An introduction to investments
If you have some savings put aside you’ll want that money to work as hard as it can. One option is to open a savings account, which will give you interest on your money. Over the long term this interest can add up to a decent sum, but this will depend on how good the interest rate is on the account. However, there’s also the opportunity to invest that money, which could bring both greater potential for growth and a greater risk than a savings account. There’s a huge range of investments out there. Here we cover some of the most common types.
What are the different types of investment a person can make?
The term investment can mean different things to different people. If you’re an experienced investor you might directly invest in the stock market, into property or into business opportunities. If you’re an entrepreneur it might mean starting your own business.
If you’re new to investing you might be more likely to choose some kind of investment product. These are usually available from your bank, building society or other financial service provider. They can be appealing because they usually offer a simple way for people to invest even if they have limited knowledge of how lending and financial markets work.
Bonds – These are financial assets issued by a company, a government or other organisation with the aim of raising money by selling the bonds to investors. It is essentially a loan from the investor to the organisation, but is usually spread out over many different investors to reduce the risk they take. A fixed return will be guaranteed over a specific period. The longer the period, usually, the higher the return as it means waiting longer to get the invested money back.
Buying shares – Buying shares in a company essentially makes you a part-owner of the company. Your investment could then either increase or decrease in value, and may also pay out a regular dividend. Shares can be bought in particular companies via a stockbroker or bought indirectly as part of a fund. A stocks & shares individual savings account (ISA) is a common product, which although called a savings account is very different from a regular ISA.
Asset investment – An asset can be anything from a precious metal like gold to a classic car. It could also be things like antiques, vintage wine or the digital currency Bitcoin. The idea is that the value of the asset goes up over time – this is called ‘appreciation’. As well as buying these of types of assets directly, there are also funds that pool together investments. The investment decisions are then made by people with expert knowledge on the subject.
Peer-to-peer (P2P) lending – New technology has made it possible for savers to directly connect with individual borrowers using custom P2P platforms. They can be attractive to investors by cutting out the middleman and reducing the costs associated with traditional banking. There is still a risk as borrowers may not pay back their loans; however, loans are often spread over many lenders to reduce risks.
Venture capital – This means investing in companies in return for equity, i.e. part-ownership, of the company. It is usually a venture capital firm that will invest in a company at an early stage with the expectation that the company will become more valuable later on. Although a lot of venture capital is done by large financial institutions, there are now crowdfunding sites that let people with smaller amounts of cash invest their money.
Can any investment be risk-free?
Investment by its very nature is not risk-free, which is why it offers greater potential rewards. That’s why it’s important to only choose investment products that you understand and where any potential losses would not severely damage your financial standing. If you are considering investing, you should get advice from an independent financial advisor before doing so.
If you are using an investment product, the provider should also explain clearly the potential risk of using the product. If the risk is too great, it may be that investments aren’t right for you. Using a savings accounts instead can provide a decent return and are secured by the Financial Services Compensation Scheme (FSCS) up to the value of £85,000.
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