Investments
Investments
Investments
When investing, you take calculated risks to increase your chance of getting higher returns on your money, especially over the longer term (money you can afford to tie up for five years or more). This section will explain the most common types of investments, how they work and what you need to think about before choosing one or more. Our jargon buster will explain some of the words used in the world of investments.
What are investments?
There are different types of investments but, basically, you take a risk with your money by investing in assets that could rise or fall in value. There is no guarantee you will make a return on your investment or even that you will get back the same amount you invested in the first place. Investments are different from savings - they are typically designed for the longer term and involve different types of risk.
Before investing it's usually a good idea to have sorted out your debts, made sure you've looked at protecting yourself against unforeseen events -- see Insurance, built up some savings, and arranged your pension - see Pensions (your pension is of course an investment itself).
And, once you start investing, it's highly advisable to spread your risk - don't put all your eggs in one basket - see Diversification
Types of investments
You may have heard of all sorts of investments - ISAs, shares, property, unit trusts - the list goes on. However, the best way to understand investments is to think about investing as having three 'layers':
1. The underlying investment itself will fall into what are referred to as asset classes. There are four main asset classes - shares, bonds, property and cash deposits. You can invest in each of these directly if you wish.
2. Pooled Investments. This is when you put your money with other investors to invest in one or more of the above asset classes. This spreads your risk and saves on costs. Open-ended investment funds, investment trusts and life assurance bonds are the most common pooled investments.
3. Tax wrappers. These are tax breaks that you can - subject to certain rules - wrap around your investment, to shield it from either some or all tax. The wrapper can be around either the underlying investment or the pooled investment. The two most common tax wrappers are ISAs and pensions.
Getting help
You can buy investments direct from the management company, investment trust, life assurance company, or friendly society, or through a financial adviser, a stockbroker or private client investment manager.
Firms advising on or selling investments must be regulated by the FSA or be the agent of a regulated firm.
You can, of course, buy investments without advice. This is called execution-only. If you do this then you do not get any advice on the investment and you cannot make a complaint if the investment turns out to be unsuitable.
Top tips
- Make sure you understand what you are signing up to - especially the risks - and that it is right for you.
- Check out the impact of charges on your investment fund.
- Remember to check how your investments are performing regularly, say, once a year.
- Go for safer investments as you get closer to retirement if you are making your own investment decisions.
- Make the most of the tax breaks that are available.
- Make a note of what investments you have and keep track of them.
- Make sure you let the investment company know when you move house so they can keep track of you.
