A study conducted by the Organisation for Economic Cooperation and Development (OECD) has established the scale of the need for financial education in the UK, with just 38% of adults knowing what ‘inflation’ means.
Financial services group True Potential LLP is striving to improve this knowledge through their partnership with The Open University, which has seen the establishment of the True Potential Centre for the Public Understanding of Finance (PUFin). As a result, a number of free financial courses are available remotely to help improve Britain’s understanding of finances on a general and personal level. To date, 200,000 people have enrolled on the courses.
True Potential Investor, a specialist ISA investor, is part of the group and has provided the following jargon buster to help:
Companies with a goal to achieve may offer corporate bonds to help raise the funds they need to do so. To do this, some choose to issue bonds that investors can then buy. The money raised from the investment is held for an agreed number of years. At the end — also known as bond maturity — the investor receives the money they invested plus their guaranteed interest which was agreed at the start.
Bonds and gilts can also be offered by the government. They work in a similar way to corporate bonds and are used to fund borrowing.
The funds that you invest initially are generally referred to as capital.
Capital Gains Tax
Any profit your investment makes — depending on its type — may be subject to capital gains tax. You may not need to pay capital gains tax — it depends on the amount of profit you make and whether you use the profit to buy new shares. More information can be found on the GOV.UK website.
Diversification describes splitting any investments you make across multiple areas instead of just one. For example, you can diversify your investment across a range of investment types — such as shares or bonds, for example — as well as between industries, currencies and countries.
Diversification is beneficial in that it allows you to reduce the impact of market uncertainty and manage risk.
FTSE (Financial Times Stock Exchange) is a monitor of how companies and indices trading on the London Stock Exchange are performing. A number of lists are available, with each showing the fluctuations in share prices over time.
Increases in the prices of goods and services over time are referred to as inflation. It is measured as an annual percentage change and can impact interest rates and share prices.
Offering a tax-free or tax-efficient saving method are Individual Savings Accounts (ISAs). There are two main types of ISAs: cash ISAs and stocks and shares ISAs.
- Cash ISAs — similar to a typical savings account, cash ISAs do not require you to pay tax on any interest that is generated.
- Stocks & shares ISAs — with a stocks and shares ISA, the money is invested with the aim of growing the fund over time. You do not pay tax on dividends.
Many people use pensions to set money aside for later life. The money you place in the pension fund is invested with the aim of growing it by the time you retire.
There are three main types of pensions:
- Personal pensions — a pension you arrange yourself, which you can contribute to whenever you want.
- Workplace pensions — this type of pension is arranged through your employer. Usually, you’ll contribute an amount each month, with your employer also contributing and the government contributing tax relief too.
- State pensions — a state pension is the amount you receive from the government once you reach State Pension age. Details on how much this is and eligibility can be found at the UK website.
Stocks & Shares
Investors can own a share in a company through purchasing stocks. However, these stocks can be broken down into a number of shares, which can also be purchased by investors. Because of this similarity, the two terms are often interchangeable.
Investors try to sell their stocks and shares for more than what they bought them for to generate a profit. Usually, stock and shareholders receive a proportion of the company’s profits on an annual or bi-annual basis in the form of dividends.
Current and future performance of your investment is described by the term yield. For example, if you received £5 in interest from £100 placed in a Cash ISA, your total yield would be 5% which is equal to £5.