Do the finance pages seem like they're written in an alien language? Our jargon buster should help...
Keeping up with what’s happening in the financial world isn’t always easy, with an endless stream of acronyms and odd-looking terms doing their best to trip us up. The trouble is, if we don’t fully understand what’s going on, we risk making poorer decisions about our money as a result.
At Aviva, we think that simply won’t do. So we’ve put together this list of key terms to help you learn the lingo. And not a word of Martian in sight.
No, it’s nothing to do with batteries. Instead, this is the highest possible rating given by credit ratings agencies (such as Standard & Poor’s, Moody’s, and Fitch) to the issuers of bonds (ie governments or companies).
Stands for ‘annual equivalent rate’, and is the standard rate for savings accounts. It’s designed to show what rate you’d get if you put your money into an account and left it there for a year. The idea is that it allows you to compare one savings account against another when you’re deciding which to go with.
Like an end of year review, an annual report is a yearly report on a company’s activities and financial performance in the preceding year.
An annuity is a type of financial product that pays you an income until you die. They’re usually bought when you retire, using the money you’ve built up in your pension plan. Once you've bought an annuity you can't normally cash it in or change it.
The increase in value of an asset, such as a property or some shares.
Stands for the ‘annual percentage rate’, and it’s the standard rate for borrowing. It takes into account not just the interest on the loan, but also any other charges you have to pay – like an arrangement fee. So the APR for a loan with an annual interest rate of 11% could be 16%, for example, once any additional charges are taken into account. It’s designed to help you compare different credit and loan offers.
In financial terms, this is anything that can be converted into cash. Businesses and governments have assets, and you do too. Your house, personal property such as furniture, jewellery, vehicles, plus any investments you own – all of these are examples of assets. A liquid asset is one that can be turned into cash quickly.
In the world of investments, an asset class is a group of assets with similar characteristics that behave in similar ways. There are four main asset classes – shares, cash, bonds and property – each with different pros and cons. Investment funds invest in one or more asset classes.
Auto-enrolment is a government initiative whereby millions of employees are being automatically enrolled into workplace pension schemes. If you’re one of them, a slice of your pay packet will automatically go into a pension plan for you to help you save for your retirement – and your employer will have to chip in, too.
Bank of England
The central bank of the United Kingdom, responsible for maintaining monetary and financial stability. Among other things, it designs and issues bank notes, and its Monetary Policy Committee sets the UK’s bank rate. The bank was founded in 1694, and is sometimes known as the ‘Old Lady’ of Threadneedle Street (where it’s based).
This is the borrowing and lending rate set by the Bank of England’s Monetary Policy Committee, which in turn determines savings and mortgage rates throughout the UK. The Bank of England uses the rate to influence economic activity. If it needs to stimulate the economy, it cuts the rate to encourage spending and borrowing; if it needs to slow things down, it raises the rate so we don’t spend and borrow so much.
Basic rate income tax
The standard rate of income tax, which most of us have to pay. For the 2016/17 tax year it’s 20% of your income up to £32,000. However, you only need to pay it on any income that’s over and above your personal allowance.
You won’t find Yogi or Paddington here. A bear market is actually an investment term for when the stock market has fallen by around 20% for a sustained period (usually considered to be two months or more). The falling market sees people selling shares, which causes prices to fall further – and the cycle repeats itself, like a vicious circle.
Blue chip company
In poker, the highest value chip you can get is traditionally the blue one – and that’s where blue chip companies get their name. Highly regarded and valued, they are generally older, larger companies with long-term records of stable growth. Companies on the FTSE 100 are often referred to as blue chips. Examples would be the likes of IBM and Coca-Cola.
A bond is basically an IOU issued by a company or government as a way of borrowing money. There are two main types: ‘corporate bonds’, issued by companies; and ‘government bonds’, issued by governments. Bonds issued by the UK government are generally known as gilts. By investing in a bond, you’re essentially loaning money to the company or government, and they’re agreeing to pay it back on a certain date, with interest added on top.
