For all investors, particularly those focused on earning income from the stocks they hold, understanding dividend yield is crucial.

A dividend yield tells us what percentage of a company’s current share price is paid out in dividends each year.

Companies pay dividends to their shareholders as a means of rewarding them for investing in their business. They are, theoretically, the key mechanism through which investors get paid back for buying stocks and investment trusts.

You can get back more than you paid for a stock if its share price rises and you sell at a profit – but ultimately, that will be because the buyer expects the company to pay a higher dividend in future.

“If anything, history suggests that it is dividend growth that is the real secret sauce for a share price, as a growing pay-out has the potential to drag it higher over time,” said Russ Mould, investment director at investment platform AJ Bell.

Dividend yields are important to understand because they relate the dividend you are paid to the price you pay for the stock.

Imagine you are considering investing £1,000 into one of two different stocks: Stock A or Stock B. Stock A pays a dividend of 10p per share. Stock B pays a dividend of 30p per share. Which is the better investment?

While it’s tempting to say Stock B, you can’t answer the question without knowing how much each costs.

If Stock B costs £10 per share, but Stock A costs £2 per share, your £1,000 investment will buy you £50 of annual dividends if invested in Stock A, but only £30 of annual dividends if invested in Stock B.

In this example, Stock A has a higher dividend yield (5%) than Stock B (3%).

So rather than looking at the absolute amount that companies pay in dividends, it’s more informative to assess dividend yield: the percentage of a company’s share price each shareholder receives as a dividend.

What is a dividend?

The main aim of any business is to make a profit, otherwise, it’s not a productive use of capital.

Profits invest in growth, strengthen the balance sheet for a rainy day and reward the investors who backed the business in the first place.

A company might choose to reward its investors with a dividend, assuming it’s generating enough cash to cover all its other operating expenses and spending obligations.

For example, if profits (after tax) are £100,000 and £50,000 is paid out as a cash dividend, then only £50,000 can be kept back by the directors for growth. That's why (traditionally at least) some firms grow fast, but pay low dividends (technology firms are typical) while others offer high dividends but lower growth prospects (utilities often fit this description).

Certain sectors or indices, such as the FTSE 100, are known for paying high dividends.

What is a dividend yield?

The return from dividends on any given stock or share index is measured by the dividend yield. It is calculated as follows:

Full-year dividend per share payment ÷ share price

That number is then multiplied by 100 to give the percentage figure representing the dividend yield.

For example, if a company paid a single dividend of 10p per share this year and its shares are trading at a price of 1,000p, the dividend yield would be 10p ÷ 1,000p = 0.01 (which is 1%).

If the firm paid a dividend of 5p after half a year (usually called an interim dividend) and a further 10p at the end of the financial year (a final dividend), you would add the two together and get (5p + 10p) ÷ 1,000p = 0.015 = 1.5%.

Companies don’t have to pay dividends

It’s important to understand that companies don't have to pay dividends. After all, dividends are a return of profit. If a business isn’t making any money, it shouldn’t be giving money back to its shareholders.

Some public companies try to pay what’s known as a “progressive dividend.” This means they try to keep the dividend growing year after year. These are usually defensive businesses, such as utility companies, which have predictable revenue streams.

However, other equities might choose to pay a smaller regular dividend, and then present shareholders with large, one-off special dividends when profits are better than expected. This is quite common in the resource sector, where commodity prices (and as a result, profits) can be very volatile.

There are lots of factors that determine whether or not a company will pay a dividend to its shareholders. And just because they paid one this year, doesn't mean they have to do it next year.

There are good reasons why even very profitable companies might not pay a dividend. The more they pay back to shareholders, the less they can invest for future growth. Often, companies decide that shareholders’ long term interests are best-served by reinvesting back into the business and generating higher profits in future.

In fact, some investors (particularly growth-focused ones) look sideways at companies with high dividend yields, viewing it as a sign that the company has exhausted all its potential for growth and can’t do anything more useful with the capital they are generating.

Can you only calculate historical dividend yields?

To get a more complete picture of a firm’s dividend the dividend yield can be calculated based on what the firm paid in the past 12 months or calendar year (sometimes referred to as the trailing or historical dividend yield) or on the amount that it’s expected to pay over the next 12 months (a forecast or forward dividend yield).

Trailing yields reflect what has actually been paid – but past dividends may not be sustainable.

Forecast yields reflect any changes that analysts expect, but forecasts can be unreliable.

“Markets are forward-looking mechanisms and as such investors should focus on forecast, or prospective, dividend figures,” said Mould.

It pays to look at both, but should not rely solely on either to make their decision: you need to think about the long-term prospects for a firm’s dividends, including any signals that the market is sending.

Dividend red flags

A good way to determine whether or not a company can maintain its dividend is to look for some common red flags. These may indicate an imminent dividend cut.

For example, a firm with a very high yield may look cheap, but this could indicate that the market doesn’t think the company will be able to afford to maintain its current level of dividends. This is a common red flag.

Another red flag is high debt levels. If a company has a lot of debt, these obligations will fall due at some point. From a business point of view, paying off creditors must be done before and return of profits to shareholders is considered.

It's important to safety-check the dividend, to test just how sustainable it is – especially if the dividend yield looks particularly large compared to the rest of the sector.

Using dividend cover to check the dividend yield

There are several ways to sense-check dividend yield sustainability.

One way is to look at “dividend cover” or “payout ratios”.

Dividend cover measures the number of times profits cover the payout. The earnings per share (EPS) figure is usually used in this calculation.

EPS measures total net profits divided by the total number of shares outstanding for a public company. If the business is expected to report EPS of 20p over the next year and pays a dividend of 10p per share, its cover is two. That’s a healthy level.

“A ratio under 1.0 suggests danger,” said Mould, excepting real estate investment trusts which are obliged to pay out 90% of earnings, “or if the company offers fabulous free cash flow and a strong balance sheet”.

While cover usually differs across sectors, theoretically the higher the figure, the more secure the dividend.

A dividend that is well covered typically signals that a company has sufficient capital to pay out dividends. But this does not necessarily mean the company can actually afford to pay the dividend, let alone actually will.

Using cash flow to check the dividend yield

You can also look at cash flow to check the sustainability of a company’s dividend payouts.

“In dividend investing, you want to be focused more on cash flow than earnings, because dividends get paid out of cash flow, not earnings,” said Sam Witherow, portfolio manager of JPMorgan Global Growth & Income.

Witherow recommends comparing free cash flow to earnings. Ideally, free cash flow should be approximately the same as or higher than earnings, but if it is below, it is worth looking at whether the gap between them is narrowing or widening. If it is widening, this could be a sign that current dividend levels are unsustainable.

Millions of taxpayers are being dragged into higher tax bands due to frozen thresholds.

The number of income taxpayers rose for the sixth year in a row during the 2025/2026 tax year to 40 million, HMRC data shows.

That is an increase of 1.3 million income taxpayers or 3.4% on the previous tax year.

Frozen tax thresholds mean that as workers’ wages increase with inflation, they will be dragged into higher tax bands – a process called fiscal drag.

Income tax thresholds have been frozen since the 2022/23 tax year, after then-chancellor Rishi Sunak announced income tax brackets would not be adjusted yearly with inflation, as had been the norm, for four years.

Another Tory chancellor, Jeremy Hunt, subsequently extended the freeze for a further two years until the 2027/28 tax year.

In the 2025 Autumn Budget, Labour chancellor Rachel Reeves extended the freeze on income tax thresholds until the 2030/31 tax year.

By the time the extended freeze ends, income tax bands will have been the same for almost a decade, meaning millions of UK taxpayers will have paid thousands more in income tax than if thresholds had increased in line with inflation.

Claire Stinton, senior personal finance analyst for Hargreaves Lansdown, said: “You may have had a pay rise, job change, or taken on more hours in recent years, but not felt much difference in your monthly pay packet. That’s because more of your earnings are being swallowed by tax. And it’s not stopping anytime soon, with income tax thresholds due to be frozen until 2031, meaning more people will be dragged into the tax net and across tax bands in the coming years.

“The impact of crossing into a higher tax band goes beyond paying more income tax. It can also reduce your access to tax-free allowances and trigger higher tax rates on savings and investments, creating a ripple effect across your wider finances.”

We look at what ‘fiscal drag’ is, why successive governments have imposed it, and how much it is going to cost you.

What is fiscal drag?

Fiscal drag is simply the term used to describe what happens when a government does not adjust their income tax thresholds according to inflation and wage growth data.

This means that a higher number of taxpayers are dragged into paying tax for the first time, or at a higher rate, despite the purchasing power of their money not increasing at the same rate.

For example, in Autumn 2022 (when tax bands were first frozen), the tax-free personal allowance was £12,570.

According to the Bank of England’s inflation calculator, £12,570 in 2022 was worth around £14,650 in April 2026 when adjusting for inflation.

Normally, tax bands are adjusted for inflation, but, because they have been frozen, people today who earn the equivalent of £12,570 in 2022 (which is £14,650 in April 2026) are now paying tax on the £2,080difference that has occurred thanks to inflation.

Therefore, people are being dragged into paying tax despite not earning more money in real terms. Given the tax rate doesn’t rise, but the amount of tax raised increases, it is sometimes called a ‘stealth tax’.

How much will extended fiscal drag cost you by 2031?

With the freeze on income tax thresholds extended for an extra three years, taxpayers will be feeling the pain of fiscal drag even more profoundly – and higher earners will be bearing the brunt of the hit.

Taxpayers could be as much as £1,292 worse off thanks to the three year extension, research by AJ Bell suggests, compared to if the freeze ended in 2028 as planned.

But this will not be spread equally. Someone with a yearly income of £15,000 will only have to stomach an extra tax bill of £259 over the three year extension period.

Meanwhile someone on £47,000 will likely have to pay an extra £1,292 as their income is dragged into the higher rate of income tax.

How can you protect your money from fiscal drag?

While there aren’t many direct ways of avoiding fiscal drag apart from refusing to let your wages increase, there are some clever ways that you can mitigate its impact on your money.

First of all, it is important to get an idea of what your pay will look like for the year ahead so that you can plan accordingly.

Once you have established this, you can start to consider whether it is worth it for you to implement measures so your income stays below the tax bracket you would otherwise enter.

This can be in the form of increased pension contributions or looking into salary sacrifice. Those who are set to breach tax thresholds may also want to utilise the tax wrapper that comes with a cash ISA or stocks and shares ISA.

Make the most of your ISA allowance

Using the ISA tax wrapper can protect your savings and investment income from the taxman.

Stinton added: “Shelter your savings and investments in ISAs to ensure there is no tax due on interest, dividends, or growth. So should you find yourself going up a tax band, you’ll sidestep a potentially higher tax bill.”

This is especially important as the tax rates on savings and investment income rose in April 2026.

The maximum you can save in an ISA in any given tax year is currently £20,000, but this is set to change in April 2027. The overall £20,000 limit will remain, but you will only be able to save a maximum of £12,000 in a cash ISA. This new rule won’t apply to over-65s.

Put more into your pension

A way to reduce your taxable income is by putting more of your salary away into your pension.

Camilla Esmund, senior manager at interactive investor, notes that while this will leave you with less money in your pay packet at the end of each month, you will get upfront tax relief on your contributions – and you’ll still be able to enjoy the cash when you retire.

Consider salary sacrifice

Salary sacrifice offers another way for you to reduce your salary and therefore avoid the negative effects of fiscal drag.

Salary sacrifice could be used to put more in your pension, get childcare vouchers, buy a bike through the bike-to-work schemes, and could be spent on other technology schemes.

The amount you can salary sacrifice into a pension without having to pay National Insurance is set to change in April 2029 though when a £2,000 per year cap will be introduced.

Plan your income

Another way to avoid the worst of fiscal drag is to carefully plan when your income enters your account.

For example, you could opt for a fixed term savings account that pays interest annually, instead of an easy access option which pays more frequently. You could then have the fixed savings interest pay out once you’re in a lower tax bracket.

When we talk about government spending and the public finances, we often hear the word ‘deficit’ being used. But what is a deficit, and why does it matter?

What is a budget deficit?

Traditionally, when a government needs money, it can get it in two ways: it can raise the money through taxation, or it can borrow the money in financial markets, by issuing government bonds (known as gilts in the UK).

If a government spends more money in a given year than it raises through tax revenues, that means it is running a deficit. In other words, the deficit is the government’s annual overspend.

The “national debt”, on the other hand, is the total overspend. So when a government runs a deficit, it’s adding to the national debt. When it runs a surplus (that is, it raises more in taxes than it spends), it’s reducing the national debt.

Both the deficit and the national debt are often expressed as percentages of GDP. Generally speaking, borrowing money is seen as more sustainable when the deficit is low as a percentage of GDP.

The latest figures from the Office of Budget Responsibility (OBR) suggest that the UK budget deficit is going to hit 7.1% of GDP in the 2022/23 tax year, the seventh year of the past 15 where the budget deficit has been above 7% of GDP.

Why does a large deficit matter?

In theory, the main risk of a country running too big a deficit for too long, is that markets will start charging more for the country to borrow. In extreme cases, investors might shun the currency too, causing it to crash in value.

And that’s just what happened earlier this year when Lizz Truss and Kwasi Kwarteng unveiled their economic plan for the country.

They hoped to stimulate growth by slashing taxes and ramping up infrastructure spending, but the markets didn’t like the sound of the unfunded tax cuts. The resulting chaos nearly lead to the collapse of the UK’s financial system (the Bank of England had to step into stabilise markets) and ultimately cost Truss and Kwarteng their jobs.

Still, in practice, many countries have been running large deficits since the 2008 financial crisis, and yet borrowing costs have mostly fallen since then.

That has led to a situation where, increasingly, some economists have been questioning whether deficits matter at all.

Can the government just print more money?

Proponents of Modern Monetary Theory (MMT for short) argue that as long as a country controls its own currency – which for example, the UK and the US do, but Italy doesn’t – then the government can never run out of money.

It need not tax or borrow, it can simply print what it needs. As a result, governments can spend what they want, for as long as inflation remains under control.

As interest rates (and inflation) have jumped over the past year, MMT is being tested to destruction, and as we’ve seen in the UK, while governments might want to keep spending, it’s not clear if the markets will let them.

The term “moral hazard” was first widely used in the insurance industry in the 18th century. Put simply, it refers to a situation in which a person or institution engaged in a risky activity does not bear the full negative consequences of their decisions. This lack of consequences encourages them to behave more recklessly than if they were fully responsible for their actions.

Here’s an easy example. Let’s say you’ve insured your mobile phone. As a result, you don’t bother to buy a protective case for it. After all, if it drops on the floor and breaks, the insurer will pay. That’s moral hazard.

For a much more dramatic real-life example, consider the role moral hazard played in the financial crisis of 2008. In the early 2000s, the US housing market was booming. Investors lined up to buy bundles of US mortgages, which they saw as a low-risk way to get higher interest payments than they could get from US government bonds. They bought these mortgage bundles from the banks. The banks, in turn, made the bundles out of individual mortgages they’d bought from mortgage lenders.

