Glossary of Terms

  • Shares
    The direct equity investment in a company is provided by its "ordinary " shares.
    Made popular by privatisation the share is ideal for the punt on an interesting company, but if it goes bust you lose your money.

    Shares carry voting rights so they are good buy for AGM activists.( This is when ethical / environmental / consumer activists buy shares in order to have a right to attend meetings and ask awkward questions).

    May provide special deals and discounts on company goods and services.

    If you think you know something that the market doesn't, buying could make you a lot of money, (as long as you are not insider dealing ). ( E.g. in Canada a geology student found some ore out in the wilds. The professor had heard that exploration permits had been sold. They found out which penny share company had the permit for the area, bought as many shares as they could, then gave the company the good news. Or so goes the story).

    Dividend income subject to Income tax, share sales to Capital Gains Tax.
    Although simple for single holdings of any share if you have bought several blocks over the years, ( or accumulated them in an employers company ), you will have to deal with "pooling". This is a tedious computation for which an entire acquisition and sales history is needed. Always keep all bits of paper or you may face a tax bill that, if all the information was to hand, might be reduced.

  • Unit Trusts
    Unit Trusts are special trusts that enable the investors to pool their resources and thereby spread their risks, have professional management etc. Unit Trusts are now one of the most popular ways for the average investor to enter the market.
    Unit Trusts were begun as self help groups, but they are now set up and run by the financial companies, who create new ones as markets open up.

    There are thousands of Unit Trusts to choose from in al sectors.

    Expect to pay a bid offer spread of 5-7%, and an annual management charge will normally be 1-2%.

    They can be used in ISAs and PEPs.

    The managers can buy and sell within the trust without paying tax. Tax liabilities arise only on dividends and any unit sales by the holder. Dividends are under Income Tax, gains/losses on sales under Capital Gains Tax.

  • Investment Trusts
    Investment Trusts are companies set up to invest in shares.

    There are Investment Trusts in all sectors and buying costs are about 1-2%.

    There is a big debate about which is best, an Investment Trust or a Unit Trust. In truth both are good and the key factor should be that the managers approach meets your aims and objectives.

    They can be used in ISAs and PEPs.

    As Shares

  • Personal Equity Plans
    The information below is left as a matter of record, but any new money must go to an individual savings account.

    If you were using a PEP for savings purposes, esp if for a mortgage, school fees etc then it is absolutely vital to ensure that you do use an ISA to continue saving, otherwise you will have a shortfall in your funds.

    It is estimated that at mid April 99 only half of people with PEP mortgages had set up the corresponding ISA.

    Note - while the PEP cannot accept new money it is in no way frozen. You can cash it in, you can move the investments around. It remains tax free, it grows tax free etc etc. It is a marvelous investment, (which is why, a cynic would say, the Government stopped them and replaced them with stupidly complex ISAs), and should be held onto until you have very good reasons not to.

  • TESSAs
    They are now closed, but you have the ability at maturity to ’roll over’ the original investment into a TOISA, sounds painful but you keep the tax free grow and the capital does not affect your ISA allowance. Do not surrender your tessa, unless you want all the money.

    Government Stocks / GILTS are loans made to the Government in order to fund its spending. They comprise most of the National Debt. A GILT is issued for a given redemption value at a fixed date in the future, and provides the holder with interest payments until that time.

    The value of a GILT depends upon the outlook for inflation and interest rates. (Inflation eats away at the true value of the redemption capital, while interest rates make the interest payment seem more or less attractive).

    If interest rates are expected to rise then the value of the gilt will fall, and when rates are going down gilts rise.

    Most people should not buy GILTS themselves unless it happens to fit a specific purpose, but will encounter them within other investments where the managers use them to spread risk, produce income etc.

    If however you do want to buy one go to the Post Office and avoid dealing costs, and also get the interest paid gross, (though taxable).

    If you doubt the inflation beating prowess of the Government (whether in or out of EC single currency), go for Index Linked issues.

  • Corporate Bonds.
    Corporate Bonds are the corporate equivalent of gilts, and work in the same fashion. Corporate Bonds are issued by multinationals who find such borrowing cheaper than bank loans

    The returns from Corporate Bonds are often better than gilts because the risk of a bankruptcy of a company is greater than that of a country failing to repay.

    Corporate Bonds are not normally an investment for the individual, but one for the fund managers. Corporate Bonds are sometimes used in income producing investments.

