Illiquid
The opposite to liquid, obviously! This is the posh way of describing investments that are not very easy to buy and sell. Or more bluntly, a pig to try to get in and out of. In a stock market sense it tends to refer to shares in smaller companies that are not very actively traded. The natural corollary to illiquid shares (or any other illiquid investment for that matter) is that they are a whole lot more volatile (see Beta, Liquid, Thin Market, Volatility).
Income
Income is money received by us from various sources and which we tend to live off. One form of it is money earned through our own efforts, in terms of a salary or wage. The other main source is money generated by things we possess. Examples are shares paying dividends, bonds that pay interest, or cash earning interest on deposit in the building society. The Inland Revenue likes to call this unearned income. All the above are liable to income tax (see Tax – Income Tax). In Jane Austen’s time, when people were said to be on ‘£10,000 a year’ it meant that they had an income of £10,000 a year (this was a hell of a lot those days. Come hither Mr Darcy!), which was being generated from their capital and investments (see Capital).
Income Funds
These are investment funds that provide an attractive yield or return to investors. Because the people who buy into these funds seek income in the form of high returns, the prospect for underlying capital growth in the shares is sometimes sacrificed. The more mature investor might well want income to supplement a pension. Younger investors are often willing to forgo short-term income with a view to seeing their shares or investments rise in value over the long term (see Collective Funds, Distribution Funds, Growth Funds, Income Shares, Managed Funds, Unit Trust, Yield).
Income Shares
Shares that give you an income! They offer you a stream of money in the shape of dividend payouts (otherwise known as yield). Generally when we buy income shares, we don’t expect them to be really super-stud performers and go to the moon. More often than not, they are big businesses that operate in a mature market, and show sluggish growth, but generate very good cash flows and pay good, regular dividends. These types of shares tend to suit people who don’t want to take enormous amounts of risk but do want the regular income that they can get from a reasonably solid safe company. Similar, but more high risk, are high-yielding shares (see High-Yield Shares).
Income Yield
When a borrower raises money by issuing bonds, it usually pays the lender interest, the amount of which is based on the price paid for the bonds in the market. This interest, or return, is also known as the income yield. Example: suppose a company issues a £100 bond that offers the lender 5 per cent per annum over its lifetime. The income yield at that point is 5 per cent. So far, so good. But what happens if the price of the £100 bond, which is being traded freely on the bond market, falls to £50? The bond’s income yield will automatically rise to 10 per cent because of the mathematical rules of the bond market – when the underlying price of a bond falls, its return goes up, and vice versa (see Bonds, Redemption Yield, Yield).
Independent Financial Adviser – IFA
In an ideal world, you meet the perfect independent financial adviser who will put you into the best pension plan, the best life insurance policy, the best mortgage, the best ISAs and unit trusts, etc. Completely impartial, he will not be swayed by the temptation of big fat commissions from insurers, pension providers and mortgage lenders. At least, that is the theory. Welcome to the real world. With several thousand IFAs to choose from, finding the right one for you could be a nightmare. These people can be useful because they take so much of the legwork out of the dreary task of getting yourself a mortgage, etc. They shop around and know about all the best deals of the moment.
When you first meet an IFA, you want reassurance from him that he is completely independent and will give you best advice. Test his knowledge. And if you don’t like or trust the person, don’t even think about going any further. Meet several IFAs until you find one you do trust and you feel will act in your best interests over the long term. The watchword here is caution. Because pensions and life insurance, etc are all long-term commitments, do not rush decisions. Be like a reluctant virginal bride and take your time.
Be aware that an IFA must give you a menu outlining both his fee and commission-charging options and that he is obliged to offer you this ‘fees’ option. Feel free to grill him on which method of payment would be best for you. Don’t hold back. This is your money and you have to take charge. It’s no good whinging ten years after the event and wishing you hadn’t been so compliant with the IFA who roped you into the wrong mortgage or pension.
Far better to be more assertive and ask the right questions now. This is where you can really go to town and be as pedantic and nitpicking as you like! Ask things like the following:
Are you authorized to give investment advice?
Are you truly independent and not tied to any particular company?
How are you paid for giving me your wonderful, impartial advice?
How much is it going to cost me?
How much are you being paid for selling me this product?
Why have you chosen this product over that?
Do other similar products pay you less commission?
If so, what’s wrong with the cheaper ones?
Is the commission I’m paying you front end-loaded (ie, paid to
the adviser all upfront as soon as he or she has shifted, sorry,
sold the product!) or do you get paid evenly over a period of
years? (Obviously the latter is preferable for you.)
How will the commission charges affect the performance of my investment?