Because there was so much demand, mortgage lenders paid their salespeople big bonuses to sell as many mortgages as they could. But because they were immediately selling the mortgages on to the banks, the mortgage lenders didn’t worry about how creditworthy the borrowers were. They just cared about their commissions. And because the banks were selling the mortgage bundles on to investors, they didn’t worry about the quality of the loans. They just cared about their fees.

In short, the people who issued the mortgages made a profit, and thought they had offloaded the risks to someone else. Then house prices fell, some homeowners stopped paying their loans, and the entire financial system nearly collapsed.

That’s moral hazard, too – when profits go to one group of individuals or companies, but losses are borne by the taxpayer as a group.

And moral hazard is still rife in the financial system. For example, central banks constantly step in and print money to prevent economic shocks from spreading. But that encourages investors to take more risk than they otherwise would.

Which just sets us up for a worse crash in the future.

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Most of us probably know what “contagion” means in a biological sense – particularly after 2020 brought it home to us in a very visceral manner. But it’s also a term that crops up in financial markets. And just as “contagion” almost always spells bad news in the real world, it’s also not a term you want to hear in market news.

Global economies and financial markets are arguably more interconnected in the modern era, than at any other point in history. This has lots of benefits. But this interdependence also means that problems which erupt in one corner of the globe can have unexpected consequences elsewhere.

As a result, a financial crisis which at first seems contained in one market or sector, can spread – just like a virus – and potentially overwhelm apparently unrelated markets elsewhere. In other words, there is the risk of “contagion”.

How does financial market contagion generally spread? Debt is a major source of contagion, and also one of its main vectors.

It’s simple when you think about it. Say a friend owes you £100. You need to get it back so that you can go to the pub that night. But when you go to collect, it turns out that he used it to take a punt on a dodgy cryptocurrency and now has no money. As a result, you can’t go to the pub, and the landlord doesn’t get your £100. That’s contagion.

To take a real-world example, the 2008 financial crisis spread globally because ownership of debt linked to US mortgages was far more widespread than most investors had realised. When US house prices fell and that debt collapsed in value, it caused panic as investors sold indiscriminately, unsure of who they could trust.

But while falling US house prices may have been the trigger for the crisis, the real problem was that financial institutions generally were over-leveraged. In other words, they had borrowed too much money, so it only took a small drop in the value of any assets they owned to render them insolvent.

This then fed into a wider crisis because bankrupt banks sold assets and stopped lending money to anyone else, which in turn caused pain in the wider economy.

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Tax comes in many different forms – VAT, capital gains tax, inheritance tax, income tax – and different people pay it at different rates. Typically, the more you earn, the more tax you pay; this is what’s known as a “progressive” tax system.

Your marginal tax rate is simply the tax rate you pay on each extra pound of income you earn. For example, take income tax rates in the UK. As of the tax year that started in April 2025, there is no income tax due on any money you earn up to £12,570. Then, for every pound you earn above that, you will pay 20%. This is your marginal tax rate.

Then once you earn more than £50,270, your marginal income tax rate goes up to 40%. Once you earn over £125,140, it goes up again, to 45%, so for every pound you earn, you keep 55p and 45p goes to the tax office.

So far, so straightforward – as you earn more, you pay more tax.

However, years of government tinkering designed to raise more money without upsetting too many voters has left us with a very complicated tax and benefits system. As a result, different taxes kick in at different income levels, while certain benefits are clawed back. These interactions sometimes create huge spikes in marginal tax rates for certain groups.

For example, child benefit is clawed back once one person in a household starts earning above £60,000 a year. This could result in a marginal tax rate of more than 58% on earnings above £60,000 – or even more in the case of families with more than one child.

Similarly, once someone earns more than £100,000 a year, their personal allowance – the amount on which they pay 0% income tax – starts to be clawed back. This creates a marginal tax rate of 60%.

Taxing marginal income at these levels seems counterproductive. However, a cleaner, more transparent tax system might make it clear just how much we have to pay. And governments tend to lack the political nerve to embrace that sort of transparency.

Traditionally, economists and central bankers worry about economies either overheating or falling into recession. If the economy is growing faster than its productive capacity allows, inflation will be the result. In this case, central banks will raise interest rates to make borrowing more expensive and thus slow the economy down.

If the economy is growing more slowly than its productive capacity allows, recession will be the result. In this case, central banks will cut interest rates to encourage more lending and spending, pushing the economy out of recession.

That’s the theory, anyway. However, there’s another more unusual combination which gives us the worst of all worlds. Stagflation occurs when economic growth is weak and unemployment is high, but inflation is also high.

The term is a combination of the words “stagnation” and “inflation”. It was coined in the 1960s by British politician Iain Macleod and became popular during the 1970s when stagflationary conditions took hold in the UK, the US, and several other developed economies.

Economists argue about the exact causes. One contributing factor was high oil prices, which drove up both prices and costs, squeezing profit margins. Meanwhile, clumsy attempts by governments to control prices actually exacerbated inflationary pressure by making it harder for production to rise to match demand.

Stagflation is difficult for policy makers to tackle. High inflation makes it hard for central banks to cut interest rates with the aim of stimulating the economy. Yet raising rates to tackle inflation will only exacerbate weak growth.

The 1970s stagflation also gave rise to the “misery index”. This was created by US economist Arthur Okun as an informal way of measuring the amount of economic pain the average American was feeling. The misery index simply adds the unemployment rate to the inflation rate. The higher it goes, the grimmer the situation.

Stagflation is also pretty miserable for investors. Squeezed profit margins are bad for stocks, but rising inflation is bad for bonds. That leaves few places to hide.

The term is being muttered again now because supply chain disruption in the wake of the Covid-19 pandemic is driving up prices. Meanwhile, unemployment remains stubbornly high.

Here’s hoping we don’t see a repeat of the 1970s.

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The term “metaverse” sounds like something out of a science fiction novel. There’s a good reason for that – it is.

The term was coined in Neal Stephenson’s 1992 novel Snow Crash.

Like the similar term “cyberspace”, it describes a three-dimensional, immersive version of the internet in which human beings do business, play games, and socialise, represented by digital avatars.

And just as the term cyberspace did, the metaverse has made the leap from comics and sci-fi films to the boardroom and the business sections.

In July, Facebook founder Mark Zuckerberg said that within the next five years, he expects it to be described not as a social network, but as a metaverse company.

Meanwhile video game platform Roblox, whose users can sell their creations to each other for Robux – exchangeable for real world currency – became a multibillion-dollar company when it listed in the US this year.

This is not a new vision by any means. Virtual worlds such as Second Life, where individuals can establish businesses and buy digital property for real money, have been around for a few decades. But usage has largely been limited to enthusiasts.

The key difference today – according to proponents of the metaverse – is that not only has technology advanced considerably, but the pandemic has driven new demand for remote interaction.

For example, Facebook has unveiled technology enabling workers to meet and interact in a virtual office by donning virtual reality headsets.

Some dismiss this as little more than a 3D Zoom call – others argue that it offers a more natural way to interact in the working-from-home era.

Either way, it represents a big opportunity for a company like Facebook to collect even more data on its users.

But there are plenty of competing visions for the metaverse.

Many entrepreneurs in the crypto world favour the idea of an open, decentralised metaverse built on the blockchain, as opposed to one dominated by a single company.

As with its previous incarnations, the metaverse may turn out to be more hype than reality.

But with technology advancing all the time, it’s likely that at least some aspects of it will become everyday parts of our lives.

See you in the matrix!

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What makes the pound in your pocket – or your bank account – money? Why are people willing to accept currency in exchange for goods and services?

These days, there is nothing physical underwriting the value of the pound or the dollar, or any other currency for that matter. Such currencies are popularly known as “fiat” currencies. Put simply, they are backed by the strength of the economies and the governments that issue them and that demand taxes be paid in them.

However, this wasn’t always the case. In the past, commodities of various sorts were often used as money. The most popular such commodities have been the precious metals, and gold in particular.

The “gold standard” describes a monetary system where paper currencies are exchangeable for gold at a fixed rate. Put very simply, the idea behind the gold standard is that it prevents countries from living beyond their means. If a country needs to hang on to enough gold to back its currency, then it makes much harder for governments to manipulate the money supply.

However, the rigidity of the gold standard also has drawbacks. An inflexible money supply in theory makes it harder for central banks to adjust for economic conditions. Perhaps more pertinently, history shows that when the gold standard has proved overly restrictive, governments simply abandon it. For example, most countries abandoned the gold standard between the First and Second World Wars.

After the Second World War, the world went back onto a form of the gold standard. Under the Bretton Woods agreement, the US dollar was backed by gold, and the rest of the world’s currencies traded at fixed exchange rates against the dollar.

However, in the late 1960s, mounting US spending – partly on the Vietnam war – threatened to cause a run on America’s gold reserves as foreign countries lined up to swap their dollars for gold.

As a result, in 1971, president Richard Nixon severed the link between the dollar and gold. By 1973, most major currencies were free floating and the US dollar was no longer tied to the yellow metal.

Of course, the monetary system is constantly evolving. As the prospect of fully digital currencies becomes reality, we may see another shift in the near future.

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The financial world has a habit of coining new definitions for old words, and then constantly referring to these new usages as if everyone should know what they mean.

One relatively recent such coinage is “tapering”.

“Tapering” relates to central bank policies.

Since 2009 and the great financial crisis, central banks have been printing money to buy assets such as government bonds.

This is known as “quantitative easing”, or QE. The aim – or at least, one of the aims – of QE is to reduce the cost of borrowing across the entire economy. This makes it cheaper for those with debts to pay their interest bills.

It should – in theory at least – also make it more appealing for companies to borrow money to invest in expanding their businesses. This in turn should help to boost economic growth.

However, another side-effect of QE has been to drive up asset prices across the board, from bonds to shares to property prices.

As a result, investors tend to like it when central banks add more QE, but aren’t so happy when they reduce it.

It’s not entirely clear who actually coined the term “tapering”, but it sprang into widespread use after May 2013.

That month, Ben Bernanke, who was then the head of the US central bank – the Federal Reserve – indicated in a speech that the central bank was starting to consider reducing the volume of assets that it was buying via QE.

So “tapering” simply describes a reduction in the amount of QE a central bank is doing.

Markets didn’t like this idea, fearing that less QE would spell lower asset prices. The ensuing period of turbulence became known as the “taper tantrum”. This resulted in the Federal Reserve taking several months longer than expected to slow down the pace of QE.

The term “taper” is becoming relevant again today because central banks are now looking at stepping back from the emergency monetary policy they launched during the coronavirus pandemic.

Whether we will see a repeat of the 2013 “taper tantrum” or not, remains to be seen.

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There are two main ways for companies to return cash to shareholders.

Dividends tend to be preferred by income investors; a dividend is a cash payout to shareholders, typically issued on a half-yearly basis.

The other method is to use a share buyback. This means just what it says – the company buys back its own shares.

It’s easy to see why shareholders like dividend payouts. But how do buybacks benefit shareholders? Well, when a company buys and cancels some of its own shares, the remaining shareholders are left holding a greater proportion of the company.

Let’s say a firm has one million shares in issue, and the share price is £10 per share. It made one million pounds profit last year. So it has earnings per share of £1.

Let’s say it wants to return the whole one million pounds profit to its shareholders via a share buyback. It buys back 100,000 shares at £10 a share and cancels them. This leaves 900,000 shares in issue.

That means earnings per share has increased from £1 to just over £1.11, because there are now fewer shares. In turn, assuming that investors keep valuing its earnings on a constant basis, the share price would rise to just over £11.

Fans of buybacks argue that they are more tax-efficient than dividends. For managers, buybacks are also more flexible than dividend payments. Shareholders tend to react more negatively to a dividend cut than to a reduction in buyback levels.

Critics argue that executives have an incentive to use buybacks to meet performance targets linked to share-price growth. So they may curb investment or borrow too much to fund buybacks.

Timing can also be a problem. Some studies suggest that larger companies in particular have a bad habit of buying back shares near the top of the market, when they’re expensive, rather than nearer the bottom, when they’re cheap.

Even if you couldn’t care less about investing, you’ve probably heard of the FTSE 100. The FTSE 100 is the best-known stockmarket index in the UK. In effect, it sums up the fortunes of Britain’s biggest listed companies into one single number, by combining them all into one hypothetical portfolio.

Why is this useful? It gives a representative snapshot of how strong or weak the market in big UK companies is at any given point in time. But more importantly, it serves as a useful benchmark.

If you invest with a fund manager who says they will put your money into big UK companies, then how do you know if they are doing a good job or not? One way to tell would be to compare their performance to that of the FTSE 100. If they manage to beat the index over the long run, it suggests that their stockpicking skills are adding some value for you. If not, then why pay them to manage your money?

There are many different ways to construct an index. Most indexes, including the FTSE 100, are based on market capitalisation – that is, the share price of each company multiplied by the number of shares outstanding. In other words, the companies deemed most valuable by investors carry the most weight in the index.

The best-known indexes tend to be the ones that represent individual countries’ stock markets. Other indexes you may well have heard of include the Dow Jones or the S&P 500 in the US, and the Nikkei in Japan. However, there are literally thousands of different indexes available, and there are many different ways to build them.

As passive investing – which aims to track an index, rather than beat it – has boomed in popularity, index providers have become huge businesses. As investor demand for index funds that track specific themes, or specific investment styles has grown, index providers have created custom indexes to back these investment products.

Some fear that the boom in indexing may distort the flows of money into financial markets in disruptive ways. However, there is no doubt that index funds can be a very convenient and cheap way to build a diversified long-term investment portfolio.

To learn more about index investing, subscribe to MoneyWeek magazine.

If you read the business pages for any length of time, you’re likely to come across a rather clunky acronym: Ebitda. The acronym stands for earnings before interest, tax, depreciation and amortisation.

Ebitda first came into common use in the US in the 1980s during the boom in leveraged buyouts (LBOs), as a measure of the ability of a company to service a higher level of debt. This had a major impact on what a prospective buyer would be willing to pay. Over time it became popular in industries with expensive assets that had to be written down over longer periods of time. Today it is commonly quoted by many companies.

What is Ebitda?

Ebitda is a way of measuring profit that can make it easier to compare the valuation of two companies. Ebitda may be helpful when it is difficult to compare firms using other profit measures – such as earnings per share (EPS) – because they have very different levels of debt, tax rates, or different accounting policies on, for example, the depreciation of fixed assets.

So it’s the amount of money a company makes before it has to pay the following costs:

• interest on any debt outstanding
• tax on its profits
• depreciation – that is, accounting for changes in the value of tangible goods such as equipment and premises over time
• and amortisation – accounting for changes in the value of intangible goods such as brands or intellectual property over time

Why is Ebitda an important measure?

One of the main reasons analysts use Ebitda is because it focuses on the profitability of a business based on its day-to-day operations, without any distortions caused by how the company is funded, its tax efficiency, or its accounting policies.

Ebitda measures a firm’s profitability before these factors are taken into account. So you could use Ebitda in valuation ratios to compare two companies which are in the same line of business but are funded with different levels of debt, for example. The two businesses can be compared on a like-for-like basis by taking their enterprise value (EV – the market value of all their shares in issue, plus net borrowing or less net cash) and comparing this with Ebitda.

