Ways to invest your money

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.