There are many different things (assets) that you can invest in, all with their own attributes and risks.
If you decided that you are going to be an Active Investor (manage your own investments), then you will probably be investing in at least one of the below.
Have a read through the information about each asset group so that you are familiar with the range, what they are and their characteristics. When you come to actually investing in one of these, you will need to do your own detailed research to make sure you know exactly what you are investing in.
A diversified portfolio might contain more than one asset class, infact it is always a good idea to have a specific proportion of your overall wealth in cash – just to be on the safe side.
Cash is the safest of all the assets as there is very little chance of loss. As most cash investments are protected up to £85,000 by the Financial Services Compensation Scheme (FSCS) they are as secure as an investment can be. This is for UK regulated financial institutes. Check to see if your cash is UK regulated and protected by the FSCS.
Cash asset examples are as follows:
National Savings and Investments (NS&I).
These investments might be the safest type, but they are also the not going to return you very much. Interest rates, especially at the moment at pretty low and in some case do not even cover inflation. In terms of the NS&I, there is also Premium Bonds, which instead of an interest you get a lottery style reward.
Everyone should have a % of their money in cash assets, the amount or proportion depends on your risk level, age and other situations.
EQUITIES / STOCKS / SHARES
Equities, stocks, shares are all pretty much describing the same thing. This is owning a share in a company. These are probably the assets people are most used to and automatically think of when talking about investing.
When you are investing in stocks and shares, you are investing in a particular company. Equity is classed as one of the higher risk assets to invest in, as you are relying on the specific company to perform well and continue to perform. However the economy plays a big part in the performance of the stock market, and things such as a recession can suddenly cause big drops across the market. There are obviously thousands of companies out there to invest in across many different sectors, all with their own strengths, weaknesses and risks. Different sectors react better or worse in different economic environments, which is why people tend to diversify across different sectors. The main sectors include:
CONSUMER DISCRETIONARY (None priority – retail, services etc.)
CONSUMER STAPLES (Consumer priorities – food, drink etc.)
Even with these sectors the companies can be very different. You can get small cap, young companies that have potential for high growth, but also potential to not work at all. You have company’s that are growing and profitable, and have potential for a bit more growth. Then there are the big companies, that have little room for growth but are safe and provide dividend incomes.
The equity market is vast, which is another reason it can be risky. You need to know what you are investing in. The alternative way to invest in equities but not have to invest in individual companies is to invest in funds such as an ETF.
An equity fund or an exchange traded fund is a group of equities that all work together as one investment. It gives you more protection as you can afford for one or more individual stocks to struggle and hopefully be covered by others. You can get ETF’s for thousands of different groups of stocks now, they can be for a sector, a country, industry, investment style etc… the list goes on.0
There are two main types of bond, a Corporate Bond and a Government Bond. A bond is basically like you loaning money to either a corporation (business) or a Government in which they will pay you back the value of the loan after a specific period along with interest payments are specific intervals.
The more financially stable the corporation or government is, the lower the rate you tend to get due to it being lower risk. Also the shorter the term the the lower the interest. Bonds are generally classed as lower risk than equities but with that comes a lower return (in general), and government bonds are classed as lower risk than corporate bonds, again due to the government more likely to be able to pay you back. This doesn’t mean there is no risk as there is still a risk something can happen in the markets causing financial issues.
When investing in bonds, you will not receive any ownership like you would with stocks. You will also not benefit from any growth or developments.
You can trade bonds like stocks as the value of them can increase or decrease. If you buy a bond and intend on keeping it through until it matures (reaches the agreed date to be paid back your investments) then the value change doesn’t matter. You will still receive your initial investment back while also picking up the interest payments along the way. If you are trading the bonds, the value of it does matter and that will depend on the economic and market changes.
There are a couple of ways to invest in property. The tradition way is to purchase a physical property in which you can get a return from either renting it out or selling it at a high price than you purchased it. This method requires a lot of money either through up front cash or a mortgage, as well as any additional maintenance costs and buying/selling fees. This method can also be time consuming due to the time it takes viewing and deciding, to the time it takes for deals to complete. There is also additional demand if you are renting as you will need to manage the tenants (you can pay a management company) and sort things such as insurances etc.
The second method of investing in property is through property funds. There are a number of different ways to do this but a popular way to invest in property via the markets is through Real Estate Investment Trusts (REITS). These trusts will own large portfolios of property which in most cases will be rented out. There are many different types of REIT that have many different portfolios from residential, commercial and industrial properties and in many different locations. When you invest in a REIT, it is similar to investing in shares is put together with thousands of other peoples money to allow you have a more diverse investment. So you will own a small portion of lots of property rather than investing a lot into one. You can also invest a much smaller amount of money than you could if you were purchasing physical property directly.
People usually invest in REITS due to the dividend yields are usually high, rather than for capital appreciation. You might potentially benefit from a long term steady increase in the REITS value but regular strong dividend payments are really where you are getting your return on investment from.
Commodities are raw materials or agricultural produce that you can buy and sell, such as gold, silver, oil, wheat, corn, cattle, cocoa etc.
The commodities markets work buy establishing a common standard for each of the products so that a particular commodity can be worth the same value no matter who produced it or where it came from.
There are multiple ways to invest in commodities that all have their own pros and cons. You can invest directly in the commodity, for example purchasing physical gold. You can invest in stocks that produce the commodity such as gold miners and oil companies. Or you can investing in Exchange Traded Funds (ETF’s) that specialising in commodities.
The other way to make money from commodities is to trade in commodities futures contracts, which is basically the future price of the commodity. This is much more suited to the shorter term trader than the longer term investor.