Commonly used words and phrases in connection with investing can often seem confusing, but the good news is that we are well-versed in providing plain-English explanations of technical terms.
You will probably have heard this term quite a lot recently. Volatility refers to the rate at which the price of an investment moves up and down. If the price moves up and down rapidly over a short period, it is described as having high volatility. If the price remains relatively stable, it is said to be a low volatility stock. Needless to say, investors generally prefer lower volatility.
This is the process of deciding what proportion of your investment portfolio should be invested in different types of investment.
There are four main categories of assets – cash, equities, bonds and property. Determining which mix of assets you should hold in your portfolio will depend on personal factors including your investment time horizon and your attitude to risk. Asset allocation helps to spread risk through diversification, which in simple terms, means not putting all your eggs in one basket.
An index, and there are several, is a combined measure of fluctuating market prices of shares in a selection of companies that have similar characteristics, such as size. Some indices are designed to reflect the overall performance of a particular market, while others follow a specific sector.
So, for example, the FTSE 100 is made up of the UK’s 100 largest quoted companies, the FTSE 250 includes the next largest 250 companies, and the FTSE Small Cap includes companies smaller than that. In the US, the Dow Jones Industrial Average consists of 30 large American companies across various sectors.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.