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Friday, 2 September 2011

Understanding the jargon....


ATM Posh word for cash machine or hole-in-the-wall.
Libor Very en vogue thanks to the credit crunch, it's the rate at which banks all lend to each other for commercial activities such as mortgage lending. When Libor rises, the cost is felt by everybody.
BACS The electronic payments system
Individual voluntary arrangement (IVA) Better than bankruptcy, it's a five-year debt repayment programme organised between you, your creditors and a middleman. You can wipe out up to 40% of your debts - but your credit record will suffer.
CCJ A county court judgment is a stigma that invites costly credit and higher fees. Sticks to you for six years. Ouch.


Additional voluntary contributions (AVC) A pension top-up offered to staff lucky enough to be members of occupational schemes. Largely dying off, along with the gold-plated final salary pension.
Sipp The self-invested personal pension offers bells and whistles such as a huge choice of investment options. Not for the faint-hearted.


No claims discount (NCD) Money off for good behaviour. Car insurers offer discounts of up to 55% off your monthly payments. You can now even build in protection for your NCDs into the premium - at extra cost. Go figure.


Isa The individual savings account offering an annual tax-free allowance of £7,200 to divvy up between the stock markets and cash. Isas have superseded Tessas and Peps.
AER The annual equivalent rate of interest on your account that shows what you'd get by year-end if you left your cash alone and let any interest, added during the year, be compounded. Crucially, it removes the effect of bonus offers that make the account appear very juicy but then disappear after a few months. Banks like it because it reflects the very best rate of return you could get.
Gross What your money will earn, pre-tax, in the bank or building society.


Loan-to-value (LTV) The value of your house relative to how much you're borrowing against it; the lower the better, since you end up paying more for riskier loans.
Higher lending charge This is insurance you have to pay to protect your lender in the event that you default and it has to sell your home for less than the mortgage. Avoid like the plague if you can.
ASU Accident, sickness and unemployment cover that pays out for up to 12 months if you can't work. Buy it cheaply as a standalone policy from a broker, not from your lender.
Early repayment charge A hefty fee for bailing out on your mortgage that stops mortgage tarts switching to the best deal every few months.
Mortgage exit administration fee (MEAF) Just when you think you've got shot of the mortgage, there's a sting in the tail: lenders often charge this controversial fee of up to £475 for closing down your mortgage account.

Investments and the stock market

Guaranteed growth A fund that promises a cast-iron return - but only on part of your capital. It tries its best to maximise returns on the rest but can end up losing you money.
Collateralised Debt Obligation (CDO) A toxic traded security backed by a mishmash of other assets, usually bonds, loans and derivatives. These played a big part in the credit crunch as financial institutions bought and sold CDOs without knowing what was really bundled up inside them.
EBITDA Lets you compare, over time, a company's profitability before the distorting effects of depreciation, amortisation (fall in value of intangible assets such as a brand name), interest and tax.
Earning per share: A measure of how much profit a company is making for its shareholders. Changes in EPS are tracked by analysts to assess performance of companies. If EPS is on the rise, you're on to a winner.
Initial Public Offering (IPO): Fancy technical name for floating a company on the stock exchange.
FTSE The most widely quoted indices for tracking the London stock markets. It's part sponsorship by the Financial Times newspaper, hence the name.
The FTSE-100 The big one in London. It contains the 100 most highly capitalised blue-chip companies.
Open-ended investment company (Oeic) Yes, it's pronounced "oik", but comparisons end there. Oeics are simply investment funds whose eponymous open-ended status means that investors buy and sell portions of the fund which grow or shrink, though it has a single price which is linked to the value of its underlying investments.
Endowment Nothing to do with the masculinity of City traders, this is a form of mortgage which was tainted by scandal as they were too often mis-sold by commission-hungry mortgage advisers from the 1970s on. And they're still controversial: it's essentially a savings vehicle, investment policy and life cover all wrapped into one.
Price/Earnings (p/e) ratio
A mathematical-sounding term that expresses how cheap - or expensive - a company's share price is. The p/e ratio is calculated by dividing the earnings per share figure (see above) into the share's market price. For example, if a company has earnings per share of 35p and the market price is 500p, the p/e ratio is 14.3 (500 divided by 35). The higher the PE ratio, the higher the expectations for profit and dividend growth from the City.


FSA The overarching Financial Services Authority regulates the City and all its players, while keeping mortgage lenders and insurers in check too.
Financial Services Compensation Scheme (FSCS) This bails out investors if a company goes under, but it has strict limits on what the investor gets back.


Annual percentage rate (APR) The overall cost of borrowing for comparison purposes, including interest and other fees.
Equivalent Annualised Return (EAR) This is the figure quoted when you're borrowing money for an overdraft. Watch out for the sting in the tail: it doesn't include fees you'll pay - just how much your borrowing will cost if you remain overdrawn for a year.