Key terms
Investing words, explained simply.
The terms that come up again and again in markets and in the Knightsman Letter. Each guide covers what it means, an everyday example and why it matters.
Interest rateThe cost of borrowing money. Central banks such as the Bank of England and the Federal Reserve set a policy rate that influences mortgages, savings and company borrowing.Read the guide →InflationThe pace at which prices rise. If inflation is 3%, something costing £100 today costs about £103 in a year, so cash loses buying power.Read the guide →Bond yieldThe annual return a bond pays relative to its price. When bond prices fall, yields rise, and the other way round.Read the guide →EquityAnother word for shares: part-ownership of a company. Shareholders benefit if the company grows but can lose money if it struggles.Read the guide →DiversificationSpreading money across different investments so one bad outcome does not sink the whole portfolio. It reduces risk but cannot remove it.Read the guide →VolatilityHow sharply and how often an investment’s price moves. Higher volatility means bigger swings in both directions.Read the guide →CompoundingEarning returns on previous returns. Over long periods, compounding is why starting early can matter more than starting big.Read the guide →RecessionA significant, broad fall in economic activity, often defined as two consecutive quarters of shrinking GDP.Read the guide →LiquidityHow quickly something can be bought or sold without moving its price. Cash is highly liquid; property is not.Read the guide →Risk premiumThe extra return investors demand for holding something riskier than a safe asset such as a government bond.Read the guide →Quantitative easingWhen a central bank buys bonds to push down long-term interest rates and support the economy.Read the guide →ISAAn Individual Savings Account: a UK tax wrapper where interest, dividends and gains are free from UK tax, up to an annual allowance.Read the guide →
Education only, not financial advice.