share in the risks.

Ethical investment:

An investment that meets certain ethical principles, such as environmental concerns or social responsibility.

Endowment:

A financial asset, usually a donation, which is made to a charitable organisation or individual. It may or may not have to be used for a specific purpose.

Endowment fund:

An investment fund, established by a foundation, where the capital is used by a charitable organisation or individual.

Exchange of letters:

A written communication which outlines the details of a gift of shares, or the proceeds from selling those shares, from a donor to a charity. It acts as proof to HMRC that the donor hasn’t profited personally from the transfer or sale of the shares, allowing the charity to receive full tax relief.

Exchange-traded fund (ETF):

A form of collective investment vehicle, but structured as a share that is traded on an exchange. It is usually passive, although there are some active funds. ETFs can be bought and sold throughout the trading day, rather than at one valuation point (see unit trusts), and are cheaper than most active or index funds.

Execution only:

All investment decisions are made by the investor without having received investment advice.

Exposure:

The amount, or percentage, of your investment portfolio invested in the same industry sector.

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F

Fixed interest security:

Another way to describe a bond.

Fixed income investment:

Another way to describe a bond. Discover the fixed interest funds available through the CAF Investment Account.

FCA (Financial Conduct Authority):

The regulator for the UK financial services industry.

Financial Times Stock Exchange 100 (FTSE 100) index:

The share index made up of the largest 100 listed UK companies by market value.

Financial Times Stock Exchange Mid 250 (FTSE 250) index:

The share prices of the 250 companies that come after the top 100 companies (the FTSE 100).

Financial Times Stock Exchange (FTSE) All-share index:

The share prices of 1,000 of the 2,000+ companies traded on the London Stock Exchange.

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G

Gilt-edged security and gilt:

In the UK these are often bonds issued by the Government, usually with a fixed coupon or yield and a fixed term to maturity. Index-linked gilts can also be issued, where the coupon and principal payment are adjusted to match the cost of living or rate of inflation through changes in the Retail Price Index (RPI).

Gross-status fund:

A fund which can accumulate and pay out interest without incurring tax.

Growth:

Organisations that invest their money for growth want to increase the value of their investments over time.

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H

High Yield Bond:

A higher-paying bond with a lower credit rating than corporate bonds or government bonds.

High Yield Bond Fund:

An investment fund which invests in High Yield Bonds.

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I

Index:

Gives a measure of fund performance and is a calculation based on a sample of securities intended to illustrate average market performance.

Index tracker:

Invests in the stocks making up an index and aims to match its performance.

Inflation:

Describes the overall general upward price movement of goods and services in an economy. It’s usually measured by the Retail Price Index (RPI).

Interest rate:

The charge for borrowing money, interest is usually expressed as an Annual Percentage Rate (APR).

Investment:

An asset which you hold back from spending today, in the hope that your money will grow or produce an income over a period of time.

Investment advice:

Financial guidance given about the most suitable product or products available to an investor (according to their needs) from an authorised investment adviser. Advice must not be given by anyone who isn't qualified and authorised to do so. Find out more about investment advice for charities.

Investment adviser:

Someone who is qualified and authorised to discuss financial affairs in detail, assess needs and make appropriate investment recommendations.

Investment portfolio:

A mix of different investments, usually across different asset classes, which is held by one organisation.

Investment policy:

Sets out the rules and regulations that the trustees or a delegated investment manager must follow when investing a charity's assets. This should include considerations about the level of assets required for present and future activities, level of risk and the charity's stance on ethical investment (if there is one). Find out more about writing an investment policy for your charity.

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K

Key Investor Information Document (KIID):

A short document which includes important information about a fund. It aims to help investors understand the features and risks of a fund to ensure they make an informed decision about its suitability.

L

Leveraged (or Short) Exchange Traded Funds (ETFs):

An ETF is a form of collective investment vehicle, structured as a share that is traded on an exchange. A Leveraged Exchange Traded Fund uses financial derivatives and debt instruments to magnify exposure to an index or asset which is tracked by the Fund.