This is where the Chancellor of the Exchequer explains how the government intends to spend the country’s money over the coming year. He or she will also spend some time reviewing the nation’s finances and economic situation. You’ll know it’s the Budget because the Chancellor will be waving a red briefcase around, which traditionally contains the Budget speech. The briefcase was first used by William Gladstone in 1860, but in 1997 a new one was made – as the original was looking rather shabby.
The opposite of a bear market, a bull market is where share prices are going up for a sustained period of time and confidence is high. While the origin of the term isn’t certain, some believe it derives from the way bulls attack their foes – by raising their horns upwards. Bears, on the other hand, attack by swiping their paws downwards, reminiscent of a falling market.
An economic system – like ours – where companies and people are allowed to compete in an open market for their own financial gain. In this system, the things used to make and move products (such as land, trucks and factories) are owned by individuals and businesses, as opposed to the government.
Its exact definition depends how you use the term, but generally speaking it means the financial resources you have available.
Capital gains tax (CGT)
This is a tax on the profit you make (a ‘capital gain’) on a taxable asset that has increased in value, like some shares or a second property. It’s the gain that’s taxed, not the total amount of money you receive. Some things are exempt (like your main home, for example), and you don’t have to pay any CGT if all your gains in a year are under your tax-free allowance.
An institution that keeps an eye on a country’s currency, money supply and interest rates – with the aim of keeping the economy stable. Two of the most famous are the Bank of England and America’s Federal Reserve (or ‘the Fed’, for short). Central banks often also oversee the commercial banking system in their country, and usually design and make the national currency.
The Chancellor of the Exchequer is the government’s top financial minister. It’s his or her role (though it’s always been a man so far) to raise revenue through taxation or borrowing, and to control public spending. Some notable figures have held the post since Richard Sackville first took it up in 1559, including William Pitt the Younger in the early 19th century, Winston Churchill from 1924-29, Gordon Brown during ‘New Labour’s’ time in power – and even someone called Julius Caesar (though it wasn’t that one).
The City refers to the area of London where the London Stock Exchange and many of our country’s biggest financial institutions are based. When reporters say, “The City has reacted well to this,” they’re referring to the reactions of these institutions. Also known as ‘the square mile’ because it covers an area of approximately that size.
A commodity is a raw material or basic agricultural product that can be bought or sold, such as gold, oil, lumber, natural gas and wheat. All commodities of the same type are priced equally per unit of measurement (so an ounce of gold, for example, is worth the same all over the world). The most commonly traded commodities have well established markets, and are traded on exchanges around the globe.
A credit rating is basically a measure of how well you deal with debt. Banks and other lenders use it when they’re deciding whether to let you have a certain mortgage, credit card or loan. To get a decent rating, you’ll need to build up a credit history – for example, by taking out a credit card and paying it off in full each month. Businesses and governments also have credit ratings, too, with the highest possible being ‘AAA’.
A demerger is when one company splits into two or more, and is the opposite of a merger. Lloyds TSB did this recently, when it split into two separate high-street banks: Lloyds Bank and (you guessed it) TSB.
The fall in value of an asset, such as a property or some shares. The opposite of appreciation.
A share of the spoils! If you own shares in a company, you may receive a dividend. This is basically a portion of the company’s earnings, and is usually paid as cash (although it can be paid in other ways, such as more shares). There’s no set frequency for how often you’ll receive dividends (if at all), but many of the biggest companies pay them two, three or four times a year.
Equities are simply shares in companies listed on stock exchanges around the world. The term is used widely in investment circles; if you invest your money in investment funds, you’ll find many of them have ‘equity’ in their name. For example, a ‘European Equity Fund’ would invest mostly in shares in European companies.
Ethical investing means using your ethical principles as a way of determining how to invest your money. So, for example, you may choose to avoid investing in certain industries, such as tobacco, weapons or gambling. Ethical funds are specialist investment funds that invest in an ethical way.
The official currency of the eurozone, which was first adopted in 1999 by 11 countries in the European Union.
