Investments
Your options explained
There are lots of different investment options available to you. The right one for your money will depend on a number of factors including your financial objectives and personal circumstances; how long you can leave the money tied-up for; whether you're looking for a return or an income; if you want to make regular investments or a one-off lump sum; and the level of risk you're prepared to take. Its important to see investments as something you consider in addition to savings, not as an alternative. When you're choosing an investment, you need to ask yourself a few questions:
- How long can I leave the money tied up for?
This will narrow down the type of product that will be suitable for you. Options start from just a few years, but some are much longer.
- Could you afford to lose some or all of it?
You'll need to invest in something with a level of risk you're happy to take. The higher the risk, the higher the potential return, but there are no guarantees, so you'll need to be prepared for the fact that you may not get back all of what you put in.
- How much more do you want to make?
This relates to the investment term and risk factor. The longer you can leave it and the higher the level of risk, the more you could make. But you need to be comfortable with both.
Property and pensions are considered as investments, these are covered in more detail elsewhere on the site. For the purposes of this section, we've focused on guiding you through some of the most common investment products that are readily available through high street banks and other financial providers.
Shares and stock market-linked investments
You can buy shares directly (through a broker) or as part of a pooled investment such as a unit trust, or other investment fund that's managed for you. When you buy shares directly, you're buying part of that company and you'll have the right to vote on certain issues relating to the running of that company.
You can buy new shares when a company starts up and sells shares to raise money - through an Initial Public Offering or you can buy shares in existing companies that are traded on the stock market.
The value of shares can go up and down dramatically, and you have to pick your time to buy and sell carefully as their performance can be easily affected by changes in the economy. The investment aim of shares is to buy them when they're low, then wait for them to rise and sell high to make a profit. But there lies the risk, not everything that goes down, comes back up. Likewise, you may buy at one price and they may drop further, making your investment worth less. In order to make a profit you're looking for shares that will grow in value as the value of the company increases in line with its profitability. Plus, you may receive a dividend an income paid out of the companys profits but this will not always be the case.
Buying shares carries one of the biggest risks, and if you're looking for a safer investment, you should look at a product that invests in the stock market on your behalf and offers a guaranteed return, or one that shares or caps the level of risk.
ISAs
Individual Savings Accounts (ISAs) can also be considered as a savings product as you can choose to invest in a cash only pot. There are different types of ISA, which is why they fall into the investment category. You can choose to invest up to 3,600 per tax year in a Cash ISA, which pays you interest tax-free. Or, you can choose to invest in a Stocks and Shares ISA where you can pay in up to 7,200 each tax year this means your money will be used to buy stocks and shares and could go up or down in line with the stock market. Any profit made in an ISA is not liable for capital gains tax.
You can also mix and match by investing some funds in a cash ISA (up to 3,600) and some in a stocks and shares ISA, as long as the total doesn't exceed 7,200.
The investment limits will increase in October 2009 for investors aged 50 and over , and for everyone from April 2010. The new investment limits will allow you to save up to 5,100 per year in a Cash ISA and 10,200 in a Stocks and Shares ISA.
When investing in a Stocks and Shares ISA, you should be prepared to tie your money up for at least five years. This can be a lower risk way to get the potential benefits of a stock market-linked investment, without having to know all the ins and outs of the FTSE, as the money will be invested on your behalf in a mixture of companies.
Bonds
In simple terms, the word bond is another word for loan. They are a form of debt issued by companies and governments to raise money. If you invest in one, you are lending money to the issuer. In return, they agree to pay you a set rate of interest each year, and repay the capital at the end of the agreed term which can be anything between 12 months and five years.
They can be bought and sold on a market, just as stocks and shares can. And can go up and down in value in the same way.
The most common type is a Government bond - or GILT. This is a bond issued by the UK Government that offers a fixed interest rate for the term of the investment, which typically varies between 12 months and five years.
The value of these investments fluctuates, and they can be sold at any time throughout the term, potentially providing a higher return than simply if you kept them for the length of the agreed term. Government Bonds are considered to be a relatively low risk investment.