Glossary beginning with A
Interactive Investor’s All You Need to Know Investment Glossary
- Accumulation unit
This is a type of unit in a unit trust where the income is reinvested automatically, thereby increasing the unit price. With income units, the income is given to the unitholders.
- Active management
An active fund manager tries to outperform stockmarket indices by skilfully selecting winning stocks, as opposed to the passive manager, who just buys everything (or a representative portion) of an index.
Active managers charge more for their supposed skills, although in reality, more than two thirds of them actually underperform the index on a regular basis. Hence the popularity of passively-managed index funds.
An American Depository Receipt represents ownership in the shares of a non-US company that trades in the financial markets. ADRs allow US investors to buy shares in foreign companies with engaging in the risk and expense that come with cross border and cross currency transactions. In the case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. The first ADR was created by JP Morgan in 1927 for the retailer Selfridges.
- Advisory stockbroker
A broker who will give you personalised advice on what shares or other investments to buy. You don't have to follow the advice, but bear in mind that you'll be paying for it in the annual management charge whether or not you do.
Annual General Meeting
The annual opportunity for shareholders to find out how a company is performing, vote on changes and ask questions. A vote by a single private shareholder doesn't hold much sway though, as it's the big pension funds and other financial institutions that own most of the shares and hold the real power. But lots of people still turn up, if only to get answers to their questions.
Association of Investment Companies
The AIC is the main trade body for the closed-ended investment company industry representing over 300 investment trusts. The AIC's revamped web site is a useful source of information on trusts for investors, including a comprehensive list of all the trusts available with links through to fund manager web sites. There are also links to some execution-only online stockbrokers.
Amortisation is accountant-speak for the gradual writing off in value of an asset over time.
- Annual management charge
This is a charge you pay to a company for managing your investments, whether it is a fund manager, stockbroker or financial adviser. Annual charges can vary from 0.5% to around 1.5%, according to the type of investment and the degree of advice you're getting.
- Annual report and accounts
Every year, companies that trade on the main market and AIM have to provide shareholders and the London Stock Exchange with an annual report and accounts. This gives all the financial facts and figures for the previous year's business, including profits and losses, and the directors' salaries and pay increases.
Usually when you retire you use your pension fund to buy an annuity - an annual amount paid to you for the rest of your life. You can delay buying the annuity until you're 75 and there are several options available. For example, you could choose to have the annuity increase in line with inflation each year and to have it paid to your spouse on your death. And don't just accept the annuity quote given to you by your pension fund provider - shop around. There can be a difference of around 30% between the highest and lowest quotes on the open market.
- Annuity Share
This is another term for an income share within a split capital investment trust. It's not worth much at the end of the trust term because the capital value has be distributed as income to the investor.
- Approved Investment Trust Company
This is an investment trust company that doesn't have to pay capital gains tax on profits it makes from sales of investments within its portfolio.
Annual Percentage Rate
Supposedly an interest rate figure that indicates the total cost of borrowing, including any charges. It is mostly used for credit cards, personal loans and mortgages. The idea was that it would help us compare products on a like-for-like basis. In effect, headline APR rates are seldom the ones you end up paying, because the rates change according to the size and time-period of the loan. So it's always important to look behind the advertised figures and find out the rate that you would pay for the type of loan you want. Also bear in mind that low early-year APRs on discount mortgages will revert to standard variable rates after the discount period has ended, making the overall APR much higher for the life of the loan.
Basically this is the art of buying something cheap in one place and selling it at a profit somewhere else. The rise of global electronic trading has made this process much faster and easier, enabling arbitrageurs - as they're called - to switch huge sums of money across continents in seconds in an attempt to exploit small differences in the quoted prices of investments in different markets - foreign currency, for example. In share trading, so-called risk arbitrageurs attempt to make profits from the usual share price movements of companies that are in takeover situations. These investors will simultaneously buy stock in the target company, whose share price normally rises, while selling that of the bidder, whose share price normally falls. They will also invest in the target company if they think there's a chance the bidder will have to raise the offer price.
Association of South-east Asian Nations.
- Ask price
The lowest price at which someone will sell an investment at a given moment.
An investment which can end and pay-out before the stated term if a particular event occurs, for example the relevant index is above a pre-determined level. Also known as a kick-out.
Additional Voluntary Contributions
AVCs are top-up payments people make into their pension schemes to boost their eventual retirement income. If your employer does not contribute much into your company pension you may have to make AVCs to achieve anywhere near your hoped-for level of pension income. There are two types of AVC. You can either make extra payments into your company scheme or decide to contribute to another scheme managed by someone else. This latter AVC is called a Free-Standing AVC (FSAVC). There are pros and cons with both types of scheme. AVCs tend to be cheaper to make because administration costs are lower you're already in the pension scheme after all. But you put all your eggs in one basket and hope that the pension managers are good. An FSAVC may be slightly more expensive but at least you give another company a go at making your money grow. Whichever type of AVC you choose, the total contributions must not exceed 15% of your earnings in any tax year. You get tax relief on AVCs at your basic rate, as with other pension contributions. For example, for every £60 a 40% taxpayer contributes, £100 will actually go into the scheme, making a very tax-efficient way to save for the future. The only drawback is that the money you commit to your pension scheme is tied up until you retire, so don't leave yourself short in your zeal to make the most of the tax breaks!
Word of the Day
Insurance designed to protect a mortgage lender against the risk of the borrower not being able to repay the loan. The injustice is that it's the borrower that pays the premium. This type of insurance is only imposed by the lender if you borrow above a certain percentage of the value of the property - typically 75% or above. The greater your proportional borrowing, the bigger the insurance premium you have to pay. This kind of policy is also known as a mortgage indemnity guarantee (MIG).