In Focus

In Focus Investments

When investing, you take calculated risks to increase your chance of getting higher returns on your money, especially over the longer term (money you can afford to tie up for five years or more). This section will explain the most common types of investments, how they work and what you need to think about before choosing one or more. Our jargon buster will explain some of the words used in the world of investments.

What are investments?

There are different types of investments but, basically, you take a risk with your money by investing in assets that could rise or fall in value. There is no guarantee you will make a return on your investment or even that you will get back the same amount you invested in the first place. Investments are different from savings - they are typically designed for the longer term and involve different types of risk.

Before investing it's usually a good idea to have sorted out your debts, made sure you've looked at protecting yourself against unforeseen events -- see Insurance, built up some savings, and arranged your pension - see Pensions (your pension is of course an investment itself).

And, once you start investing, it's highly advisable to spread your risk - don't put all your eggs in one basket - see Diversification

Types of investments

You may have heard of all sorts of investments - ISAs, shares, property, unit trusts - the list goes on. However, the best way to understand investments is to think about investing as having three 'layers':

1. The underlying investment itself will fall into what are referred to as asset classes. There are four main asset classes - shares, bonds, property and cash deposits. You can invest in each of these directly if you wish.

2. Pooled Investments. This is when you put your money with other investors to invest in one or more of the above asset classes. This spreads your risk and saves on costs. Open-ended investment funds, investment trusts and life assurance bonds are the most common pooled investments.

3. Tax wrappers. These are tax breaks that you can - subject to certain rules - wrap around your investment, to shield it from either some or all tax. The wrapper can be around either the underlying investment or the pooled investment. The two most common tax wrappers are ISAs and pensions.

Getting help

You can buy investments direct from the management company, investment trust, life assurance company, or friendly society, or through a financial adviser, a stockbroker or private client investment manager.

Firms advising on or selling investments must be regulated by the FSA or be the agent of a regulated firm.

You can, of course, buy investments without advice. This is called execution-only. If you do this then you do not get any advice on the investment and you cannot make a complaint if the investment turns out to be unsuitable.

Top tips

• Make sure you understand what you are signing up to - especially the risks - and that it is right for you.
• Check out the impact of charges on your investment fund.
• Remember to check how your investments are performing regularly, say, once a year.
• Go for safer investments as you get closer to retirement if you are making your own investment decisions.
• Make the most of the tax breaks that are available.
• Make a note of what investments you have and keep track of them.
• Make sure you let the investment company know when you move house so they can keep track of you.

Jargon Buster

Asset allocation
The spread of investments across the asset classes.

Asset classes
The underlying investments - shares, bonds, property and cash deposits.

Bonds
A loan to a company or the government.

Bond funds
Pooled investments investing in bonds.

Capital
The money you invest.

Capital growth
An increase to your original investment after costs, charges and depreciation.

Collective investment scheme
A way of pooling contributions from lots of people into a single investment fund.

Corporate bonds
Loans issued by companies.

Corporate bond funds
Funds that invest in a selection of individual company bonds.

Coupon
A bond's fixed rate of interest as a percentage of its nominal value.

Debt securities
Another name for a bond.

Derivatives
A right or an obligation to buy or sell another type of asset - such as a share or a bond - to someone else at a specific date and time in the future.

Distribution bond
A type of investment bond that provides a regular income.

Diversification
Spreading your investments across different asset classes, or types of investments within an asset class.

Equities
Another name for shares in a company.

FCP
Fonds communs de placement. A type of open-ended investment fund.

Friendly Society
Similar to a mutual life assurance company but with different tax rules.

Gearing
The use of borrowing potentially to increase the amount you get back, but will also increase the risk.

Gilts
Bonds issued by the UK government.

Gross
Before tax.

High-yield bond funds
The same as bond funds but investing in higher risk bonds that offer a higher interest rate.

ICVC
Investment Company with Variable Capital, also known as an OEIC. A type of open-ended investment fund.

Investment/Insurance bonds
A pooled investment; a lump sum life assurance investment.

Investment trusts
A pooled investment. You are buying shares in a company that invests in other investments. It has shares and is quoted on the stock exchange. It is a closed-ended fund as there are a set number of shares available.

ISA
Individual Savings Account - a tax wrapper for savings and investments.

Life assurance investment
A pooled investment offered by a life assurance company.

Net asset value (NAV)
An expression used with investment trusts to mean the value of the fund's underlying assets.

Nominal value
Sometimes called the face value; this is the cost of the bond when it is issued and the amount you get back at the end of the term.

OEIC
Open-Ended Investment Company, also known as an ICVC. A type of open-ended investment fund.

PEP
Personal equity plan, a wrapper for investments but no longer available to buy - similar to ISAs.

Pooled investments
A way of putting various levels of contributions from lots of people into a single investment fund. There are different types and they work in different ways.

Rate of return
The change in the value of your investment taking into account both income and growth.

Rating
A formal opinion of a security's or organisation's investment quality and credit risk.

Redemption date
Usually associated with gilts or bonds - the date set in advance when the gilt or bond will be repaid by the issuing government or company and you will receive the nominal value of the bond.

Shares
A stake or share in a company.

SICAV
Societe d'investissement a capital variable. A type of open-ended investment fund.

Stocks
Another term for shares.

Tax year
6th April one year till 5th April the following year.

Trading at a discount/at par/at a premium
Expressions used with investment trusts meaning the value of all the investment trust's shares combined are below (discount), equal to (par) or higher (premium) than the underlying investments.

Unit trusts
A pooled investment, which is an open-ended investment that gets bigger as more people invest and smaller when they take money out.

With-profits funds
A type of fund available within a life assurance investment. You share the return from these investments and the profits and losses of the company (if it's a mutual) or the with-profits business fund (in the case of a plc).

Yield
What the bond pays to investors by way of interest as a percentage of the bond's price.

Advice
A recommendation about the most suitable product for you made by an adviser who is regulated by the FSA.

FSA
The Financial Services Authority - the UK's financial services regulator.

Authorised firm
A firm that has permission from the FSA to carry out regulated activities.