Insuring your long-term financial stability shouldn’t be a chore, but it often is. The financial services industry are far too keen on acronyms, jargon and in-speak. In this section, I’m going to define several terms that everyone should know.
What are Stocks and Shares?
Shares and stocks are synonymous and are small fractions of a company that you can own. Each share costs you money to buy, and during your ownership, the share may increase or decrease in price. This fluctuation depends on how well the company is doing . For example, if a company is about to increase its dividend payment, its share price might increase because more investors will want to buy it.
What are Dividends?
Dividends are payments issued by a company to the holder of its stocks. One stock gives you one dividend payment.
What is a Mutual Fund?
A mutual fund is a collection of stocks. You buy units, or a small fraction, of a mutual fund. If the companies in a mutual fund are doing well, then the unit price of the mutual fund goes up, and vice versa. You are charged a fixed amount (known as the management charge) for holding units in a unit trust – this pays for the running of the fund.
What is a Fund Manager?
A Fund Manager decides the investment objection of a mutual fund by deciding what stocks go in the fund.
The manager may decide the mutual fund should invest heavily in companies whose shares pay high dividends (compared to the price of a share). The unit price of a fund like this tends to be relatively stable, perhaps rising or falling with the rest of the economy.
Alternatively, a manager may decide to invest in companies whose share price is predicted to rapidly rise. The unit price of a fund likes this tends to change more
What is a Bond?
When you buy a bond, you loan an organization money for a fixed period of time (in effect, you are buying debt). The organization guarantees to pay back the money you loaned plus interest at a fixed point in the future. The additional interest you are paid is also known as the coupon. The coupon may be fixed at the time you bought the bond, or it might be tied to some factor which rises or falls during the duration of the bond.
What is a Stock Market Index
This is a representative collection of companies that describe some portion of a national (or international) economy. For example, the FTSE 100 is an index that describes the 100 companies with the largest share value (or market capitalization) in the UK. The value of an index is the value of the companies in that index.
What is Market Capitalization
The market capitalization of a company is the number of shares multiplied by the value of each share.