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investing-day-v3

Which investment types are right for you?  (part 1)

Intro

There are many different investment types, as you may have realized by now: shares, commodities, funds, bonds, cash, foreign currencies, and the list goes on.

Let’s take a moment to consider the benefits and drawbacks of investing in company shares and investment funds, as well as other forms of trading such as CFDs and Spread Bets.

Stocks

Company shares can go up or down, depending on the general market sentiment, and on the company specifics. When a market is generally moving higher, it is commonly called a ‘bull market’. When prices are going down generally, investors call it a ‘bear market’

PROS

  • You choose the precise firm you wish to invest in. Since every company has a different risk and reward profile, you should conduct research and make investment plans for businesses you anticipate will expand.
  • There are two possible ways to earn investment returns: a rising share price and dividend payments, which are payments made to shareholders from a company’s profits but are never guaranteed.
  • Investing in shares of a specific company may involve a higher degree of risk than a portfolio consisting of a wide selection of shares, including an investment fund, but may also offer a higher potential return.
  • Investment gains are subject to capital gains tax (CGT). In some markets, like the UK, shareholder returns up to a specific threshold may be tax-free, and accounts like ISAs can offer further tax benefits. It’s important to learn about CGT and tax-efficient savings in the country or area where you currently live. 

CONS 

  • If you choose a non-performing business, you risk receiving minimal profits, having your investment lose value, or even losing everything if the business fails. Before making an investment, you must be aware of and comfortable with the level of risk.

Investment Funds

With the help of investment funds, individual investors can purchase a variety of assets simultaneously. They pool together money from several investors and utilize them to purchase a variety of investment instruments. This may consist of shares listed in various markets around the globe, bonds, cash, and other investment categories.

Funds may be actively managed, meaning that a fund manager is in charge of purchasing and disposing of assets with the goal of outperforming a particular benchmark, such as the FTSE 100.  On other hand, passively managed investment funds, may have a mandate to simply mirror a particular index or benchmark.

PROS

  • A qualified manager chooses which assets are purchased or sold inside the fund. Less experienced investors, or those who do not have the time to personally manage their investment portfolios or make their own investment decisions, may choose to invest through purchasing units of an investment fund, since fund managers are better equipped to react to changes in the market.
  • Since the risk is distributed across a large number of underlying investments, investment funds normally carry less risk than individual shares, even though their value may still decline.
  • Regular contributions can assist lower the average entry price you pay for the underlying investments (or “average down” your cost of investment), if you make regular contributions across time, for example on a monthly basis. However, there are no guarantees.

CONS 

  • The services of fund managers are compensated. Typically, a management and an administration fee are charged, which are defined as a percentage of the amount invested.
  • Investing in a handful of companies, would yield a higher return if these prove to be successful and profitable, compared to a less risky portfolio with a wide spread of investments.
  • Like any investments, there is a chance that you could lose your original amount invested. 
Stay tuned for part 2 of today's lesson!

Learn about one of the most popular instruments for traders and investors today