A unit or investment trust, or other collective fund, which aims to pay a high dividend to its shareholders by investing in bonds or shares which themselves produce good income, either through high rates of interest or high dividend yields.

The focus of such a fund is resolutely on income and it does not seek capital appreciation. Of course, really high income can sometimes only come from accepting more risk in investments. Junk bonds, now referred to as high yield bonds, pay high levels of interest precisely because the companies that issue them have soft credit ratings.

People aged 65 to 74 are entitled to an additional personal tax allowance provided total earnings do not exceed a given amount. This allowance is further increased for people aged 75 and over.

Also a married man, living with his wife where either person is over the age of 65, is entitled to an additional married couple's allowance provided his total earnings do not exceed that same given amount. In cases where total earnings exceed this figure, these allowances are reduced by £1 for every £2 of income earned above this amount.

1. Shares bought in anticipation of an above average income being produced. Also referred to as high yield shares. All this really means is that the investor chooses shares in companies that have a history of paying consistently high dividends. There is no guarantee that the companies will continue to provide the same level of dividends in the future.
2. Those shares in a split capital investment trust which receive most or all of the trust's income. The other class of shares (capital shares) get the benefit of the trust's capital growth

In most countries income tax is progressive on successive slices of income, so that the more you earn the higher the incremental rates of tax you pay.

In the UK, everyone is allowed to make a certain amount of income before any tax is payable. Known as the 'personal allowance', the amount increases with age, and for the year 2006-2007 the figures are:

• Under 65: £5,035
• 65-74: £7,280
• 75 and over: £7,420

If your income in a tax year is below these thresholds, you are not liable for income tax. In some circumstances, where tax has been deducted at source, you will be able to reclaim tax already paid.

For earnings above your personal allowance, your income tax liability will go up in bands and vary according to whether the income is from employment, share dividends or interest. The lowest rate is 10% and the highest is 40%.

A person qualified to give financial advice to clients on life assurance, pensions, funds, and other financial products, who is not tied to any one financial institution.

A financial adviser may charge his clients a fee for his advice, and, depending on his contract with product providers, may also receive a commission on the products which the client buys.

In theory, an IFA's recommendations should be based on which company and products best suit the needs of the client, not on the level of commission he receives.

In contrast, a company representative or tied agent is a financial adviser who is authorised to recommend only the products of the company he represents, so his advice is partial.

Financial advisers have to make it clear to their clients whether they are independent or tied.

In the stock market, an index is a device that measures changes in the prices of a basket of shares, and represents the changes using a single figure. The purpose is to give investors an easy way to see the general direction of shares in the index.

The FTSE 100, for example, is calculated by taking a weighted average of the share prices of the largest 100 companies on the London Stock Exchange. Launched in 1984 with a base figure of 1,000, the FTSE is calculated continuously throughout the trading day. When the media report that 'FTSE climbed 37 points today' you don't know exactly which shares in the index climbed and which fell, but you get an immediate idea of the direction of the market.

Index funds base their investment decisions on tracking the companies in a particular index.

Call or put options on an index such as the Standard and Poor's 500 Index or the FTSE 100 Index.

Index options are exercisable into cash rather than the underlying shares in the index. This differentiates them from equity options which are exercisable into the shares to which the option relates.

In the USA, index options are traded on a number of exchanges including the New York and Chicago Board Options Exchanges. In the UK, index options are traded on the London International Financial Futures and Options Exchange. (LIFFE)

Indexation is an allowance which reduces the taxable gain on an investment by increasing its base cost. It does this by applying a percentage uplift to the acquisition cost which increases according to the length of time that you have held the investment. The amount of the uplift is pegged to inflation rates in the years which you have held the investment. The tax saving arises because the higher the adjusted base cost of the investment, the lower the chargeable gain will be when you dispose of it. The indexation allowance varies according to when you bought the asset:

1. Shares acquired before 31st March 1982
   The base cost can be taken either as their cost when acquired or their value on 31st March 1982. You can either:
   a) elect for all your holdings dating from before 31st March 1982 to beassessed on one or the other of these bases. You may already have donethis; if you have not but wish to, you must do it within 1 year of the 31st January after the end of the tax year in which you made the first sale ofany such shares you hold; or
   b) treat each such holding individually, choosing which basis to use as andwhen you make a sale.
   Then calculate your indexation by looking up the applicable percentagefigure in tables, and applying it to your base cost. That gives you a figureto add to the base cost and thus reduce your gain.
2. Shares acquired between 31 March 1982 and 5 April 1998
   Calculate your indexation by looking up the applicable percentage figure in tables, and applying it to your base cost. That gives you a figure to add to the base cost and thus reduce your gain.
3. Shares acquired after 5th April 1998
   There is no indexation allowance, but you may be able to get taper relief instead.

