Throughout our lives, we will all have specific milestones that we need to fund, whether school fees, paying off a mortgage or even buying a second property.

These create future “calls on capital” as they will require sufficient liquid funds to be available to meet them. Part of successful planning is to identify and value these milestones so that an investment portfolio can be correctly allocated, between stocks, bonds and cash, to meet them as they arise without sacrificing long-term growth in the process.

A contract that gives the person who buys it (the “holder”) the right, but not the obligation, to buy an asset (perhaps 1,000 shares) at a fixed price (“the strike”) on or before a specified date.

The further the price of the asset is above the strike price at the point the option is exercised, the higher the potential profit for the holder. However in return for granting the option the seller (the “writer”) will demand a non-refundable sum (“the premium”) which is paid whether the option is used (“exercised”) or not.

With a put option it is the strike price minus any premium paid.

So for example if a call option has a strike price of £2.50 and you have paid a premium of 20p per share with transaction costs of 5p per share the underlying share price will need to hit £2.75 (£2.50 + 20p + 5p) before you breakeven by exercising the option.

Regulated firms such as banks are required to hold a minimum amount of capital as a rainy day fund in the hope that it stops them going bust too easily.

Regulators set the level of this minimum capital and impose various “capital adequacy” tests that firms have to pass. A typical test might involve comparing the value of a firm’s “own funds” to its risk-weighted assets to ensure it is adequately cushioned should its asset base suddenly become threatened by third party defaults.

This is the tax charged when a UK individual makes a chargeable disposal, via a sale or gift, of a chargeable asset (certain assets such as your main home are exempt).

The tax is charged on any gain that arises between purchase and sale at a rate that varies according to that individual’s income tax bracket.

This is where an investor borrows in a currency where the interest rate is low and reinvests the proceeds in a currency where a higher rate of interest is available.

The difference between the interest being paid and earned is taken as a profit. The trade works as long as the currency of the loan doesn’t suddenly appreciate, which in effect boosts the outstanding amount owed.

Cash flow is the difference between the amount a firm receives in cash in a given period and the amount it spends in cash over the same period.

It can be measured in a number of ways. Free cash flow for example is a firm’s operating cash flow after certain non-discretionary cash flows, such as bank interest, tax and the amount needed to maintain fixed assets, have been deducted. Cash flow is different to profit in that it is based only on cash received and paid during a specified period rather than revenue earned or expenses incurred.

A financial statement that summarises the amount of cash that a business has generated less the amount spent over a twelve month period.

The statement generally breaks cash flows down into three broad categories – operating cash flows, financing cash flows and investing cash flows.

This phrase covers transfers of value (gifts typically) that are immediately chargeable to inheritance tax unless they qualify as an exempt transfer or a potentially exempt transfer.

Typical examples include gifts to children and to certain types of trust, including discretionary trusts.

Some investors believe that the best way to spot where shares will head next is to look for repeating patterns based on their recent share price history.

This approach is based on the idea that history tends to repeat itself meaning that you can predict how investors, and therefore share prices, will behave. Chartists give names to these repeating patterns (for example “head and shoulders”).

A Child Trust Fund is a long-term tax-free savings account for a child if they were born between 1 September 2002 and 2 January 2011 and were living in the UK.

They have now been replaced by Junior ISAs (see JISA) for new applicants. Under the new JISA rules you can invest up to £4,128 a year and that money will then attract no income or capital gains tax subsequently. However money transferred to a JISA cannot be withdrawn until the child reaches 18 and then it all belongs to the child.

Once a buyer and seller have agreed a deal, clearing is the process that ensures neither of them defaults while they are organising settlement of the trade – the point where cash moves from the buyer to the seller and the relevant securities move in the other direction.

Clearing houses take responsibility for ensuring that multiple trades in shares, bonds and derivatives can be settled on time. To encourage both parties to a trade to hit the settlement deadline, a clearing house will take a form of safety deposit from each party. This is known as margin.

See investment trust. A closed ended fund is one that cannot issue further securities to investors to meet demand (in that sense it is not “open ended”) and does not buy them directly back when investor wish to sell.

Instead a fixed number of shares are traded between investors on a public exchange.

This term describes an investment vehicle that pools the funds of many investors together and invests them collectively via a fund manager.

Unit trusts, investment trusts and exchange traded funds are all examples of collective investment schemes.

Compound interest is the ability to earn interest on interest.

So for example if you invest £1,000 at 10%, after one year you will have £1,100 (£1,000 x 1.1). After two years you will have £1,210 (£1,100 x 1.1). If you stay invested like this for ten years you will have £2,593, or nearly 2.6 times your original investment. The longer you invest for and the more risk you take the better your chances of a high return from compounding. However it is also effective even at relatively low interest rates especially if you can shelter any gains you make from tax using an ISA or a SIPP.

This is a standard measure of inflation that has been adopted across Europe.

The US inflation measure goes by the same name. It measures the change in prices of a standard basket of goods consumed by a typical family over a month. It matters because many payments made to savers and pensioners may be linked to it (or another inflation measure known as the retail price index) and central banks often base their interest rate decisions, in part, on the level of this index. The CPI measure the cost of regular items of expenditure such as food, utilities and petrol but does not include property related costs such as mortgage interest and council tax.

This is a derivative contract that enables an investor to bet on the price of an asset rising or falling without having to own the underlying asset.

As the name suggests any payment made from one party to another is simply based on the difference in price of the asset when the contract is opened compared to when it is closed. These are also known as CFDs and, unlike spread bets, any gains are taxable.