Liquidity:

How often - and how easily - you need access to your funds. For example, you might want to think about how easy it is to buy and sell shares on the open market, and how long it might take. Liquidity can vary widely based on the type of investments you hold. Many shares that are listed on a main stock exchange can be bought and sold at any time in the day. Other assets, like hedge fund investments, are usually less liquid and are harder to buy and sell.

Liquidity ratio:

This measures a company's ability to repay its short-term creditors from its total cash holdings. A ratio of greater than 1 means its short-term liabilities are fully covered.

Liquidity risk:

This measures how hard it is to sell an asset. For example, investing in property may mean that cash cannot be raised from that asset without either waiting for the property to sell or funding the cost of borrowing against it.

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M

Market capitalisation:

The overall market value for a company's outstanding shares of stock. There are three primary market caps: large, mid, and small. Large-cap companies have a market capitalisation of more than £2.5bn and are well-established and financially strong. Mid-cap companies have a market cap of between £250m and £2.5bn, while small cap companies have less than £250m in market value. Market capitalisation changes constantly with the fluctuation in share prices and as companies buy back shares of stock.

Market risk:

The exposure or potential loss from changes in the overall index or market (as opposed to changes in the individual company's credit status). Also, the risk to the value/performance of your investments by movements in inflation, interest rates and currency.

Maturity date:

The date when the amount borrowed will be repaid.

Methodology:

Star Ratings are calculated using tests on alpha, volatility and consistency as compard against a relevant benchmark.

Mid price:

The mid price between the buy and sell price. Commonly used as an indication price for valuations.

Model portfolios: 

Risk-profiled portfolios specially developed to ensure they meet the needs for return, length of investment and possibly cash flow as defined by an investor. These portfolios are maintained within pre-determined investment risk/return and income parameters.

Monetary Policy Committee:

A committee of the Bank of England which decides the official UK interest rate.

Multi-asset fund: 

This fund gives investors access to a range of asset classes including cash, fixed income, equity and alternative assets from across different geographies. The aim is to increase overall diversification in an effort to reduce risk.

Mutual funds:

An investment fund that pools money from many investors.

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N

Net assets:

Total assets, including fixed and current assets, less current liabilities and long term liabilities that have not been capitalised (eg short term loans).

Nominee:

A legal arrangement whereby investments are held by a third party on behalf of the beneficial owner. For administrative reasons, securities are more than likely to be held in a nominee name.

Non-complex investments

An investment whose features don’t involve any liabilities which may cost the investor more than it did to buy it.

There are plenty of opportunities to trade the investment at prices that are publicly available. Comprehensive information on the investment’s features is publicly available, and should be easily understood by the average retail investor, enabling them to make an informed judgement as to whether or not to make a trade.

Examples of non-complex investments are cash, equities, bonds, and most Funds or investment trusts.

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O

Ordinary shares:

Represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company.

Ordinary shareholders are entitled to receive dividends if any are available, but only after dividends on preferred shares have been paid. Unlike preference shares, ordinary shares don’t have any predetermined dividend amounts.

Open price:

The final price before the pre-market trading has completed. The open price can differ to the close price.

Ongoing Charge for Fund (OCF):

This is a new term for the Total Expense Ratio (TER) and it gives the most accurate measure of what it costs to invest in a fund. The OCF is made up of the Annual Management Charge (AMC) and other operating costs. The AMC is levied by the manager and is used to pay the investment manager, financial adviser, fund accountant, administrator and distributor. Other operating costs include those for extra services paid for by the fund, such as the fees paid to the trustee (or depositary), auditor and regulator.

Option:

An investment that gives the buyer the right to get something which the seller of the option must deliver.

Offer price:

The price at which the Fund Manager will sell units to investors (that is, the price at which investors can buy).

Open ended investment company (OEIC):

Open-ended Investment Companies (OEICs) are a type of collective investment scheme that can be seen as a hybrid between a unit trust and an investment trust. The main difference between unit trusts and OEICs is that they quote a single price rather than a buy and sell "spread", with the charges quoted separately. However, like investment trusts, OEICs are based on a company structure. The primary difference is that OEIC pricing is easier to understand since they only have one price and you buy shares rather than units.