Example:

• In June 1990 you bought 1,000 Plastex plc shares in a transaction which cost £2,000 in total.
• You sold the shares in March 1998 for £5,000. Before indexation, your gain was £3,000.
• Looking at the indexation tables gives you a number 0.269.
• Multiply this by the base cost and you get an amount which can be added to base cost to decrease the amount of your gain.

On the basis of these figures, the Indexation Allowance would apply as follows:

• Base cost - June 1990 £2,000
• Indexation - June 1990 to March 1998 0.269
• Uplift in base cost 0.269 x 2,000 = £538
• Adjusted cost £2,538

The adjusted base cost would therefore be £2,538 rather than £2,000, which reduces your gain from £3,000 to £2,462.

There are four important points to note about indexation:

1. It can only reduce a gain. It cannot create a loss. So if you sold your shares for £2,200, you would not be able to use the 'loss' of £338. Indexation would just reduce your gain to zero.
2. It only applies to purchases made before 5th April 1998. For purchases after that date, you have to rely on taper relief.
3. Indexation can be used in combination with taper relief in certain circumstances.
4. Capital Gains Tax can be complex and if any doubt contact your tax adviser/accountant.

• People over the age of 18 living in the UK can invest a maximum of £7,200 per year in each tax year.
• Investment may be made in two components: equities and cash. There are strict limits on how much you can put in each component.
• Until 5th April 2004 ISAs benefited from a 10% tax credit on UK equities. Stock and share investments which can be held in an ISA include unit trusts, open ended investment companies (OEICs), investment trusts, ordinary shares, preference shares and fixed interest corporate bonds.
• PEPs in existence at 6th April 1999 may continue to be held outside an ISA with the same tax advantages. TESSAs in existence at 6th April 1999 are allowed to run their full five year term.
• Income from ISA investments is tax free and you don't have to report it on your tax return. Capital gains are also exempt from CGT.
• ISA plans are sold by stockbrokers, IFAs, fund managers, banks and other authorised financial institutions. You can buy a plan and take advice on what to put in it, or you can have a 'self-select' ISA and make your own decisions.

The increase of prices in an economy over a period of time, usually annualised for comparative purposes.

In the UK, the benchmark of inflation is the Retail Price Index (RPI). This is used to measure the cost of a 'basket of goods and services' representing the average household's purchases.

Inflation is a persistent threat to savers, partly because the erosive effect it has on savings is 'unseen'. In order to make 'real' gains on your investments, the first task is to make sure your returns beat the rate of inflation. Index-linked products, which pay an interest rate that keeps pace with inflation, are one solution.

A tax on gifts made by an individual in the seven years before death, and on the value of assets when he or she dies. The tax rate is 40 per cent, and it applies to any amount over £285,000 for deaths on or before 6th April 2007. The calculation of IHT works as follows

1. On death, add up the value of everything the deceased owned at the time of death, including home, investments, savings, and belongings.
2. Add life assurance payments to the total.
3. Deduct any debts, including outstanding mortgage amounts.
4. Deduct any bequests which are exempt from HIT (see list below).
5. Add any gifts made to third parties in the seven years prior to death which are not exempt from HIT.

If the figure produced is more than the current threshold (£285,000 for deaths on or before 6th April 2007), the amount of surplus is taxed at 40% This has to be paid by the deceased's estate, except for non-exempt gifts to third parties where the tax has to be paid by the recipient of the gift on a sliding scale.

Certain types of gift are exempt from HIT. The most important of these are (a) gifts between spouses either during life or on death, which are tax-free. So if you leave your entire estate to your husband or wife, no HIT is payable, and (b) gifts to charities.

