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Types of investments

There are many types of investment, each with their own characteristics.

Shares or funds?

Two of the main ways to invest in the financial markets are through shares and funds. It is common to have both within an investment portfolio, but if you are new to investing funds offer some attractive advantages.

Shares

Buying a share means buying a (usually very small) stake in a specific business. Shares are generally bought by more experienced investors, or those with detailed knowledge of what they are investing in.

Pros

  • Shares allow investors to pick the specific companies in which they want to invest
  • If the company is successful there’s potential for substantial rewards– both in terms of share price increases and dividend payments

Cons

  • Picking the shares in which to invest is all down to you, and requires you to make a call on the future of specific companies
  • If you pick a share that performs badly you might not grow your investment and you could lose the money you invest

View our quick ‘Guide to Shares’ here.

Funds

A fund is an investment that pools together the money from many individuals. Fund managers then use this pool of money to invest in a wide range of assets.

Pros

  • Funds benefit from an expert manager who will decide which assets to buy or sell on behalf of the fund’s investors. This means funds can be more appropriate than shares for inexperienced investors.
  • Because they include many different investments rather than just one, funds are often less risky than individual shares, although the overall value can still fall
  • Funds offer the opportunity to have a variety of investments, whether corporate bonds, property or more unusual assets like commodities, such as gold or oil

Cons

  • Fund managers will charge a fee for their expertise and administration of the fund
  • A wider spread of investments may be a safer way to increase the money you invest, but it will return a lower amount than if you had invested in a single outright winner

Funds come in a variety of different shapes and sizes and include unit trusts, Open Ended Investment Companies (OEICs) and Investment Trusts. For more details on these explore our short ‘Guide to Funds’ – available here.

Next: Before you start investing