By comparing Ebitda to the company’s enterprise value, you can get an idea of how highly valued it is by investors. Simply divide enterprise value by Ebitda. The higher the number, the more expensive it is. The lower the EV/Ebitda ratio, the cheaper the company – essentially it’s like a price/ earnings (p/e) ratio, but using a different measure of earnings and taking account of debt.

Ebitda can be useful when combined with other analysis tools, but it has become an overused and abused measure of value. Its strength – that it represents profit before various costs – is also its weakness, because it doesn’t represent profits that can be paid to investors (as opposed to helping private equity buyers gauge how much debt a firm could be loaded up with).

EPS isn’t perfect, but at least it allows for replacing assets, depreciation, paying interest on borrowings and paying tax – all of which reduce how much profit ends up in investors’ hands.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Many people reading this might be asking "What is an option?" In this article, we'll take a look at these financial products.

An option is simply the right to buy (a 'call' option) or sell (a 'put' option) a quantity of any asset by an agreed expiry date for a fixed ('strike') price. 

What is an option?

Options can be used in a portfolio as a way to manage risk and potentially increase returns. By buying a put option, an investor can protect their portfolio from potential losses if the value of the underlying asset decreases. 

On the other hand, buying a call option can provide the opportunity to profit from a potential increase in the underlying asset's value. Overall, options can offer flexibility and customization for an investor's portfolio strategy.

As with insurance policies, the buyer of an option pays a non-refundable premium to the seller for the right to either exercise the option before it expires or abandon it. So, someone who holds gold and is worried about the price falling but doesn't want to sell in case they are wrong could buy a three-month 'put' option instead.

Should gold fall over the three months, it can be delivered to the option seller at the higher fixed strike price rather than the market price. Should gold rise, the buyer can abandon the option, hold onto their gold and just suffers the option premium cost.

The risks of option trading

It's crucial to understand that options trading carries inherent risks. If the underlying asset's value moves in an unexpected direction, options can expire worthless, resulting in a loss of the premium paid. 

Additionally, options are complex and require a thorough understanding of the underlying asset and market conditions. Before incorporating options into a portfolio strategy, you should carefully consider the potential risks and rewards, as well as the risk of potential margin calls. 

Margin calls are triggered when a trader's account value falls below a certain level, requiring the trader to deposit additional funds to maintain the required margin level. In options trading, margin calls may occur when an option holder's account cannot cover the potential losses of an option position.

In popular fiction, zombies are the walking dead.

You probably already knew that. But you may be surprised to hear that economics has zombies too.

A “zombie company” is one that makes just enough money to stay afloat, and to pay the interest on its debts. However, it doesn’t make enough money to expand or invest, or to reduce the level of its debts.

In other words, it’s neither alive nor dead – it’s just shambling along, dependent on the ongoing indulgence of its lenders to survive.

This leaves it highly vulnerable to the slightest economic shock.

What makes a zombie company? It has to be reasonably mature. Young firms are often loss-making, but that’s because they are at the “invest and build” stage of development.

The company also has to be chronically loss-making rather than in temporary difficulties – in other words, there is no obvious way out of its situation.

A 2018 study from the Bank for International Settlements (which is basically a central bank for central banks) found that the percentage of zombie firms around had risen from just 2% in the late 1980s to 12% by 2016.

The biggest factor driving this rise was the long-term slide in interest rates seen in recent decades.

Lower interest rates enable struggling companies to reduce their interest payments, allowing them to shuffle on for a bit longer. A low interest-rate environment also means investors are more willing to lend to such companies, simply to make any sort of return on their money.

However, this desperate “reach for yield” simply enables the survival of more zombie companies. Eventually this can be a big problem for the economy as a whole, as it makes the overall economy more fragile.

Some argue that zombies also impair the vital process of “creative destruction”. If low quality companies plod on rather than going bankrupt, it means that they crowd out younger, potentially more dynamic companies that don’t have the same access to resources that they do. As a result, the economy becomes less efficient and productivity falls.

To learn more about the debate around zombie companies and what to do about them, subscribe to MoneyWeek magazine.

Many people have heard of private equity, but it’s an area that few understand well enough to feel confident investing in – if they even know how to invest in it at all.

There are no dedicated private equity funds or investment trusts in the latest list of top funds for DIY investors, and this isn’t surprising given that private equity is a relatively esoteric investment.

Private equity generally refers to investments in companies that haven’t listed publicly so, their shares aren’t listed on a stock exchange. It takes various forms, including venture capital, management buyouts and development capital.

Private equity firms raise capital from investors, such as pension funds, wealthy individuals, and institutional investors, and use that money to acquire ownership stakes in private companies.

They also sometimes buy listed companies and then take them private.

Private equity firms typically take an active role in managing the companies they invest in, working closely with management teams, implementing significant operational improvements and strategic initiatives to create long term value. Following a successful business transformation, the private equity manager will then seek an “exit” – generally by re-listing the company on public markets.

It is potentially a rewarding sector for investors to target, as long as they understand it is higher risk and it could take time for a company to be successful, if at all.

“Private equity gives you access to a range of opportunities that are not available on the listed market,” says Hamish Mair, fund manager at CT Private Equity Trust.

It has been a rocky year for private equity. Going into 2025, many within the industry thought the stage seemed set for the market to rebound strongly following a tough period.

“Then, along with the rest of the economy, we were hit by the tariffs introduced by president Trump,” said Mair. “That injected a high degree of uncertainty into the whole business community. In private equity, people don’t like uncertainty.”

But there are signs, he says, that despite lingering uncertainty the private equity market is starting to recover from the shock earlier in the year.

Before investing in private equity, though, there are some important considerations to bear in mind.

The advantages and disadvantages of investing in private equity

Data from the British Private Equity & Venture Capital Association (BVCA) and professional services firm PwC showed that over the 10 years to 2024, UK private capital funds outperformed key public market benchmarks, delivering an annualised internal rate of return of 15.8% compared to 6.2% for the FTSE All share and 8.0% for the MSCI Europe Index.

“Over the long term, private equity and venture capital offers a compelling proposition, delivering strong returns for investors while supporting 13,000 businesses across the UK,” said Michael Moore, chief executive of BVCA.

In Mair’s view this outperformance is to be expected, partly because these companies are smaller so tend to grow faster (in percentage terms) from a smaller base, and partly because they tend to be highly focused in specific areas, which can benefit their performance compared to larger, more distributed firms.

But mostly, it reflects the fact that private equity is a relatively risky investment. “You don't have the protection of a liquid market,” said Mair. “You don't have the price discovery and the information transmission which goes with that price discovery.” In other words private equity investors have to do a lot more research into the companies they invest in compared to public companies, so private companies tend to be relatively cheap compared to publicly listed equivalents.

“It follows that well-informed, diligent investors who do the research and find opportunities can have an advantage over everybody else. They can buy in at a good price, hold the company, improve the company, sell it on and make a return in excess of what they could have done simply by buying shares in a stock exchange,” says Mair.

The risk – and the information gaps that go along with it – is one obvious downside of investing in private equity.

Private equity tends to require a longer holding period than public investing, too. “Private equity is normally structured around a four or five year holding period,” says Mair, “and they can often be much longer than that. That's far longer than any public company investor would normally have as their investment horizon.”

How to invest in private equity

Unless you have a lot of investible cash to hand it can be difficult for ordinary investors to access private equity-backed firms.

Mair says there are safe and unsafe ways of investing in private equity. “The unsafe way is by meeting somebody at the golf club who says, ‘Would you invest in my private company?’ Unless you are an expert in that sector, I would sincerely recommend that you do not do that!”

In terms of safe ways to invest, Mair says you could buy into a properly managed private equity fund, but these often require a seven-figure minimum investment, putting them out of reach of many private investors.

“The obvious way for a retail investor to get involved is to go through a private equity investment trust,” he says. “These are listed vehicles; anyone can buy them. They’re covered by stockbrokers, so they’re properly researched.”

Most also have experienced management teams and a track record that can be examined going back a long way.

The persistence of discounts across the investment trust industry also means that these can be a cheap way to buy into private equity. “When private companies are sold from these portfolios, they typically achieve a significant premium to the previous carrying value,” says Mair.

Mair manages the CT Private Equity Trust (LON:CTPE), one of the Association of Investment Companies’ (AIC) next-generation dividend heroes (meaning investment trusts that have increased their dividend every year for between 10 and 20 years). Other AIC-next generation dividend heroes that focus on private equity include Patria Private Equity (LON:PPET) and ICG Enterprise Trust (LON:ICGT).

The largest investment trust in the UK, 3i Group (LON:III), is also focused on private equity. It is the only trust in the sector that trades at a premium to NAV, with the premium currently at 16%.

Government spending is funded in two ways. One is taxation. We all pay taxes to pay for public services such as healthcare and to fund benefits such as the state pension. But government spending often exceeds the amount of tax raised in any given year. So the government plugs the gap by borrowing the money.

But unlike you or I, the government doesn’t go to the bank to borrow. Instead it goes to financial markets. In effect, the government offers to write IOUs to investors, who are mostly big institutions such as pension funds.

In exchange for lending money to the government for a fixed period of time, these IOUs entitle investors to an annual interest payment. This payment is usually fixed.

So the UK government might say that it wants to borrow money for ten years. In exchange, it’ll pay lenders £20 a year for every £1,000 they lend – a 2% interest rate.

These IOUs are called bonds. Bonds are mostly issued by governments and big companies. When companies borrow money in this way, the IOUs are called corporate bonds. When governments do it, the IOUs are called sovereign bonds.

When the UK issues sovereign bonds, they’re called gilts. For the US, it’s Treasuries. For Germany, it’s bunds.

Once issued, these bonds can be traded freely in financial markets. So the interest rate – or yield – on them will rise and fall.

The yield – which represents the return an investor expects to receive in exchange for taking the risk of owning the bond – will vary depending on a wide range of factors.

A credit-worthy country such as the US or UK will generally be able to offer a lower yield – in other words, borrow at a lower interest rate – than a country with a long history of defaults, such as Argentina.

Countries who can issue debt in their own currencies are also at an advantage. Nations with poorer credit histories sometimes issue debt in US dollars to increase the confidence of lenders. However it means that if the local currency falls against the US dollar, the cost of paying the interest on the bonds can shoot up.

To learn more about what influences sovereign bond markets, subscribe to MoneyWeek magazine.

When it comes to saving money for the long term – that is, ten years or more – investing your money usually delivers better returns than simply saving it up as cash in the bank. This is why any workplace pension you have, for example, will at least partly be invested in the stock market, and most of the rest will be in bonds.

The majority of us don’t have the time, patience or enthusiasm necessary to do the research required to buy and sell individual shares for our own portfolios. This is why most people hand their money to a fund manager to do it for them – the fund manager gathers the money together and invests it in a portfolio of shares. This is known as “active management”. So far, so good.

When you invest money with an active fund manager, you want to know that they are using their skill to deliver you the best return they can. In the jargon, you want to know that they can deliver “alpha”.

So if your fund manager is investing in big UK-listed stocks, for example, you would probably want to compare the returns the fund gives you with those of the main London index, the FTSE 100. You’d use the FTSE 100 as a “benchmark” – a figure that you’d expect the manager to beat over time.

This is where we hit a snag. Because the reality is that a majority of active fund managers struggle to beat their benchmarks – whatever they are – over any decent length of time. That’s partly because they also charge relatively high fees, which they have to earn back before you see any return yourself.

This is where passive investing comes in. Passive funds don’t try to beat a benchmark, they just try to track it. So a passive fund investing in UK stocks might just buy all the stocks in the FTSE 100 in the same proportion as the index. 

Because this isn’t very labour-intensive and can be automated, the fees are lower too. So most of the time, an investor will get a better return, and pay less for the privilege, by opting for passive rather than active management.

Commodities – that is, raw materials ranging from oil and copper to cotton and grain – are not typically a large part of a private investor’s portfolio.

Commodity prices are highly cyclical. When prices rise, commodity producers boost supply to take advantage. As supply rises to meet demand, prices fall again in turn, and so on.

Over the very long term, commodities prices tend either to be flat or falling in real terms, because technological improvements lead to more efficient ways of using and extracting raw materials.

However, there are periods during which demand rises strongly because of a major change in the global economy. Supply then struggles to keep up as producers adjust to this structural shift.

This leads to a prolonged period of rising prices and investment in supply by commodity producers, until supply has finally grown enough to meet or surpass demand.

This is known as a commodities “supercycle”.

The most recent example came in the early 2000s, when China opened up to world trade, and became a significant force in the global economy.

China’s rapid economic growth saw surging demand for all commodities, as the country pumped money into building roads and railways, and expanding its cities.

That boom lasted – with a brief pause during the global financial crisis in 2008 – right up until 2011, with oil peaking at well over $100 a barrel and copper at more than $4 per pound.

By that time, China’s growth was starting to level off.

However, more importantly, commodity producers such as mining companies had invested so much money on finding more raw materials, that the new supply overwhelmed demand, and prices dropped again.

Today, there are signs that we might be seeing another commodities supercycle, as governments around the world spend heavily to help their economies recover following the pandemic.

The price of copper in particular has shot up, as it is used widely in “green” technologies.

The best way for private investors to get exposure to a commodities boom is through the resource producers themselves – by investing in miners, for example.

However, it’s worth bearing in mind that all such booms come to an end eventually.

To learn more about investing in commodities, subscribe to MoneyWeek magazine.

“Gearing” – also referred to as “leverage” – is a very important concept in investing. It refers to the use of debt to fund an investment.

This can apply to a business itself. For example, a company might borrow money to invest in new technology. The higher level of debt means the company has a higher level of gearing, but it also applies to investments in shares or other assets made by investors. For example, a hedge fund manager might borrow money to invest in a market or company that he or she has a high-conviction view on.

Why would anyone borrow money to invest? The easiest way to understand this is to think about using a mortgage to buy a house.

Say you buy a house for £200,000. You pay a deposit of £50,000. You take out an interest-only mortgage of £150,000 for the rest. A year later, house prices have gone up by 10%. You sell for £220,000. You pay the bank back the £150,000. You get £70,000. That’s a £20,000 profit, or a 40% return. So prices only rose by 10%, but the power of gearing meant you made 40%.

The danger is that gearing works the other way too. If house prices had fallen by 10%, you’d still have had to pay the bank its £150,000, and you’d have been left with £30,000. So you’d have made a 40% loss.

The same mechanic is at work when investors borrow money to invest in bonds or shares, or even currencies. It’s what individuals are doing when they spreadbet – they’re using borrowed money to bet on asset price movements, which is why so many spreadbetters lose all their money.

There are lots of detailed ratios you can look at to measure the extent to which gearing is being used, both by companies or investment funds, but the key point is this: debt can boost your returns if things go your way. But it also increases the overall riskiness of any investment you make.

All else being equal, a highly-indebted company is a riskier investment than one with no debt. Always bear this in mind when considering any candidates for your portfolio.

For more on debt and investing, subscribe to MoneyWeek magazine.

Many concepts in investing sound far more complicated than they are. “Pound-cost averaging” – also known as “drip feeding” – is no exception. It simply means investing a sum of money into the market at regular intervals rather than in one go. So if you have £1,200 to invest this year, you might invest £100 a month; if you have £12,000, you invest £1,000 a month.

