There are many different assets available to invest in all with their own attributes and risks. A diversified portfolio might contain more than one asset class.
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 or equivalent if outside the UK.
Cash asset examples are as follows:
National Savings and Investments (NS&I).
These investments might be the safest type but will provide little return on investment. Interest rates are low and in some cases do not cover inflation. As an alternative to a savings account, NS&I Premium Bonds provide a lottery style reward instead of interest.
EQUITIES / STOCKS / SHARES
Equities, stocks and shares are different ways to describe owning a proportion of a company. These are the assets people are most familiar with and associate with investing.
Equity or shares are one of the higher risk assets to invest in because they rely on strong, sustained performance of the purchased company stock. However, the economy plays a key role in the performance of the stock market. Events such as a recession can suddenly cause substantial drops in prices across the market. There are hundreds of thousands of companies to invest in across many different sectors each having their own strengths, weaknesses and risks. Each sector reacts differently to economic environments or events which is why people diversify their investment portfolios across different sectors.
The main sectors include:
CONSUMER DISCRETIONARY (None priority – retail, services etc.)
CONSUMER STAPLES (Consumer priorities – food, drink etc.)
Companies within the same sector can be very different. Small or young companies can carry huge potential but higher risk compared to a large established company carrying lower risk but also lower return. Some of the larger companies also pay dividends.
It can be complex and time consuming finding the right company(s) to invest in. An alternative to purchasing shares in individual companies is to invest in a fund.
An equity fund or an exchange traded fund is a group of equities that all work together as one investment. It offers more protection as an individual company can under perform and have less impact on the overall investment. There are ETF’s for many different investment categories covering sectors, geographical area, industry, investment style and so on.
There are two main types of bond; Corporate Bonds and Government Bonds. A bond is essentially purchasing the debt of a corporation or a Government in which they will repay at an agreed date along with interest payments at specific intervals.
The interest rate you receive is determined by the financial stability of the corporation or government. So the lower the risk, the low the rate received. Also, the shorter the term the the lower the interest. Bonds are classed as a safer investment in comparison to equities and so the return is generally lower.
Government bonds are generally classed as lower risk than corporate bonds due to the governments financial risk being lower. It is important to be aware that governments can also default during an economic crisis.
Investing in bonds does not provide you with any ownership as is the case with stocks. You will also not benefit from any growth or developments.
Bonds can be traded as the value of bonds can increase or decrease. If you buy a bond and intend on holding 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.