Glossary to investment decisions

Investing your money may involve some unfamiliar words and phrases. Here's a quick guide to some of the most common ones.

Annual Equivalent Rate (AER)

This is the rate that is generally quoted as interest paid on savings and investments so that you can compare accounts. It is used to demonstrate what your interest return would be if the interest was compounded (adding interest on to the balance then paying interest on the new higher balance) and paid annually instead of monthly (or any other period).

Assets

Things that have earning power or some other value to their owner.

Base Rate

The interest rate set by the Bank of England from which all other interest rates are calculated.

Bear Market

In a bear market, prices are falling and investors, anticipating losses, tend to sell. This can create a self-sustaining downward spiral.

Bull Market

A bull market is one in which prices are generally rising and investor confidence is high.

Capital

The amount of money you borrow.

Correction

A short-term drop in stock market prices. The term comes from the notion that, when this happens, overpriced stocks are returning back to their "correct" values.

Credit Crunch

The situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had. This in turn resulted in more expensive loans and mortgages for ordinary people.

Current Assets

These are the things that can easily be turned into cash and are expected to be sold or used up in the near future.

Direct Debit

This is an instruction from you to your bank or building society allowing someone to take money from your account. The amount of money taken can vary, but you must be told the amounts and dates beforehand. You can utilise direct debits to pay bills automatically from your account on a regular basis.

Equity

In a business, equity is how much all of the shares put together are worth.  Shares are often referred to as equity.

Fixed Rate

A rate of interest guaranteed not to change over a fixed period of time.

Gross

The way interest is paid before any deductions e.g. tax/fees.

Inflation

The upward price movement of goods and services.

Interest Rate

The percentage rate that is paid on every £1 saved or borrowed with the bank.

Net

The amount of interest paid after deduction of income tax (or other fees).

Recession

A period of negative economic growth.  In most parts of the world a recession is technically defined as two consecutive quarters of negative economic growth - when real output falls. In the United States, a larger number of factors are taken into account, like job creation and manufacturing activity. However, this means that a US recession can usually only be defined when it is already over.

Standing Order

A standing order can be set up if you want to transfer a specific sum on a regular basis to another account. This can be used to make regular savings from a current account to a savings account.

Toxic Debts

Debts that are very unlikely to be recovered from borrowers. Most lenders expect that some customers cannot repay; toxic debt describes a whole package of loans where it is now unlikely that it will be repaid.