The advantage of investing like this is that it can reduce the risk – and pain – of buying just before the market drops. For example, if you put all your money in UK shares this month and the market drops steadily over the year to end up down 20%, your portfolio will also be down 20% (ignoring dividends).

But if you invest equal amounts monthly, you buy in at a lower price each time and so reduce your average cost. So your portfolio may end the year down by around 10% rather than 20%. In turn, that’s less painful, which may make it easier to hold your nerve and wait for the recovery. If markets rise rather than fall over the same period, you will of course make smaller profits than you would have, if you had invested a lump sum at the start.

Critics of pound-cost averaging point out that most major markets have risen substantially in the last few decades. As a result, pound-cost averaging has not delivered the best long-term returns. However, a useful lesson to learn about investing is that the best strategy is not the one that’s best in theory, but the one you can actually stick with in practice.

In an ideal world, we would calmly stick to our plans through thick and thin. But it’s easy to panic in a crash when you see your portfolio’s value falling. Following the pound-cost averaging route – rather than committing all of your money at once – may help you to stay invested during a crisis, rather than pulling your money out at exactly the wrong point.

A disciplined approach to investing small amounts can also help you to overcome the fear that might stop you entering the market at all until the best of the recovery is over.

For more on workable investment strategies, subscribe to MoneyWeek magazine.

Cryptocurrencies such as bitcoin and ethereum have divided investor opinion. Some people think that they represent the future of money and a huge technological advance. Others think that the whole thing is a scam, a bubble, or just hopelessly idealistic.

But one thing is clear: governments are increasingly keen on the possibilities that might arise from issuing fully-digital currencies themselves. Hence the growing interest in central bank digital currencies, or CBDCs for short.

A CBDC is simply a government-backed digital currency. A digital pound – or “Britcoin”, as it’s been nicknamed – would be similar to the paper pound, in that the central bank would control its issuance.

This is perhaps the most important difference between CBDCs and cryptocurrencies. Cryptocurrencies are decentralised. The whole point of bitcoin is that it represents a form of money that cannot be created at will by a government or a central bank. Instead it derives its value from a network of freely-participating individuals.

There are some benefits to CBDCs. In theory they should cut down on transaction costs. And in developing markets in particular, they should make it easier for everyone to get a bank account.

However, there are also some serious disadvantages. Bitcoin is anonymous, but transactions made using CBDCs would be easily tracked by the authorities. This gives rise to privacy concerns.

CBDCs might also replace cash altogether. That would make it easier for central banks to impose policies – such as negative interest rates – that effectively operate as a tax on savers. So the next time the economy is deemed to require monetary stimulus, the central bank could effectively force people to go out and spend their money.

This might sound like something from a dystopian science-fiction novel, but most governments around the world are now working on CBDCs. The Bahamas already has the “sand dollar” which was launched last year. Among major economies, trials of a digital yuan are well advanced in China. And in the UK, the Bank of England and the Treasury are now looking into the idea of “Britcoin”.

So even if cryptocurrencies aren’t the future of money, there’s a good chance that they’ve helped to bring forward the end of cash.

To find out more about the monetary system and central banks in general, subscribe to MoneyWeek magazine.

The first thing to understand about hyperinflation is that it’s not just really, really high inflation. High inflation – in the sense of broadly rising prices for goods, services and wages – can certainly be very disruptive. For example, in the 1970s, at one point prices in the UK hit were rising by more than 20% a year. It’s a decade well known for civil unrest and financial turmoil.

However, hyperinflation is on an entirely different level. One technical definition of hyperinflation is when prices are rising at a rate of more than 50% a month. At that rate, prices will have risen by roughly 130 times by the end of the year.

As you can imagine, keeping track of price changes in that situation is virtually impossible. In short, what hyperinflation really represents is the point at which faith in a country’s currency and economy has been destroyed. The currency is effectively worthless.

The most famous example is from the 1920s and Weimar Germany, with its images of people pushing wheelbarrows full of money. More recent examples include Zimbabwe in the late 2000s, and even more recently, Venezuela. How does this happen?

Hyperinflation is often associated with money-printing. However, it’s more accurate to say that money-printing can be a symptom of hyperinflation rather than the underlying cause.

There are several factors involved, but two stand out as crucial. One key factor is the destruction of a country’s ability to produce as many goods and services. For example, political corruption and mismanagement resulted in the collapse of both Zimbabwe’s farming industry and Venezuela’s oil industry. Weimar Germany, meanwhile, happened in the wake of the devastation of World War I.

Another key factor is that a country has high levels of debt or other obligations that need to be paid in a foreign currency. These debts are clearly unaffordable and yet the country cannot just print money to get rid of them. Instead, the value of the domestic currency collapses as the economy’s reduced productive capacity is channeled into paying these debts.

This is not to say that hyperinflation couldn’t happen in a developed economy like the UK or the US, who issue debt in their own currencies. But it would imply a devastating economic and civil collapse, rather than simply too much quantitative easing.

For more on inflation and its causes, subscribe to MoneyWeek magazine.

Scams come in all shapes and sizes. The financial world is, unfortunately, full of them. But probably the best-known type of financial fraud is the Ponzi scheme. 

How does a Ponzi scheme work?

A con artist promises to deliver an attractive return to investors in his or her project. Early investors put their money in, and – lo and behold! – they get huge returns as promised. This encourages more and more people to sign up for the scheme.

However, there is no actual investing going on. Instead, the con artist is simply using the new money coming in from fresh investors to pay the so-called “investment returns” to the initial investors. The rest of the money is being creamed off to fund the con artist’s lifestyle.

Why are they called Ponzi schemes?

Ponzi schemes are named after Charles Ponzi, who emigrated to the US from Italy in 1903. Ponzi hoped to make his fortune, but instead, ended up moving from job to job and spent some time in jail for forgery.

But in 1919, he hit upon an idea based on exploiting a loophole in the pricing of postal coupons. The opportunity was real in theory, but entirely impractical in reality. But of course, that didn’t matter to Ponzi, because he wasn’t actually investing the money. He told investors he could double their money within 90 days. The scheme took off as word spread.

Within a year, the scheme had been exposed by The Boston Post, and it collapsed. Yet by that point, Ponzi had already taken around $20m (in 1920 dollars) from 15,000 investors. The demise of the scheme also caused the failure of six banks.

Ponzi was not the first fraudster to run this type of scam. But for a long time, he was the most infamous. That is, until the 2008 financial crisis revealed that the highly-respected investor Bernie Madoff had been running a Ponzi scheme under the noses of regulators for decades.

More recently, there have been lots more cases of con artists trying their luck by creating Ponzi schemes and luring in investors, especially during the cost of living crisis and with the promise of high, guaranteed returns. For example, the Financial Conduct Authority won a case this month against Robin Forster, the director of a company that took £57 million from 380 investors in an illegal Ponzi-like care home investment scheme. It had advertised returns of 8 - 10% for sub-letting rooms in a care home.

The lesson for investors? If something looks too good to be true, it almost certainly is. 

What should you do if you’re a victim of a Ponzi scheme?

If you think you’ve lost money to a Ponzi scheme, report it to Action Fraud by calling 0300 123 240 or report it online.

If you are still participating in a Ponzi scheme, break off contact with the fraudsters immediately and do not invest any more money.

If you’ve given them your bank account details, alert your bank straight away.

It’s important to keep any written communications received from the Ponzi scheme, as this could be used as evidence by the authorities in future.

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Dogecoin is back in the news amid murmurs well known DOGE fan Elon Musk is looking to launch financial services to compete with traditional banks on X (formerly Twitter) next year. But what is dogecoin and why is this speculation so potentially important for the cryptocurrency? 

What is dogecoin? 

Musk suggested dogecoin would be useable for purchases on the Twitter platform - a move that saw dogecoin’s price spike more than 30% - when he acquired Twitter in 2022, but he’s not talked about the topic since.

The first thing to understand about dogecoin is that it was set up as a joke. It was invented in 2013 by a pair of software engineers, Billy Markus and Jackson Palmer.

It’s called dogecoin because it was based on the popular “doge” internet meme. This features a picture of a particularly cute breed of Japanese dog – the Shiba Inu – looking baffled, and surrounded by multicoloured words with spelling mistakes.

The idea was to parody the whole concept of cryptocurrencies and to highlight how easy it was to launch one. Yet some argue that this in itself drew attention to the cryptocurrency, and thus gave it a staying power and traction that has escaped many “serious” rival cryptos.

So what is dogecoin actually for?

How does dogecoin work? 

Unlike some cryptos, which have specific uses embedded in them, dogecoin is simply a digital currency, just like bitcoin. Unlike bitcoin however, which limits the total number of coins that can ever be mined to 21 million, dogecoin has no maximum.

So technically, there is no restriction on the quantity of dogecoins that can be mined. It’s also easier to mine dogecoin, though you would still need specialist equipment to do so now. All of this should imply that even if dogecoin does have a value, it should be a lot lower than bitcoin’s.

As for its inventors, neither works on dogecoin anymore. Markus has said that he sold all of his dogecoin in 2015. Apparently, he made enough to buy a second-hand Honda Civic.

Inflation is a very loaded term for economists, with plenty of debate around exactly what causes it and the best way to define it. But when most people hear the word “inflation”, they think about rising prices.

Understanding what’s happening to prices is very important. Measuring price inflation can help us to spot where potential problems might be building up in the economy. For example, rising prices might indicate shortages or bottlenecks. Falling prices might imply a collapse in demand. However, even then, getting a proper view on what’s happening to inflation depends on exactly which set of prices you are trying to measure.

Two of the most important such indicators for the economy are “producer price inflation” and “consumer price inflation”. So what are they and what do they measure?

“Producer price inflation” is all about prices at the manufacturing level. It covers changes in the cost of raw materials used by producers of goods. And it also looks at changes in the prices of the goods produced. In other words, it looks at changes in manufacturer’s input costs, and also in what they charge for the finished goods when they leave the factory. This is why it’s sometimes referred to as “pipeline inflation” – it’s a measure of price changes that are currently further up the supply chain from the consumer.

“Consumer price inflation” on the other hand, looks at changes in the price of a basket of goods consumed by the average household. So for example, the producer price indexes would cover what it costs to make a jacket, and the price at which the manufacturer then sold it to a supermarket. Consumer price inflation would cover the price the supermarket charged customers for the jacket.

Most of the time, the key question is whether rising costs will end up being passed on to consumers or not. If so, then that will create inflationary pressure in the wider economy. But if producers and shops can’t pass on their higher costs – usually because there is too much competition in the market – then their profit margins will feel the squeeze, which can be bad news for investors in the companies affected.

To find out more about inflation and what causes it, subscribe to MoneyWeek magazine.

Exchange-traded funds (ETFs) are a key component of the modern investor’s toolkit. These simple products are gaining in popularity, and can offer a huge range of options for investors.

The European ETF market registered over $56 billion of inflows in January 2026, according to analysis of etfbook.com data by Fidelity International.

“While we continue to move from one geopolitical crisis to the next, the ETF market remains a source of stable growth,” said Neil Davies, Head of ETF product and capital markets, Europe and APAC at Fidelity International.

As the name suggests, exchange-traded funds or ETFs are funds that are bought and sold on stock exchanges. As such, their prices change in real time like a stock, rather than at the end of each day, and investors can buy them at their current price at any time during stock market opening times.

ETFs come in two forms: active and passive.

Passive ETFs track the performance of a specific sector by investing in a benchmark index. They don’t attempt to beat their benchmark, but to accurately replicate its returns. These are, historically, the most common form of ETF, though active ETFs are increasingly popular.

“The debate around ETFs vs mutual funds has historically been a proxy for the active vs passive debate,” Tom Bailey, Head of ETF Research at HANetf, tells MoneyWeek. This, however, has been changed by the rise of active ETFs.

Active (or actively managed) ETFs have a portfolio manager that adjusts the allocation of securities within the fund to try to beat the performance of the benchmark index (if there is one – some active ETFs aren’t based on an index at all).

According to analysis from research provider Morningstar, the value of assets held in European ETFs increased 49% from €52.5 billion to €78.4 billion over the course of 2025.

Types of ETF

Like any type of fund, there are ETFs for almost any purpose. ETFs (or similar products like ETCs) exist for bonds, commodities and currencies, while some (known as multi-asset ETFs) invest in a mixture of asset classes.

Within equities, ETFs can take various forms. You could, for example, use an ETF to invest in a particular geography or region: like the Franklin FTSE Asia ex-China ex-Japan UCITS ETF (LON:FRQX) which provides exposure to Asian countries besides China and Japan.

Or you could use an ETF to invest thematically; that is, into a particular sector or theme. An example of a sector-focused ETF would be the iShares MSCI Global Semiconductors UCITS ETF (LON:SEMI), which invests in an index of semiconductor and semiconductor equipment manufacturers.

How do ETFs work?

ETFs are priced in line with the total value of all their holdings and cash (‘net asset value’ or NAV).

While, in theory, an ETF’s price could diverge from its NAV if investors buy or sell it more than the sum of its individual holdings, a mechanism exists that keeps its price aligned with the assets it tracks. In simple terms, authorised partners create or remove new ETF units when its price diverges from NAV, quickly correcting any discrepancy.

This is in contrast to other funds such as investment trusts, which have a fixed number of shares from inception and can therefore diverge more widely from their NAV.

Pros and cons of ETFs

There are various reasons why ETFs are so popular among investors. These include:

• Diversification: thematic ETFs offer investors a convenient way for investors to gain exposure to a sector or theme whilst diversifying and rebalancing their investment across multiple securities;
• Tax efficiency: ETFs can be held in a stocks and shares ISA, protecting your investment from the taxman;
• Low costs: ETFs, especially passive ones, tend to have relatively low fees compared to other types of fund;
• Transparency: ETFs publish their holdings daily, while mutual funds and close-ended funds aren’t required to and tend only to publish holdings quarterly.

Furthermore, ETFs are traded on exchanges in real time which offers advantages over mutual funds. It “provides greater flexibility and real-time pricing”, Bailey says, adding that end-of-day pricing for mutual funds and the need for orders to be placed in advance “seems archaic” in an on-demand world.

Investors should, however, consider the potential drawbacks of ETFs:

• Passive ETFs will never outperform their benchmarks over the long term. Active ETFs might outperform their benchmark, but they can also underperform it.
• ETFs are designed to achieve a specific investment objective over the long term. They aren’t suitable for short-term trading, as over shorter time frames their performance can vary from their benchmark.

ETFs and ETCs: what’s the difference?

An exchange-traded commodity (ETC) works very similarly to an ETF, but tracks the price of a specific commodity.

This is subtly different from a commodity-focused ETF, which will generally invest in shares of companies that are directly exposed to a commodity (such as copper miners) in order to reflect its price movements. While they might produce similar returns, the underlying mechanism is different.

In all other respects, however, ETCs are very similar to ETFs. They offer everyday investors access to commodity investing without having to use complex instruments such as futures or options.

