We have described some of the most common types of investments below.
Many are sure that you are only investing in something that you understand. So, if you do decide to buy shares in a company, make sure that it is a company that you know or use on your own.
The same goes for financial products. If an investment product seems complicated to you and you have a hard time understanding it, do not hit it with a barge pole.
Actions
A stock is a small piece of a business. When you buy a stock, you own a share of that company, so when it is doing well, so do you.
You earn money when:
- The value of your shares increases if the business is doing well (which is your return on investment)
- Either by receiving part of the profits that these companies make, called dividends
The UK’s 100 largest companies are listed on an index called the FTSE 100. Learn more: How to buy stocks
Here are the pros and cons of buying stocks yourself:
Advantages
- You can choose the exact company you want to buy shares for, from Rolls-Royce to Hotel Chocolat
- If the business is successful, the rewards can be substantial in the form of increases in stock prices and dividend payments.
The inconvenients
- You choose stocks, so you need to call on future business growth
- If you buy stocks from a poorly performing company, you could lose your money
Find out if it’s time to buy stocks here.
Obligations
You lend money to a business or to a country. You will receive a fixed amount at the end of the period when the bond “matures”, along with regular interest payments called coupons.
Advantages
Generally speaking, bonds are considered less risky than stocks.
The inconvenients
As the risk is lower, so too is the potential for reward. As a result, your returns on your investment will likely be lower than on stocks.
Funds
Instead of choosing your own individual stocks, you can put your money in a mutual fund. It’s actually a group of stocks, although managers can invest in other types of assets like bonds.
If buying a stock is like supporting the star player of a football team, a fund is like choosing the whole team. So if one player is not doing well, there are others who can take over.
You have the choice between:
- Passive funds that follow a stock market
- Active funds where a professional investor selects stocks on your behalf
If you want to know more, find out how to choose investment funds.
Here are the pros and cons of funds
Advantages
- A manager uses his expertise to decide which stocks and what range of assets to buy and sell
- Funds include many types of investments and are therefore often less risky than individual stocks
The inconvenients
- Fund managers charge fees
- Overall value may fall further despite a range of assets to balance risk
Goods
We’ve all seen how house prices have gone up, so it’s no wonder people are investing in real estate.
While most people think of residential real estate investing, you can also invest in commercial real estate like warehouses and shopping malls.
A good way to invest in commercial real estate is to purchase an investment trust in which a manager selects a number of properties in which to invest.
Precious metals
You can also invest smaller amounts in other types of assets, like precious metals like gold and silver.
Investments in precious metals can help diversify your portfolio and tend not to correlate with the stock market. In other words, if the stock markets fall, you may find that the price of gold goes up as people flock to this “safe haven” asset to house their money.
You can invest in precious metals by purchasing an investment fund specializing in this sector.
To inspire you, here we describe the major trends in investing.
