Money can sometimes feel complicated, especially when financial terms get thrown around. To help make things clearer, we’ve put together a simple glossary of common words and phrases you might come across when saving or investing. This guide is designed to give you confidence in understanding the basics and how they might apply to you.

Investing and Saving

Investing means putting your money into things like pension plans, stocks and shares, property or businesses, aiming to grow your money over time. However, returns are not guaranteed and you could get back less than you put in.

Saving usually involves putting money into a savings account where you can expect to get back what you saved plus some interest.

You might not realise it, but if you have a pension through work or certain types of Individual Savings Accounts (ISAs), you are likely investing. That’s why it’s important to know the difference between saving and investing.

 

ISA (Individual Savings Account)

The two main types of ISAs are Cash ISAs and Stocks and Shares ISAs. Cash ISAs work like a savings account and offer tax-free interest. Stocks and Shares ISAs allow you to invest your money in different assets, often through funds.

Each type carries a different level of risk. Cash ISAs tend to be safer because your money is not exposed to investment fluctuations. Stocks and Shares ISAs usually have more potential for growth over time, but the value of your investments can go down as well as up. This means you might get back less than you originally put in.

 

Pension Plan

A pension plan allows you, and if applicable your employer, to set money aside for your retirement. With today’s flexible pension options, your contributions are invested, giving your money the chance to grow more than it would in a regular savings account. However, because your pension is invested, its value can go down as well as up, and you could receive less than you paid in. By contrast, savings accounts or cash ISAs are not subject to investment risk, so your money is generally safer there.

The way your pension is invested will influence how much its value can change, so it’s important to understand the options available to you.

Additionally, contributions to your pension plan can benefit from tax relief, making it a tax-efficient way to save for retirement.

 

Funds

A fund pools your money together with that of other investors, giving you access to a broader range of investments than you might be able to achieve on your own. A professional fund manager handles the day-to-day decisions and management on your behalf.

There are many types of funds to choose from, including those designed to diversify across different investment types. You can also choose between actively managed and passive funds, depending on your goals and preferences.

 

Portfolio

A portfolio is the collection of investments or assets you hold, which might include stocks and shares, bonds, and cash.

You can manage your portfolio yourself, or you may choose to work with a financial adviser or investment professional who can do this on your behalf.

 

Responsible investing

Responsible investing can take many forms, whether you want to avoid companies involved in harmful activities or focus on those with strong ethical, environmental, or social values.

Beyond ethics, considering how responsible an investment is can also make financial sense. How a company treats its staff, supports local communities, manages waste, and uses energy may all impact its future performance and growth potential. Companies developing solutions to sustainability challenges can also create new opportunities for investors. That’s why investment managers often assess these factors and use their influence to encourage better practices.

 

Asset Classes

Asset classes are the different categories that investments fall into. The four main types are equities (also known as stocks and shares), bonds, property, and money market investments such as cash.

Having a mix of asset classes is usually seen as a sensible approach. This is known as diversification, which helps to spread risk across different types of investments.

 

Equities

Equities, also known as stocks or shares, are one of the most familiar types of investments. When you buy shares, you become a part owner of the company, known as a shareholder.

Over the long term, equities have typically delivered higher returns than many other investments, making them a key part of many portfolios. However, it’s important to remember that past performance does not guarantee future results.

 

Bonds

Bonds are effectively loans you make to organisations like governments or companies that need to raise funds. When you buy a bond, you’re lending your money to the issuer for a fixed period.

Bonds do carry some risk, and unless the bond is guaranteed, there is a possibility you might not get back the full amount you invested.

 

Diversification

Diversification means spreading your money across different types of investments.

This approach helps manage risk by reducing the chance that your overall investment value will fluctuate wildly. It’s like not putting all your eggs in one basket.

If you invest through a workplace pension, especially in the default option, your investments are likely already diversified.

 

Active and passive

Fund managers usually measure performance against a benchmark, often a market index such as the UK’s FTSE® 100. This helps guide investment decisions based on the fund’s specific objectives.

An actively managed fund involves the fund manager selecting investments with the aim of outperforming the benchmark.

In contrast, passive funds (also known as tracker or index funds) aim to mirror the performance of the benchmark. They follow the market up and down to deliver similar returns.

