Market words, explained the way you would explain them to a friend.

• Shares

  Instruments

  A share is a small unit of ownership in a company. Shareholders may receive dividends and can usually vote at company meetings, and the share price moves with what buyers and sellers are willing to pay.

  ExampleIf a company has issued one million shares and you hold one thousand, you own a tenth of one per cent of it. If the company fails, shareholders are paid last and may get nothing back.

  Verify it: the company's annual report and the London Stock Exchange's educational pages.

• Bonds

  Instruments

  A bond is a loan to a government or company. The issuer usually pays interest at set intervals and promises to repay the original amount on a set date, called maturity.

  ExampleA bond's market price moves when interest rates change: if new bonds pay more, older bonds paying less tend to fall in price. Issuers can also fail to pay.

  Verify it: the Debt Management Office's explanations of gilts and the FCA's consumer pages on bonds.

• Gilts

  Instruments

  Gilts are bonds issued by the UK Government to borrow money. Their name comes from the gilt edges of the original paper certificates.

  ExampleGilts are often described as lower risk than company bonds because the issuer is the Government, but their prices still rise and fall with interest rates.

  Verify it: the UK Debt Management Office, which publishes official information on gilts.

• Funds

  Instruments

  A fund pools money from many investors and invests it in a mix of assets according to stated aims. Each investor owns units or shares in the fund rather than the assets directly.

  ExampleA fund holding 200 companies spreads exposure, but you pay the fund's charges and its value depends on how all those holdings move.

  Verify it: the fund's Key Information Document, which must state its objective, risks and costs.

• Index

  Instruments

  An index measures the combined value of a defined group of investments, such as the largest companies listed on one exchange. It is a statistic, not something you can hold directly.

  ExampleNews reports saying "the market fell today" usually mean a headline index fell. Index providers publish rules on which companies are included and how they are weighted.

  Verify it: the index provider's published methodology and the factsheet of any fund that follows it.

• ETF

  Instruments

  An exchange-traded fund is a fund whose units trade on a stock exchange throughout the day, like company shares. Many ETFs aim to follow an index.

  ExampleBecause prices are quoted live, an ETF's price can differ slightly from the value of what it holds. Dealing costs and a bid-offer spread apply as well as ongoing charges.

  Verify it: the ETF's Key Information Document and factsheet, and the FCA's consumer information on investing.

• Dividend

  Instruments

  A dividend is a payment a company may make to its shareholders, usually from the money it has made. Companies can raise, cut or stop dividends at any time.

  ExampleA fund may pay dividends out to you as income or reinvest them, depending on the type of units held, often labelled "inc" or "acc".

  Verify it: the company's announcements or the fund's documents, and GOV.UK pages on how dividends are taxed.

• Volatility

  Market behaviour

  Volatility describes how much and how quickly a price moves up and down over a period. It is often measured statistically, but in plain words it is the size of the swings.

  ExampleTwo investments can end a year at the same value, yet one may have travelled there smoothly and the other through sharp falls and rises.

  Verify it: the summary risk indicator, on a scale of 1 to 7, in a fund's Key Information Document.

• Liquidity

  Market behaviour

  Liquidity is how easily an asset can be turned into cash quickly without a big change in its price.

  ExampleCash is highly liquid; a building is not. Some property funds have paused withdrawals in the past because they could not sell buildings fast enough.

  Verify it: the dealing and redemption sections of a fund's prospectus and the FCA's pages on fund liquidity.

• Bid-offer spread

  Market behaviour

  The spread is the gap between the price at which you can buy (the offer) and the price at which you can sell (the bid) at the same moment.

  ExampleIf you bought and sold straight away, the spread is roughly what you would lose. Spreads tend to be wider for less liquid investments.

  Verify it: the dealing information published by the exchange or fund, and any costs and charges disclosure you receive.

