What can I invest in?
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The answer to this question is pretty broad as you can invest in virtually anything that you think might appreciate in value over the years. Typically, investments fall into four main categories, also known as asset classes: cash, bonds, shares and property.
Typically considered as ‘saving’ rather than ‘investing’, most of us will have some money earning interest in a deposit account. Deposit accounts are straightforward, relatively safe and you can usually access your money at short notice if you need to. However, this relative security comes at a price; the potential returns on a deposit account are often relatively low compared to those of other asset classes that may be achieved, particularly when you take inflation into account.
Bonds are issued either by the government (called gilts in the UK) or by companies (corporate bonds). Essentially, when a bond is bought, the buyer is lending the issuer money for a certain period. The issuer then pays interest at a pre-determined rate and schedule (twice-yearly for example) on the loan and at the end of the agreed period they return the capital (i.e. the value of the original loan) in full. While the interest paid by the issuer is fixed, the price of the bond is determined by the market and so can fluctuate, daily. This means that there is a degree of risk to an investor’s capital. Bond investment also carries the risk that the issuer might default on the loan. Dependant on the issuer, this risk will vary.
When you invest in equities, also called shares, you invest in a company. So, in a small way, you become a part owner of that company and every year you may receive a share of the profits the company makes, called a dividend. Shares rise or fall in value depending on the performance of the company and the stockmarket’s view of a company’s results, profitability and future prospects. This means that a company’s share price can fluctuate, in some cases, greatly. The principal advantage of share-based investments is that they give access to the growth potential and development of companies over time. However, they also carry greater risk than some other asset classes.
In the UK, residential and commercial property has become increasingly prominent as a form of investment. A property can be purchased for buy to let purposes, for development or investment and can be made directly or via property based collective investment schemes (we will provide further details on collective investments on page 08). Property investment can offer a regular income in the form of rent from a tenant, as well as the potential for long-term capital growth if the property increases in value. The risks associated with investing in property are the ups and downs that can occur in the property market, as well as the chance that a tenant may not pay their rent.