The jargon explained — a plain English investing glossary

Most people do not struggle with investing because the markets are complicated. They struggle because nobody explained the language. Pick up a financial news article and you might encounter a P/E ratio, a yield, a bear market and a spread all in the same paragraph, with no explanation of any of them. It is enough to make anyone put the whole thing off until next year.

This glossary cuts through that. These are the 30 terms that come up most often when you start investing, explained in plain English. You do not need to memorise all of them at once. Bookmark this page and come back to it whenever something stops you in your tracks.

A share is simply a slice of ownership in a company. If a company is divided into one million shares and you own one thousand of them, you own 0.1% of that business. Shareholders are entitled to a portion of any profits the company distributes, and they can make money if the share price rises. Equity is another word for the same thing — when people talk about equity investing, they mean investing in shares.

A dividend is a cash payment a company makes to its shareholders, usually out of its profits. Not all companies pay dividends; younger, faster-growing businesses often reinvest everything back into the company instead. Dividend yield expresses the annual dividend as a percentage of the share price. A share priced at £10 that pays £0.50 per year in dividends has a yield of 5%.

The stock market is not one single place. It is a collection of exchanges where shares are bought and sold. In the UK, the main one is the London Stock Exchange (LSE). Alongside the main market, the LSE also operates AIM, the Alternative Investment Market, which is designed for smaller, earlier-stage companies and has lighter regulatory requirements. When people say they invest in the stock market, they usually mean the main market of their home country’s exchange.

A bull market describes a sustained period of rising prices, typically defined as a rise of 20% or more from a recent low. A bear market is the opposite: a sustained fall of 20% or more from a recent peak. These terms get used loosely in everyday commentary, so treat them as general mood descriptors rather than precise signals.

Market capitalisation (usually shortened to market cap) is the total market value of a company’s shares. Multiply the share price by the number of shares in existence and you have the market cap. It tells you roughly how large the market thinks a company is. A blue chip company is an informal term for a large, well-established, financially stable business with a long track record, the kind that tends to anchor the FTSE 100.

The P/E ratio, or price-to-earnings ratio, is one of the most widely used tools for judging whether a share looks cheap or expensive. It divides the current share price by the company’s earnings per share. A P/E of 15 means you are paying £15 for every £1 of earnings. High-growth companies tend to have high P/Es because investors expect big future profits; more mature businesses tend to trade at lower ones. Earnings per share (EPS) is the company’s total profit divided by the number of shares in issue, which is the figure used in the P/E calculation.

When you place a trade, you will encounter the bid price and the ask (or offer) price. The bid is what a buyer will pay; the ask is what a seller wants. The gap between them is the spread, and it represents an invisible cost of trading. Liquid, heavily traded shares tend to have tight spreads; smaller or less popular shares can have wide ones that eat into your returns.

A market order instructs your broker to buy or sell immediately at whatever price is currently available. A limit order sets a price you are willing to accept and waits. You buy only if the price falls to your limit, or sell only if it rises to yours. Limit orders give you more control; market orders give you certainty of execution. Volume is the number of shares traded in a given period. High volume on a day when a share price moves sharply can signal genuine conviction behind the move. Low-volume moves are treated with more scepticism by experienced investors.

Volatility measures how much a share price moves around over time. A volatile share can swing sharply in either direction; a stable one moves more slowly. Higher volatility generally implies higher risk, but also potentially higher reward. Diversification is the practice of spreading your investments across different companies, sectors or asset classes so that no single bad outcome can devastate your portfolio. Correlation describes how two assets tend to move relative to each other. Assets that move in the same direction at the same time are positively correlated, which limits the benefit of holding both for diversification purposes.

Total return is the full measure of what an investment has made you: price gains plus any dividends received. It is a more honest measure than simply tracking the share price. A capital gain is the profit made when you sell an asset for more than you paid for it. In the UK, capital gains above the annual exempt amount may be subject to Capital Gains Tax.

Revenue (sometimes called turnover) is all the money a business brings in from its operations before any costs are deducted. Profit, or earnings, is what is left after costs are taken out. A business can have rising revenue and still be losing money, which is why looking at profit matters. Cash flow takes this a step further: it measures the actual cash moving in and out of the business. A company can be profitable on paper but still run into trouble if its cash flow is poor.

The balance sheet is a snapshot of what a company owns (its assets) and what it owes (its liabilities) at a given point in time. The difference between the two is shareholders’ equity, the theoretical book value of the business. Analysts use the balance sheet to assess financial strength and to spot red flags like excessive debt.

Index funds and tracker funds are the same thing: investment funds that aim to replicate the performance of a market index, such as the FTSE 100 or the S&P 500, by holding all or most of the shares in it. They charge much lower fees than actively managed funds. An ETF (exchange-traded fund) is a type of fund that trades on a stock exchange just like a share, meaning you can buy and sell it throughout the trading day. Many ETFs are index trackers, though not all.

An ISA (Individual Savings Account) is a UK tax wrapper that lets you hold investments free of income tax and Capital Gains Tax, up to £20,000 per year. A SIPP (Self-Invested Personal Pension) is a pension you manage yourself, with the same tax advantages as a workplace pension and the added benefit of tax relief on contributions at your marginal rate. Both are structures rather than investments in themselves. What you put inside them is up to you.

Short selling is an advanced strategy where an investor borrows shares, sells them in the hope the price falls, then buys them back cheaper to return to the lender, pocketing the difference. It is not something most beginners need to worry about, but you will see references to it in market commentary, particularly around heavily shorted stocks. A benchmark is the standard against which a fund or portfolio is measured. If a fund claims to beat the market, it means it has produced better returns than its benchmark index over a given period. It is useful for judging whether an active fund manager is actually earning their fees.

That covers the core vocabulary. You will still encounter terms you have not seen before. The financial world has an apparently inexhaustible supply of them. But these thirty will carry you through the vast majority of what you read, hear, and need to understand as you build your investing knowledge.

TL;DR — the short version

• A share is a slice of ownership in a company; a dividend is the cash payment shareholders receive from profits.
• The P/E ratio divides the share price by earnings per share and is a simple starting point for judging whether a stock looks cheap or expensive.
• The bid-ask spread is an invisible cost of trading; wider spreads matter more in smaller, less liquid shares.
• Diversification spreads your risk across multiple investments; volatility measures how sharply a share price moves around.
• Index funds and ETFs are low-cost ways to invest in a basket of shares without having to pick individual companies.
• An ISA shelters your investments from tax; a SIPP does the same for pension savings with the added benefit of tax relief on contributions.

Nothing in this article is financial advice. Tax rules change frequently. Check the current ISA allowance, CGT exemption and relevant rules on HMRC’s website or consult a qualified financial adviser for your specific situation.

Money & Markets is a guide to personal finance and investing for people who want to understand the world they live in, updated as rules and markets change.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.