A term to describe the countries in the European Union (EU) that use the euro (€) as their official currency. The other members of the EU use their own national currencies.
European Union, The
Usually referred to as ‘the EU’, the European Union is a group of countries (member states) whose governments work together. It operates as a single market that allows goods, capital, services and people to move freely between different countries.
This is a marketplace where securities, commodities and other financial ‘instruments’ can be traded. Stock exchanges are the best known, with some of the most famous being the London Stock Exchange, the New York Stock Exchange and the Tokyo Stock Exchange.
Final salary scheme
A type of workplace pension scheme where the retirement income you receive is based on your salary in your final year of employment and how long you’ve been in the scheme. How much you get is often calculated by multiplying one-sixtieth of your final salary by the number of years you’ve been a member. Many such schemes have been closed to new members because they’re too expensive to run.
This is when a country’s central bank, such as the Bank of England, gives public guidance about what it plans to do regarding interest rates in future. In simple terms, the purpose of forward guidance is to help stimulate the economy.
Another name for an initial public offering (IPO).
The FTSE stands for the Financial Times Stock Exchange. It manages several lists of companies, known as ‘indexes’, that are trading on the London Stock Exchange, which show how they are performing. The most famous is the FTSE 100, which is an index 100 of the top-performing companies (often referred to as blue chips). Then there’s also the FTSE 250, the FTSE All-Share Index, and others besides.
Also known as an investment manager, this is someone who’s responsible for overseeing the investments a fund makes. Some funds are managed by just one person, while others are ‘co-managed’ by a team of two or more. They usually work for fund management or insurance companies.
As well as being something a 1990s teenager might have said, gross refers to any type of income before tax and any other charges have been taken off.
Gross domestic product (GDP)
An economic pulse of sorts, this very important figure tells us how healthy a country’s economy is. New GDP figures are released every quarter: if the figure is up on the previous three months, the economy is growing; if the figure’s down, the economy is slowing. If the figure is lower for two quarters in a row, it means the economy is in recession.
Help to Buy
A government scheme, set up in 2013, that’s designed to make it easier for people to afford their own home. Right now, there three ways you can use it: ‘equity loans’, where the government lends you money towards a new build; the ‘mortgage guarantee’, where the government pays your lender if you can’t pay your mortgage; and the ‘Help to Buy ISA’, where the government helps you save up for a new home.
Higher rate income tax
If you’re a higher earner, you’ll need to pay higher rate income tax on any taxable income you have over a certain limit. For the 2016/17 tax year it has been set at 40% of income from £32,001 to £150,000. This limit usually changes each year, and the tax rate itself can also change.
Inflation is simply the rate of increase in prices for goods and services. It’s measured using the Consumer Prices Index (CPI), which looks at the prices of hundreds of things we typically spend money on. The Bank of England is in charge of trying to keep the annual rate of inflation to around 2% in the UK.
Inheritance tax (IHT)
Ever heard that the only certainties in life are death and taxes? Well, inheritance tax combines the two. Basically, it's the name for any tax due on the value of a person's estate (their property, possessions and money) when they die.
Initial public offering (IPO)
The first time the general public can buy a company’s shares. Also known as a ‘flotation’ or ‘floating on the market’. The likes of Facebook and Royal Mail have done it in recent years.
Investment funds invest in a range of assets (such as shares, bonds and property) with the aim of achieving certain objectives, such as investment growth. When you invest in one, your money is pooled with that of other investors. This gives you access to greater management expertise and lower fees than you’d usually be able to get on your own.
Individual savings accounts – better known by the acronym ‘ISA’ – allow you to save or invest money tax-free or tax-efficiently. There are two main types: cash ISAs and stocks and shares ISAs. Cash ISAs work very much like a standard high-street savings account, except that you don’t have to pay any tax at all on the interest you receive. With stocks and shares ISAs, your money is invested, and you don’t have to pay any income or capital gains tax on any returns you make.
