In recent discussions with some of our clients, we are reminded there is a lot of financial jargon and unnecessary complication when it comes to finance, investments, and money. We think that some banks and financial institutions use jargon, acronyms and technical terms to make things seem complicated and difficult, and to make themselves look clever. We wrote about jargon busting a year ago and its time for an update.
We believe transparency and clarity is better and that expats in Europe should have access to plain language, clear explanations when it comes to finance. Therefore, we have updated our list of key terms that you may hear when exploring banking, finance, and investing to help you to better understand your options and your position. This list is far from exhaustive; we have focused on the commonly used, sometimes misused, and frequently misunderstood terms.
If there is something you hear that you don’t understand or would like clarity on, contact us at [email protected] and ask for jargon busting.
Stocks/shares/equities/actions – All different ways of saying a small portion of a big company that you can buy or sell. If you invest in this asset class, you are most often holding ‘shares’, that is a share or a portion, of a company. A public company is one that has its shares on a stock exchange, where the shares are traded. You may also hold shares in a private company. This is where the company is not publicly traded -also called listed- on a stock exchange. A share is a piece of ownership.
Bonds/debt instruments/fixed interest – Different ways of saying that you are lending money in return for pre-agreed returns. A government bond is where you lend money to the government and they promise to pay you a set interest rate of return every month or year, and at the end of the set period of time, you will receive your initial investment back.
Funds/collectives – Companies made up of a selection of investment assets. You can buy and sell shares of these companies at a price often called a unit price. There are many types of funds, with different combinations of assets within them, including shares, bonds and other asset types.
ETFs – ‘Exchange Traded Funds’ hold a range of assets like a fund, but are traded on a stock exchange like a share. There are specific ETFs for different parts of the financial markets.
Index funds – also called index trackers. These are set up to follow the performance of a particular stock market index or sector without active decision-making.
Liquidity – Access to immediate cash. If your investment in liquid, it means you can have access to your cash that is in your investment, in a timely manner, and without exit restrictions or penalties.
Volatility – this is the likelihood of a price going up and down in a period of time. An asset that has a price that fluctuates more than another asset is considered more volatile. Cash in the bank is less volatile than shares on a stock market.
Asset – Anything you own with a positive financial value and can be considered something that you own or have a right over, that has value to you. Examples are shares, property, art, and cash in the bank.
Liability – Anything you own, with a negative financial value, and anything you owe. This includes loans, credit cards, mortgages.
DTA/DTT – Double Taxation Agreement/Treaty – A formal agreement between two countries stating how taxes will be applied to expats, internationals and people with assets or income in both countries.
AMC – Annual Management Charge – The fees each year for a financial product or service.
TER – Total Expense Ratio – The overall cost of an investment relative to its total assets.
FATCA – ‘Foreign Accounts Tax Compliance Act’ – The agreement by countries and companies around the world that they will pass the details of US-connected clients to the United States tax authorities.
FBAR – Foreign Bank Account Reporting – The requirement for US-taxpayers to report any overseas account with a value of $10,000 or more.
PFIC – Passive Foreign Investment Company – Any fund or managed portfolio that is based outside the US and has not reported all data to the IRS (US tax authority) since its first year of trading. These are aggressively taxed in the USA.
QEF – Qualified Election Fund – A PFIC that has volunteered all data to the IRS since year one of trading. These are not so aggressively taxed.
DB/DC pension – ‘Defined Benefit’ (your statement says how much you will receive for each year of work) or ‘Defined Contribution’ (your statement says how much you have put in, investment performance defines how much you will get out).
SIPP – Self-Invested Personal Pension – This is just what it sounds like. A UK pension under your own control based on money you have personally added. Some DB/DC pensions can be transferred into these.
QROPS – Qualified Recognised Overseas Pension Scheme – This is a lot like a SIPP, but based in an EU country, rather than the UK. Some DB/DC or SIPP pensions can be transferred into these.
DRA/ARD – Deferred Retirement Annuity – A tax-efficient option of drawing pension benefits in many EU countries.
ESTD/EUSD – European Savings Tax Directive – Law that enforces sharing of data about accounts held by European residents/citizens and withholding tax on some savings assets.
CRS – Common Reporting Standard – A bit like a European FATCA. Enforces sharing of account information for EU citizens.
And finally, we are often told that the difference between citizenship and residency for tax and investment purposes can be confusing, so here’s a quick breakdown for you:
Residency = Where you live.
(Primary) Residency for tax purposes = Your financial centre of life. The country that has the first (and usually biggest) claim for your regular taxes on income, investments, inheritance etc.
Tax residency = Any country where you have a tax liability.
Citizenship = The country that provides your passport.
You can be a tax resident or citizen of more than one place, particularly if you work cross-border and earn or save money in more than one place. If your country of citizenship charges tax worldwide (eg. The USA) then this does not necessarily count as tax residency while you are living and working somewhere else in the world, but must always be considered in financial plans.
Contact us if there are any other terms you would like us to clarify.