Some gifts are tax-free on death. These include lump sums paid out by a pension scheme provided the trustees have discretion about who gets the money, and refunds of personal pension contributions paid directly to a third party or to a trust but not to the deceased's estate.

And then there are 'lifetime' gifts that are tax-free or potentially tax free:

• Small gifts of up to £250 to any number of people in any one tax year.
• Gifts on marriage to a bride or groom. Each parent can give £5,000, each grandparent and remote relative can give £2,500, and others can give £1,000.
• Regular gifts out of normal income which do not affect the donor's standard of living. This covers birthday presents etc.
• Up to £3,000 in other gifts in any one tax year. If this exemption is not used in one tax year, it can be carried forward to the next, but no further.
• Any gifts given to an individual more than seven years before the death of the donor.

It is the last type of gift that is 'potentially-exempt'. If the donor does not live for seven years after the date of the gift, tax will have to be paid. See 'potentially-exempt transfer'.

The first offering of a company's shares to the public known in the UK as a flotation. IPO was originally an American term but is increasingly being used across all world markets The shares offered may be existing ones held privately, or the company may issue new shares to offer to the public.

There can be lots of reasons why companies offer shares to the public:

• the directors want to raise new capital for the company
• the directors want to widen the shareholder base of the company
• the shareholders want to have a liquid market in which to trade their shares
• the directors want to be able to use 'paper' to make acquisitions
• the directors want the publicity that a public listing brings

In recent years there has been a tendency for companies to list on the market by a private placing of shares to institutions rather than public offerings. This is partly because the costs of a placing are far lower than an offer for sale, and partly it is because in 1996 the Stock Exchange scrapped its rule requiring that new issues worth more than £50m should offer a proportion to the public.

Whatever the reason, it rankles that members of the public are so often denied the chance to 'get in on the ground floor' while institutions clean up. The internet may reverse the trend, however. There have already been several online flotations in the USA and Europe in which private investors get full participation rights. These are sometimes referred to as EPOs (Electronic Public Offerings).

One of the advantages of buying shares in IPOs is that they do not attract Stamp Duty (0.5% tax normally paid on share purchases) and since you can buy direct from the issuing company you can avoid broker's commission.

Illegal share dealings by employees of a company where they have used confidential price-sensitive information for their own gain or the gain of their associates.

The inside dealer does not have to work for the company for his dealing to be an offence. So a stockbroker, or merchant banker, who knows about an impending takeover deal who buys shares in the target company with the intention of making a profit, is guilty. If he gets a friend to buy the shares, he is still guilty. In theory, the net is cast quite wide. In practice, insider dealing prosecutions are rare, and successful ones rarer still because the allegations are so hard to prove.

Note the difference between insider dealing (an offence) and directors dealings (not an offence).

Price-sensitive information about a company that has not yet been made public.

People who use the information either to make a profit for themselves or for someone else are committing a criminal offence (insider dealing).

The inside dealer does not have to work for the company for his dealing to be an offence. So a stockbroker, or merchant banker, who knows about an impending takeover deal who buys shares in the target company with the intention of making a profit, is guilty. If he gets a friend to buy the shares, he is still guilty. In theory, the net is cast quite wide. In practice, insider dealing prosecutions are rare, and successful ones rarer still because the allegations are so hard to prove.

Note the difference between insider dealing (an offence) and directors dealings (not an offence).

The charge you pay if you borrow money, and the income you receive if you lend it or invest it in an income-producing bank account or in a security like a bond or a gilt.

For example if you borrow £1,000 at an interest rate of 10% per year, the interest payable is £100 per year. Loans are sometimes made at fixed rates of interest, and sometimes at variable rates.

If you invest £1,000 at 10%, then you as lender expect to receive £100 interest. If instead of spending the interest, you reinvest it in the same security, then at the start of the second year you will have £1,100 invested and attracting 10%, so at the end of the second year you expect to receive £110 interest. This is the principle of compound interest, where you get rolling interest on your original capital and on the reinvested income.

Interest cover measures the amount of interest paid by a company on its borrowings against its operating profit in the same period.

The ratio shows the impact of gearing on a company's profit and loss account. If the figure is low, a small reduction in operating profits, or a rise in the cost of borrowing, can wipe out pre-tax profits. To calculate interest cover, divide the operating profits by the interest paid.