    Corporate Bonds can be used in ISAs and PEPs. If considering such an investment you must be sure that you understand the risks involved. The capital value of these bonds will vary, and companies can, and do, go bust. When that happens bondholders lose their money just like shareholders. Those who held corporate bonds in Barings when it collapsed lost out when it crashed. The chief advantage of corporate bonds in ISA's lies in their low tax income generation.

    Corporate Bond prices will tend to rise when inflation falls, or interest rates fall, or a previously shunned company comes back into favour. They will fall when the outlook for inflation is poor, interest rates rise or a company gets into trouble.

  • Tax Free Friendly Society Saving Plans
    Mainly known for their Tax Free Savings Plans, they have an interesting history and background.
    These are regular monthly savings plans.

    You save for a period of 10 years, though children's plans may be longer.
    Maximum investment £25pm or £270pa
    Anyone can invest, both taxpayers, non taxpayers and children.
    Children's plans are written to age 18 (and may therefore exceed 10 years at outset).
    Growth is tax exempt.
    Maturity is tax exempt.
    Investment profile tends to be conservative - a managed fund or with profits approach. This is not a legal requirement, but more a result of tradition, (and the fact they used to be obliged by law to adopt a low risk approach).
    I expect to see some more interesting fund variations made available (and indeed Family FS have already launched an Ethical Fund).

    Who should have one?
    Pretty well everyone can find a place for 10 Year Savings Plan, with the simple proviso that you must be confident that you will invest for the 10 years.

    It is a must have for higher rate taxpayers.

    It is a very good tool for parents investing for children, as each child can have one, and by the time they get the money, should be sensible about it, (great for university fees or house deposit or babe magnet...)

    What to look for
    Charges - watch out for charges, and be careful about those with monthly policy fees. You are only investing a modest amount and even £2 is a lot out of £25.

    Investment approach - make sure that you understand where your money will be invested.

    Tax Free Friendly Society Saving Plans
    Life Insurance - part of the package, but for the old it detracts from the investment aspects to some degree. (Grandparents might be better paying towards a grandchilds plan than starting their own, but as always, ask your IFA).
    Mutuality - most Friendly Societies (all? being definite will only bring emails, but certainly most), are Mutuals. This means that they are owned by the policyholders, not shareholders, and that, after the expenses of running the society, all the profits go to the policy holders. If the society is efficient then this is good because you should do well. If the society is not efficient then you might end up benefiting from a demutualisation a la building societies. That said second guessing the future is always chancy and this should not be uppermost in your mind!

    The other products that Friendly Societies offer are:
    1) Single Premium Bonds, these are not tax exempt, and should be looked at in the same manner as other Single Premium Bonds.
    2) Critical Illness and Permanent Health Insurance, which are worthy of consideration when looking at these areas. You might find that a mainstream company is best, or that a Friendly Society is good for you.

    You should be aware that FS policies may have an investment element, whereas mainstream policies are normally pure protection. When this is the case the premium for the FS will normally be higher than that for pure protection policies, and you should seek to ensure that you know whether it is better to combine the protection and investment elements, or keep them separate. The answer may be mathematically clear, or more of an emotional decision. Discuss this with your IFA.

  • Insurance Bonds
    These are single premium investments into a unit linked investment fund i.e. property, equity, distribution, North America, cash or with profit funds, they are whole of life investments, therefore have no maturity date, but do attract a death benefit, usually 101% of the bid value of the units.

    Basic rate tax and capital gains already paid by the fund, it is a good investment planning tool for IHT, non-taxpayers cannot reclaim the tax.

    Up to 5% income may be withdrawn p.a. tax deferred for 20yrs as the revenue consider this as return of capital.

    Currently with profit fund managers operate the ’market value adjustment factor’ which is designed to protect other investors if you surrendered all or part of your investment. As the investment can be written on joint life last survivor,it is a useful tool in estate planning.

  • ISA
    There are two types of shares Isas - maxis and minis. For the 2007/08 year you may invest £7,000 in a maxi equity Isa. If you have a cash mini Isa you may also invest £4,000 in a mini equity Isa.

    For 2008/09, the overall limit increases to £7,200. So if you have used the new maximum cash mini Isa allowance of £3,600, the maximum you may place in a stocks and shares Isa is £3,600, bringing your total Isa investment to £7,200.

    If you invest in a cash mini Isa, you are allowed to take out only a shares mini Isa in that tax year.

    Open ended investment companies are investments in a corporate form, but with a variable share capital. They are open ended like a unit trust, there is a single price structure with the charges shown separatley. Taxed as unit trusts.