Investing allows you to grow your money over time, by inserting capital into various projects or activities that are expected to produce a positive return. This can include any number of things, from investing into company stocks and shares, bonds, real estate and commodities such as gold or oil. This article will provide an overview of the various forms of investments that will be found in your investment accounts.
This is the most basic type of investment. Having cash in a saving’s account will offer a low growth, low risk investment. They have low interest rates, however, are a very safe option. Nevertheless, there is one caveat with this, namely the risk of inflation. Due to the low interest rates, even at stable inflation rates your money will lose value over time. In the UK, we are currently in a period of high inflation, at 6.7% as of September 2023 , meaning your saved cash is especially at risk of losing its value. Thus, saving’s accounts are an effective short-term consideration, but should be shied away from when considering your options long-term.
Bonds are loans given out by the governments, municipalities, and corporations. In the UK they are a common way for the government to raise money in order to meet its spending targets and specifically in the UK they are known as Gilts (or treasuries in the US). They are generally relatively low risk in comparison to other investments and entitle you to regular interest payments as well as repayment of the bond’s face value once it matures. UK company bonds will be higher risk than UK government bonds; however, they are still considered to be lower risk than equities.
An equity simply refers to stock and shares in companies, i.e. a small piece of the organisation, that can be traded on stock exchanges. Depending on the company these can be high risk, especially in the short term. This is because the value of the stock is directly linked to the performance of the company. If they have a bad quarter, your stock’s value will go down. If they perform well, the value will likely go up. Thus, if you own 10 shares of a company valued at £100 each, and the share price goes up to £110, you have made a profit of £100. Dividends are a distribution of corporate earnings to its shareholders. This is determined by the board of directors. Thus, if the company announces a 5% dividend, and you still own your aforementioned 10 shares, you will receive £50 in dividends.
Derivatives refer to a highly complex financial structure, seen as an advanced investment. Thus it should be treated with caution and discussed with a professional advisor. They are a type of financial contract, with the value being contingent on an underlying asset, or a benchmark. A good example of this is a future contract, which is used to set future prices and manage risks. These are contracts that oblige the buying and selling of goods at a later date at a pre-determined price rather than the market price. Say a contract between two oil companies who use a future contract to set a benchmark for oil prices in the future, thus managing risk and promoting stability. An example would be if two parties were to contract to buy and sell 50 barrels of oil at £30 per barrel in 6 months’ time. Once 6 months have passed the parties would be obliged to fulfil the contract, at the set price, while ignoring whether the market price has gone up or down.
These are investments in any sorts of tradeable goods. There are four main categories, namely energy, metals, livestock, and agriculture, with the investments being carried out through futures contracts, or through ETFs (see below). Commodities can either be bought outright, or you can invest in companies who work with commodities, e.g. agriculture companies.
These are financial instruments that allow you to invest in a number of different investments, including stocks, bonds, shares etc. One common example is a mutual fund or Unit Trust or open ended investment company (OEIC) as they are often referred to in the UK.
Here money is paid to a fund management company, who use those funds to make investments on behalf of the investor. This will then be pooled with funds of other investors, to allow for a much larger overall investment. The benefit of this is it allows your money to be professionally managed whilst keeping costs low because a number of investors are all pooling their assets.
Exchange-traded funds (ETFs) are similar to mutual funds in the sense that they are also groupings of various different assets and investments. The main difference, however, is that they can be traded immediately on stock exchanges like a regular stock, so are structured in a slightly different way. Whereas Unit trusts, mutual funds and OEICs often take a few days for the trades to settle.
Mutual funds, unit trusts, OEICs and ETFs can all invest actively (where investments are chosen by managers based on analysis of the market or they can invest passively (where they are designed to track an index like the FTSE 100. It’s more common for passive investments to be structured as ETFs whereas actively managed funds are often structured as Mutual funds, unit trusts or OEICs.
Property is one of the most basic investments, and contains any purchase of land, such as residential and commercial real estate. The most common method of earning money through property investments is through rent or selling the property for a higher value than you bought it for. Property can be a difficult investment to manage and often involved high transactions costs. It is also considered quite illiquid due to the fact it takes a long time to sell and when sold must be sold in its entirety, in comparison to a stock portfolio, for which you can instead sell just part of.
The includes the buying and selling of foreign currencies, in order to profit from exchange rate fluctuations. This is a relatively high-risk investment, and as such is normally just carried out by companies and other financial institutions. It has become more common with globalisation, especially among those institutions operating multinationally.
To conclude, there are a number of different opportunities available for anyone looking to start their investment journey. These can be utilised in a number of different ways, whether through trading various investment accounts. Nevertheless, it is helpful to engage a financial advisor who can help professionally manage your investments, especially if you are considering high risk investments such as commodities or equities.