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P

Passive management:

Investing across assets in an asset class, without assessing under or over valuation. Passive Fund Managers don’t attempt to beat the market; they try to mirror the performance of a selected market index such as the FTSE 100.

Performance table:

A tool which allows you to see how a selected group of companies or collective investment schemes are performing compared to their peers.

Pooled fund:

Also known as a collective investment scheme, this is where a number of investors put their investment funds together to buy a spread - or range - of securities. It’s usually managed by a firm of Fund Managers eg a unit trust. See also CSF / CIFs / OEICs / Unit Trusts

Portfolio:

A group of investments such as stocks, bonds and cash equivalents, held either directly or through various structures such as mutual funds, exchange-traded funds, and closed-end funds. These assets are then allocated based on the investor's short-term or long-term investment goals.

Portfolio manager:

The person responsible for building and running a client's portfolios. They ensure that the portfolio is managed to meet the client's individual requirements within an agreed framework.

Preference share:

A special equity security that has properties of both an equity and a debt. Preference shares have a higher ranking to common stock but a lower ranking than bonds.


Principal:

The original amount of the investment.

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Q

Quantitative easing:

A central bank, such as the Bank of England, creates money to buy bonds from investors such as banks and pension funds. This increases the overall amount of funds in the financial system. With more money available, financial institutions can lend more, which pushes interest rates lower. Lower interest rates encourage businesses and individuals to spend, boosting the economy.


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R

Restriction risk:

The impact on investment returns of excluding particular stocks from your portfolio, for example, by choosing an ethical investment approach to reflect your organisation's mission or values.

Return:

The profit or loss made by an investment. Returns can be expressed as a percentage and are calculated as:

Income + change in value
------------------------------------------
Initial principal or investment amount

The annualised return is calculated by dividing the percentage return by the number of years the investment has been held.

Redemption yield:

The current yield of a fixed interest security adjusted to take account of the capital gain or loss on redemption.

Region:

Some funds invest in specific geographical regions (eg global equity funds invest in equities across the world); while others invest in funds from a specific region (eg a UK equity fund might only invest in stocks listed on the FTSE 250). Meanwhile, funds that aim to provide diversification often invest across multiple regions.

Regulatory risk:

The potential for loss created by changes in the regulatory environment.

Restricted fund(s):

Funds used by an organisation that are restricted or earmarked by a donor for a specific purpose, such as an endowment or pensions investment or research project, which can’t be used for anything else. This might require the organisation using the funds to provide specific reporting or work within defined timescales.

Sources of restricted funds include government, foundations and trusts, grant-awarding bodies, philanthropic organisations, private donations and bequests.

Retail Price Index (RPI):

A measure of domestic inflation based on average expenditure patterns. It allows for the measurement of the cost of living.

Risk and risk appetite:

There’s a risk associated with any type of savings or investment, and the level of the risk depends on the type of investment and the asset class in which the funds have been invested. High-risk investments have greater potential to provide higher rewards, but can also perform badly in poor market conditions.

An investor's appetite for risk is the level of uncertainty or exposure to potential loss they’re prepared to take on to achieve the return they want.

Risk profilers:

Risk profilers try to assess the degree to which various risks are important to a particular individual or organisation. They’ll help assess the investor's requirements and priorities against time horizons. This could include assessing the importance of capital preservation over outpacing inflation; willingness to accept fluctuating values when investing for the long term; or whether dividends and income are more important than growth through capital appreciation; whether above average risk is important to generate above average returns.

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S

Securities:

An asset which has financial value, and can be traded. Securities are categorised into debt securities (such as banknotes, bonds and debentures) and equity securities, eg stocks; and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer. Regulatory structures determine what qualifies as a security within each jurisdiction.

Shares: 

A share of stock (also referred to as equity shares) represents a share of ownership in a corporation. The price of a stock is directly proportional to the demand. However, there are many factors on the basis of which the demand for a particular stock may increase or decrease. Stock price is also changed based on the forecast for the company and whether their profits are expected to increase or decrease.

Share class:

A way of describing a specific type of security such as stock or shares. Companies that have more than one class of stock usually give them alphabetical markers, such as "Class A" shares and "Class B" shares.