This is someone who believes that the market sometimes misprices shares and leave opportunities for anyone prepared to not follow the herd.

They look for shares that are overlooked by mainstream analysts and therefore cheap or have been pushed too high and are therefore expensive. They then do the opposite of most investors and buy unpopular stocks and dump very popular ones. It’s a potentially profitable approach for anyone with the time and the talent to attempt to “beat the market” but it can also be risky – contrarians have, for example, been calling an end to London’s property boom for the last fifteen years and missed out on some big gains in the meantime.

Some bonds are issued in convertible form which means they can be swapped for shares of the same company at a future date.

The holder of a convertible bond therefore has conversion rights. These may not be exercisable until a future date, or perhaps a series of future dates. Also the conversion will be done at a predetermined conversion ratio whereby a certain nominal value of a particular bond can be swapped for a specified number of shares at a set conversion price.

A bond that may be converted into the shares of a firm at a predetermined date, or series of dates, in the future.

These are often issued by companies looking to pay a lower rate of interest on their debt by offering conversion rights later. The holder of the bond can expect a windfall should the firm’s shares trade higher than the fixed conversion price on the date of conversion.

This is the extent to which the change in the price of two assets can be said to be related.

A high degree of correlation means that a movement in one asset, say the Dow Jones, is matched by a movement in the other, say the FTSE 100. This can be measured using “correlation coefficients”. Assets or prices that tend to move in the same direction have positive correlation, those that move in opposite directions have negative correlation.

Most firms are financed by a mixture of debt, say from banks and bondholders, and equity from shareholders.

These come at different costs. A firm’s average cost of capital will lie somewhere between those two costs and represents the cost of deploying a pound in the business. Let’s say a firm’s debt costs 4% a year and its equity 8% and it is financed using £100m of each. Its weighted average cost of capital is around 6% ((4%+8%)/2). The higher this is the bigger the return on capital the firm must earn to justify staying in business. If this firm earns say 12% on its capital employed then all is well but if it can consistently only earn say 2% then it is a wealth destroyer.

This court makes decisions on behalf of people who are unable to on their own and who have not granted power of attorney to someone who can act on their behalf.

This is one way that a fund manager can try to enhance the income in a fund.

It works by them writing call options (the right to buy) on the shares that they hold within a portfolio. The logic is that the premium income generated boosts the overall income of the fund if the option is not exercised. The downside is that the underlying shares may have to be delivered to the holder of the call option if it is. As such, covered calls are viewed as somewhat bearish as the normal expectation is that they will not be used once written.

This is a contract that allows someone like a fund manager to in effect insure an asset – say a bond – against default.

This may be preferable to selling the bond if it is illiquid and/or difficult to replace later and/or may trigger a tax liability on sale. The fund manager pays a premium to a bank which is non-refundable provided there is no “credit event” that affects the recoverability of the bond’s cash flows. If such an event takes place the bank is obliged to compensate the fund manager (the CDS buyer).

Credit rating agencies, such as Standard & Poor’s, Moody’s and Fitch assign ratings to bonds to reflect the risk that the issuer will be unable to meet its debt obligations.

Essentially, the ratings fall within two broad categories; investment grade and non-investment grade (also called sub-investment grade). For example, bonds with a Standard and Poor’s rating of ‘BBB-‘ or above are considered “investment grade” and issues with ratings lower than ‘BBB-‘ are called “sub-investment grade”. An issue rated ‘AAA’ is regarded as having the lowest default risk.

One way to measure risk with a fixed income security is to look at the gap between the yield to maturity offered by a corporate fixed income security and that offered by a government security with a similar maturity – gilts in the UK and Treasuries in the US.

For example if a corporate bond has a yield of 4.5% and the ten-year gilt yield is 2%, the spread is 2.5% (4.5%-2%) or 250 basis points (one basis point is 0.01%). The bigger this gap, or spread, the higher the market perception regarding the riskiness of the underlying security.

Crest is the settlement system, owned by Euroclear that is responsible for the legal transfer of securities from a seller to a buyer.

Brokers are members of CREST but a client can also apply to become one separately. This means that they can legally hold shares in their own name rather than that of their broker.

This can be summarised as the safeguarding of a client’s assets.

Shares, for example, are registered securities, just like property, so it is important that the right legal owner ends up on the right register at the right time. With shares this can all be done electronically however with bearer securities, such as Eurobonds, the custodian may handle physical safekeeping too. Aside from safekeeping securities a custodian may also offer other services such as settlement (ensuring the right number of securities is legally registered in the relevant account at the right time), tax support, foreign exchange management and dividend and/or interest receipts and payments. Finally a custodian will typically manage corporate actions (share buybacks or splits) on behalf of its clients.

These are stocks that tend to be strongly affected by the business cycle.

So when consumers are feeling confidant they use a lot more of this type of firm’s goods or services which pushes up profits and the share price. However in bad times the same consumers will rein in spending quickly which in turn hits profits and dents the share price. Examples of cyclical firms therefore include banks (lending is often based heavily on confidence) and house builders (who only tend to build when forward orders look strong).

A standard P/E ratio compares the current share price of a firm to one year’s earnings.

Critics argue that this makes the ratio too sensitive to the changes in a firm’s profits that can occur at different points in a ten-year business cycle. So a CAPE compares the current share price to a profit figure that is an average of the last ten years. Fans argue that this smooths out earnings volatility and makes the resulting P/E ratio more reliable. This measure is also known as the Shiller P/E after the Nobel Prize winning Yale Professor Robert Shiller, who invented it.