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Tuesday 12 February 2008

Accumulation Unit

This is a type of unit in a unit trust where the income is reinvested automatically, thereby increasing the unit price. With income units, the income is given to the unitholders.

Active Management

An active fund manager tries to outperform stock market indices by skilfully selecting winning stocks, as opposed to the passive manager, who just buys everything (or a representative portion of an index), and then goes off for an early lunch. Active managers charge more for their supposed skills, although in reality more than two thirds of them actually underperform the index on a regular basis. Hence the popularity of passively-managed index funds.

Additional Voluntary Contributions (AVCs)

AVCs are top-up payments people make into their pension schemes to boost their eventual retirement income. If your employer does not contribute much into your company pension you may have to make AVCs to achieve anywhere near your hoped-for level of pension income.

There are two types of AVC. You can either make extra payments into your company scheme or decide to contribute to another scheme managed by someone else. This latter AVC is called a Free-Standing AVC (FSAVC). There are pros and cons with both types of scheme. AVCs tend to be cheaper to make because administration costs are lower - you're already in the pension scheme after all. But it is a case of putting all your eggs in one basket and hoping that the pension managers are good. An FSAVC may be slightly more expensive but at least you give another company a chance to make your money grow.

Whichever type of AVC you choose, the total contributions must not exceed 15 per cent of your earnings in any tax year. You get tax relief on AVCs at your basic rate, as with other pension contributions. For example, for every £60 a 40% taxpayer contributes, £100 will actually go into the scheme, making it a very tax-efficient way to save for the future. The only drawback is that the money you commit to your pension scheme is tied up until you retire, so don't leave yourself short in your zeal to make the most of the tax breaks!

Advisory stockbroker

A broker who will give you personalised advice on what shares or other investments to buy. You don't have to follow the advice, but bear in mind that you'll be paying for it in the annual management charge (see below) whether or not you do. If you're a confident investor you shouldn't need to pay extra for advice you don't need. Novice investors may appreciate a little bit of handholding at first. Unfortunately, there's nothing to guarantee the advice you get will be any good.

Annual management charge

This is a charge you pay to a company for managing your investments, whether it is a fund manager, stockbroker or financial adviser. Annual charges can vary from 0.5 per cent to around 1.5 per cent, according to the type of investment and the degree of advice you're getting.

Alternative Investment Market (Aim)

Aim is like the London Stock Exchange's nursery for small, fast-growing companies that want access to investment capital without the cost and regulatory burden of a full listing on the main market (The Official List). They often use it as a stepping stone. Although Aim is regulated, its stocks can be risky because the companies don't usually have long track records and there aren't always buyers for your shares if you want to bail out (an effect known as illiquidity). But there are big potential rewards investing in small companies if you are prepared to take the risk. After all, even Microsoft started off small.

Amortization

This has nothing to do with dead people. Amortization is accountant-speak for the gradual writing-off in value of an asset over time.

Annual General Meeting (AGM)

This is the annual opportunity for private investors to throw buns at the bosses while they trot out their lame excuses for poor performance. All companies - except the tiddlers - have to have an AGM. Although private shareholders have the right to vote in elections for new directors, for example, they don't really have much influence. It is the big pension funds and other financial institutions that hold the power because they own most of the shares. But lots of people still turn up, if only to hurl abuse and partake of any freebies on offer.

Annual Percentage Rate (APR)

One of the most misunderstood and misused terms in personal finance. It is supposedly an interest rate figure that indicates the total cost of borrowing, including any charges. It is mostly used for credit cards, personal loans and mortgages. The idea was that it would help us compare products on a like for like basis. In effect, headline APR rates are seldom the ones you end up paying, because the rates change according to the size and time-period of the loan. So it's always important to look behind the advertised figures and find out the rate that you would pay for the type of loan you want. Also bear in mind that low early-year APRs on discount mortgages will revert to standard variable rates after the discount period has ended, making the overall APR much higher for the life of the loan.