How to invest in ETFs

One of the best aspects of ETFs is their convenience. They can be bought and held in a stocks and shares ISA, like a stock, so if you don’t already have one, opening one of these is the best first step towards ETF investing.

Before buying, though, consider the type of ETF you want to buy, and research the various options available. There are usually multiple ETFs available for any given sector or asset class, so compare options from different providers to assess factors such as fees and the ETF’s strategy and holdings before deciding which to invest in.

Examples of ETFs

If you’re new to ETF investing, a good place to start might be with a passive fund that tracks a major index.

Some examples include:

• The Vanguard S&P 500 UCITS ETF (LON:VUSA), which tracks the S&P 500;
• The Invesco FTSE 250 UCITS ETF (LON:S250), which tracks the FTSE 250;
• The iShares NASDAQ 100 UCITS ETF (LON:CNDX), which tracks the Nasdaq 100.

More confident investors might want to add ETFs to their portfolio in order to gain exposure to a specific sector or asset class. Some examples of ETFs that could be used in this way are:

• The WisdomTree Artificial Intelligence UCITS ETF (LON:INTL), a passive fund that tracks the NASDAQ CTA Artificial Intelligence Index;
• The L&G ESG GBP Corporate Bond UCITS ETF (LON:GBPC), which offers exposure to the sterling-dominated investment grade corporate bond market by tracking the J.P. Morgan GCI ESG Investment Grade GBP Custom Maturity Index;
• The Royal Mint Responsibly Sourced Physical Gold ETC (LON:RMAU), which tracks the gold spot price. As this is a physical ETC issued by the Royal Mint, holders can exchange shares of the ETC for responsibly-sourced gold coins or bars stored by the Mint.

Can I buy US ETFs from the UK?

Investors based in the UK might want to use ETFs to track the performance of US companies or indices. US regulations mean that UK-based investors cannot buy US-listed funds, but there is a workaround, however, in the form of the UCITS legislation. UCITS (Undertakings for Collecting Investment in Transferable Securities) is a regulatory framework that allows European investors to buy US-listed funds, as long as they carry the UCITS designation.

To find out more about ETFs, subscribe to MoneyWeek magazine.

When investors buy shares or other financial assets, they can borrow money with the aim of boosting their returns. However, if things don’t go their way, they may face a “margin call”, and be forced to sell their holdings for a large loss.

Before we explain what a margin call is, we need to look at why someone might borrow money to invest in the first place. The easiest way is to compare it with using a mortgage to buy a flat.

Say you buy a flat for £100,000. You put down a 10% deposit – £10,000 – and borrow the other £90,000 from the bank. A year later, house prices have gone up. You sell the flat for £110,000. The price of the flat has gone up by 10%. But you have made a 100% profit. How? Once you repay the £90,000 to the bank, you are left with £20,000. You only put in £10,000 of your own capital. So you’ve doubled your money.

Of course, it cuts both ways. If house prices had fallen by 10% – heaven forbid! – the flat would have been worth just £90,000. All of the sale proceeds would have gone to the bank, and you’d have lost your original £10,000 – a 100% loss.

So borrowed money amplifies movements in the underlying asset price. This is why it’s known as “leverage” or “gearing”.

When an investor borrows to bet on shares, they also put down a deposit. In this case, it’s known as “margin”. The “margin” is there to protect the banks who lend the money.

A “margin call” happens when the margin available to cover any losses falls below a certain level. At that point, the banks demand the investor puts up more “margin” in the form of cash or other collateral. If they fail to do so, the banks may have to sell their holdings to reduce their own risk.

Day traders and spread betters often get margin calls. But it also happens to institutional investors, such as hedge funds. The risk with such margin calls is that if one heavily leveraged seller is forced to sell their shares, this might trigger margin calls for other investors, resulting in a domino effect.

This is why central banks have been known to step in when “systemically important” institutions have suffered margin calls in the past.

To find out more, subscribe to MoneyWeek magazine.

If you invest in a company’s shares, you are entitled – through ownership of those shares – to certain rights. The right that shareholders tend to be most interested in, is the right to share in the future profits of the company. Owning a share will entitle you to a chunk of any dividend payouts, for example. However, there’s another important right – that is, the right to have a say in the running of the company.

Shareholders usually benefit from voting rights – that is, the right to attend Annual General Meetings, and to vote on certain corporate actions that will affect shareholders. For example, a shareholder will usually have the right to vote on big changes such as takeovers or mergers, or the right to vote in elections for board members.

However, in recent years, some of the world’s most exciting companies have sold shares which offer fewer voting rights than other types of share in the same company. Big tech companies in particular often split their shares into different classes when going public.

For example, social media giant Facebook has “class A” shares and “class B” shares. Normal investors buy and sell class A shares, which have one vote per share. The class B shares are owned largely by Facebook founder Mark Zuckerberg, and come with ten votes per share. In 2017, social media company Snap took this a step further. The shares it sold to the public when it listed in New York, came with no voting rights whatsoever.

Meanwhile, here in the UK, food delivery company Deliveroo plans to have two classes of share when it goes public shortly. The shares available to investors will carry one vote per share, while those owned by the founder will have 20 votes per share.

Founders argue that these different levels of voting rights insulate them from the short-termism of being a public company. In other words, they can pursue long-term strategies without the fear of being pushed out of their own companies due to a short-term run of weak performance.

For now, shareholders seem content to put up with the inequality, in order to be able to share in the fortunes of these stocks. Whether that will last, should these companies face harder times, remains to be seen.

To find out more about shareholder democracy in general, subscribe to MoneyWeek magazine.

If you’ve ever spoken to a financial adviser or read an investment magazine, you’ve probably come across the term “60/40 portfolio” before. But what exactly is a 60/40 portfolio, and why have they proved so popular over the years?

The term “60/40” refers to a style of asset allocation. Asset allocation is simply the process of splitting any money you plan to invest between different types of assets. The goal of asset allocation is to deliver the best possible expected return for your money, while avoiding taking more risk than you feel comfortable with.

In the case of a 60/40 portfolio, 60% of your money goes into riskier assets – typically shares (or equities as they’re sometimes called). The other 40% goes into less risky assets – typically government bonds, which are just IOUs issued by governments.

Please note that when we talk about risk in this context, we’re referring to the longer-term volatility of your portfolio, rather than the risk of losing all your money. In other words, it’s a measure of how bumpy a ride you have to put up with along the way. Over the long run, financial theory suggests – and history backs this up – that if you are willing to take more risk, then you should get bigger returns.

With a 60/40 portfolio, the idea is that you get a smoother ride than you would with a portfolio that was 100% in risky shares. But you also get better returns than if you were 100% in boring old bonds.

You would also make sure to rebalance your portfolio at least once a year. So for example, if bonds had gone up a lot and now accounted for more than 40% of the portfolio, you would put more money into equities, until you were back to a 60/40 allocation.

The 60/40 portfolio has worked well for some time. However, past performance is not necessarily any guide to future performance. With bond yields now at or near record lows, and concerns about inflation rising, some investors are now questioning whether the 60/40 portfolio will continue to be a good bet in the decades to come.

To find out more about that and about asset allocation in general, subscribe to MoneyWeek magazine.

There are two main approaches to investing in asset markets. One is to look at what are known as “the fundamentals” – for example, you might look at a company’s accounts to see how profitable it is, and to work out how much you should be willing to pay for it. You might also look at the wider backdrop – is the economy growing or weakening? What impact might that have on the sector? However, there is another popular way to invest that ignores all of this entirely – that’s “technical analysis”, often referred to as “charting”. This involves looking at price charts to forecast the likely direction of the price of an asset.

As far as hardcore technical analysts are concerned, all of the information you could possibly need to make an investment decision is already reflected in current prices. In other words, anything you can glean from “the fundamentals” has already been priced in. However, while there is always a flow of new information coming into markets, investors react to this new information in predictable ways. And because markets are cyclical, this results in recurring patterns of buyer and seller behaviour, which in turn will show up as recurring patterns on the charts. Being able to identify these patterns as they occur gives technical analysts an insight into what might happen next.

In effect, technical analysis is built on an understanding that markets are driven by human greed and fear as much as they are by things like profitability and balance sheet strength.

Technical analysts employ a whole range of indicators and different types of chart. The simplest approach focuses on the idea that prices tend to “trend”, moving up, down or sideways for long periods of time. So, for example, the path of least resistance for a stock that is moving up is to keep moving up. So a technical analyst might, for example, use moving averages – that is, plotting a line which takes the average of the asset price over a set number of trading days – to identify trends, and to measure how powerful they are.

Technical analysis may not sound very scientific, and like any other market approach, whether it “works” or not depends on who you ask and when you ask them. But its main purpose is to enable short-term traders to define clear entry and exit points for trades, which is something that fundamental analysis simply cannot do.

To learn more about investing methods, subscribe to MoneyWeek magazine.

When it comes to influencing economic growth in a country, the authorities are considered to have two main levers. These are monetary policy and fiscal policy.

Monetary policy is managed by central banks who aim to meet economic goals set by governments. They do this by influencing the amount of money circulating in the economy. For example, most central banks, including the Bank of England, are asked to target a specific level of inflation. This is usually around 2%. By the way, there is no specific rationale behind the 2% target; it’s just generally viewed to be roughly the “right” amount of inflation for most developed economies.

The central bank influences the cost of borrowing by raising or cutting interest rates, or printing money to buy government bonds and other assets. In theory, when it’s cheaper to borrow money and less rewarding to save, people and companies will invest and spend more. That boosts growth, which should eventually drive up inflation. If inflation gets too high, the central bank raises interest rates. That raises the cost of borrowing and encourages saving over consumption, which should slow growth and choke off inflation.

Fiscal policy, on the other hand, refers to the tools used by governments to influence the economy. Governments can raise and lower taxes. They can also direct spending at specific industries or groups of people. Fiscal policy is more targeted and arguably more powerful than monetary policy. But clearly, it is also more political. It creates winners and losers in a much more explicit manner than monetary policy.

One core feature of economic management in the late 1990s and the run-up to the 2008 financial crisis was an increasing reliance on monetary policy to smooth over ups and downs in the economy. In effect, governments delegated macro-economic management to their central banks. Nobody really complained because most economies seemed to be pottering along merrily. However, the 2008 financial crisis shattered that illusion. Since then, economic growth has been weak, while at the same time soaring asset prices have fueled a perception of growing inequality. Faith in monetary policy has been eroded.

Meanwhile, fiscal policy – such as subsidising wages – is now being used to tackle the effects of pandemic lockdowns. This is likely to last long beyond Covid, and has some serious implications for investors. To learn more about this huge political and economic shift, subscribe to MoneyWeek magazine.

Hedge funds are just like any other fund. A manager pools money from a number of investors and invests it on their behalf, but unlike the traditional funds you and I might use, these funds are not open to your average private investors. 

They’ll typically require minimum investments of upwards of £100,000 or more. This is because hedge funds tend to use more exotic investment strategies that financial regulators deem too risky for ordinary investors.

What is a hedge fund? 

A hedge fund is a type of investment vehicle that pools money from accredited individuals or institutional investors to invest in a range of assets with the aim of generating a positive return. Hedge funds are typically managed by experienced professionals who use complex investment strategies to maximize returns while mitigating risk.

One of the defining characteristics of hedge funds is that they are generally only available to accredited investors. This means that individuals or institutions must meet certain financial criteria to be eligible to invest. The idea behind this is that these investors are more sophisticated and able to bear the risks associated with hedge fund investments.

Hedge funds can invest in a wide range of assets, including stocks, bonds, commodities, currencies, and derivatives. They may also use a variety of strategies, such as long/short positions, options trading, and leverage, to generate returns. In some cases, hedge funds may also engage in short selling, which involves betting that the price of a particular asset will fall.

Hedge fund benefits

One of the key benefits of investing in a hedge fund is the potential for higher returns compared to other types of investments. Because hedge funds use complex strategies and invest in a wide range of assets, they have the potential to generate significant returns. 

However, with this potential for higher returns comes a higher level of risk. Hedge funds are not regulated like other types of investments, which means that investors may be exposed to greater risk.

Another benefit of investing in a hedge fund is the potential for diversification. Because hedge funds invest in various assets, they can help spread risk across different types of investments, such as equities, bonds, property and even private businesses. This can help to reduce the overall risk of an investor's portfolio.

Hedge fund risks

However, there are also some disadvantages to investing in hedge funds. One of the main drawbacks is the high fees associated with these investments. Hedge funds typically charge a management fee, a percentage of the assets under management (typically 2%), and a performance fee, which is a percentage of the profits generated by the fund (typically 20%). 

Another potential drawback of hedge fund investments is the lack of transparency. Because hedge funds are not regulated like other types of investments, investors may not have access to the same level of information about the fund's holdings and performance. 

This can make it difficult for investors to make informed decisions about whether to invest in a particular hedge fund, although some details are usually obtainable via the fund’s 13F report, which is filed with regulators in the United States. The 13F report details any US equity holdings the fund might own. 

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Investors often use the price/earnings, or p/e, ratio, to judge whether a stock is cheap or not. It’s easy to calculate, hence its popularity. We’ve covered it in a previous video, but to sum up, you simply divide the share price of the company by its earnings per share.

A low number – below ten, say – suggests that you aren’t being asked to pay much for each pound or dollar of earnings the company makes. That might be because the stock is cheap. But it might instead be because investors expect earnings to fall in the future. A high number indicates that a stock may be expensive, or perhaps that investors expect earnings to grow rapidly.

However, the basic p/e is very flawed. Using just one year of profits means that a company – particularly one in a cyclical business, such as housebuilding – can look cheap because profits happen to be peaking at that point, and are set to fall hard when business turns down in line with the wider economy.

So in the 1930s, value investors Benjamin Graham and David Dodd suggested that analysts should instead take the average of earnings for the previous five to ten years. This should give investors a better view of whether a stock is really cheap compared to its average performance over an economic cycle.

Professor Robert Shiller of Yale University popularised this idea of the cyclically-adjusted price/earnings ratio – or Cape, for short – in his book Irrational Exuberance, which was published in 2000. That’s why it’s also sometimes known as the Shiller p/e.

Shiller and his colleagues found that investing in markets when the market-wide Cape was low tended to deliver strong returns over the following 20 years. Buying when the Cape was high, tended to lead to weaker returns. Shiller’s findings gained particular attention because his book was published just as the dotcom bubble burst, and US markets – which had never been more overvalued on a Cape basis – collapsed.

However, despite this apparent prescience, it’s important to note that Cape is not a tool for market timing. The US market has been expensive on a Cape basis for several years now, for example. Instead, it is a useful measure to look at when trying to find markets that have the potential to outperform in the long run.

To learn more about valuation measures, subscribe to MoneyWeek magazine.

When most investors put money in the stock market, they go “long”. That is, they buy shares in the hope that the price will go up. Short selling is the opposite of this – it’s a method of profiting from a share price going down.

Here’s how it works: a short seller borrows the shares from someone who already owns them (usually a fund manager) – the fund manager is happy to lend the shares to the short seller, because they get a fee in return for the loan. The short seller then sells these shares in the open market. If things go according to plan, the share price falls and the short seller can then buy the shares back at the lower price, return them to the lender, and pocket the profit.

