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).
At the halfway mark in our ‘Investing for beginners’ video series, Dan Coatsworth dives into the types of investment that are available, and how each of them works.
Hello, I’m Dan Coatsworth, and welcome to AJ Bell’s bite-sized series aimed at helping people to start investing.
So far in this series, we’ve explained why you should consider investing and the key life events where it can pay to have some money. We’ve talked about the different types of accounts so the next step is to run through the types of investments you can choose from.
Two of the most popular ways to invest money for investors are shares and bonds. You can either buy them individually or in bulk via investment funds. I’ll explain what each of them are now.
Shares are also known as stocks or equities - the terms all refer to the same thing, which is partial ownership of a company. Think of a cake split into 16 slices. Some people might have 2 slices, others might have one, but collectively the people holding all 16 slices own the cake. The same principle applies to a company on the stock market - it issues millions of shares and investors can buy a slice via their investment account.
Now, if you own a share, you make money in two ways - one is when the value of your shares goes up and you then sell them for a higher price than what you originally paid. The other is when a company pays out some of its spare cash as a dividend.
Some of the world’s best-known companies have their shares available to buy and sell on the stock market, including Apple, Coca-Cola and McDonald’s. You can also find lesser-known names which play an important role in people’s lives, even though you might not realise it.
The list includes companies providing disposal gloves to doctors and nurses in hospital and businesses recycling the milk cartons and cardboard packaging you have at home.
Bonds are slightly different as they are issued by companies or governments as a way of borrowing money from the people who buy the bonds - i.e., you and me.
When you buy a bond, you’re effectively lending money to a company or government and in return you’ll get a regular interest payment called a coupon, and the face value of the bond back after a specific time. For example, a bond might pay 5% in interest a year and mature after 10 years.
Many people just starting out with investing look at investing in funds rather than individual shares or bonds. It’s an easy way to diversify your portfolio and spread your risks.
I like to describe funds as a box of assorted biscuits. You buy one box and get lots of different flavours inside the box. A fund is the same principal - it will invest in different companies or bonds.
If something bad happens to one of the holdings, you’ve got all the other companies or bonds in the fund to act as a cushion and dampen the blow. In contrast, if you own an individual company share and the company goes through bad times, you’ll feel the impact if the share price falls.
Funds will have different flavours - one might focus on companies of all sizes around the world, another might be more specific such as small companies listed in Asia or a selection of ideas in the technology sector.
You get two choices when buying funds - you can either invest in funds run by a fund manager where they make all the decisions about what goes in and out of the fund portfolio. That’s called an active fund.
The alternative is a passive fund where you invest in a fund tracking a specific index. Here, there isn’t a person making the decisions - instead, the fund mirrors whatever is in the index, which is decided by a set of rules.
For example, a FTSE 100 tracker fund tracks the performance of the FTSE 100 index. This index contains the 100 biggest companies on the London Stock Exchange, with the basket members rejigged once a quarter.
Passive funds come under the name of a tracker funds or ETFs, which stands for exchange-traded funds. If you want an active fund, you can choose from open-ended funds which can also go under the name of unit trusts, or you buy an investment trust.
Where investment trusts differ to funds is that they trade on the stock market which means their price can move up or down throughout the day. In contrast, funds are only priced once a day and they trade in line with the value of their assets.
Often, it is possible to buy an investment trust for less than the value of its underlying portfolio, and sometimes you have to pay more than they’re worth if the trust is in demand.
These slight complexities mean investment trusts may not be suitable for first-time investors unless they can get their head round how they work.
Someone starting out investing for the first time might find that funds are easier place to begin. AJ Bell’s Dodl app features a streamlined number of tracker funds providing exposure to specific sectors such as technology and healthcare, as well as ones providing broader coverage of sectors and regions. You can also find ones that mix and match shares and bonds.
Furthermore, AJ Bell offers its own range of funds managed by our experts and designed to match different risk appetites such as if you are cautious or more adventurous. And Dodl can be used to invest in a select number of stocks including Amazon, Tesco and Coca-Cola.
If you’re looking to choose from a really big selection of funds and stocks or want to deal in investment trusts or individual bonds, then you’ll find the AJ Bell platform to be more suitable than Dodl because it has a much broader range.
In the next video, we will address a popular question which is "how much should I invest?", while we will also discuss the impact of charges. I hope you’ve enjoyed the videos so far and hope that you join us for the next one. Thanks for watching.
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.
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.
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Disclaimer: These articles are for information purposes only and are not a personal recommendation or advice. The value of your investments can go down as well as up and you may get back less than you originally invested. How you're taxed will depend on your circumstances, and tax rules can change.