Security

Legal term for tradeable financial assets. Stocks, bonds, options, futures - all securities. It represents ownership or debt that has value and can be bought/sold.

Stock vs Share

Functionally identical in modern usage. Historically, “stock” was the general term (you own stock in a company) and “shares” were the units (you own 100 shares). Americans say “I bought stock in Apple,” Brits say “I bought shares in Apple.” Both mean the same: fractional ownership of a company.

Bond

A loan you make to a government or company. They pay you interest (the coupon) at fixed intervals and return your principal at maturity. UK government bonds are gilts, US government bonds are Treasuries. Corporate bonds pay higher interest because there’s default risk. If you buy a 10-year UK gilt with 4% coupon at £1,000 face value, you receive £40/year for 10 years, then get your £1,000 back (assuming no default).

Bond vs Stock

Bonds and stocks behave differently in default. Bondholders are creditors - they have legal claim to assets before shareholders. Shareholders own equity, which is worth zero if the company goes bankrupt. This is why bonds are considered less risky than stocks of the same company, though they offer lower potential returns.

If you’re holding government bonds from stable countries (UK, US, Germany), default risk is negligible. Corporate bonds require more scrutiny.

Commodity

Raw materials or agricultural products traded in bulk. Oil, gold, wheat, natural gas, copper, coffee. They’re fungible - one barrel of Brent crude is identical to another. You can invest directly (buying physical gold) or through derivatives (futures contracts, ETFs that track commodity prices).

Fund

A pooled investment vehicle. Instead of picking individual stocks, you and thousands of others put money in, a manager (or algorithm) invests it according to stated objectives, and you own units/shares of the fund proportional to your investment. The fund might hold 500 stocks, but you own a slice of everything with one purchase. Types: mutual funds (traditional, end-of-day pricing), ETFs (exchange-traded), unit trusts/OEICs (UK structures), hedge funds (exclusive, complex strategies).

Market Index

A basket of securities used to measure a section of the market. It’s essentially a list with rules. The FTSE 100 is the 100 largest UK companies by market capitalization. The S&P 500 is the 500 largest US companies. Indexes serve as benchmarks - “did I beat the market?” means comparing your returns to the relevant index.

Dividend

Cash payment companies make to shareholders from profits. Usually quarterly (US) or semi-annually (UK). If you own 100 shares of a company paying £1/share annual dividend, you receive £100/year, typically split across payment dates.

How paid: Directly into your brokerage account (or ISA). You don’t need to claim them. Do all companies pay dividends? No. Growth companies (tech startups, Amazon historically) reinvest profits into expansion. Mature companies (utilities, tobacco, big banks) often pay substantial dividends because growth opportunities are limited. Some companies pay nothing, others yield 5-8%/year. Do you automatically get dividends? Yes, if you own shares on the “ex-dividend date” (the cutoff), you receive the payment regardless of how long you’ve held the stock. If you buy after that date, the previous owner gets it. Critical point for UK investors: Dividends inside an ISA are tax-free. Outside an ISA, you pay dividend tax: £500 tax-free allowance, then 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). This is why ISAs matter significantly for dividend-focused portfolios.

Default

When a borrower fails to make required payments on a debt. For bonds, this means the issuer (government or company) doesn’t pay the interest (coupon) or doesn’t return the principal at maturity.

Example: Company issues a bond: “We’ll pay you 5% interest annually for 10 years, then return your £1,000.” Five years in, the company goes bankrupt. They stop paying interest and can’t return your principal. You’ve defaulted on - you’re now an unsecured creditor in bankruptcy proceedings, likely recovering pennies on the pound.

Index Fund

A fund that tracks a market index (like the FTSE 100, S&P 500, or MSCI World) by holding the same securities in the same proportions. The goal is to match the index return, not beat it. This is passive management - no stock picking, minimal trading, low fees. Example: If the FTSE 100 is weighted 8% in Shell, the fund holds 8% Shell. When the index rebalances, the fund follows. FTSE 100 weighted 8% in Shell: The FTSE 100 isn’t equally weighted - larger companies count more. Shell represents 8% of the index’s total value. If you invest £1,000 in a FTSE 100 tracker, £80 goes to Shell shares. This is market-cap weighting: bigger companies = bigger index slice. When Shell’s share price rises, it automatically becomes a larger percentage of the index.