So, for example, say you want to bet that the share price of Dodgy Widgets plc is heading for a fall. You borrow 10,000 shares from a friendly fund manager, and sell them at £1 a share. So you now have £10,000, but you owe the fund manager 10,000 shares. Thankfully, Dodgy Widgets issues a profit warning later that month, and the share price falls to 80p per share as a result. You buy 10,000 shares back for £8,000. You return the shares, and keep your £2,000 profit (less your borrowing fee).

Professional short sellers try to hunt down companies with weak business models, and bet against them. Managements don’t like being challenged in this way, so short sellers are often maligned. But in fact they provide a valuable service, and sometimes help to reveal the truth about an overhyped or downright fraudulent company.

Shorting is also far riskier than being “long”. If you buy a share, then the worst that can happen is that the share price goes to zero, and you lose all of the money you invested. But with short selling your losses are technically unlimited, as there is no ceiling on how high a share price can rise.

In our previous example, if Dodgy Widgets hadn’t warned on profits, but instead said that it was set to make much more money than expected, sending the share price higher, then our short-seller would still have to buy the shares back in order to return them. In this case, they would be looking at a hefty loss.

To learn more about short-selling, subscribe to MoneyWeek magazine.

There are many ways to estimate the value of a company. One ratio that is popular with value investors, in particular, is the price/book ratio, which compares a company’s share price with its book value.

So what is book value? Quite simply, it’s the total value of a company’s assets after subtracting all of its liabilities. You can find it in the balance sheet section of a company’s annual report. It’s also known as shareholders’ equity or net asset value.

Assets come in two main types. Tangible assets include land, machinery, cash - anything you can “touch” (including cash in the bank, and other financial assets such as shares). Intangible assets include the value of a brand, or intellectual property rights – assets that you can’t touch, but which definitely have a value.

Intangible assets are harder to put a specific value on than tangible assets. It’s a lot easier to know what a fleet of vehicles is worth today than it is to put a precise value on a brand at any given point in time. Moreover, many of the costs that create intangible value (such as spending on research and development) never end up being recorded on the balance sheet as a result of accounting conventions.

Yet for many companies – tech stocks are an obvious example, but consumer goods companies are another – the value of the intangible assets may well be far greater than any physical assets they own. As a result, book value is arguably more useful for valuing companies with lots of tangible assets, such as housebuilders or banks.

If you divide the share price by the book value per share, this can give you an idea of whether the company is cheap or expensive. A price/book value of less than one means that, in theory, you can buy the company for less than its assets are worth.

In other words, if you had the means to buy the whole company, you could buy it, then sell off all of its assets immediately, and still make a profit. Of course, it may also imply that investors are sceptical as to the real value of the company’s assets.

What is a Spac?

Spac stands for “special purpose acquisition company”. The key difference between a Spac and a normal company is that the Spac has no business of its own. Instead, its sole purpose is to raise money via an initial public offering (IPO – ie, joining the stockmarket) and then use that money to buy an existing private company or companies.

For this reason, Spacs are also known as “blank cheque companies” in the US. In the UK, they’d more commonly be described as “cash shells”.

Spacs have been around for some time, but they have erupted in popularity (and controversy) in recent years. For example, in 2009, only one Spac came to market, and even in 2019, the number was only 59 (according to data from Statista).

By contrast, nearly 250 Spacs were created in 2020, raising $83bn. And in 2021, that number surged to more than 600 Spacs, raising more than $160bn, according to industry website SpacInsider.

Big names that have gone public via the Spac route include Virgin Galactic and US sports and gaming group DraftKings.

So what is a Spac and how does it work?

A Spac is usually put together with the aim of buying a company (or companies) in a specific sector. The founders may be experts in the area, although as the popularity of such vehicles has rocketed, many are now associated with celebrities or other well-known figures, with everyone from US cook Martha Stewart to former president Donald Trump backing Spacs in recent years.

Once it has listed, the Spac generally has two years to find a deal or target to spend the money on. If it doesn’t then it has to return the cash to shareholders. Investors in Spacs can range from members of the public to big private equity firms and hedge funds.

What are the advantages?

Spacs have numerous benefits compared to traditional IPOs – at least, for the companies involved. The main advantage is time – Spacs allow private companies to go public much more quickly than via a normal IPO process. Another selling point is that being bought by a Spac saves on the hassle and paperwork of an IPO, and it’s also less costly.

As Martin Szydlowski, assistant finance professor at University of Minnesota Carlson School of Management, points out, Spacs “avoid the use of an underwriter, making it cheaper”. Spacs are also less tightly regulated, particularly in terms of the information they have to disclose to investors.

What are the biggest risks?

For an investor, Spacs come with plenty of risks. Perhaps the biggest is that investors do not know what their money is going to be spent on, so they are often taking a leap of faith when investing in a Spac.

Spacs also have a record of disappointing. According to one study by the European Governance Institute, “Spac share prices tend to fall by about a third of their value within a year of their mergers,” notes Rana Foroohar in the Financial Times.

This view is echoed by Szydlowski: “In the last decade, Spacs have been performing poorly in the stockmarket, leaving investors with substantial losses and alarming regulators… Some research suggests Spacs release excessively optimistic projections of future value, which influences retail investors who overvalue the shares.”

Partly as a result of this, Spacs have been coming under greater regulatory scrutiny. For example, the US Securities and Exchange Commission’s chair, Gary Gensler, warned in December 2021 that he wants to introduce tougher rules for the sector early next year.

As with almost every important concept in economics, finding a technical definition of inflation that everyone agrees upon is impossible.

But for most of us, inflation boils down to one simple question: “how fast are prices in general rising compared to this time last year?”

That makes sense. There are two main reasons for most of us to worry about inflation, and both concern the impact of rising prices on our standard of living.

Firstly, if your cost of living is rising more rapidly than your income, then your standard of living will deteriorate, potentially quite rapidly.

Secondly, if prices generally are rising more rapidly than your savings are growing, then the value of your savings is in fact falling in “real” terms. This might not be obvious in the short term, but in the long run, it could really ruin your retirement plans.

So, how do we measure inflation? The main inflation gauge in the UK is the Consumer Prices Index, or CPI for short.

Every month, the Office for National Statistics checks the prices of more than 700 goods and services in an imaginary shopping basket. This is meant to roughly represent the sorts of things that the average UK consumer buys regularly.

Clearly, some people will have a higher rate of personal inflation than others. A 75-year-old pensioner will have a very different shopping basket to a 20-year-old student.

But the CPI methodology is widely accepted around the world as being the most practical way to measure price inflation.

One of the jobs of a central bank is to keep inflation hovering around a specific level, usually around 2%.

This is because rapidly rising prices – as happened in the UK in the 1970s – are economically and socially disruptive.

However, central banks also want to avoid deflation – where prices are consistently falling.

Contrary to popular belief, this is not because falling prices make consumers less likely to buy goods in the hope of getting them cheaper in future.

No one would ever buy a new TV or mobile phone if this was genuinely true.

The real problem is that deflation makes the real cost of debt go up, which is something that our debt-fuelled economies are not set up to cope with.

However, that’s a story for another day.

To learn more about how inflation affects your investments, see our previous video on “real returns” – and don’t forget to subscribe to MoneyWeek magazine.

If you ever tune into financial commentary, two of the most common terms you’ll hear are “bullish” and “bearish”. But what do they actually mean, and where on earth do they come from?

The definitions are very simple. A bull market is a rising market. So if you are bullish on an asset or a market, it means you think the price will go up. If a news item or economic data point is described as bullish for the market, then it’s seen as something that will drive prices higher.

A bear market is a falling market. So if you are bearish, it means you think the price of an asset or market will go down. And if a news item is bearish for a stock or for the market, it’s seen as something that will drive prices lower.

A very loose definition of a bull market – in other words, a market that is viewed as being on the rise more generally – is one that has risen by more than 20% from its most recent low. A similar definition – but in the opposite direction – applies to bear markets. To be clear, there is nothing especially significant about the figure of 20% – it’s just a big number.

Some market analysts argue for more thoughtful definitions of bull and bear markets that take into account underlying conditions and span a wider period of time. These are sometimes known as “secular” or “structural” bull or bear markets.

So that’s pretty simple. Bulls are optimistic about asset prices, while bears are pessimistic. But where do the terms come from? No one really knows for sure. But one theory is that they come from a rather grisly bloodsport – popular in both Elizabethan England and gold rush era California – in which a bull would be pitted against a bear. Spectators would bet on the outcome. Thus you have ”bulls” versus “bears”. In this case, bulls represent a rising market, because when bulls attack, they thrust their horns upwards, whereas when bears attack, they claw downwards.

A related theory is that the term “bear” originated with the market for bearskins. Middlemen in the trade would sell skins before they’d bought them from trappers. In effect, they were short-selling. Hence the term “bear” – with its opposite being “bull”.

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When you start investing, one of the first concepts you’re likely to encounter is ‘value investing’. Like many terms in investment, “value” is not easy to pin down precisely.

As Charlie Munger, the business partner of legendary US investor Warren Buffett, put it: “All investment is value investment, in the sense that you're always trying to get better prospects than you're paying for.” This is true, but not very helpful. So let’s be more specific.

Value investors look for solid companies that are trading for less than they are worth.

“The term we often use is durable businesses,” says Nisha Thakrar, product specialist at Nedgroup Investments who works on the firm’s Contrarian Value Equity Fund. “We’re trying to find ‘forever companies.’”

The team selects from a list of approximately 500 stocks they feel are worth considering as investments given their long-term prospects, but buying or selling any stock within this longlist is based on its value at any given time.

While it fell out of favour for much of the period between 2008 and the present day, value investing is coming back into vogue. So what do you need to do to become a value investor?

How does value investing work?

Many value investors base their investment decisions on a calculation of a stock’s ‘intrinsic value’ and will look to invest in stocks that are trading below this – often accounting for a ‘margin of safety’ as a further buffer. So if a stock is deemed to be worth £2 and the investor wants a 30% margin of safety, they will only buy it if its price falls to £1.40 or lower.

There is no single way to define or calculate intrinsic value (if there were, the stock market would be a much less dynamic place). So different value investors will all use different approaches. Nedgroup's Contrarian Value Equity team, for example, looks at companies’ growth trajectory over the next three to five years, and looks for evidence they can generate annualised returns of 8-10% over that time period.

What unifies value investors is that their approach will be based on company fundamentals’ – which broadly refers to the price at which a stock trades at compared to the amount of money the company makes (or, in some instances, is on course to make). Most value investors also pay close attention to company balance sheets.

“The natural questions are what’s the balance sheet strength? Are these cash-rich companies? Are they indebted? What’s the structure of the business? What are the core drivers of revenue, and how diversified are those?” says Thakrar.

How does value investing differ from growth investing?

This is in contrast to ‘growth’ or ‘momentum’ investors, who are broadly speaking less focused on fundamentals and more focused on market sentiment and narrative. They want to buy the stocks that are increasing in value and which are likely to do so long into the future, regardless of how profitable (if at all) they are right now. Companies that have the potential to grow in future tend to trade at a substantial premium, so value investors will often steer clear.

All of this is a spectrum, though, and there are overlaps between these styles: as Munger says, all investing is value investing to some extent. Growth investors buy growth stocks because they think they’re cheap compared to their long-term value, and might look at fundamental metrics like the forward price:earnings ratio (forward P/E), which measures a company’s price divided by the profits analysts expect it to post over the next 12 months.

Value investors are likewise not oblivious to the idea that good companies grow over time; they might well find agreement with growth investors that particular stocks make attractive long-term investments at their current price.

So rather than see these two labels as diametric opposites, it can be helpful to view them as different perspectives or approaches to solve fundamentally the same problem; trying to decide where to invest your money.

What is contrarian investing?

Contrarian investing is in many respects similar to value investing, in that both seek out companies that are undervalued by the market.– but each has a subtly different way of going about it.

Value investors look at company fundamentals to find solid, reliable businesses. Contrarians, on the other hand, actively focus on companies that are being disregarded for one reason or another.

Take Google’s parent company Alphabet (NASDAQ:GOOGL). This is part of the ‘Magnificent Seven’ group of big tech megacap stocks, which many investors believe are overvalued. Alphabet trades at over 30 times trailing earnings. In some respects, it is as far as you could get from a traditional ‘value’ stock.

Yet, it was the top holding in Nedgroup’s Contrarian Value fund with 7.5% of the portfolio as of 31 December. As Thakrar explains, buying stocks when the market disregards them is key to success for contrarian investors.

“We bought Alphabet when it was probably still called Google, in 2011,” she says. “At the time, Google was facing this existential threat of how it would pivot its business from desktop to mobile.” Nedgroup bought the stock because of its deep moat, resilient ad-revenue business, its impressive management team and strength of its balance sheet.

"Since then, the company has expanded into a range of revenue drivers beyond its core search business which are making a meaningful contribution to growth," said Thakrar.

The market wrote Google off at the time, but in retrospect, it seems obviously wrong to have. Nedgroup’s investment has increased seventeen-fold.

Contrarians will also look to enter any given market at a time when most investors are shunning it; hoping, in doing so, that they can buy low, then sell high once sentiment recovers.

What are the risks of value investing?

There are two big risks for value investors. One is that they buy companies which will never regain their past glory, and that are cheap for a reason; they might, for example, have had their business model destroyed by new technology. These are known as “value traps”. Their business is on a downward trend and they are only cheap because the rest of the market has recognised this in advance.

The second risk is summed up in the apocryphal quote from John Maynard Keynes, who as well as being the 20th century’s most famous economist, was also a brilliant investor. As Keynes said: “The market can remain irrational for longer than you can remain solvent.”

In other words, sometimes even good quality value stocks remain out of favour for longer than the average investor can endure holding onto them, in the face of massive underperformance. This highlights the most important trait for the value investor: patience.

Legendary contrarian investor Michael Burry notably ran out of patience in October 2025, when he wrote to his investors explaining that he was closing his hedge fund Scion Asset Management.

"My estimation of value in securities is not now, and has not been for some time, in sync with the markets," Burry wrote.

Even for the professionals, value investing is not easy. Inexperienced investors may want to stick to funds that suit beginners while getting started in investing. But once you have a bit of confidence, looking at company fundamentals can be a rewarding approach to deciding which stocks to buy.

Even if you don’t pay a lot of attention to markets or investing, you’ve probably heard the term “bubble”.

The global property bubble of the early 2000s led to the sub-prime crisis. The dotcom bubble of the late 1990s led to the dotcom bust. The South Sea Bubble of 1720 cost Sir Isaac Newton millions of pounds in today’s money.

But how exactly can we define a bubble?

Given that it’s probably one of the most famous terms in investing, it’s somewhat ironic that the correct answer to that question is “we can’t”.

There is no specific recognised definition of an investment bubble.

This is partly because financial markets theory is built on models which assume that markets are rational. Most people know that this isn’t the case in practice, but it still makes it difficult to slot an emotionally-driven phenomenon like a bubble into existing theories.

However, it’s also because pinning a bubble down is hard.

Does a bubble just mean a high valuation? Well, no, it’s more than that.

