Shares
A share is simply a unit of ownership. If you own a share, you own a stake in a particular company. Shares are listed on a stock exchange and the price of all shares will fluctuate throughout the day.
If you invest wisely, your stocks could increase in value. Shares have historically provided better returns than cash when investing for a longer term, although this isn't guaranteed.
If the company you choose to invest in isn't doing well then the share price may fall - meaning you could lose money on your investment.
Funds
Funds are a form of collective investment where professional Fund Managers will pool together investors’ money and invest on their behalf. Since your investment can be spread over a range of different stock markets, sectors and investment types (without you having to buy lots of individual shares), the risk involved may be reduced.
Funds often spread their holdings across different stocks or markets which reduces the risk. So if one of their holdings is not doing well others in the fund may be doing better to make up for it.
A fund manager may have to sell holdings to pay investors back who are exiting the fund. If the assets they hold are difficult to sell - such as property - then this can mean delays in getting your money back.
Exchange Traded Funds (ETFs)
Exchange Traded Funds (ETFs) trade on the stock exchange in a similar way to shares. ETFs are usually designed to replicate an index, sector, commodity or currency and will invest in a range of assets with the aim of closely tracking its performance.
ETFs can offer lower fees than managed funds as they have lower operating costs.
An ETF is designed to track a market, unlike funds which are actively managed to try and outperform it. This can impact the performance.
Investment Trusts
An investment trust is a company which invests in a number of different assets. Unlike funds, shares in investment trusts trade on the stock exchange just like shares.
Investment Trusts don't have to sell assets when investors exit the fund. This means that investors should be able to sell their holding easily on the stock market - though the price could go down if more units are sold than bought.
- Cons: Potential Price Volatility
The price of an investment trust is partly based on the value of the assets it owns but can also be influenced by the demand for the share itself. If investors don't feel that the investment trust is being managed well then this can adversely affect the price as more people will want to sell than buy the share.
Bonds and Gilts
Bonds and gilts are created by companies or governments for investors as a way of raising money. When you invest in a bond or gilt you’re lending money to the company or government for a fixed period in return for a fixed rate of interest.
Bonds and gilts are a more stable investment than stocks with a lower risk and steady returns.
Bonds and gilts don’t always offer the possibility of high long term returns which is a disadvantage compared to the performance of other stocks. Interest rate, currency fluctuations and economic uncertainty can impact the value of bonds and gilts.
For further information on your investment options explore our easy to read articles designed to help you on your investment journey.