Investing: Types of investment

There are many different things to invest in. These are called assets. Assets can include shares, bonds, property and even commodities like gold and oil. It’s important to understand the options before starting your investment journey.

Let’s start with one of the most common types of assets, which are called shares. Investing in shares means you own a small part of a company. For example, if you buy shares in a supermarket chain, you will own a tiny slice of the company. Investing in shares can grow your money in two ways. If the company grows in value, the price of your shares can go up. This means you could sell them later for more than you paid. Some companies also share part of their profits with you. This payment is called a dividend and it is paid periodically. Share prices move up and down every day. It depends on how the company is doing, how the economy is doing and even how confident investors feel. This is explained in more detail in our video on economic factors affecting investing. Over the long term, shares have often given some of the best returns, but in the short term, their value can go up and down. The good news is that shares are usually easy to buy and sell. This can be done using an investment platform, which is just an app or website where you can buy or sell shares.

Be sure to use ones that are regulated by the Financial Conduct Authority, the FCA, to ensure they’re legitimate. If you opt to use an ISA to invest, it’s wise to ensure it’s covered by the Financial Services Compensation Scheme, the FSCS. You can invest in shares by investing in funds. A fund is where lots of people’s investments are pooled together and managed by professionals. They include mutual funds, index funds and exchange-traded funds or ETFs. But don’t worry, we’ll cover these later.

Funds can hold hundreds of different investments. Think of it like a basket filled with lots of different companies. You can buy a share or unit of this basket. This means you’re spreading your risk. So if one company does badly, it won’t affect you as much and is an easy way to diversify your portfolio in one transaction. For beginners or for those who want to be less hands-on, funds can provide an easy way to get started without having to pick individual shares yourself.

Make sure you check the fund’s risk level, objectives, fees and historical performance before investing. In some funds, an investment manager chooses your investments. Their job is to choose shares that will give the best return and outperform the market. This is called active management. Not all funds work this way. Others just track a whole market like the FTSE 100, which tracks UK listed shares, or the S&P 500, which follows US listed shares. These are called passive funds. So if the FTSE 100 goes up, your tracker fund goes up too. And if it goes down, your fund does too. These often have lower fees because no one is picking the shares.

Not all funds invest in the whole market. Some focus on specific regions or industries, such as technology or healthcare. Instead of shares, some funds invest in bonds. When you buy a bond, you’re lending money to a government or company. The lender promises to pay you back the money on a specific date, which is called the maturity date. While you wait to get your money back, the government or company also pays you small amounts of interest regularly, so bonds can offer steady income, though usually with lower growth than shares. Bonds are generally less risky than shares, so their value doesn’t jump around as much.

Most bonds pay a fixed interest rate, called a coupon. The price of a bond can still change when interest rates in the market change. If interest rates fall, your existing bond looks attractive because it pays more than new bonds, so its price can go up. But if interest rates rise, new bonds would pay more than your bond. So fewer people might want your bond. So to sell your bond, you would need to lower the price.

For example, imagine you buy a £1,000 bond that pays 5% a year. That’s £50 annually for five years. If market interest rates rise to 6%, new bonds might pay £60 a year. To sell your bond, you’d have to offer it for less than £1,000 to match the higher return from new bonds. Alternatively, you could keep it until it matures and continue receiving £50 pounds a year plus get your £1,000 back at the end.

Predictable interest payments make bonds attractive for those seeking stable returns. When considering investing in bonds, it’s helpful to understand the risks. Government bonds are usually lower risk because governments can raise taxes or even print money to cover their debts if needed. Corporate bonds often pay higher returns, but they carry more risk. If a company struggles, for example, during a recession when sales fall, it may not be able to repay its debts. That’s why many investors combine government and corporate bonds to balance safety with the potential for higher rewards.

Another popular form of investment is property. Property can make money in two ways: when its value rises or when you rent it out. When the property increases in value, that’s called capital appreciation. If you want to benefit from rental income, there are two ways you can do this. The first way is by directly owning the property, allowing you to generate income through buy-to-let. This method is quite hands-on as you’ll be in charge of managing tenants and maintenance. Some people enjoy the control this gives, but others may find it time-consuming.

If you don’t have time to manage tenants, another option is investing indirectly through real estate investment trusts or REITs. With a REIT, the company looks after the properties and you receive regular payments called dividends. By law, REITs must pay out at least 90% of their taxable income to shareholders. Property values do tend to rise over the long term, but they can fall during tough economic times. And unlike shares or bonds, homes are harder to sell quickly. Property can be a useful part of an investment plan, but it’s worth balancing the potential rewards with the risks.

Commodities represent another investment opportunity. These are raw materials like crude oil, wheat, coffee or gold that are traded on global markets. Prices fluctuate depending on supply and demand. They can also experience sharp price swings because of weather, political events and market sentiment. Precious metals such as gold often retain their value when inflation rises. You can invest in commodities, including precious metals, through exchange-traded funds or ETFs. These are simple investment products you can buy and sell easily, just like shares.

Some ETFs actually hold the physical commodity. For example, gold ETFs backed by bars stored in a bank vault. Others track prices by using futures contracts, which is an agreement to buy or sell something at a set price on a future date. ETFs can also invest in shares of commodity-producing companies. That makes ETFs an easy way to invest in commodities without having to buy and store them yourself.

There are lots of ways to invest from shares and funds like ETFs to bonds, property and even commodities. Each has its own risks and rewards. The right mix for you depends on your goals, your time frame and how much risk you’re comfortable with. What matters most is starting early, contributing regularly and making choices that fit your situation.

Over time, small, consistent steps can help your money grow and give you more security for the future. In recent years, crypto has gradually become more accepted as an asset for serious investors, either through buying coins like Bitcoin directly or through ETFs. Experts disagree about whether it’s a safe and secure investment with long-term value, or if it’s more like gambling. In the short term, crypto prices are likely to jump up and down more dramatically than most other assets.

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