• Benchmark

  Market behaviour

  A benchmark is a reference point, often an index, used to compare how a fund has behaved. It shows context; it is not a target or a promise.

  ExampleA fund investing in UK companies might compare itself with a broad UK index. Past comparisons do not show what will happen next.

  Verify it: the benchmark stated in the fund's documents and how the fund explains the comparison.

• Fees and charges

  Costs and economy

  Fees are what you pay to invest: fund charges, platform or account fees, dealing charges, spreads and sometimes adviser fees. They are taken whether markets rise or fall.

  ExampleA yearly charge of 1% on £5,000 is £50 for that year. Because it is taken every year, the total over many years is far larger than 1%.

  Verify it: the costs and charges disclosure UK firms must give you before you invest, and MoneyHelper's guide to fees.

• Ongoing charges figure

  Costs and economy

  The ongoing charges figure (OCF) is a fund's yearly running costs expressed as a percentage of its value. It covers management and administration but not every cost.

  ExampleTransaction costs inside the fund and platform fees are usually shown separately, so the OCF alone can understate the total.

  Verify it: the "costs" section of the fund's Key Information Document.

• Inflation

  Costs and economy

  Inflation is the rate at which the general level of prices rises. When inflation is higher than the interest on savings, money buys less over time.

  ExampleIf prices rise by 4% in a year and savings interest is 2%, the savings grow in pounds but lose buying power.

  Verify it: the Office for National Statistics consumer price releases and the Bank of England's explainers on inflation.

• Interest rate and Bank Rate

  Costs and economy

  An interest rate is the price of borrowing or the reward for saving, expressed as a percentage per year. Bank Rate is the rate set by the Bank of England that influences many other rates in the UK.

  ExampleChanges to Bank Rate can affect mortgage costs, savings rates and bond prices, although each lender sets its own products' rates.

  Verify it: the Bank of England's pages on Bank Rate and the Monetary Policy Committee.

• Compounding

  Costs and economy

  Compounding means growth is added to the starting amount and future growth is then calculated on the larger total. It works over time, in both directions.

  ExampleInterest left in a savings account can earn interest itself. Equally, charges and unpaid debt interest also build on themselves.

  Verify it: MoneyHelper's savings and borrowing guides and the Bank of England's explainers on interest.

• Diversification

  Portfolio ideas

  Diversification is spreading money across different investments so that a single failure does not decide the overall result.

  ExampleHolding shares in many companies, several sectors or several asset types reduces the impact of one going wrong. It does not protect against a broad market fall.

  Verify it: MoneyHelper's investing guides and the risk section of any fund document.

• Asset class

  Portfolio ideas

  An asset class is a group of investments that behave in broadly similar ways, such as cash, bonds, shares and property.

  ExampleDifferent asset classes often react differently to the same news, which is why people think about the mix of classes as well as individual holdings.

  Verify it: the FCA's consumer pages on types of investment.

• Time horizon

  Portfolio ideas

  Your time horizon is how long it is until you expect to need the money. It shapes how much short-term movement can sensibly be lived with.

  ExampleMoney needed for a deposit next year faces a different question from money set aside for retirement in thirty years.

  Verify it: MoneyHelper's guidance on saving and investing for different goals.

• Capacity for loss

  Portfolio ideas

  Capacity for loss is how much of a fall in value you could absorb without it harming your standard of living. It is different from how comfortable a fall would feel.

  ExampleTwo people may be equally relaxed about risk, yet one could not cope with a loss because the money is needed for rent.

  Verify it: the FCA's descriptions of how regulated advisers must assess suitability.

• Rebalancing

  Portfolio ideas

  Rebalancing is the idea of bringing a portfolio's mix back towards its original proportions after market moves have changed it.

  ExampleIf shares rise faster than bonds, they become a bigger slice of the whole. Rebalancing would trim that slice; it also involves dealing costs.

  Verify it: the Portfolio basics page on this site and the explanations in any managed fund's documents.

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