Impacting investing is an investing style with a double aim: to receive a financial return and generate a positive social or environmental impact.
This philosophy inhabits the middle ground between philanthropy (on the impact-only end of the scale) and traditional investing (at the profit-only end of the scale).
Measuring both financial returns and social or environmental impact is an important part of any impact investing endeavour. Examples of this type of investing include Socially Responsible Investing (SRI) or green investing, which is focused on reducing the environmental harm of commercial activities.
Income is money or another valuable item received by a person or entity from investments or from providing goods or services. Personal income usually refers to the money a person earns in the form of a salary or wages, but it can also include interest payments, social security, retirement payments, and other items. For businesses, income (or net income) is the total amount of money taken in by the firm minus its expenses and tax bill. In investing, income is any return on capital invested, whether gains, interest, or dividends.
Income Tax is the percentage of the money a person or business receives from sales, wages, investments, gifts, or pensions that a government takes to fund its works, services, and obligations. Governments usually levy income tax on a sliding scale, applying a larger percentage to higher earners. The tax is also normally calculated based on taxable income, meaning total income minus expenses and other deductions.
For the 2021-2022 tax year in the United Kingdom (excluding Scotland), the income tax rate is 0% on the first £12,570 of income, 20% on £12,571 to £50,270 of income, 40% on any income between £50,271 to £150,000, and 45% on all income above £150,000.
An index fund is a pool of money collected from different investors that is then invested in a portfolio that tracks a specific index. Common underlying indexes include the S&P 500 or the Nasdaq Composite, although there are thousands of index funds to choose from.
Investing in index funds is usually considered a passive investment strategy: instead of picking specific stock or securities, index fund investors gain exposure to a wide range of instruments and industries, thus diversifying their portfolio.
Under this approach, investors reply on the overall long-term growth of that sector market for their gains, rather than outstanding performance by a handful of specific securities. Since index funds are more passive, they often incur lower management fees and taxes than more actively managed funds and can offer more competitive expense ratios.
Indirect taxes are taxes charged on a transaction rather than on goods, services, or property or on the income of businesses or individuals.
The two most widespread examples of this type of tax are sales tax and Value Added Tax (VAT). Excise taxes and customs duties are also indirect taxes.
Ultimately the consumer pays these taxes, which are embedded in the cost of goods or services, and the retailer or manufacturer acts as an intermediary in collecting them. Indirect taxes have been criticized as unjust because they remain the same regardless of how rich or poor the payer is.
Inflation is a rise in prices for common goods or services over time. Effectively, inflation means that a unit of currency has progressively less purchasing power. The speed at which this devaluation happens is called the inflation rate, which is expressed as a percentage. If prices rise over 50% in the course of one month, this is called hyperinflation. The opposite of inflation is deflation, where prices for a set of goods and services steadily drop over time.
Negative effects of inflation include discouraging people from saving money, as inflation will actually eat away at the value of money sitting in a savings account. However, low levels of this same dynamic can have the positive effect of stimulating investments and loans, thus injecting more capital into markets.
Inheritance tax is a tax levied on the assets (money or property) of a deceased person. In the United Kingdom, inheritance tax only applies when someone’s estate (the value of all of their assets) is over a certain amount (£325,000 as of the date of publication of this glossary). This threshold can vary depending on factors like whether children or grandchildren are inheriting a home. If all assets above the inheritance tax threshold are left to a spouse, civil partner, charity, or a community amateur sports club, inheritance tax does not apply. Otherwise, the standard tax rate is 40% of the value of all assets over the threshold.
Insolvency is the inability to repay a debt when it comes due. Both persons and companies can be insolvent, and there are two broad types of insolvency: balance sheet insolvency and cash-flow insolvency.
The former occurs when a debtor’s liabilities exceed their assets, and the latter when the debtor does not have the liquidity to pay what they owe at a debt’s maturity, even though they do have assets.
The terms insolvency and bankruptcy, while often associated, are not synonyms. Bankruptcy is a legal procedure that some insolvent entities or people use to clear their debts.
