Investments for growing your future
Deciding where to invest your money is a big decision to make when you’re considering how to grow your finances, and not understanding the different types of investments available to you could make the decision harder. You might find yourself lost in the sea of investment options and end up asking just how many types of investments are there? We want to help you better understand a variety of investments and strategies that are available for you, so you can choose the best type of investment, for the future you’re aiming towards, with hopefully the growth you want and the risk you’re willing to take.
What is an investment?
In its most simple form, an investment is an item, or an asset, that you acquire with the goal of generating an increase in wealth or value. It is something that you intend to use in the future to create wealth. Investing comes in many forms depending on what you want to invest in, the monetary gains you wish to make from your investment, and how much risk you’re willing to take with your money to get there. Here some of the more common types of investments and the best ways to invest in them.
Types of investments
A stock is a type of investment that represents your share, or partial ownership, of a business. Stocks are seen as one of the best types of investment strategies to build wealth because as a shareholder you make money when the stock price rises, and you may also earn dividends when the company distributes earnings. Stock prices can fluctuate, which is a risk you take with stock investments, as it’s not always guaranteed that the fluctuations result in an overall gain. Over a longer period, you want the stock you’ve invested in to increase in value because if the stock goes up during the time you own it, you can sell it and make a profit – this is known as a capital gain.
Investing in commodities means you are putting your money into raw materials or agricultural products, such as gold, energy resources or goods like wheat. A benefit of investing in commodities is that they bring diversification to your investment portfolio. They are also one of the few investment assets that may benefit from rising inflation like we are witnessing in the current climate, because commodity prices tend to rise with inflation. A key consideration when investing in commodities is supply and demand because the higher demand a commodity has the higher the profits will be for the investor.
Bonds are a more complex way of investing your money compared to stocks, so it’s important to understand the basics when considering this investment strategy. In the simplest way, bonds are loans taken out by a business, but instead of going to a bank, the business gets the money from its investors who buy its bonds.
A useful way of thinking about bonds is to consider them a form of IOU between the lender and the borrower. Bonds are more complex than stocks because of their ability to vary based on the terms they come with and there are 6 aspects of bonds which we advise you to consider before selecting whether to invest:
- Maturity – this defines the lifetime of a bond, are they short, medium, or long term? Their date defines when the amount of the bond is paid and the obligation between the investor and the business ends.
- Secured or Unsecured – a secured bond offers specific assets to bondholders in case the business cannot repay its debt. Whereas unsecured bonds do not offer any collateral.
- Liquidation Preference – if the business goes bankrupt it will repay its investor in a particular order as it liquidates.
- Coupon – the coupon amount is important because this represents interest that is paid to bondholders either annually or semi-annually.
- Tax status – some forms of bonds are exempt from tax which makes income and capital gains tax-free. Although tax-exempt bonds normally have lower interest than taxable bonds.
- Callability – if a bond has a callable option, then the company which issued the bond may be able to repay investors earlier than the quoted maturity date. Given that this is a risk to an investor (they may receive the proceeds back earlier than expected at a fixed price) then these types of bonds typically have a higher coupon to compensate for the increased risk.
Options are one of the more complex investment strategies and are classed as a derivative – specifically an option is a contract that gives a buyer the right, but not the obligation, to buy or sell the asset at an agreed price by a specified date. Investors should weigh up the risks before deciding if this is right for them. Options involve a buyer paying a premium for a financial product granted by the seller, and the two parties agree within a contract to transact an asset for a decided price at a date in the future. The two most commonly used options are call options and put options, which we advise you understand in more detail to help decide if options investments would be a good fit for you.
You may be thinking what the best way is to invest in the investments we have explained above, and there are three ways which we have to consider when investing in stocks, bonds, commodities and more.
Stocks and Shares ISA
With a Stocks and Shares ISA you invest in funds such as shares or bonds from various companies. This is seen as a tax-efficient way to grow your investments, allowing you to invest up to £20,000 per tax year. An appealing aspect of this investment is that any interest earned or investment growth you get from your Stocks and Shares ISA is tax-free.