A merger is where two companies join forces to become one. It’s the opposite of a demerger.
Monetary Policy Committee (MPC)
The MPC is part of the Bank of England. Its main tasks – set by the government – are to keep inflation to a 2% target and to help maintain financial stability in the UK. It meets on the first Thursday of every month to set the UK’s bank rate. Essentially, if inflation looks likely to rise it might raise interest rates to slow spending, and vice versa.
National insurance contributions
National insurance is a system we have in the UK where workers and employers pay contributions towards the cost of certain state benefits. Originally it was to help protect workers if they became ill or unemployed, but these days it also allows you to claim a state pension and some other benefits – depending on your circumstances and how much you’ve paid in.
The amount of income that you don’t have to pay tax on. For the 2016/17 tax year, the standard personal allowance is £11,000. However, your personal allowance may be more if you get blind person’s allowance. And if your income is over £100,000, your allowance will be smaller.
Personal savings allowance
The biggest savings shake-up in a generation. The personal savings allowance was brought in on 6 April 2016, and is the amount of interest you can earn on your savings without paying tax on it. If you’re a basic rate taxpayer, you don’t have to pay any tax on the first £1,000 of interest you earn. Higher rate taxpayers have an allowance of £500.
Pensions are schemes that allow you to build up a sum of money (a ‘pension pot’ or ‘pension fund’) that you can use as an income when you’ve retired or semi-retired. There are three main types: workplace pensions, where your employer will also usually chip in; personal or private pensions; and the state pension, which you claim from the government.
Also known as ‘government borrowing’, this is where the government has to borrow money if it doesn’t have enough to pay for its spending programmes. The government borrows money by issuing a type of bonds known as gilts. Essentially this is an IOU – the government gets the money it needs, and promises to pay it back to the lender, plus interest, at a certain date in future.
Quantitative easing (QE)
Creating money out of thin air, essentially! QE is an unconventional form of monetary policy where a central bank creates new money electronically in order to buy financial assets, such as gilts (government bonds). The ultimate aim of doing this is to encourage people and companies to spend money, rather than save.
If there’s a decline in gross domestic product for two quarters in a row, we’re officially in recession. If there’s a deep recession lasting two or more years, it’s known as a ‘depression’.
In the past, a ‘security’ referred to the paper certificate you’d receive as proof when you made an investment. In today’s virtual age, it’s used as a sort of catch-all term to describe all kinds of investments – from equities and bonds to commodities like gold and oil. The London Stock Exchange is the main market for buying and selling securities in the UK.
A regular payment you can get from the government when you reach state pension age. To get it, you’ll need to have paid or been credited with enough national insurance contributions. The first state pension in the UK was called the old age pension, and was first paid on 1 January 1909.
Stocks and shares
Historically, ‘stock’ was a term to mean the ownership certificates of companies in general, whereas ‘shares’ were used to refer to the ownership certificates of a particular company. These days, however, people use the two terms pretty much interchangeably. Also known as equities.
A takeover is when one company – usually the larger one – takes control of another. The firm doing the ‘taking over’ is known as the bidding company, while the other is known as the target company.
A year-long period used for tax purposes. In the UK, it currently starts on 6 April and ends on 5 April the following calendar year. As for why it starts then, well, you'd have to go back nearly 2,000 years to the reign of Julius Caesar. But we'll leave that little history lesson for another day...
A street in New York City where many of America’s biggest financial institutions were historically based, though many have now relocated to elsewhere in Manhattan and the US. Still used as a shorthand for the financial markets in the US, much as The City is in the UK. Also the name of a rather good 1987 Oliver Stone film starring Michael Douglas and Charlie Sheen.
A legal document in which you say what you’d like to happen to your money, property and possessions (also known as your ‘estate’) when you die. If you die without a will, the law decides who gets what, and it may not be the people you’d have wanted.
Are there any other terms you’d like us to cover? Please tweet us at @AvivaUK and we’ll take a look. This page was last updated on 15 July 2016, and was correct to the best of our knowledge at time of writing.