Investment Types

There are many types of investment, each of which has different structures, different tax treatments and investor implications.

Some of these are Stocks & Shares, Deposit accounts, Gilts, Insurance Bonds, PEPS, Tessas, ISAs, Endowments, OEICs, Annuities, Unit Trusts, Investment Trusts, Zeros, Capital Units, Income Units, etc.

You need to give some thought to is what your objectives are. This is an area in which compromise and self understanding are essential.

Everyone wants investments which are safe, in the sense that they cannot fall in value and which offer reasonably high returns. This combination is sadly not available and we recommend that you beware of anyone who claims otherwise.

Sensible investment planning revolves around understanding what your investment aims are, remembering that long-term investments generally involve lower risk but the short-term speculative investment may attract a much higher risk. If however the money is needed in full in the near future then the short-term safety of a deposit account is probably the most appropriate.

Risk and Reward
It is imperative that you understand this vital area, for sensible investing and your adviser will help you determine an investment strategy appropriate for your needs and the investments best-suited to your investment attitude and tax position.

Most people understand the need for some element of investment and funding for retirement, but due to changes in Government policies, there it is now essential that individuals contribute to a Private or Stakeholder Pension or at least create some funds from which an income may be drawn in the future.

Let us look at the options for creating such a fund and providing for your future.

There are a range of options available for the person wishing to invest to generate additional income or build up a fund for the future. In so doing, the investor may additionally provide for dependents should you suffer an unexpected loss or reduction in your earnings.

Direct Investment
This is generally dealing in shares, stocks, bonds and gilts and is conducted through stockbrokers who will buy or sell shares on your behalf for a commission. Terms will vary from one stockbroker to another but commission will normally be charged as a flat fee or a set percentage. Although the idea of share ownership has grown significantly in the last 20 years there is often an inadequate view of the risks and how to minimise them and it is worth looking at the various options.

If you intend to actively manage your share portfolio by regularly buying and selling different shares then the commissions will start to stack up. The shares which offer the greatest potential for high returns may also present the greatest risk to your capital. So unless you intend to invest directly in a broad range of stocks and shares, you should probably consider a collective investment scheme instead.

Shares
The price of a company's shares is determined by the value of its assets and its potential to generate further revenue. If shareholders begin to see the estimates of future revenue as unduly optimistic, or if the value of the company's assets decline, they are likely to sell their shares and this may cause the share price to fall. If the reverse happens, demand from buyers will increase - thus pushing the share price up. The trade in stocks and shares, facilitated by market makers whose role is to quote both a buying and selling price for listed stocks and shares, is known collectively as the stock market.

Public Limited Companies (plc's) in the UK are listed on the FTSE All-Share index, with the 100 largest listed on the FTSE 100 which is usually just referred to as "the footsie". Companies who want to issue shares to the public but are not able to go for market flotation may choose the Alternative Investment Market (AIM) but these shares carry higher risk than those listed on the main stock market.

Bonds and Gilts
The second principal form of direct investment is bonds and gilts. Bonds are where the investor in real terms loans money to the bond's issuer, knowing in advance the sort of return they will get on their investment. Bonds are generally regarded as a low-risk investment, compared with shares.

Gilts are bonds issued by the UK government so by buying gilts the investor is lending money to the Government. As the UK is regarded as a safe bet to honour its commitment to buyers of its stock, gilts are thought to be the safest forms of investment. The issuer guarantees to repay your capital at the end of the bond's term, and you get a guaranteed income or return throughout the investment period.

Bonds pay a predetermined interest each year to the holder and it important to note that the rate must be competitive with current interest rate levels at the time of issue. However, it should be remembers that if interest rates then rise, the return on your bond might not be as much as a deposits in a Building Society. For this reason, bonds are regularly traded in the market place.

However, it is always comforting to know that you will get your original money back on redemption as, whatever your political views, the Government is a fairly safe bet.

Corporate bonds work in rather the same way as Government bonds - they are issued by companies as a way of raising money from investors. Again, they pay an interest rate coupled to a promise to repay the capital on maturity. Like Government gilts, they can be traded on the market open if investors want their capital back before the maturity date.

However, with corporate bonds, the return of capital is not guaranteed. They are therefore a higher risk option, but pay a interest rate to attract buyers.

So you must assess the guaranteed return of your capital with a Government bond against the potential for higher returns offered by the stock market and your view of the stock market may be that prices are erratic and investors cannot rely on all companies increasing the value of their shares.

This is the major potential pitfall of direct share investment - any company is at the mercy of conditions in its own particular business sector, and even companies in generally profitable sectors can fall victim to bad times. Correctly identifying which companies to invest in is therefore vital for direct share investment. Warning against putting all your eggs in one basket may seem a little obvious, but relevant in this context.

You should keep a close eye on how your investments are doing. Potential investors often find the prospect of constantly keeping tabs on their share portfolio too daunting and for this reason - as well as those outlined previously - many opt to take their first step into these markets via collective investment schemes rather than direct stocks and shares investment.

Collective Investments
In the UK there are three principal types of mainstream collective investment schemes - Unit Trust, Investment Trust and Investment Company with Variable Capital (ICVC). All three will take the pooled monies of a large number of investors and put them in the hands of a professional fund manager. He or she will choose a broad spread of instruments in which to invest, depending on the relevant published investment remit.

Investment trusts are most commonly bought through a stockbroker but we are also in a position to advise on their purchase whereas Unit trusts and ICVCs are normally acquired through an Independent Financial Adviser like ourselves.