Insurance is an arrangement under which a person or entity (an insured) makes regular payments (called premiums) to an insurance company in exchange for the promise that the insurer will pay compensation (often called a benefit) in the event of a specific kind of loss or damage to the insured, its property, or a third party. Insurance is a way of spreading risk out over a larger pool of people or entities and hedging against risks that could jeopardise financial health. Common types of insurance for individuals include car insurance, health insurance, or life insurance, while frequent categories in the business world include professional liability insurance, workers’ compensation insurance, and product liability insurance.
The International Financial Reporting Standards define an intangible asset as “An identifiable non-monetary asset without physical substance.” Examples of intangible assets are software, intellectual property (like patents or trademarks), and goodwill. Intangible assets are hard to valuate, unlike physical assets (like real estate and equipment) or financial assets (like cash, stocks, or other securities).
Intangible assets are not included in a company’s book value (i.e. on its balance sheet) and are one reason why companies are often bought and sold at a price above their book value.
Interest is the money a lender earns for loaning money. Interest is usually calculated as an annual percentage of the amount loaned. The borrower pays this amount back to the lender in instalments or in a lump sum when repaying the loan’s principal. Credit card debt, mortgage loans, and business loans all bear interest. Bonds, which are debt securities issued by a government or corporation, also usually pay regular interest to bondholders. Money in savings accounts at banks also usually earn interest for the account holder.
In a business context, interest can also mean an ownership stake in a company. If an investor has a 30% interest in a business, they own 30% of the company.
Interest Coverage Ratio
The interest coverage ratio, also known as the “times interest earned” ratio, measures a company’s ability to make interest payments on its outstanding debt. The ratio is calculated by dividing the company’s EBIT (Earnings Before Interest and Taxes, or operating profit) by interest expense.
Investors pay attention to this ratio because it tells them whether companies can pay their bills on time. If so, they will not have to cut into revenue for operations or profits to service debt, and the company is more likely to grow in value. Essentially, the ratio can show whether the debt has become a burden for a company rather than a liability that helps fuel growth.
An interest rate is the percentage of an amount borrowed that a borrower pays a lender as compensation for a loan. This payment is usually made in periodic instalments and calculated yearly (as the annual percentage rate, or the APR).
Interest rates are usually set as a function of risk—the riskier the loan, the higher interest rate. Mortgages, consumer loans, business loans, and bonds (where money is loaned to governments or corporations) all bear interest at a specific rate. Countries’ central banks set base interest rates, which in turn affect all other rates.
Invested capital is the sum of all equity (shares) issued by a company plus all debt issued to bondholders. Companies may choose to fund operations and expansion using invested capital instead of bank loans because it can be cheaper, or they may not qualify for a loan. Fundamental analysts use invested capital to calculate Return On Invested Capital (ROIC), an important metric for determining investment worthiness.
Potential investors compare a company’s ROIC to its capital maintenance costs (which are usually expressed as the Weighted Average Cost of Capital, or WACC). If the WACC is higher than the ROIC, the value of the invested capital is slowly being eroded, and the investment is less attractive.
An investment is the acquisition of an asset that is expected to provide income or, alternatively, grow in value over time and be sold for more than it was purchased for, thus providing a return (profit) to an investor. Investments can take the form of real estate, securities (stocks, bonds, or derivatives), commodities (minerals, foodstuffs, or other goods), artwork, or other items. All investments involve risk; investors generally expect greater benefits from riskier investments.
Investment income is any earnings from investments. It can include dividends, interest earnings, capital gains on the sale of stocks or property, coupon payments and any other profits made through an investment vehicle.
It is different from earned income, which is income from a job, such as wages, salary, tips or commissions. This distinction is important because the two types of income are taxed differently in most jurisdictions.
Investor relations refers to the activity of liaising with potential or current investors to give them key information about the finances or other aspects of a business or project. This step allows stockholders, investors, and other important stakeholders to make investment decisions. It also allows a business’s stock to achieve a fair valuation on the market. Publicly traded companies often have an entire department dedicated to investor relations, and the activity is highly regulated in most markets.