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Jargon busters: investment terms explained

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The world of investments can be a minefield for old pros, and even more so for the uninitiated. The best starting point for a would-be investor is to learn to speak like the professionals by understanding the jargon:

 

Assets

Simply put, assets are anything tangible or intangible that is capable of being owned and that has value. Types of asset include shares, bonds, cash, trademarks and buildings amongst many others items.

Portfolios

A portfolio is the term used to describe a collection of financial asset investments held by an individual or institution.

Risk exposure

Every investor, be it a large financial institution or an individual, will need to decide how much risk they’re prepared to take on. An aggressive investor will have a portfolio consisting of a greater proportion of high risk investments. Conversely, a conservative investor will favour lower risk investments.

The type of portfolio suitable for you will very much depend on your financial circumstances. Check out APT website to see how risk models can be used to achieve the desired risk exposure.

Portfolio optimisation

Once you have a portfolio in place, it’s important to review your assets regularly and make any necessary changes to ensure your risk exposure still meets your requirements. Fund managers and other specialists will use the most sophisticated market risk analysis to optimise a portfolio. This specialised software gives the best chance of realising your investment goals.

Shares

If you purchase shares in a company you are, in effect, buying part of the company itself.  Shares, like any investment, can go up or down in value. For this reason, it’s better to have a diverse portfolio which includes other types of assets. Some shares will pay a dividend, which is a share of the profits made by the company in proportion to your shareholding.

Bonds

Bonds are a form of investment in which an investor loans money to an entity in return for a fixed interest rate and repayment of the original capital investment. They are considered a lower risk investment due to the fixed nature of the return, although it should be noted that they’re not entirely without risk.

Funds

An easier way to diversify your portfolio might be to let a fund manager do all of the legwork for you.  A fund can be made up of one or more asset classes, or it could include investments made in a particular geographical location or business sector.

The fund will consist of capital pooled from many investors, which will be invested as per the strategy set out in the fund’s prospectus. Thus, instead of buying shares or bonds in only one company, you could invest in a fund that in turn invests in a wide number of different shares or bonds.

Resources 

Financial tools and calculators

From the Guardian’s investment pages

4 strategies for managing a portfolio of mutual funds

Investopedia article

Prices and markets

From the London Stock Exchange

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