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INTRODUCING INVESTMENT

DIFFERENT TYPES OF INVESTMENT AND THEIR RISKS 

The main types of financial investments are cash, fixed interest securities (gilts and bonds) and shares (equities).

CASH

Cash deposited in a bank or building society can earn interest. The amount of interest that you will get depends upon a number of different things:

  • The general level of interest rates set by the Bank of England
  • The size of your investment - larger investments may attract higher interest rates
  • How long you are prepared to give up access to your money - if you are prepared to wait, say 60 or 90 days before withdrawing your money, you may get more than if you withdrew it straightaway.

Saving in deposit accounts or National Savings products which offer interest, is the way most people start investing. However, there is some risk involved because the interest you receive after tax, may not be enough to allow the value of your cash to keep up with inflation. Over the long term this can mean that your money loses its value in terms of what it can buy. A £1 coin will always be worth £1, but what you can buy with that coin will reduce with inflation.

FIXED INTEREST SECURITIES (GILTS AND BONDS)

Bonds are issued by governments and companies as a means of borrowing money. Government bonds are known as gilt-edged securities or "gilts". Bonds issued by companies are known as corporate bonds.

Bonds and gilts are issued with a promise that investors' money will be repaid at a set future date - the "redemption date". In the meantime, the bonds/gilts pay out a regular and usually fixed amount of interest. The income you earn is known as the bond yield. This is generally higher than the interest paid on deposit accounts because bonds can be riskier than deposit accounts. For example, the price of bonds varies relative to interest rates and may therefore fall when interest rates are rising.

If you need access to your money before the redemption date, you can sell the bond to someone else through the open market. The price you get will be the market price of the bond at the time you sell, so you may get more or less than you would get if you wait till the redemption date.

Later in this guide we talk about the benefits of using investment funds to spread the risk of investing in bonds and other assets.


SHARES

Shares in a company are just that. As a shareholder you own part of the company in which you have invested, and have a direct share in its assets and future profits. Shares are often called "equities". Part of the company's profit may be paid directly to you in the form of dividends, normally distributed twice a year. People also invest in shares to make money through an increase in value, which is reflected in the share price.

It is important to note that the value of shares can go down as well as up and you may not get back the amount you originally invested.

To convert your shares back into cash, you have to sell them to someone else in the stock market. The price you get depends on a range of factors such as what other investors think the future profits of the company are likely to be.

Click here to see the change in value of the FTSE 100's top ten companies from June 2006 to June 2007.

Later we talk about the benefits of buying investment funds to spread your risk by giving you access to professional fund managers whose job is to invest in a range of companies with the aim of maximising the return from your investment.

PROPERTY

Property is a popular investment asset but it is important to realise that if you invest directly in property you are holding an asset which is harder to dispose of than some other assets. Your own property may of course be your biggest asset, but you cannot benefit from its value if you also need somewhere to live. You could invest in other properties, such as buy to let, but it may be better to consider investing in property via investment funds. Not only do these offer you the option to cash in your investment on a daily basis, but they also offer you the benefits of exposure to commercial property investment.

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