Example: a company which has profits of £4m and which pays net interest of £1m, has interest cover of 4.

Europe's leading energy futures and options exchange and the second largest in the world.

The IPE provides a highly regulated market place where industry participants can manage their exposure to highly volatile energy prices. Incorporated in 1980, the IPE lists three main energy contracts: Brent Crude futures and options, Gas Oil futures and options and Natural Gas futures. The IPE is a Member owned exchange and clients can access the market either by becoming a Member or by using the broking services available from Members. Trades are cleared by the London Clearing House (LCH) which guarantees contract performance. The IPE is a Recognised Investment Exchange (RIE) regulated by the Financial Services Authority (FSA).

• A call option/warrant has intrinsic value if the exercise price is below the share price, because it means that the holder of the option can buy shares in, e.g. Company X for 70p when they are trading at 82p. In such a situation it is said to be ' in the money' and has intrinsic value of 12p. If the share price is lower than the exercise price, the call option has no intrinsic value and the option is said to be out of the money.
• For put options and warrants, which give the holder a right to sell the shares, the situation is the other way round. The option has intrinsic value if the price of the underlying share is lower than the option price, because it means that the option holder can sell shares at 82p when they are trading at 70p (for example). Again, the intrinsic value would be 12p. Conversely, a put option is out of the money if the share price is higher than the option exercise price.

• For value investors, intrinsic value has a slightly different meaning. It is an estimate of the true worth of a company based on an analysis of its current and projected future earnings and how that relates to its share price.

1. The buying of shares in individual companies or units in collective funds (unit trusts, OEICs etc) in order to earn income and to make a capital profit.
2. The placing of money with banks and other financial institutions in order to earn interest.

In the UK, the Financial Services Act 1986 defines investments to include shares, debentures and other securities such as government securities, certain options and warrants, unit trusts and other forms of collective investment schemes, futures contracts and some long term life insurance contracts.

A credit rating given to a government or coporate bond which indicates that the agency giving the rating (Standard & Poor's, Moody's or Fitch) thinks the issuer has strong creditworthiness.

The grades used by two of the leading agencies are as follows:

Moody's Aaa / S&P AAA
The highest-quality, lowest-risk bonds

Moody's Aa / S&P AA
High-quality debt obligations with minimal repayment risk

Moody's A / S&P A
Quality bonds with a strong capacity to pay interest and principal which are somewhat susceptible to adverse economic conditions

Moody's Baa / S&P BBB
Quality bonds with a adequate capacity to pay interest and principal which are more vulnerable to adverse economic conditions bonds

Moody's Ba / S&P BB
Medium-grade bonds with few desirable characteristics

Moody's B / S&P B
Speculative bonds with a major degree of risk in adverse economic conditions

Moody's Caa / S&P CCC
Issuers in poor standing

Moody's Ca / S&P CC
Issuers may be in default

Moody's C / S&P C
Income bonds on which no interest is being paid

S&P D
Bonds in default

All those at Baa/BBB or above are adjudged 'investment grade'.

A company quoted on the London Stock Exchange which invests its shareholders' funds in the shares of other companies.

Points to note about investment trusts are:

1. They enable private investors with limited funds to get diversified share ownership and without incurring heavy dealing costs.
2. They enable investors to get exposure to markets that they may not be able to reach themselves (e.g. to emerging countries). Different trusts also have differing objectives (e.g. growth or income).
3. They enable investors who don't have the skill or inclination to invest directly in companies to get the advantage of professional fund management (although see point below 6)
4. It is easy for investors to drip-feed money into investment trusts over time by using a monthly savings plans.
5. Unlike unit trusts, investment trusts are closed end funds. That is, there is a fixed number of shares in circulation, and the price of those shares is determined like other quoted shares - by supply and demand. This means that IT shares often trade at a discount to their Net Asset value (i.e. the value of their underlying investments) and it also makes IT shares more volatile than unit trust prices.
6. ITs are actively managed funds which try to produce total returns better than the market average. However once management charges are taken into account, they often fail to meet this target. Hence the move by many investors to passive funds - trackers and index funds - which have lower charges.

1. The number of shares of a company on sale to the public at a given time.
2. A child mentioned in a will.