Mutual Funds and Exchange Traded Funds
Mutual Funds is a financial investment that combines assets from shareholders to invest in a group of stocks, bonds, options, or other securities. The Mutual Fund portfolio that is created is managed by money managers who oversee allocating the funds to make capital gains or income for the investor. Like investing in any security, investing in a Mutual Fund involves certain risks, including the possibility that you may lose money.
Exchange traded funds (ETFs) merge aspects of mutual funds and conventional stocks. Like a mutual fund, an ETF is a pooled investment fund that offers an investor an interest in a professionally managed, diversified portfolio of investments. This may sound exactly like a Mutual Fund, but individually to ETFs, they are traded on stock exchanges and can be bought or sold throughout the trading day at fluctuating prices.
This is, of course, just a whistle stop tour of some of the most common types of investments, there are many more investments that could be the right choice for you. If you want more information from our experts why not get in touch for a free consultation to help you reach your investment goals.
What type of fund should I invest in?
You may find yourself stuck on deciding what types of investment funds are the best fit for you and one of our main pieces of advice in this situation is to invest in funds that align to your risk profile and personal values. Yes, you want to see your investments increase in value but you also want to consider the level of risk you are taking and feel like your money is invested in things you value. Your investments should reflect your financial goals and priorities, that’s why it’s also important to know how much money you need and why.
Investing in a range of investment funds is also important to consider, because diversifying your portfolio is a useful strategy to protect your investments from being too heavily invested in one place. If you can spread your investments across a variety of assets, regional exposures, and sectors, you’re likely to reduce the overall risk, because if one of your investments fall in value then you will still have other investments which will not have fallen by the same amount and may have actually increased in value.
Which investment types carry the least risk, which type carries the most?
Understanding the different types of risk in investments is one of the most important aspects when you’re choosing where to invest your money, and it’s imperative to know that if you investment in a high-risk fund, things have a higher chance of going badly and you could lose all of the money you initially invested.
High risk investments may seem appealing because they reap the highest rewards if things go successfully, but you must consider if you are willing to lose a significant part of your investment if markets fall. On the other end of the scale, investing in lower risk funds may not put your money in danger, but they also reduce the total level of return you can expect. So, it's important to find a balance with your risk; you don’t want to risk losing everything you invested, but you do want to see some sort of returns for your efforts.
It’s known that your investments perform better or worse depending on the broader market and economic environment. In a climate with such high inflation, bonds are performing worse than they would with lower inflation. There is no ‘one size fits all’ when it comes to risk, and the value of investments can always fall as well as rise, but we want to give you some general insight into what investments are high and low risk.
Below, we have constructed a risk pyramid, so you can understand which investment types carry the most risk, but if successful bring the highest returns, and which come with lower risks, but will see less return on investment.
What are different types of investment strategies?
The most important thing when investing your wealth is to make sure that the strategy you adopt aligns with your financial goals and values. For example, ethical investing has become increasingly popular in recent years. One type of ethical investment strategy has become commonly used called Environmental, Social, and Governance (ESG) investing.
Impact investing has also become another popular form of ethical investing. Impact investing is when you invest your money into assets or organisations with the intention of having a positive environmental impact as well as financial returns for yourself.
As you can imagine there are a variety of different strategies to choose from when investing your money, not all of them are ethically driven. Value investing, Growth investing, Emotional investing and Income investing are some of the most popular investment strategies. However, similarly to how managing risk in your investments is impacted by the current economic climate, so is selecting an appropriate strategy. Income investing for example would currently be a less desirable strategy due to cash rates being at a historical low (even with interest rates rising) which has meant cash flow from investments has been made increasingly difficult.
If you would like to know more about investment strategies, what risks to take according to your financial goals, or anything else we have discussed here today, please get in touch for a free consultation with one of our financial experts here.
Please note: The value of investments can fall as well as rise and you may not get back what you originally invested.