Different types of investments

So, once you’ve chosen the provider you’re going to invest with, and the account that suits you, it’s time to choose your investments.

It might feel a bit overwhelming at first, particularly if your provider offers lots of options. But you’ll soon get to grips with the different kinds of investments out there and the key details to look for when deciding if they’re right for you.

To help you get there even quicker, let’s walk through the four main investment types: shares, bonds, funds and exchange-traded funds (ETFs).

Episode 7: Investment choices

Our experts look at the pros and cons of five popular investment choices – all of which you can access with AJ Bell.

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What are shares?

A share is a portion of a company. So when you buy a share in a company, you’re a part-owner of it. Depending on how well the company does, the value of your shares could go up or down, giving you either a capital gain (hopefully) or loss when you come to sell them.

While you hold your shares, you might also receive a portion of the company’s profits in payments. These payments are known as ‘dividends’. You’ll also get certain rights as a shareholder and can cast your vote on some of the big company decisions.

Offering shares to investors is one of the ways companies raise money to grow their business. You can buy shares in big publicly traded companies via a stock market. The London Stock Exchange is just one of them – there are dozens of major stock exchanges all over the world. And many investment platforms and apps offer access to international stock exchanges, including AJ Bell.

How to invest in stocks and shares

Choosing a company to buy shares in can take a bit of research. Handily, you’ll find key company information on your provider’s website or app. Make sure you read it carefully so you know exactly what you’re putting your money into.

Check things like the company’s share price, performance, where the shares are traded, and any additional charges you might face for investing – like stamp duty for UK shares and foreign exchange charges for international shares.

Once you’ve swotted up on the company, are happy with your choice and the higher risks involved in investing in individual shares, there’s another important thing to consider. Will this investment fit into a nicely diversified portfolio? Remember, diversification is key to reducing your overall risk of losing money.

How to invest in shares

What are bonds?

Bonds are effectively an IOU from a company or government. Unlike shares, which make you a part-owner of a company, by buying a bond you lend your money to a company until an agreed end date (also called the maturity date). In return, you get regular interest payments, and on the maturity date, the amount you originally lent returned to you.

Bonds are generally lower risk than shares, but some are riskier than others – so it's always important to make sure you understand the risks. Bonds issued by companies (corporate bonds) tend to be higher risk and offer higher interest rates than government bonds (gilts). That’s because gilts are usually a safer bet when it comes to paying their debts.

Though bonds may offer fewer potential gains than shares, they can be a good option when you’re looking for something more reliable offering a steady flow of income.

How to invest in corporate bonds and gilts

When you buy and sell a bond, the price is set by its current market value, not by its initial value. So your price may be higher or lower than when the bond was first issued.

If you’re thinking about building bonds into your investment portfolio, it’s worth reading up a little further to understand how they work in general and some of the (unfortunate) bond-related jargon you’ll come across.

As a start, though, it’s important to know where the bond comes from. What company or government originally issued it and how secure are they? Helpfully, companies that issue bonds are given a credit rating, telling you how likely they are to keep up with interest payments and pay back the full amount of the loan when the time comes.

The lower the credit rating, the higher the risk and the greater the chance the company gets into financial trouble and defaults on its debt to you. But that’s the attraction to some. Also called ‘high yield’ bonds, these higher-risk investments have the potential to deliver a bigger gain when they’re sold.

There are other things to look out for when buying a bond – including its interest rate (‘coupon rate’) and its maturity date.

More about buying and selling bonds

What are funds?

Funds come in all different shapes and sizes, with different aims, underlying investments and managers.

A plus of investing in funds is they let you invest in more than one thing at once. Also, you can leave it to a professional to choose what makes it into the line-up and what doesn’t.

Unlike shares, traditional funds aren’t bought and sold every minute of the day on a stock exchange, but are traded more leisurely, once a working day. That’s when the value of the fund is calculated and the price of one unit is set.

A fund’s manager can either be a real human with a team of people researching companies and picking which investments to buy. Or it can be a computer algorithm that automatically buys investments based on a set of rules. The human-run funds are often referred to as ‘active’ funds, with the computer-run ones called ‘passive’ funds. Because computers are cheaper to employ than humans, passive funds tend to be much less expensive than their active counterparts.

What are exchange-traded funds?

ETFs are somewhere between a fund and a share. A popular choice for new investors, exchange-traded funds are a low-cost way to track the performance of a particular index (for example, the FTSE 100 index fund of the largest 100 UK companies) without buying all of the companies or investments in it. When the index goes up or down in value, so will the price of the ETF.

Though ETFs give you access to a range of underlying investments, like regular funds do, they behave more like shares because they’re bought and sold on a stock exchange.

How to invest in funds and ETFs

When you invest in a fund, your money goes into a pot with lots of other investors’ money. A professional fund manager then uses that pot of money to buy lots of different investments – usually around 50–100 shares, bonds and other ‘underlying investments’ – that match the fund’s aims.

On your investment platform, you should find all the information that your chosen fund offers investors. Though this info can feel a bit heavy and difficult to navigate, accessibility is improving. And it’s certainly worth reading it. Required documents like fund fact sheets and the key investor information help explain all the most important points of the fund, as well as the risk level.

One of the first things to look for is the fund’s charges. In exchange for managing the fund, the fund manager charges you a percentage of your investment in it. This is called the ‘ongoing charge’ and usually sits between 0.1%– 1% of the value you’ve invested. There can be other fund charges, but the ongoing charge is the main one.

It’s also super important to check if the type of fund is what you’re actually after. Does the fund offer you regular cash payments from the profits made (an ‘income’ fund), or does it reinvest that income to grow the fund more quickly (an ‘accumulation’ fund)?

Also, is the fund invested in a wide range of sectors and world regions? Or just in something very specific – like exclusively tech companies from the US? Know what you’re looking for, and make extra sure that’s what you’ve got in front of you.

Learn how to invest in funds

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