ETF (Exchange-Traded Fund)

A fund that trades on stock exchanges like an individual share. You buy and sell throughout the trading day at market prices. ETFs can track anything - indexes, sectors, commodities, bonds. Most ETFs are index funds (tracking an index passively), but not all. Some are actively managed, some use leverage, some hold physical gold. The defining feature is the trading mechanism, not the strategy.

ETF vs Index Fund Differences

Trading: Traditional index funds (unit trusts/OEICs in the UK) trade once daily at the end-of-day NAV (net asset value). You submit orders during the day, execution happens after market close at whatever price is calculated. ETFs trade continuously during market hours at live prices - you see the price before buying, like a stock. Costs: ETFs typically have lower expense ratios (0.05-0.20% for broad market trackers) versus traditional index funds (0.10-0.30%). But you pay broker commissions on ETF trades, whereas many platforms offer commission-free trading on their own-brand index funds. Minimum investment: Traditional index funds often allow £25-50 monthly contributions. ETFs require buying whole shares - if an S&P 500 ETF trades at £50, your minimum is £50 per purchase. Tax efficiency: In the UK, this distinction barely matters inside an ISA since everything is sheltered. Outside an ISA, both generate the same capital gains and dividend tax liabilities. In the US, ETFs have a structural tax advantage for capital gains distributions, but this doesn’t apply under UK tax rules.

Practical example: You want FTSE All-Share exposure:

Vanguard FTSE All-Share Unit Trust: 0.06% fee, trade once daily, £100 minimum, no trading commission on Vanguard platform Vanguard FTSE All-Share ETF (VUKE): 0.06% fee, trades live during market hours, costs ~£90/share, broker commission applies

They’ll deliver virtually identical returns. The choice comes down to platform fees, trading preferences, and contribution patterns.

ISA

An ISA (Individual Savings Account) is a tax-wrapper for investments and savings in the UK. It’s not an investment itself - think of it as a protective shell that shields whatever you put inside from tax. How it works: You get an annual allowance (£20,000 for the 2024/25 tax year) that you can contribute across different ISA types. Once money is inside an ISA:

• No capital gains tax on profits when you sell
• No income tax on dividends
• No tax on interest from cash savings
• Withdrawals are tax-free

Main types:

• Cash ISA - basically a savings account with tax-free interest. Currently poor value given interest rates have dropped from their 2023 peaks but inflation remains elevated.
• Stocks & Shares ISA - holds investments like individual stocks, ETFs, funds, bonds. This is where the tax benefits become substantial if you’re investing rather than saving.
• Lifetime ISA - restricted to house purchases or retirement (age 60+), with a 25% government bonus on contributions up to £4,000/year. Penalty if you withdraw for other reasons.
• Innovative Finance ISA - for peer-to-peer lending. Higher risk, illiquid.

Derivative

A financial contract whose value derives from an underlying asset (stock, bond, commodity, index, currency). You’re not buying the asset itself - you’re making a bet on its future price movement. Options and futures are derivatives. So are swaps, forwards, and more exotic structures.

Option

A contract giving you the right (not obligation) to buy or sell an asset at a specified price before a specified date.

• Call option: Right to buy. You think Apple will rise from £150 to £200. You buy a call option with £160 strike price expiring in 3 months for £5/share. If Apple hits £180, you exercise the option, buy at £160, sell at £180, profit £15/share (minus the £5 premium = £10 net). If Apple stays below £160, the option expires worthless, you lose the £5 premium.
• Put option: Right to sell. Inverse scenario - profits when prices fall.

Options are leveraged and can expire worthless. Not beginner territory.

Future

A contract obligating you to buy or sell an asset at a specified price on a specified future date. Unlike options, you must fulfil the contract. Futures are used by producers (farmers locking in grain prices) and speculators (betting on oil movements). They’re standardized, exchange-traded, and typically settled in cash rather than physical delivery.

Example: You buy a crude oil future at £80/barrel for December delivery. If oil is £90 in December, you profit £10/barrel. If it’s £70, you lose £10/barrel. You’re locked in regardless.

Principal

The original amount of money lent or invested, excluding interest or returns. For bonds: You buy a £1,000 bond. That £1,000 is the principal. The issuer pays you interest periodically, then returns the principal at maturity. For loans: You borrow £200,000 for a mortgage. That’s the principal. Your monthly payments include principal repayment plus interest.

At maturity

The end date when a bond or loan comes due. The issuer must repay the principal.