Many investment funds also have more than one share class. Different classes will have different attributes such as how income is treated, fee levels, minimum investment requirements or restricted availability etc. For example:

• Share Class 1: available to all investors with a 1% fee and a £1000 minimum investment, or
• Share Class 2: available only to institutions with a 0.5% fee and a £500,000 minimum investment.

Some Fund Managers allow investors to move between share classes without selling and buying their holdings in the fund.

Share gifting:

When a donor gifts shares to a charity as a charitable donation or having left them in their Will. Note that our services differ according to the type of account you have.


Short (or leveraged) Exchange-traded Funds (ETFs):

A type of ETF that attempts to achieve returns more sensitive to the movements of an index. These are usually classified as complex investments.

Single investment type:

These provide exposure to different management styles, market segments and geographical regions within a single asset class. The aim is to increase overall diversification within that asset class.

Socially Responsible Investment (SRI):

Investing in line with the  charity's goals or mission. Read our article Is it time for your charity to invest ethically?

Spread:

The difference in price or yield between two assets. A credit spread is the difference in yield between a corporate bond and the corresponding government bonds of differing maturity. A price spread is the difference between the quoted bid and offer prices for a single security.


Stocks or stock instrument:

Stock is a general term used to mean equity investment.

Stock selection: 

The process by which fund or portfolio managers use their own judgement to complement numerical analysis and select those company shares that are most appropriate to their client's objectives.

Structured products:

A fixed-term investment where the return you get depends on the performance of something else, such as the stock market or other investments on which it is based.

Sub-investment grade bond: 

A bond whose issuers have been given a credit rating of less than BBB by rating agencies and are more at risk of becoming insolvent.

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T

Tax voucher:

Details of income from an investment and any tax paid to HMRC as a result.

Time horizon:

An organisation's timeframe for investing in order to achieve its financial goals. For example, investing to boost working reserves in the short term, or investing in funds for the longer term.

Total Expense Ratio (TER):

A measure of the costs associated with managing and operating a fund. It can include management fees, trading fees, legal fees and other operational expenses and is calculated as the total cost of the fund divided by the fund’s total assets.

Tracker:

A fund that aims to mirror the performance of a specific index. See also Passive funds.

Trade:

The buying and selling of  investments, where payment is made by a buyer to a seller, or more rarely in the retail investment world the exchange of investments between parties.

Treasuries:

Treasuries are stocks typically issued by the UK or US Government (either bonds or notes).

Trustee Act:

The Trustee Act 2000 (England & Wales), Trustee Act 2001 (N Ireland) and Charities and Trustee Act 2005 (Scotland) set out the duties and powers for trustees.

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U

Unincorporated charity:

A group of people acting together, but who do not form a separate legal body or corporation, for example a trust or unincorporated association. The charity trustees of the unincorporated charity are likely to be the trustees (if it is a trust) or the members of the management committee (if it is an unincorporated association). They will have to sign loans and contracts as individuals and therefore carry the risk of personal liability.

Unit trust:

These enable a number of investors to pool their money to buy shares in a range of different companies. Some trusts also invest in fixed interest stocks or other assets. The value of the total amount invested is divided into units and an investor will receive a number of units representing their stake in the fund. The price of the units will rise and fall in line with the value of the underlying investments held. As the investment is spread across many stocks and shares so is the investment risk. These are similar in structure to OEICs. Unit trust distributions are paid out of income, usually on a half-yearly basis from the fund's investments.

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V

Valuation:

The process of determining the current worth of an asset.


Volatility:

How much and how quickly the value of an investment, market, or market sector changes. For example, because the stock prices of small, newer companies tend to rise and fall more sharply over short periods of time than stock of established, blue-chip companies, small caps are described as more volatile.


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W

Warrants:

Allow the investor to buy shares from a company at a fixed price during a specific time. They can be cheaper and have a longer life span than share options.

Weighting:

The mix of asset classes in an investment portfolio which is expected to achieve its aims and risk profile.

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Y

Yield:

The annual income that an investor will receive on their investments, expressed as a percentage of the value of their asset. Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment.


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