Investment Jargon – Busted

Every walk of life has its own particular terminology and expressions that can seem baffling to the outsider. The world of investment is no exception; if you put your money into stocks and shares, you are likely to be confronted with a whole range of concepts, words and phrases that you may not have come across before. Here we look at some of the common jargon in use and explain what it means for you.

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Volatility

You will probably have heard this term quite a lot recently. Volatility refers to the rate at which the price of a stock or share moves up and down. If the price moves up and down rapidly over a short period of time, it is described as having high volatility. If the price remains relatively stable, it is said to be a low volatility stock. Needless to say, investors generally prefer lower volatility.

Risk Profile

This refers to the amount of investment risk you are prepared to take with your money. Your adviser will run through a set of questions with you to assess your profile so that they can recommend the right investments for your portfolio. Risk is closely related to reward, with riskier investment offering a greater chance of reward, but also the risk of greater losses if the stock or share performs badly. Your attitude to risk will probably change over the years.

Asset Allocation

The process of deciding what proportion of your investment portfolio should be invested in different types of investment is referred to as asset allocation.

There are four main categories of assets – cash, equities, bonds and property. The process of determining which mix of assets you should hold in your portfolio is a very personal one, and will depend largely on your time horizon and your attitude to risk. Asset allocation helps to spread risk through diversification, which put simply, means not putting all your eggs in one basket.

Collective Investments

Collective investments – also called pooled investment funds – are a way of putting sums of money contributed by many people into one large fund spread across a wide range of investments. The resulting fund is managed by a professional management team. This type of investment represents a good way of diversifying your investment, and represents less of a risk than buying individual shares in just a few companies. Unit Trusts, Investment Trusts and Openended Investment Companies (OEICs) are all examples of collective investments, though their pricing arrangements differ.

Platforms

Platforms help investors and their advisers buy investments, hold them in a structured online environment, analyse them as they see fit, and when the time comes, sell them.

Online platforms are like electronic filing cabinets. They cut down on correspondence, use leading-edge technology and provide a secure environment that enables you to hold all your assets in one place, and view them whenever you like. Platforms are now well-established in the UK, and over 90% of advisers regularly use them in some shape or form.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation, are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of investments can go down as well as up and you may not get back the full amount you invested.

The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.

Simply Put

Earnings per share explained

Earnings per share (EPS) is a simple formula used to assess a company’s profitability; it shows how much of a firm’s after-tax profits belong to each ordinary share. It’s calculated by dividing a company’s net earnings by the number of shares issued. So if Company A had net earnings of £1m and 200,000 shares issued it would have an EPS of 5 (500p); if Company B had net earnings of £1.6m and 400,000 shares issued, it would have an EPS of 4 (400p). The most common use of EPS is to calculate the price-earnings (P/E) ratio, which helps put EPS into context. The P/E is calculated by dividing a company’s share price by its EPS. This is one of the most widely-used ways of assessing a share’s value when compared to its peers. A highly valuable ratio to employ. Looking at the P/E ratio is a good way of comparing shares, particularly those in the same sector; investors normally choose shares with a low ratio rather than one with a high ratio, as they are getting more of the company’s earnings for their money.

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