WHAT ARE THE DIFFERENCES BETWEEN CASH, SHARES
AND BONDS?
IMA’s "Pocket Guide to Investing" and the more detailed “Introducing Investment” are clear, easy to understand guides to investing and are available on our website. The following should give you an idea of the basics:
Cash (Savings Accounts)
Unlike the money in your pocket, *cash* deposited into a bank or building society account earns *interest*. Savings accounts are one of the lowest *risk* ways of saving, but are not completely risk-free: the money you receive from such accounts may be reduced by *inflation*. Over the long term this will mean that if the rate of inflation exceeds the interest you receive, that money will not be able to buy as much as it would have when you started investing.
Bonds
When governments or companies want to borrow money they issue *bonds*. So when you buy a bond, you are basically lending money. A bond will normally have a “term”, which is the life of the bond, after which the Government, or company, will pay you back the amount they borrowed. During the term of the bond, they will also pay you a set amount of interest each year.
Bonds, like *shares*, are bought and sold in the stockmarket. This means investors can make money (or lose money) when bond prices go up (or down). Bonds are riskier than cash, but usually less risky than shares. This is because you earn a regular *income* and your money will be paid back to you if you hold a bond to the end of its life (unless the company that issued the bond has gone bust and is unable to repay their loan, so choosing the right bonds, and owning a varied selection of them, is very important.)
Shares
Shares in a company are just that. When you invest in a company’s shares (or “equities”) you are buying a part of that company. You own a direct share in it and its future profits. Part of the company’s profit may be paid directly to you, as a shareholder, in the form of *dividends*. This *dividend income* is normally paid twice a year. People also invest in shares to make money through an increase in the value of the company, which may be reflected in the share price. This is the price at which shares are bought and sold in the stockmarket. Of course, companies can lose money and the value of shares can go down as well as up, which means that you may not get back the full amount of money you invested. Limiting the chances of this happening by choosing a selection of shares in good companies requires a lot of knowledge, but it may be easier and cheaper than you think to get professionals to do it for you.
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