 

Stock markets

Stock markets are places where companies list their shares, allowing people to buy and sell them.

You might also hear about stock market indexes, like the UK’s FTSE® 100 Index or the US’s S&P 500. These indexes provide a snapshot of how the overall market is performing.

 

Bull and Bear Markets

These terms might sound like finance buzzwords, but they are important to understand when investing for the long term. A bull market is when investment values are generally rising, while a bear market is when they are falling. For example, the sharp market drops in March 2020 were part of a bear market, which may have affected the value of your pension or other investments.

Investing is best viewed as a long-term plan, usually lasting five years or more. Reacting to short-term market ups and downs can lead to costly mistakes. Over time, markets have historically bounced back, and staying invested often helps your savings recover.

Having a varied portfolio across different types of investments means you won’t need to react to every market change, helping you avoid unnecessary decisions based on short-term movements.

 

Investment Risk

Risk is a natural part of investing and doesn’t always mean something negative. In fact, accepting some risk can be necessary if you want your money to grow faster than inflation.

Investments with higher risk often have the chance to deliver bigger returns over the long term, but they also carry a greater possibility of losses. Because of this, investing tends to be better suited to goals that are at least five years away, giving your money time to recover from any downturns.

The amount of risk you are comfortable with depends on your personal circumstances, financial goals and how much uncertainty you can handle. This can vary greatly from person to person and may shift as your situation changes.

 

Compounding

Compounding happens when the growth on your investments starts to generate its own growth. In other words, not only does your original investment earn returns, but the returns themselves also earn returns over time.

For instance, if you invest £100 and it grows by £10 in the first year, the next year’s growth will be calculated on £110 rather than just the initial £100. Assuming the same growth rate, this means your investment could grow by £11 in year two.

Over time, this effect can lead to your money growing faster and faster. Although it may seem gradual at first, compounding can have a significant impact on the overall value of your investments over the long term.

 

AER (Annual Equivalent Rate)

AER stands for annual equivalent rate. It shows the actual rate of interest you’ll earn on your savings over a year, such as in a bank savings account. Generally, the higher the AER, the more interest you’ll receive.

 

APR (Annual Percentage Rate)

APR stands for annual percentage rate. It’s a term you’re likely to come across when taking out a loan, using a credit card, or buying something like a car or sofa on finance.

It shows the total yearly cost of borrowing, including interest and any fees, giving you a clearer picture of how much a loan or credit agreement will cost overall.

For example, if you borrow £1,000 over one year at an APR of 10%, you’ll pay £100 in interest. This means you’d repay £1,100 in total over the year.

 

Interest

Interest is the amount you either earn on savings or pay on borrowed money. It’s calculated based on the rate set by the provider, often shown as APR for borrowing or AER for saving.

It’s worth noting that interest is not the same as the interest rate or the base rate, which refer to the wider rates set by lenders or central banks.

 

Interest Rate

An interest rate is the percentage charged when you borrow money or the percentage paid on money you save.

When borrowing, such as with a mortgage or credit card, you repay the original amount plus interest. The interest rate shows how much extra you pay based on the loan amount.

When saving, the interest rate is what you earn on top of your savings. For example, if you save £2,000 in an account with a 2% interest rate, after a year you would have £2,040 because you earned £40 in interest.

Even small changes in interest rates can make a big difference, so it is important to keep track of them.

 

Inflation

Inflation is the rate at which the cost of goods and services rises over time. It’s a key factor to consider when saving or investing, as it can reduce the real value of your money.

For example, if you put money into a savings account or cash ISA that pays less interest than the inflation rate, the value of your money could fall in real terms. This means that over time, you may not be able to buy as much with it as you could before.

 

Credit Union

A credit union is a financial organisation similar to a bank but owned and run by its members, the people who save and borrow with it. Unlike traditional banks, credit unions focus on serving their members rather than making a profit, which often means they can offer lower interest rates and fewer fees.

 

Get in touch

Understanding the basics is a great first step, but making the right financial decisions takes expert guidance. At ProSport, we work with athletes throughout their careers and beyond, helping to turn knowledge into lasting financial security.

Email enquiries@prosportwealth.co.uk or call 01204 602909 to see how we can support you.

 

Please note 

The value of your investments can go down as well as up, so you could get back less than you invested.