Why people invest
Investing isn’t the same as having a savings account – since with the former, returns aren’t guaranteed and the value of investments can go down as well as up.
So anyone looking to invest must be confident in making their own investment decisions. If you feel you need advice on investments, then the person to speak to is a qualified independent financial adviser.
Those who can afford to invest money often do so as it can offer a better potential reward reward than fixed rate savings. This is especially attractive at a time when the high street savings accounts aren’t paying interest that can match inflation. With a savings account what’s happening is that your money is growing year on year, but depreciating in real terms, since its buying power is decreased by inflation.
Reasons for investing can include long term objectives like providing for retirement, or other goals such as providing for things like children going to college in the future. Investing isn’t a get-rich-quick scenario and products like stocks and shares ISAs are aimed at people who are looking to put money away for the medium to long term, e.g. five to ten years.
Where do investments go?
There’s actually a pretty wide choice for investors these days, and while people still buy individual stocks and shares, there are also lots of other investment options to choose from including
- Active funds. This is a pooled investment whereby your money along with that of other people is put into a basket of investments managed by a fund manager, who makes decisions on behalf of the investors in order to aim for a good return.
- Passive (tracker) funds. This type of fund doesn’t need to be managed since they are set up to replicate the movements of an index. This is done by having the fund made up from the index’s stocks proportionate to their relative size within it (full replication) or a section of stocks within it (partial replication). Then there is also synthetic replication, which is slightly more complex and involves the use of a total return swap – in effect a contract with a third party rather than actual buying of shares.
- Bonds. Essentially a bond is a type of loan, whereby investors loan to the body issuing the bond for a fixed time and interest rate.
- Property. House prices may be a headache for the first time buyer. But once that home is purchased, equity can increase – sometimes by a large amount indeed.
- Alternative investments. Everything from film to fine wine has its investors. This is a specialised type of investing. But there have been a number of high profile news stories involving unscrupulous offers, so as always it’s important to have done your research and/ or spoken to a qualified independent adviser before parting with any cash.
There are a number of guides out there on investing strategy. How you work out your strategy is largely down to how risk-averse you are as an investor. As the Motley Fool investing site puts it: “if there’s one certainty in the stock market, it’s the certainty of losing money by haphazardly picking individual shares on a whim”.
C Foley writes on investments and finance. Add him to your Google+ circles.