Since I’m putting squillions of my hard-earned cash into your highly recommended ‘Crumbling Edifice’ Fund, how about refunding some of the commission to me? Can I pay in fees, ie, per hour, rather than in commission? If so, will your advice work out cheaper, dearer or about the same? How do you actually research your investment recommendations? (This is VERY important to you, dear reader, as it’s one way of finding out who knows their onions from those who don’t!)
What happens if I change my mind a year or two down the tracks? Will I be charged any penalties and how much money will I get back?
Will this product tie me in, or can I change my mind and walk away without penalties at any stage? And so on.
A lot of these questions are common sense, but don’t be a shrinking violet. You have every right to know how your money will be spent. Whether you pay fees only or accept commission-based advice depends on what you’d be happiest with. Be sure to make an informed choice and DO make comparisons with what other advisers are offering.
If you agree to pay ‘fees-only’ to an adviser, and not commission, the good news is that any commission he would have earned goes to you. It does no harm to make sure that you are actually getting this money. Most advisers working on this basis will be only too anxious to show you that they have rebated you the commission, so you can have peace of mind that they’re not trying to pull a fast one (see Commission, Financial Adviser, Tied Financial Adviser).
Alarm bells should ring if someone offers you very attractive returns on your money without risk. If the banks and building societies, shares and bonds are offering returns of, say, 5 per cent per annum, then an investment that will double your money, risk-free, in 12 months is a pretty obvious no-no. Ask yourself why someone is offering you such superior returns and remember the risk/reward ratio (see Risk/Reward Ratio).
If you’ve been unlucky enough to have been mis-sold a product, step one is to go back to the adviser and seek compensation; if you are unhappy with their response you can then go to the Financial Ombudsman Service and enlist its help; its website is: www.fos.org.uk. If the adviser has gone bust, then your last resort is to seek redress from the Financial Services Compensation Scheme, but only if the company you dealt with was authorized (see Financial Services Authority). If you think you might have a case, contact them at: www.fscs.org.uk.
Index
A stock market index measures the general financial health of the market. It also allows you to see whether it is going up or down. You can compare one stock market with another and also check out whether the shares you own are doing better or worse than the market as a whole (see Outperform, Underperform).
Broadly speaking, an index is made up by calculating the value of all the companies it follows and doing some mathematical wizardry, which you don’t need to worry your head about to make the index meaningful over a long period of time. In the United Kingdom, the Financial Times publishes a plethora of indices that it has constructed and assiduously follows. The most widely used ones are the following:
The FTSE 100, also known as Footsie, follows the fortunes of the top 100 UK companies. The FTSE 250 does the same for the 250 next biggest companies after the Footsie. After that comes the FTSE 350 and so on.
Every stock market in the world has its own main index, like our FTSE 100, which is followed by investors. In particular, they all obsessively follow the American Dow Jones Industrial Average (DJIA), because the US stock market is the largest in the whole world, and its behaviour has an impact on other stock markets (see Dow Jones 500, Dow Jones Industrial Average, Footsie, Tracker Funds).
Index-Linked
Also known as indexation: any ‘index-linked’ investment, price, salary, etc, is linked to the rate of inflation. Just because an investment is ‘index-linked’ doesn’t mean that it is automatically worth buying, but at least you have the comfort of knowing that the returns you get will be linked to the Retail Price Index, which is the United Kingdom’s measure of inflation (see Inflation, National Savings Certificates, Retail Price Index).
Index-Linked Gilts
These are the main type of tradable index-linked investments. They are UK government bonds (see Gilts) that, as they pay you returns over the years, adjust for any inflation in the financial system. So if during the lifetime of a bond, inflation caused prices to double (hopefully an unlikely scenario), you’d get twice the value of the bond when the government was due to pay the loan off.
Individual Savings Account – ISA
Well, if you’ve got a degree in quantum physics, you may well be able to work out just how an ISA works. For the rest of us mere mortals, it’s a bit of a struggle. The government hasn’t exactly bent over backwards to make these really useful things user-friendly for us.
There are two types of ISA, a mini and a maxi. If you go for a mini (or minis), you CANNOT go for a maxi in the same year. The minis have to be one or both of £3000 in cash, or £4000 in ‘stocks and shares’. The maxi lets you put £7000 into shares only. Any of these ISAs can include insurance products.
The principle behind an ISA is that it acts like a container. Whatever you decide to pop into the ISA container, H M Revenue & Customs can’t get at. Hurray! So if, a few years down the track, you choose to sell or withdraw whatever was in it, you won’t have to pay tax on the proceeds, profits or income you received from it. To enjoy this tax break, your money has to stay in this container. The good news is that even if you change your mind about the nature of the investment, you can swap it within the ISA and still protect the tax-free element. Important to note is that cash investments can only be swapped for other cash investments and ‘stocks and shares’ investments can only be swapped for, yes you guessed it, ‘stocks and shares’ investments. You can’t swap ‘stocks and shares’ into cash.
