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Financial Jargon Buster Tool

Don’t know the difference between an AMC and CGT? Confused about the base rate or just want to learn something new? We’ve compiled a financial jargon buster to help you out.

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AMC (annual management charge)

This is a charge which is deducted by the fund manager automatically from your investment on an annual basis. The annual management charge covers the running costs of the fund including any trail (renewal) commission paid to investment advisers.

Bank of England base rate

The Bank’s Monetary Policy Committee (MPC) sets a base lending rate it judges will meet its inflation target. The cost of variable-rate loans (such as mortgages or business loans) usually rises when the Bank of England base rate goes up. An increase in the base rate benefits savers but can have a detrimental effect on borrowers and investors and vice versa when the base rate goes down.

Bid-offer spread

This is the difference between the price at which you can buy units in a fund (’offer price’) and the price at which you can sell units in a fund (’bid price’) at any particular time. Unit Trusts are dual priced in this way with the units being purchased at one price and sold at a different price. The buying price is always higher than the selling price at any point in time and this difference is the bid-offer spread.

Blue Chip

This is the name given to the UK’s biggest companies (usually members of the FTSE 100™) which are usually considered to be a safer investment than smaller firms. The term ’blue chip’ comes from the high-value blue-coloured chips used in casinos.

Clean Share Class

The term ‘Clean Share Class’ typically relates to those share classes made available to retail investors post-Retail Distribution Review (which came into effect on 31 December 2012).

These share classes are also known as unbundled or explicit share classes. The Annual Management Charge (AMC) for clean share classes comprises only of that amount payable to the fund management group – with any platform or SFS charges being taken separately. Any investment made prior to 31 December 2012 would typically have been made into ‘bundled’ share classes, where the AMC of the fund comprised of the payment to the fund manager, platform and SFS (in the form of trail commission).

As a result the AMCs on clean shares will typically be lower than their bundled equivalents.Investors should consider the total costs of investing and separate charges will apply for the platform administration and to SFS – full details will be outlined before you invest

Consumer Price Index (CPI)

The tendency of prices to rise on a year-on-year basis is measured in the UK by the CPI. This official measure recently replaced the Retail Price Index (RPI) as an indication of inflation and is calculated each month by measuring the cost of a sample of goods and services that a typical household might purchase including food, heating, household goods and travel.

The CPI measures the increase in the price of this ’basket’ of goods and services compared to its cost in the previous month. The number that attracts the most attention is year-on-year rise in cost for this ’basket’ which indicates the current rate of inflation. This annual figure is the one used by the media, wage negotiators and policy makers. (See also Inflation.)

CGT (Capital Gains Tax)

The tax on profits made after selling assets such as shares, a business, a second home and other investments. A capital loss can be used to offset a capital gain, reducing tax due. You only pay CGT when your gain exceeds the personal allowance (£11,000 for the 2015/16 tax year), but you don’t pay CGT on gains inside PEPs and ISAs.

Commission

Money paid to individuals or companies when you carry out financial transactions.

Dividend

Cash (or, occasionally, shares) distributed to shareholders. As a part-owner of a company you are paid dividends as your share of the profits from the business.

FCA (Financial Conduct Authority)

The regulatory body responsible for managing the conduct of firms and individuals involved in regulated products such as investments and mortgages.

FTSE™ (Financial Times/Stock Exchange)

FTSE provides indices for a number of international markets. In the UK, the most well-known indices are the FTSE 100™ (the ’Footsie’ tracks the value of the UK’s hundred largest listed businesses); the FTSE 250™ (measures the next 250 firms after the top 100, according to size); and the FTSE All-Share™, which measures the value of around 700 firms.

Gross

What you receive before tax is taken off. For example, gross interest is paid by banks and building societies to non-taxpayers.

Inflation

Inflation is the increase in the price of goods and services over a period of time. Although it may be in relation to one item, or a small group of items, the term is usually used to describe the general increase in prices of a ’basket’ of goods, such as those measured by the Retail Price Index (RPI) and Consumer Price Index (CPI) in the UK. (See also CPI.)

Initial Commission

Intermediaries commonly receive initial commission from a fund manager when a client invests in one of the fund manager’s funds. Initial commission is accounted for by the fund managers in their initial charges and is calculated as a percentage of your initial investment into a fund.

ISA (Individual Savings Account)

A ISA is simply a wrapper placed around an investment (such as shares, bonds or cash) to protect it from tax. For the 2016/17 tax year, you can place up to £15,240 into either Cash or Stocks & Shares ISAs, or a combination of both.

Net

What you receive after tax has been taken off. For example, dividends are paid net of basic rate tax with no further liability to basic rate tax-payers.

OEIC (Open-Ended Investment Company)

An OEIC is an investment vehicle which provides a route to collectively invest, usually in stocks and shares.

Each investor’s money will be pooled with that of other investors and used to purchase ’shares’ in their chosen fund. Each ’share’ represents a fraction of the assets held by the OEIC which is managed by a professional fund manager.

Ordinary Shares

The type of shares most commonly traded on exchanges such as the London Stock Exchange, also known as equities.

PEP (Personal Equity Plan)

A PEP, or Personal Equity Plan, is a tax-efficient ’wrapper’ that protects any gains or income from further personal liability to capital gains and income tax. On 6th April 1999, PEPs were replaced by Individual Savings Accounts (ISAs). Following the introduction of ISAs you can no longer invest any new money in a PEP.

From the 6th April 2008 all PEPs automatically became Stocks and Shares ISAs.

Platform

The fund platform is used to administer fund investments. Thir provides a convenient overview of how they are performing.

Shares

A stake in a company. Buying even a single share in a company gives you part-ownership of that firm. Shares allow you to benefit from a company’s success, which usually includes being paid dividends and having the right to vote on company matters.

TESSA (Tax-Exempt Special Savings Account); TOISA (TESSA-Only ISA)

TESSAs were created to encourage people to start saving by allowing them to take all interest earned on these deposit accounts tax free, provided they were held for five years.

No new TESSAs could be opened after 5th April 1999 so they no longer exist, but any TESSAs that matured after this date could be rolled over into a TOISA so that savers could continue to receive tax free interest in addition to their ISA allowance. From the 6th April 2008 all remaining TOISAs automatically became Cash ISAs.

Trail Commission

Fund managers can pay intermediaries trail commission to provide an ongoing service in relation to your investment in their fund. Trail commission is calculated as a percentage of your fund value, typically this percentage is 0.5% per annum, and is accounted for within the fund manager’s Annual Management Charge (AMC).

Unit Trust

A Unit Trust is an investment vehicle which provides a route to collectively invest, usually in stocks and shares.

Each investor’s money will be pooled with that of other investors and used to purchase ’shares’ in their chosen fund. Each ’share’ represents a fraction of the assets held by the Unit Trust which is managed by a professional fund manager. Please see our Guide to Unit Trusts for more information on this subject.

Yield

The annual income provided by an investment, expressed as a percentage. For example, an annual dividend of 20p on a share worth 400p means a yield of 20/400 = 5%.