Starting your investing journey can be daunting. There isn't just all the jargon to contend with. There's also the question of investment types. Shares, funds, bonds – what are they, and which should you invest in?
So, let’s start at the beginning – what is an asset?
An asset is a thing you buy that (hopefully) increases in value – think properties and shares, for example. It’s the opposite of a liability, which is money that you owe – think mortgages or loans.
Now that we’ve got that covered, let’s deep dive into the three key investments every investor should know about:
What is a share?
A share is just a little piece of a company. It’s a piece of paper (these days digital) that you buy to prove that you own a percentage of a business.
So, for example, if a business has 100 shares issued and you own 25 of the shares, it means you are a 25% owner of the business.
If you buy a share in tech giant Apple, you’ll own part of it. It might only be a very small part – but still, you’re a shareholder in the business! That means you ride out the good and bad days with the company.
If the business does well, the value of your shares will go up and you’ll be a happy shareholder with a capital gain. Alternatively, if the share value goes down, you’ll have a capital loss compared to the price you bought the share for.
Being a shareholder also means you could look forward to a share of any profits. If companies do well and have surplus money, they tend to pay their shareholders a dividend – a little ‘thank you’, you could say. It isn’t obligatory for a business to pay dividends, however, so won’t be guaranteed income for you as an investor.
Shares have higher risks than other asset classes. If a business you hold shares in goes bust, you won’t be the first person to be paid from the company’s remaining money. Bondholders get priority over shareholders. So in the worst case, you could lose all the money you invested.
So, what is a bond?
A bond is money you lend to a business. It isn’t called a ‘loan’ because it’s tradeable (i.e. you can buy it and sell it). Essentially, with a bond you know how much money you’ll get in return because you receive an agreed level of income – and your initial loan is repaid at the end of the bond’s term.
For example, let’s consider at a 5% bond that is paid back in 2025. If you invested £100 today you would get back your £100 (aka the ‘principal’) in 2025, and each year until then you would get £5 as an income payment.
Bonds are generally lower risk than shares. You’re guaranteed to receive your income, and as discussed above, you’ll come above shareholders in the pecking order if the company did fail.
Funds are simply ‘boxes’ that combine different shares or bonds together. That makes them more diversified than if you just bought one share or bond. As an investor, you can buy a piece of this box, effectively pooling your money with other investors.
The fund will either be run by a human fund manager, who’ll pick certain investments for you and aim to beat the overall return of the relevant market. Or it will be run according to a computer algorithm and buy all of a market – for example, the FTSE 100 index of the largest 100 UK companies. As an investor in the fund, you’ll benefit from a share in any income generated and also the gains of the underlying assets.
In return for a fund manager (or a computer) picking different investments, you’ll have to pay a fee each year. The amount will vary depending on whether the fund is run by a human or computer. It will also depend on the area the fund invests in, and whether it’s niche or specialist.
However, investing in a fund means you’ll most likely save time – because as you don’t have to choose individual shares or bonds yourself.
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Author: Prerna Khemlani
Biography: Prerna Khemlani ACA is a qualified chartered accountant, a Finance Manager at Coca-Cola Europacific Partners and a One Young World Ambassador. She is also the Founder of This Girl Invests, which has been featured on Glamour UK and Cosmopolitan UK.
This Girl Invests’ mission is to help reduce the gender investment gap by using education as a tool to empower women to invest and to feel #financiallyconfident. Find out more at www.thisgirlinvests.co.uk and follow her on Instagram @thisgirlinvests
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