What kind of investment would suit you?
If you are thinking about dipping your toe in the world of stocks and shares, then it pays to know what type of investment would suit you best.
1. No appetite for risk
You need your cash to be entirely safe and instantly available, and would panic and lose sleep if your capital was reduced at any time.
Invest in cash accounts – bank and building society accounts and instant access ISAs.
Find the best savings rates on the market in our daily round-up
2. Prepared to take some degree of risk
You already have enough cash set aside for your needs but would like to earn some extra income and are happy with a small degree of risk to your capital. You are happy to keep your money invested for the medium term – about three to five years.
Invest in gilts, corporate bonds or equity income funds. Don't forget that you can invest in equity income funds that invest worldwide too, to aid diversification.
3. Happy to tie up your money in the medium term
You have plenty of cash set aside, have utilised your ISA allowance, and are comfortable with some risk to enable your capital to grow. You are happy to have your money tied up for the medium to long term – more than five years.
Invest in a portfolio of funds investing in various geographical regions and sectors, including emerging markets.
4. A long-term view
You have enough cash and wish to invest for the long term. You are quite comfortable with a high degree of volatility and potential risk.
Invest in a portfolio of shares. However, remember to keep a close eye on the companies in which you invest.
RECOMMENDATIONS FOR FIRST-TIMERS
Darius McDermott, managing director of Chelsea Financial Service, recommends:
L&G Dynamic Bond
Fund manager: Richard Hodges
"The fund has seen some stellar performance over the last year, returning 48.23% compared with a sector average of 23.98%. It has a go-anywhere strategic mandate whereby it can select from investment grade and high yield, depending on the environment."
Schroder Income Maximiser
Fund manager: Thomas See
"In an era when gilts are under fire and yields on cash are nothing short of derisory, a defensive equity income generator is certainly worth a look.
"The Schroder Income Maximser maintains a high yield (7%) but, despite having only modest aims for capital growth, still offers plenty of growth potential. The writing of covered call options may curtail upside, but the fund still returned 29.9% in 2009."
Jupiter Absolute Return
Fund manager: Philip Gibbs
"For those who are concerned about the outlook for the economy and want to take a market-neutral view, an absolute return vehicle is something to consider.
"Jupiter Absolute Return is such a portfolio and has the ability to go long and short, seeking to deliver positive returns in all market conditions."
M&G Global Dividend
Fund manager: Stuart Rhodes
"This is a fund that looks to well-run companies that are growing their dividends. It's a very flexible fund with no size or geographic bias."
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.