Inflation
Sir Stafford Cripps, the Labour Chancellor in office just after World War II, put it very succinctly when he described inflation as ‘too much money chasing too few goods’. When the government prints lots of money to stop the economy from nose-diving into recession, this creates inflation. Prices and wages rise. The stock market booms and so does the property market. Why? Because, generally speaking, there are only a fixed number of shares and houses on offer. Lots of extra money in the financial system just pushes prices up further. There is much talk about the death of inflation, but when have you known prices to stay the same or to go down over a really long period of time? (See Deflation, Disinflation, Hyperinflation.)
Inside Information
Anyone who has access to this type of information has a better than even chance of actually making money on the stock market. This is the low-down, the really juicy info that will immediately affect the price of a share the minute it’s let out into the public domain. Of course the regulatory bods out there have put paid to the pleasure of ‘insiders’ (people with access to this privileged information) being able to use inside or ‘price-sensitive’ information to their advantage. In the good old days everybody did it and made money for themselves and their investors. Now that insider trading is illegal, huge swarms of compliance officers and regulatory bureaucrats zealously scour the City in search of the wrongdoer who might be making illicit gains (see Chinese Walls, Compliance, Financial Services Authority, Insider Dealing).
Insider Dealing
Lots of people in the City are privy to inside or ‘price-sensitive’ information. However, contrary to popular belief that they’re all at it like rabbits (insider dealing that is!) most people don’t actually take advantage of it. The simple reason is that it’s totally illegal to do so and it’s not worth jeopardizing lucrative career prospects for a paltry few thousand quid’s illicit profit. However, there are some chancers in life, and they just get a real thrill out of trying to get the better of the authorities, so I rather suspect it does go on. To prevent this nefarious activity, the trusty compliance officer (see Compliance) comes galloping along and tries to rescue potential wrongdoers from their own greed. He either gets to them before they use the inside information or institutes disciplinary proceedings after the dastardly act. In reality, the perpetrator is fired from his job, fined and barred from working in the City. He might even do a spot of porridge!
Institutional Investors
These are the big cheeses in the world of stock market investment, and the ones that all the City stockbroking firms suck up to the most. They control billions of pounds in the shape of pension funds’, life assurance companies’ or individuals’ money in collective funds such as unit trusts or investment trusts, which are managed by fund managers. The 500 shares you and I own in British Telecom are infinitesimally small in comparison to the shares, bonds and other assets, such as property, that these institutional investors invest in. They are without doubt the movers and shakers of international stock markets (see Collective Funds, Managed Funds, Investment Trust, Unit Trust).
Intangible Assets
Things belonging to a business that are invisible. You cannot touch, see or feel them, but they are worth money nonetheless. Obvious examples are things like patents. A business might own the exclusive patent to make a hideously complicated Soup-o-Miser. The patent is patently worth money, and is shown in a company’s balance sheet as an asset, albeit an intangible one. The main types of intangible asset are brand names, copyrights, trademarks and goodwill (see Goodwill, Tangible Assets).
Interest
There’s no such thing as a free lunch. (Hey, that’s a great title for a topic!) If you borrow money from someone, whether it’s a mortgage lender or a credit card company, they will be very interested to get their money back, with interest. You have to pay it to them for the privilege of temporarily getting your hands on their loot. Conversely, if you put money on deposit in a building society or buy National Savings Certificates (amongst other possibilities) they are so grateful to get their mitts on your cash that they confer on you the honour of paying you interest. Whichever way around, the principle is the same. There are a huge number of banks and building societies out there where you can deposit your cash. All offer a very wide range of returns or interest on your money.
A very good way to find out who is offering the most favourable rates is to consult the Moneyfacts website: www.moneyfacts.co.uk. Another good way to check rates is in the personal finance sections of the national newspapers, like Telegraph Money or Financial Mail on Sunday, for example (see AER – Annual Equivalent Rate, APR – Annual Percentage Rate, EAR – Equivalent Annual Rate).
Interest Cover
Companies frequently borrow money. Why? Oh, all the usual reasons. They want to expand their operations, make the business bigger, improve their day-to-day cash flow. When those industrious analysts wade through all the numbers in a company’s accounts, trying to suss what state its finances are in, they love to check out the interest cover. It’s a really easy mathematical calculation:
Profit Before Interest and Tax T _
-z—;-—=;-n-= Interest Cover