Technology stocks might look expensive today. But they look positively tame compared to their valuations in the dotcom era. And US stocks have looked expensive on most valuation measures for at least five to ten years now. Yet there’s no sense of the wild optimism and “fear of missing out” that characterises the most infamous bubbles.

If anything, it’s this sentiment aspect that separates a genuine bubble market from a merely expensive one. Every bubble starts with a good fundamental story – often related to technological change, or to a genuine supply shortage of the bubble asset.

As the asset rises in price, and the story becomes more widely known, there’s a sense of almost-manic desperation to get onboard. The price rockets, then rockets some more, as more and more investors are sucked in.

The investors and company insiders who got in early on see that the high prices are no longer justified by what’s happening on the ground. They start to sell even as more naive buyers keep coming along to add more fuel to the fire.

But eventually, there are no new buyers left to buy, and the bubble bursts. The latecomers lose the lot.

This leads us to the final aspect that makes bubble spotting so tricky – you can only know for sure that it was a bubble, after it has popped.

Jeremy Grantham, the founder of asset manager GMO, has a long history of being right about bubbles. And he thinks the US stockmarket is not just in a bubble, but in a “superbubble”.

When people talk about investing, they often refer to putting money into “shares”, or buying “stocks and shares”. But what is a share anyway?

Most companies, including privately-owned ones, have shares. But usually, when we’re talking about investing, we mean investing in publicly-traded companies. That is, companies whose shares can be bought and sold on a stock exchange. These are known as “listed” companies. When a company sells shares in itself on the stock exchange for the first time, this is known as “going public”.

Companies sell shares in themselves for lots of reasons – perhaps to raise money for expansion, or to allow the original founders to sell out. But why would you want to own the shares?

A share represents a sliver of ownership in a company. If you own shares in a company, you are entitled to a share of the profits that the company makes, often in the form of dividend payments. You are also typically entitled to vote at the annual general meeting, for example. So if you believe that a business has good prospects, then you might want to buy the shares so that you can benefit from that bright future too.

As an asset class, shares are riskier than bonds for a number of reasons. The most obvious one is that if a company goes bust, its shareholders will almost certainly be entirely wiped out, whereas its lenders – the banks and bondholders – may at least be able to salvage some value from the carcass of the business.

However, to compensate for this added risk, shareholders also have potentially unlimited upside. They get to share in any future profits the company makes. So the better the company does, the better the shareholders do. Bondholders, on the other hand, will benefit from a fixed interest payment plus their money back if a company thrives. But if it becomes the next Apple or Amazon, they won’t get paid anything more than if it enjoys more modest success.

Shares are also commonly known as “stocks” or “equities”. So when people say “stocks and shares” it means the same thing as saying plain old “shares”.

For more on investing in shares and how to decide which ones to buy, subscribe to MoneyWeek magazine.

There’s been a lot of talk from the Bank of England recently about introducing “negative interest rates”. So what on earth are they, and what would they mean for your money?

Usually, if you lend money to someone, you expect them to pay you the money back, plus interest. This is why your bank pays you interest on your savings – technically, you are lending your money to the bank. Interest rates are usually positive with good reason. After all, why would you pay someone else for the privilege of lending them money?

Nevertheless, several countries now have negative interest rates. For example, the European Central Bank’s main interest rate is currently minus 0.5%. Negative rates turn the financial world on its head. If a borrower borrows at a negative interest rate, they end up paying back less than they originally borrowed. In other words, savers are charged to save, and borrowers are paid to borrow.

So why would a central bank impose negative rates? The theory is that if savers are charged to save money, they will spend rather than save. In turn, that will encourage more economic activity and growth. In practice, it’s not at all clear that this is what happens. Indeed, some argue that negative rates have the opposite effect.

For example, rather than spend money, savers might just save even harder to compensate. And rather than invest in new capacity, companies might view negative rates as a sign that the economy is in dire trouble, and focus on using cheap borrowed money to buy back their own shares instead. On top of that, any companies with pension liabilities will find that those liabilities balloon as interest rates fall ever lower, which also discourages investment. Of course, none of this will necessarily prevent central banks in the UK and perhaps even the US from following their European counterparts into negative territory.

So far at least, negative rates only affect big institutional savers. Banks are not yet passing negative rates onto small depositors like you or I – although more might start charging for current accounts, which amounts to the same thing. Sadly though, you’re unlikely to get a negative interest rate mortgage.

For more on how all of this might affect your investments, subscribe to MoneyWeek magazine.

How do you make money in the stockmarket? A common, if flippant, answer is: “buy low, sell high”. In other words, invest in companies that look cheap, and sell them if and when they get expensive.

How do you know that a company is cheap? There are many ways to value a company. But they mostly involve looking at its accounts. How much profit does it make? What are the assets it owns – from factories or shops, to brands and intellectual property – really worth? These are all sometimes known as “the fundamentals”.

But there’s another way to invest that doesn’t involve the fundamentals. In fact, it involves doing the opposite of the “buy low, sell high” advice. This is momentum investing. Momentum investing is based on the observation that trends in the stockmarket can continue for longer than most investors expect.

Share prices that are already rising can simply keep going higher, even if they look expensive. Meanwhile, companies whose share prices are collapsing can keep falling ever lower, regardless of how cheap they look on a fundamental basis. In other words, momentum investors buy stocks that are going up, and avoid (or even sell) those that are going down.

How do momentum investors decide when a trend is worth joining, and when it might be coming to an end? They generally use technical analysis. Technical analysis involves looking at charts of share prices and using various pattern-spotting methods to find promising entry and exit points.

Momentum investing does rather contradict the academic idea that the market is efficient. In theory, rational investors shouldn’t buy a stock simply because lots of other people are. And yet, in practice, several studies have shown that momentum investing works.

As with any investment strategy, momentum does not outperform all the time. You should view it as another way to diversify your portfolio. Of course, unless you are willing to spend a great deal of time drawing lines on charts and researching technical analysis techniques, it’s very difficult for an individual investor to replicate the strategy.

However there are now several momentum strategy funds available, which allow private investors to access the strategy without having to do it themselves. For more on those, subscribe to MoneyWeek magazine.

Asset allocation is the process of dividing your portfolio between different asset classes such as shares, bonds, property, cash and gold.

Each of these asset classes should behave in different ways in different scenarios, and have different potential risks and returns.

The aim of asset allocation is to blend these together in a way that produces a combined level of risk and return that best suits an investor’s needs.

To take some extreme examples, a young investor saving for retirement a long way in the future and prioritising maximum growth above everything else might have 100% in shares, while a retiree who only cares about achieving a steady income might have 100% in bonds.

More commonly, somebody who wants to achieve a combination of income and growth while also protecting their wealth from bear markets would typically have a portfolio split between different asset classes in a more balanced way.

Asset allocation is often divided into strategic and tactical allocation. Strategic asset allocation is essentially what we’ve already described – how you allocate your money for the long-term to fit your investment goals.

Over time, the amount in each investment may drift away from your strategic asset allocation because some asset classes have performed better than others.

So on regular basis – maybe once a year – you will rebalance your portfolio to take it back to your original strategic asset allocation.

Tactical asset allocation is any temporary change that you make to a strategic asset allocation as a result of current market conditions.

If shares sell off a long way and now look cheap, you might choose to reduce the amount of cash you hold and increase your investment in shares.

Profiting from tactical asset allocation is harder than it sounds, and doing it too much can easily lead to higher costs and lower returns.

When we buy shares in a company or lend money to a company, we’re usually doing so because we expect to be able to grow our money more quickly than if we put the cash to use elsewhere.

Some investors are content to focus on the idea of making a profit alone, but some investors might feel uncomfortable about profiting from the activities of certain companies. A classic example is tobacco. Cigarette manufacturers make their money by selling addictive products that are unquestionably bad for their users. Even if they can make good money by doing so, a significant number of investors don’t want to profit from that activity. Other investors may want to avoid fossil fuel companies, or weapons manufacturers, or companies that pay their staff poorly. This all comes under the broad umbrella of ethical investing.

ESG investing – that is, investing with a focus on environmental, social and governance issues – is merely the latest incarnation of ethical investing. The main shift of emphasis with ESG is the idea that being a good corporate citizen actively benefits the bottom line. In other words, ESG investors argue that they aren’t sacrificing returns for principles. Instead, it increasingly makes sense to avoid companies that are linked to sectors or behaviours that society wants to move away from. It’s not hard to find practical examples. For example, a growing political emphasis on climate change and renewable energy has resulted in oil producers badly underperforming wind and solar power companies in recent years.

One objection however, is that there is little consistency in how ESG scoring is applied. There are many different ways to “screen” companies, and not all will throw up the results you might expect. Similarly, many companies have been accused of “greenwashing” – that is, paying lip service to ESG values for PR purposes, without actually changing any of their working practices. In short, if you genuinely want to ensure that an investment is compatible with your own values, you’re going to have to work much harder than someone who simply feeds their money into a stock market tracker fund every month.

• For more on how to be a more active investor, subscribe to MoneyWeek magazine.

When it comes to ethical investing, most of us immediately think of funds and which companies we’re investing our money in. But what about your run-of-the-mill, day-to-day banking needs? While an environmental, social and governance (ESG) focus is the most recent incarnation of the phenomenon, savings institutions have a long history of what might be described as social activism (for want of a better term), with mutually-owned building societies and credit unions, for example, set up to provide financial products for their members in order to develop local economies.

What makes a bank ethical?

Today, a bank or building society’s ESG principles might cover anything from where it invests your money (or often more importantly, where it will refuse to invest your money), to how it pays its staff. The market for such accounts has widened recently, with industry fledglings and the new online banks in particular keen to make their ESG credentials clear.

There’s an element of clever marketing to all this of course, but at the end of the day, the demand is there. “People are now looking for tangible changes they can make to contribute to a better way of living, as well as lowering their impact on the environment. Switching banks is actually one of the most powerful environmental changes you can make as an individual,” argues Gareth Griffiths, head of retail banking at sector veteran Triodos Bank UK.

Ethical banks for online current accounts

Across the various websites that rate banks based on their ESG criteria, online bank Triodos regularly tops the list as the most ethical provider. Like Starling – which comes second – Triodos does not invest in the military, weapons, tar sands, fracking, mining, arctic drilling, fossil fuels or coal power.

But unlike many organisations, Triodos isn’t just about avoiding companies involved in certain sectors – it actively aims to “only finance companies that focus on people, the environment or culture”. In fact, it publishes details of every organisation that it lends to. So if you really want to check that your bank is lending in alignment with your own values, Triodos gives you the transparency to make sure of it.

The bank charges £3 per month for a current account but does not allow customers to go overdrawn, or charge any hidden fees, which Triodos argues is fairer. “Our model allows costs to be shared equally by all current account customers. We also offer one of the UK’s most eco-friendly debit cards, made from 100% renewable resources,” says Griffiths.

The aforementioned Starling is an app-based bank (in effect, you run it from your phone). According to the Curiously Conscious ethical consumer blog, Starling also uses a “carbon neutral” internet hosting provider, which given its lack of physical branches, means it also has “a smaller carbon footprint than most”. There is no monthly fee for its current account, and in fact it pays a tiny but positive interest rate of 0.05%.

Branch-based ethical current accounts

If you’d prefer a provider with physical branches, a well-known brand, and a wide range of products, and you aren’t too worried about explicit statements on ethical or environmental campaigning, then as Rebecca Jones puts it on a blog for the New Money website, Nationwide, Britain’s biggest building society, is a good all-rounder which is accountable to its members (ie, its customers) rather than to shareholders.

Another high street option is The Co-operative Bank. The Co-op’s reputation took a huge hit in the wake of the “crystal methodist” scandal involving its non-executive chairman Paul Flowers in 2013. Ethical sites also tend to feel a little squeamish about the fact that its owners are US hedge funds. However, the Co-op does have an explicit ethical screening policy that commits it to not providing banking services to the weapons manufacturing industry, for example, as well as policies on animal welfare, gambling, tax avoidance and payday lending, among several others.

Its no-monthly-fee current account pays interest (termed “Everyday Rewards”) of up to £5 a month to you or to a charity of your choice, as long as you pay at least £800 a month into the account and meet other conditions, including paying out at least four direct debits from the account each month.

The best ethical savings accounts

If you’re looking for the most ethical account in which to put your savings, rather than a day-to-day current account, then there are plenty of choices out there. That said, the most ethical banks do not always pay the best interest rates. For example, Charity Bank is owned by charitable foundations and only uses its savers’ deposits to lend to charities and social enterprises, carrying out a social impact assessment for each loan it makes. And like Triodos, it’s also entirely transparent as to who it lends to. However, it only pays interest of up to 0.35% on its Ethical 33-day Notice Account.

If you are saving less than £6,000 in total and are able to drip feed it in month by month, then you can get a rate of 1.25% with Triodos, fixed for the first year. There’s a 33-day notice period, a maximum of two withdrawals a year, and you have to save at least £25 a month and a maximum of £500 a month. After the year is up, the account switches to a “Regular Savings” account, which pays just 0.05%. Triodos also offers an individual savings account (Isa) range. The 33-day notice cash Isa pays up to 0.45% while the junior cash Isa pays up to 1.5%, both of which are tax free. Meanwhile, Ecology Building Society, an ethical lender, pays a variable rate of 1.1% on its regular saver account – but only up to a maximum monthly payment of £250 – and 0.45% on its cash Isa.

But again, for those with larger sums who are willing to consider mainstream building societies rather than explicitly ethical providers, better rates are available. For example, Skipton Building Society currently pays 1.2% a year on any amount from £1 up to £1m (you shouldn’t have more than £85,000 per person in any one bank in any case) for your first year.

Everyone’s mad for the fund management industry’s favourite acronym, ESG, short for environmental, social and governance investing. More than $4bn was shovelled into funds claiming to focus on it in the UK last year. New funds based on the idea that investing comes with various levels of governance responsibility are appearing all the time.

You’ll want to be in on this. All portfolios should at least nod to the idea that there’s more to life than short-term profits. But how?

You can make it easy. At the simple and old-fashioned end of the ESG spectrum is the idea that you can exclude the big baddies and be done with it. So perhaps just don’t buy big oil. No Shell and no BP.

Excluding the obvious big polluters is not enough

But think on and you might start to feel that’s not enough. After all, if you aren’t mad for oil, maybe you shouldn’t be mad for the companies that create demand for fossil fuels. You’d better not hold anyone that makes tractors. No Deere & Company. No Caterpillar. Same goes for aerospace firms, airlines and airports.

Following on from that last one, if you can’t hold an airport operator you really should knock out all companies which might exploit the people travelling via airports. Goodbye WHSmith, Ted Baker, CK Hutchinson Holdings (owner of Superdrug) and all luxury goods companies. Oh, and Mondelez International (maker of Toblerone, 25% of which is sold in airport duty-free shops — very often to me).

Think, too, about something such as pornography. I don’t think I much want to invest in porn. But you know what? Porn is really popular — and widely distributed by an awful lot of the companies you think are just fine ESG-wise. If you don’t want to be invested in adult entertainment, do you want to be invested in Google or mobile phone firms (around 80% of porn is watched on mobile devices)? Just asking.