A 10-year bond issued in 2020 matures in 2030. On the maturity date, the issuer returns your principal and stops paying interest. If you sell the bond before maturity (secondary market), you receive whatever price the market offers, which fluctuates with interest rates.

Equity

Ownership stake in a company. When you buy shares/stock, you’re buying equity. Equity holders (shareholders) own the company’s residual value after all debts are paid.

In accounting terms: Equity = Assets - Liabilities. If a company has £10M in assets and £6M in debt, equity is £4M, divided among all shareholders.

Why it matters: Equity is riskier than debt (bonds) because in bankruptcy, bondholders get paid first, equity holders get whatever’s left (usually nothing). But equity has unlimited upside - if the company 10x in value, your shares 10x. Bonds just give you the agreed interest rate.

Home equity: Same principle. Your house is worth £300k, mortgage is £150k, your equity is £150k.

Critical relationship: Derivatives (options, futures) are used for speculation or hedging. An oil company might buy crude futures to lock in costs. A portfolio manager might buy put options as insurance against market crashes. Retail investors generally shouldn’t touch derivatives until they thoroughly understand the leverage and risks - you can lose more than your initial investment with some structures.

Bull

Someone who expects prices to rise. Bullish = optimistic about the market, a sector, or a specific asset. Bulls profit when prices go up.

Origin: A bull attacks by thrusting its horns upward. Markets going up are “bull markets.”

Bear

Someone who expects prices to fall. Bearish = pessimistic about the market, a sector, or a specific asset. Bears profit when prices decline (through short selling, put options, or simply holding cash).

Origin: A bear attacks by swiping its paws downward. Markets going down are “bear markets.”

Bull market

Extended period of rising prices, typically defined as 20%+ gain from recent lows. Usually accompanied by strong economic growth, low unemployment, rising corporate profits. The 2009-2020 period was a historic bull market - S&P 500 rose roughly 400%.

Bear market

Extended period of falling prices, typically defined as 20%+ decline from recent highs. Often triggered by recessions, financial crises, major shocks. 2022 was a bear market (down ~25% peak to trough) driven by inflation and interest rate hikes.

Short (Short Selling)

Betting against an asset by borrowing it, selling it, then buying it back later at (hopefully) a lower price. Process:

1. Borrow 100 shares of Company X from your broker (trading at £50)
2. Immediately sell them for £5,000
3. Wait for price to drop
4. Buy back 100 shares at £30 (£3,000)
5. Return shares to broker, pocket £2,000 profit (minus borrowing fees)

Risk: Unlimited. If the stock rises to £100 instead, you must buy back at £10,000 - a £5,000 loss. Short squeezes happen when many shorts scramble to buy back simultaneously, driving prices higher (GameStop 2021 is the infamous example). Shorting requires a margin account and isn’t available in ISAs. It’s high-risk and not relevant for most long-term investors.

AER (Annual Equivalent Rate)

The standardized way UK banks quote savings account interest, accounting for compounding. It shows what you’d actually earn over a year if interest is paid more frequently than annually.

Example: A savings account pays 5% nominal, compounded monthly. The AER is slightly higher (~5.12%) because each month’s interest earns interest in subsequent months. AER lets you compare accounts with different compounding schedules fairly. If Account A offers 5% AER paid annually and Account B offers 5% AER paid monthly, they deliver identical returns. The AER normalizes the comparison.

Stock ownership vs Savings account

With a stock, you profit two ways:

• Capital gains - selling at a higher price than you bought
• Dividends - if the company pays them

If the company doesn’t pay dividends and the stock price doesn’t rise, you make nothing. In fact, if the price falls, you lose money. There’s no guaranteed return - you’re taking risk in exchange for potential upward growth.

Savings account - where the interest comes from:

You are lending money. When you deposit £10,000 in a savings account, the bank doesn’t keep it in a vault. They’re borrowing it from you and paying you interest for that privilege.

What they do with your money:

• Lend it to others - mortgages at 5-6%, personal loans at 8-12%, credit cards at 20%+. They pocket the spread. You give them money at 4.5% AER, they lend it at 6%, they keep 1.5% margin.
• Invest it - government bonds, corporate lending, interbank markets.

The bank is the intermediary. You’re a creditor to the bank, they’re creditors to borrowers. Your interest payment comes from the revenue the bank generates using your deposits.