When most people think of savings and investments they think of deposit saving accounts or maybe shares in big companies. But there are so many other options for investing your money. Nowadays most of them are available through funds or investment trusts of one sort or another, which takes a lot of the hassle out of the process of investing (but does of course involve charges).
There are many different types of investments available in these funds, split by type of asset and other things too. For example you might find a fund that specialises in Japanese Technology shares.
The different broad categories of assets you can invest in are sometimes known as asset classes. Here’s a brief introduction to the asset classes you can invest in.
(image courtesy of 401kcalculator.org)
Equities/shares
An equity share, also known as an ordinary share, is just that – a part share in ownership of that company. That ownership also gets you a share of the companies profits (paid as dividends). You can also benefit from the overall value of the company going up, meaning your shares go up in value, giving you a capital gain.
Shares tend to have greater returns than other safer assets, but also less predictable. For more on the pros and cons of investing in shares see this article.
Corporate bonds
Investing in a corporate bond is basically lending money to a company, which they agree to repay with interest. The main risks of investing in bonds is that the company will go bust and not pay you back, or that interest rates will rise reducing the value of your bond (this mostly matters if you intend to sell before the bond matures and your capital is repaid).
Corporate bonds are safer than equities in that bondholders get paid before shareholders if the company goes under. But this is at the expense of lower returns. For more on the pluses and minuses of investing in corporate bonds see this article.
Government bonds
Government bonds are essentially the same as corporate bonds, except that (as the name suggests) they are issued by governments rather than companies.
When they are issued by developed countries with their own currencies government bonds are some of the safest available. This is because such Governments will almost always be able to pay their debts. However, unless the bonds are index-linked, the real value of the investment is still at risk from inflation (ie you will still get you money back but it will buy less than you were expecting).
For more details see this article on investing in UK Government bonds.
Property
Investing in property, especially commercial property, directly is not usually something most of us can do without either borrowing a lot of money. However you can usually invest in a mutual fund or investment trust that will own a wide range of commercial property, thus effectively giving you a small share in lots of different properties.
Property is usually less risky than equities but doesnt give as high a return over the long term. On the other hand, it usually has higher returns than bond type investments.
‘Cash’ aka deposit or saving accounts
Putting your money on deposit in a bank account is usually the ‘safest’ investment in the sense that you won’t lose the money you put in unless the bank goes bust. And even if it does there are often Government or industry compensation schemes that would get you at least some of your money back.
But the flip side of this is that the returns on such accounts are quite low. Lower than your would typically expect to get on other asset classes. If you are investing for the long term and can afford to take a little bit of risk you will almost always get a better return from investing in more exciting assets like equities or bonds.
But the flip side of this is that the returns on such accounts are quite low. Lower than your would typically expect to get on other asset classes. If you are investing for the long term and can afford to take a little bit of risk you will almost always get a better return from investing in more exciting assets like equities or bonds.
Commodities
Commodities are ‘basic’ goods – ones where you don’t particularly care where you get it from, so long as it is what you need. For example rice, iron ore, or silver bars are all commodities. Commodities are typically divided into ‘softs’ and ‘hards’. Soft commodities are those that don’t last e.g. food like wheat or pork bellies. Hard commodities have a long life such as precious metals or industrial mineral ores.
Investing in commodities typically involves either buying some in the expectation that the price will go up, or promising to sell some in the future in the expectation that the price will go down. You don’t have to do this yourself in practice, as you can buy funds that will do it for you, but it is important to understand how they make their money.
Precious metals like gold and silver are a special case of commodities. They have industrial and commercial uses but are also seen as a store of value which means that they don’t always behave like other commodities. For more about the ups and down of investing in gold see this article here.
‘Alternatives’
This category covers everything else from investing in hedge funds to investing in fine wine or artworks. Many of these are difficult for ordinary ‘retail’ investors like you and I to invest in and it’s not always clear what you are buying. On the other hand the returns can be very high on some of these assets.
So what now?
If you are interested make sure you do you’re research thoroughly. Understand what you are buying and how it makes money. (For more on the things you need to consider about your investments see this article here.)
Investing in different assets can help to spread your risks and mean you have a variety of investment choices to help meet your financial goals. Understand how to use them and the risks they come with and they will serve you well.