This isn’t easy. Grappling with it means you are either going to have to drive yourself mad with the inconsistencies inherent in your approach (such as owning a car but refusing to own oil companies), hope the state takes on the responsibility for you (the Financial Conduct Authority has just announced proposals to improve climate-related disclosures by listed companies, for example) or outsource your morals to someone you have some trust in.

ESG and the world of fund management

It’s familiar-sounding rhetoric. But look at the industry as a whole on gender diversity. In 2000, 14% of fund managers were women, says Morningstar. Today, 14% of fund managers are women. There are lots of reasons why women might not want to be fund managers but it’s just a little hint at the gap between talk and walk in the fund management sector.

So with that in mind, here’s your ESG choice. You can buy a fund with one of the following buzzwords in its title: ethical, impact, socially responsible or just ESG. Otherwise you can find a fund management company that has an acceptable ESG-process embedded in its systems and buy any of its funds.

Consider a firm that insists on the proper treatment of all stakeholders connected to its investments (employees, customers, taxpayers and suppliers), keeps watch on the sustainability of, say, their water use and also takes an active approach to helping them improve.

In the end, your hope is that there is no obvious distinction between the ordinary funds these firms run and any other fund with an explicit ESG policy embedded in it.

Some ESG funds to consider

If you go for the former you will not be short of options. You can go for an active fund that just tries to be a bit more responsible than most (perhaps Fundsmith Sustainable Equity or Unicorn Ethical Income) or one that tries to invest in firms that will improve the world, maybe Pictet Global Environmental Opportunities or Montanaro Better World (I sit on the board of a Montanaro fund, though not this one).

You can go a step further than this and invest in the super-woke new CPR Invest – Social Impact, a fund as “dedicated to tackling social inequalities” as it is to helping you out with your personal urge to have a bigger Isa pot than everyone else.

Finally, you could take a more passive route and choose one of the many exchange traded funds (ETFs) that exclude various types of sin stocks. Interactive Investor has a useful list of funds with an ESG bent — the ACE 30. On it is one I hold, Impax Environmental Markets, and one that I will get around to holding at some point, the L&G Ethical Trust.

If you go for the latter approach it’s a matter of working out which firms are less awful than the rest of them. This is not a sector that regularly covers itself in ESG glory. Maybe they have signed the UN-backed Principles for Responsible Investment initiative. Or perhaps they just have a convincing ESG policy note on their website and no record of obviously awful behaviour.

Stewart Investors is hugely orientated towards sustainability, so any of its funds would suit. The Pacific Assets trust, which I hold, or GEM Sustainability funds are both good. The same goes for Impax Asset Management. L&G also appears to have a good corporate ethos, as do Baillie Gifford (I sit on the board of a trust it manages), Pictet and Hermes.

Beware the downsides of ethical investing

A few caveats to all this. Do-goodery is compelling. Just like you, I want to have ESG embedded in my Isa portfolio. But there are downsides. First, valuations. Are you prepared to pay extra for explicit ESG? Companies that are very obviously focused on the bandwagon aren’t cheap. Some prices, says Graham Clapp of investment manager RWC, are “echoing the bubble of the late 1990s”.

Second, there could be an exclusion penalty. Whatever you do, you are knocking out part of the market. There is plenty of find-the-answer-you-want research that will tell you that avoiding the dirtier parts of the market will make no difference to your returns. But cutting the diversity of portfolios does make a difference. In 2019, more than 80% of global power consumption was still derived from fossil fuels, for example. That’s quite something to decide you want nothing to do with.

Finally, you might want to worry a little about greenwash overload. Even in the course of writing this column I have read so many smug platitudes I am suffering from an almost overwhelming urge to spend a few hours gambling, smoking, boozing and binge sugar-eating, possibly in the passenger seat of a speed-limit-smashing, diesel-powered Shogun.

• This article was first published in the Financial Times

Share price growth can be a sign of success for a company, but too much can mean the stock becomes too pricey for new investors – it is at this point that a company may initiate a stock split. 

This is when a company decides to increase the number of shares it has in issue by giving its current investors extra shares for each existing share that they already own. 

Extra shares sound great on paper, but here is what it really means. We explain what a stock or share split is. 

Why do companies use stock splits? 

When a company launches a stock split, they issue more shares to existing investors.

This helps reduce their share price by spreading it across more shares, boosting liquidity and making the stock more affordable for new investors.

Major companies such as Amazon, Apple and Google-owner Alphabet have used stock splits in the past to bring their share price down. 

How a stock split works 

Shares are typically split by ratios of 2-for-1 or 3-for-1, meaning each stockholder will have two or three shares following the split.

Some companies have gone even higher. Alphabet completed a 20-for-1 split in July 2022.

As a result, the company’s share price will fall to reflect the larger number of shares in issue. 

For example, if a company with 100 million shares at a share price of £5 per share, carries out a 2:1 (or two-for-one) split, the total number of shares increases to 200 million and the share price falls to £2.50.

This doesn’t reduce the market value of a company as the price is also split across all the shares.

So in the example above, the market capitalisation would stay at £500m and an investor who previously owned 100 shares worth £500 will now have 200 shares worth the same. All financial ratios such as earnings per share and dividends per share will be halved.

It is like cutting a pizza into 20 slices instead of 10, you still have the same amount but more pieces to share.

Shareholders aren’t really getting anything extra. Each investor still holds the same percentage of the company as they did before the split. It’s just that it’s divided into more individual shares.

Investors also retain the same voting rights but the main concern of a stock split is the type of investors it attracts.

Companies not faring so well may initiate a reverse stock split.

This is where the number of issued shares is reduced by a certain number, which in turn boosts the share price.

A reverse stock split is often seen as a desperate attempt by a company to artificially boost its value but it may help a firm remain listed or to attract the attention of other investors.

Most investors with some experience will have heard about the opportunities available in emerging markets.

But the phrase can be vague and unclear, especially for beginner investors.

While there isn’t any single definition of an emerging market, the phrase usually refers to economies that are transitioning from being relatively undeveloped towards being a fully-fledged post-industrial economy with high standards of living.

Investing in them can offer diversification away from developed regions like the US or the UK, where your portfolio may well have a lot of exposure by default, whilst still tapping into key themes like artificial intelligence (AI).

They are also strong performers. Morningstar data analysed by the Association of Investment Companies (AIC), an industry body representing UK investment trusts, showed that the average investment trust in the emerging markets sector returned 65% over the 12 months to 22 May, compared to 24% for the average investment trust.

“Emerging markets have benefitted from a weaker US dollar and strong earnings growth, as well as investors looking to diversify away from concentrated US markets,” said Omar Negyal, manager of JPMorgan Emerging Markets Dividend Income Trust.

The average emerging market investment trust has returned 60% over the last five years, and 257% over the last 10. The MSCI Emerging Markets Index returned 47% in the 12 months to 30 April 2026, compared to 29% for MSCI World (which tracks developed market companies) – though MSCI World has outperformed its emerging market counterpart over the last five and 10 years.

We take a closer look at what countries form emerging markets and how you can invest in them.

Which countries are emerging markets?

The closest thing to a universal definition of an emerging market is probably the International Monetary Fund’s ‘emerging market and middle-income’ classification, which applies to 40 countries. Some of the largest and most significant economies on this list are Brazil, Russia, India, China and South Africa, which collectively make up the ‘BRICS’ nations.

But for investors, a more relevant categorisation is MSCI, which divides national economies into five categories: developed, emerging, frontier, advanced frontier, and standalone markets. MSCI counts the following as emerging market economies:

What are the characteristics of emerging markets?

While every emerging market is different (just as every country is different), the economic trajectory of emerging markets tends to lead to some general themes that are of interest to investors.

One of these is relatively fast economic growth rates. These countries tend to be increasing their standard of living, often from a fairly low starting point, and that gives high growth rates in terms of year-on-year percentages.

That often goes hand-in-hand with improving financial infrastructure. India, for example, has gone from a predominantly cash-based economy to the world’s largest digital payments market in less than a decade, thanks largely to investment in the unified payments interface (UPI) technology that underpins the country’s payments network.

Emerging markets also tend to have younger populations relative to developed economies, and often have rapidly improving standards of education.

And particular emerging markets can offer you exposure to large structural trends, without compounding your exposure to developed markets.

“South Korean and Taiwanese markets have both been lifted by the AI boom due to increased demand for semiconductors and memory chips,” said Negyal. Similarly, he added, “companies across Latin America have been supported by stronger commodity prices and increased demand for energy and resources.”

What are the risks of investing in emerging markets?

Many of the upsides of investing in emerging markets also come with additional risk compared to developed markets.

They can be impacted by geopolitical factors, such as the trade frictions that have existed between the US and China over recent years, while fluctuations in exchange rates can be challenging for emerging economies.

The war in Iran was a headwind for emerging markets, though the peace deal agreed between the US and Iran could reverse this.

“The US is likely to face elevated inflation, potentially causing the US Federal Reserve to raise interest rates,” said Jacqueline Broers, co-fund manager of Utilico Emerging Markets Trust. “This in turn, could strengthen the US dollar, weaken emerging market currencies and undermine the macro position of many emerging economies.”

Some emerging markets also have weaker corporate governance provisions compared to developed markets, which can increase risks for investors.

And similarly, the structural trends that are currently benefitting emerging markets could hinder them should they reverse.

“Any sharp reversal in the AI theme may lead to underperformance of tech-heavy markets like Taiwan and Korea,” said Hiren Dasani, chief investment officer at Ashoka WhiteOak Emerging Markets Trust.

Should you invest in emerging markets?

With all of these factors considered, is now a good time to invest in emerging markets?

This depends on the emerging market in question. As above, all are distinct and offer different risks and opportunities.

“Emerging market equities have also benefitted from lower valuations relative to developed markets,” said Broers. While this valuation discount persists, value investors will be attracted to the opportunities in emerging markets.

Ultimately you should decide whether or not to invest in emerging markets based on your circumstances and the makeup of your portfolio – but they could offer some diversification if you currently have no exposure.

How to invest in emerging markets

If you are considering investing in emerging markets, there are several ways to go about it.

You could choose a low-cost index fund that passively tracks an index. For example:

• iShares MSCI Emerging Markets ETF (LON:0JHF) which tracks the MSCI Emerging Markets Index,
• Vanguard FTSE Emerging Markets ETF (LON:0LMP) which tracks the FTSE Emerging Markets All Cap China A Inclusion Index.

For a more active approach, investors could select an emerging markets-focused investment trust such as Templeton Emerging Markets Investment Trust (LON:TEM) or Ashoka WhiteOak Emerging Markets Trust (LON:AWEM), both of which invest in long-term opportunities in emerging market economies.

Fidelity Emerging Markets Limited (LON:FEML) is an alternative option, and can invest up to 30% of its portfolio in short positions, typically when a business operates in a sector that is experiencing a structural decline and there is some sort of governance issue surrounding the company.

JPMorgan Emerging Markets Dividend Income Trust (LON:JEMI) and Utilico Emerging Markets Trust (LON:UEM) are emerging market investment trusts that focus on dividend stocks in emerging markets; UEM is a next-generation dividend hero, having raised its dividend payout for 10 consecutive years.

If you want to invest money in the stock market, there are various ways to go about it. You can buy shares in individual companies, but this involves doing lots of research and, ideally, having a solid grasp of how to read and analyse a set of accounts.

Investors who lack the time, knowledge, or inclination to invest in individual companies often use funds instead. This can be anything from using tracker funds or a traditional actively-managed fund. The latter involves you and lots of other investors handing over your money to a fund manager or team of fund managers, who invest your money in a wide range of companies.

The goal of the active manager is usually to “beat the market” – for their fund to deliver a better return than the wider market. For example, a fund manager investing in a basket of London-listed stocks might choose shares with the aim of beating the FTSE 100, the UK’s main stock market index.

There’s just one problem: countless studies have shown that the majority of fund managers fail to beat the wider market consistently over the long run.

This is where tracker funds come in.

What is a tracker fund?

Tracker funds (also known as index funds or passive funds) aim to track the performance of a particular index, such as the FTSE 100 or S&P 500. The funds may hold all, or a representative sample, of the stocks in the underlying index (physical replication), or replicate the performance of the index via buying derivatives (synthetic replication).

The aim is to have as low a tracking difference (the gap between the performance of the index and the fund) as possible. Since the goal of a tracker is to match the index, significant outperformance is as concerning as significant underperformance (even if it might not feel like that to an investor), because it suggests problems with the way the fund is being run.

Tracker funds can be traditional open-ended funds (unit trusts or open-ended investment companies [Oeics]) or exchange-traded funds (ETFs) listed on a stock exchange. Investment trusts are almost never used as tracker funds because – unlike ETFs – they have no mechanism to keep the fund’s share price in line with the value of its assets.

The first tracker open to ordinary investors was the Vanguard Index fund, which launched in the US in 1975. Rivals were sceptical as to whether it would ever succeed, arguing that people wouldn’t be satisfied with merely matching the market, but the concept caught on.

What are the pros and cons of tracker funds?

The big advantage of passive investing is cost: a FTSE 100 tracker fund can have an annual charge of well under 0.1% a year. An actively managed fund could easily charge ten times as much, with no guarantee it will beat the index (most don’t over time). A closet tracker is an active fund that sticks close to its benchmark index to avoid underperforming the market too drastically (and thus losing clients). Investors in a closet tracker are being charged the higher fees of active management in exchange for passive performance, or worse.

If you are considering investing in a company's shares, then one of the first things you'll want to know is: does the price I'm paying represent good value?

There are lots of ways to answer that question, but one of the first methods you're likely to encounter is the price/earnings ratio – p/e ratio for short.

Many investors use the price/earnings (p/e) ratio as a measure of whether a share is cheap or not. There’s a good reason for that – it’s one of the simplest valuation measures out there. You simply take the share price and divide by the earnings (profits) per share. So a company with a share price of 50p and earnings per share (EPS) of 5p would have a p/e ratio of ten.

A p/e ratio which is based on forecast earnings is often referred to as a forward p/e ratio, while one based on past earnings is sometimes described as a trailing p/e. P/e ratios are also sometimes referred to as “multiples”, as in: “Acme Widgets is trading on a multiple of ten times its earnings”.

In effect, a p/e of ten means you are paying £10 for each £1 of earnings, while a p/e of 20 would mean you are paying £20 per £1 of earnings. So clearly, in theory, the lower the p/e, the cheaper the share. However, a lower p/e does not always mean that a company represents good value. If investors are only willing to pay £5 for each £1 of current earnings, say, then this implies that they don’t really believe current earning levels can be sustained. Instead, there may be serious problems that will hinder future growth or lead to falling profits.

Meanwhile, those trading on higher p/e ratios might look expensive – but in fact, might be expected to grow exceptionally strongly (for example, high-flying tech stocks typically trade on relatively high p/e).

Also bear in mind that some industries are extremely cyclical (mining and housebuilding are good examples). They tend to trade on low multiples at the high point in the economic cycle (when they are very profitable) and high p/e at low points (when they may be loss-making). The cyclically adjusted price/ earnings ratio (also known as the Cape ratio, or Shiller p/e), which averages earnings out over ten years, is one way to try to correct for this.

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