Step 4: Investment options
If you purchase a share you are buying a unit or stake in a company. Shares are traded on the stock exchange and the price of a share can rise and fall throughout the day.
If you choose your stocks wisely they could increase in value over time. Shares have historically provided greater returns than cash if you invest for a longer term, although this isn't guaranteed.
If you invest in a company that isn't growing in value then the share price could fall. This could result in you loosing money on your investment.
Unlike a share, when you own a slice of a company, a fund is a collective investment which means your money is spread over a range of different markets, sectors and investment types. Funds are managed by professional Fund Managers who choose where to invest your money. You buy units in a fund which can either rise or fall in price.
Funds have their holdings spread across different sectors, markets and stocks which can reduce the risk. If one holding performs poorly over a certain period, other holdings may perform better which reduces the potential losses of your investment portfolio.
A fund manager may have to sell holdings to pay investors back who are exiting the fund. If the assets they hold are difficult to sell - such as property - then this can mean delays in getting your money back.
Exchange Traded Funds (ETFs)
Exchange Traded Funds (ETFs) trade on the stock exchange just like shares. But unlike shares which focus on one company, an ETF tracks an index, sector, commodity or currency and will invest in a range of assets with the aim of closely tracking its performance.
One of the major benefits of an ETF is its cost effectiveness. They can offer lower fees than managed funds as they have lower operating costs.
An ETF will track a market which unlike funds are actively managed to try and outperform the market. This can impact the performance.
An investment trust is a company that raises money by selling shares to investors and then pools that money to buy and sell a wide range of shares and assets. Different investment trusts will have different aims and different mixes of investments.
Investment Trusts don't have to sell assets when investors exit the fund. This means an investor should be able to sell their holding easily on the stock market. However, the price could go down if more units are sold than bought.
- Cons: Potential Price Volatility
The price of investment trusts can be influenced by the demand for the share itself. If investors feel the investment trusts isn’t being managed well then this can directly impact the price as more investors will wish to sell rather than buy.
Bonds and Gilts
Bonds and gilts are a way for companies or governments to raise money by borrowing money from investors. If you invest in a bond or gilts you are lending money to a company or government in return for a fixed rate of interest.
Bonds and gilts are a more stable investment than stocks and can provide a steady return with lower risk.
The disadvantage of bonds and gilts is that they don’t always offer higher long term returns in comparison to other stocks. The value of bonds and gilts can also be impacted by economic uncertainty, currency fluctuations and changes to interest rates.
Explore our easy to read articles which are designed to help you with your investment options.
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