Details of funds and fund providers are published in a range of specialist financial publications as well as sections of the national broadsheet press but the coming of the Internet has opened up another access route for investors. Many fund providers now offer their products via websites. However, given the range of investments available it is still a good idea to seek professional advice before proceeding.

However there are key differences between the three types of scheme structure as shown below.

Unit Trusts
An investor in a unit trust 'buys' a number of units, while an investor in an investment trust or ICVC 'buys' shares. Unit trusts are open-ended, which means that units can be issued as demand requires. The price of these units is dependent on the value of the underlying assets, and they can be sold back to the fund managers by the investor. Most UK collective investment schemes are authorised by the Financial Services Authority (FSA), although this imposes certain restrictions on what they can invest in.

Investment Trusts
Investment trusts are structured as companies so their shares are traded in the same way as any other limited company's shares and they offer a wide range of investments.

Investment Companies with Variable Capital (ICVCs)
The ICVC is structured along similar lines to the unit trust, but it differs as it has no bid/offer spread. This means buyers and sellers get the same single price. Additionally, the ICVC has an "umbrella" structure allowing numerous sub-funds investing in different types of assets, so the investor can switch easily between different investment funds.

Given the range of options of unit trusts, investment trusts or ICVCs, the choice can be confusing and we recommend that we get together to discuss the options before you make your selection.

Index Trackers and Active Management
Through research and analysis an active manager will seek to identify companies which he or she believes will perform better than their rivals, or whose current share price makes them a bargain buy. Potential returns depend on whether the manager gets it right or wrong.

An index tracker fund tracks a stock market index. Having decided which recognised market index is most appropriate, the fund manager will invest in such a way as to duplicate the make-up of that index. In times of good stock market performance tracker funds are attractive.

But the critics of tracker funds point to two potential drawbacks. Firstly, if the index falls, the fund must go with it. Secondly, the cost of running the fund - administration fees, management fees, etc. - can mean that tracker funds' performance is just below that of the index itself.

Active managers should really produce better returns than the market average as well as avoiding the worst of the falls in the market by selling badly affected shares.

There are hundreds of collective investment schemes to choose from which is where our services can assist you in negotiating the investment market.

So why should the saver, who has hitherto been content to build up a nest egg in a deposit account, move into the riskier field of investment in equity or bond markets? Well, the main reason is the chance of a higher return than can be obtained from deposit accounts. If the potential investor is prepared to be patient - these types of investment are not for the short term - then past performance suggests that over time he or she can expect a higher return.

Investor must also consider the question of risk. In a low interest rate environment the return on your deposit account may decrease, but there is no threat to your capital. Investing in shares is different. Potential returns can be much greater than those offered by cash deposits. But if the shares in which you have invested were to fall in price, there is a real threat to your capital itself. If you are forced to sell your shares at a time when they are performing poorly, you could actually end up with less money than you started with.

Individual Savings Accounts (ISAs)
If you are looking to invest directly in shares or bonds or collective investment schemes, a tax-efficient method of doing so is using an ISA. This is actually not an investment in itself but is a tax-efficient way which you can use to hold a number of investments.

As the UK's principal tax-efficient investment plan, an ISA can incorporate a stocks and shares element within which each person can invest up to £7,000 in each tax year. Alternatively, you can set-up three mini ISAs, the components being cash, stocks & shares and life assurance. The investment limits for mini ISAs are lower.

Within the stocks and shares element of an ISA you may invest directly in shares or bonds or collective investment funds and we will help you take full advantage of the existing tax allowances within your investment portfolio.

Offshore Investments
In certain cases, offshore investment may be worth considering. From the UK perspective, offshore funds have traditionally been used mainly by expatriates. Because UK expatriates do not generally pay UK income tax, it makes sense for them to invest in funds based in a low-tax centre such as Luxembourg or the Channel Islands. However, some funds, accumulation funds in particular, can offer a tax efficient use of offshore funds to the UK resident.

If you are a UK expatriate intending to return only on retirement when your tax status will be more favourable, there are benefits in keeping your investments offshore.

Funds based in an offshore centre are generally not covered by the regulations which govern their UK-based equivalents. This means that you might not benefit from the same level of protection offered in the UK. However funds based in several of the larger offshore centres are deemed to meet UK regulatory standards where that centre has been granted "designated territory" status by the UK.

As well as offering tax advantages, lighter regulation in offshore centres means funds can invest in a much wider range of markets than most onshore vehicles - a big attraction for the more adventurous investor.

But do remember that capital and income values may go down as well as up and you may not get back the amount invested, also exchange rate variations may cause the value of overseas investments to increase or decrease. Past performance is no guarantee of future performance.

But the offshore sector presents all manner of pitfalls for the unwary, so for investors considering a move in this direction, getting specialist advice is of paramount importance.

Here our services with our specialist knowledge of the offshore market can prove invaluable.

Whatever investments you are considering, you are strongly advised to talk to a company such as ourselves so that we can help you identify the best type of product for your requirements based on a consultation to look at the interaction between risk and return.

Remember that all investments carry some degree of charges which can vary fairly significantly so we will help you through this potential minefield so that you can fully to understand to options.

It is also important to recognise that some investments are designed to be long-term investments. It is therefore essential that we understand your wishes clearly when it comes to short, medium and long-term investments and ensure that you understand the risks of your chosen products.