AN INTRODUCTION TO INVESTING

Start with the basics

Whether you are investing for long-term growth or to provide you with a regular income, you will be faced with an almost endless list of different choices.

Before you invest, the most important questions you need to ask yourself are:

• What level of risk am I prepared to take?
• Am I prepared to accept that I may get back less money than I originally invested or do I need absolute security?
• Do I want income, capital growth or a bit of both?
• For how long am I able to invest?

In general, your portfolio should have a wide spread of investments, in different risk categories, which when taken as a whole reflect your overall attitude to risk. If you decide you can accept some risk, you can balance the riskier elements of your portfolio with a selection of less risky, more easily accessible investments.

Spreading assets over a number of different areas helps to minimise the impact of poor performance by a single investment, but you should remember that, if you cash in any medium to long term investments early, the returns are likely to be poor. Any investment you make into a product other than cash carries a potential risk.

You should also ensure that you have sufficient savings to cover any emergencies. These should be held in liquid assets, such as instant access building society or bank accounts.

INVESTMENT OPTIONS

Unit trusts

This is simply a collection of shares, and sometimes other investments such as gilts and corporate bonds, managed by a fund manager.

A unit trust pools the money of its individual investors and invests the total within a defined range of investment markets. This allows investors to spread their money much more widely than if they were investing alone, and this in turn helps to reduce risk.

The fund is divided into equal proportions called units, the price of which is normally quoted on a daily basis. Unit trusts normally pay dividends to investors twice a year but the value of the units can go down as well as up and you may not get back your original investment. Funds can be designed to produce an income and/or capital growth.

Individual Savings Accounts

There is a separate ISA factsheet which can be accessed by clicking here.

National Savings Investments

These are offered by the Government. They provide the capital security of bank and building society accounts and are, therefore, ideal if you have a low risk profile, require guaranteed returns and expect to be able to leave your capital invested for the appropriate period, often five years.

Your capital will not though always be accessible on demand.

With-Profits Bonds

With-profits bonds, which are offered by insurance companies, are appropriate if you are a cautious investor, are willing to invest for at least five years (preferably ten) and wish to combine a high degree of security with the potential for steady growth provided by a cautious investment policy.

They invest in the stock market, and aim to smooth out the ups and downs thorough the additional of annual bonuses, to provide you with a share of the returns. Once your bonus is added, it cannot be removed, and even when stockmarkets fall, you should still receive some positive returns.

The drawback is that if you need to withdraw your money when markets are performing badly, you can incur a penalty. For this reason they are more suitable for longer-term investors who want steady growth or a regular income.

Guaranteed Income and Growth Bonds

If you will not require access to your funds for a specified length of time, and require a guaranteed level of income or growth over a selected term, guaranteed bonds are often an excellent investment.

They will generally offer a fixed income for a selected period or a guaranteed maturity value at a specific future date. But beware - you may be caught out if you 'lock into' a rate and then interest rates rise.

Stock Market Linked Bonds These generally guarantee to return at least the value of your original capital investment at the end of a fixed period, usually 5 years.

They can offer better returns than banks and building societies, because you receive some interest but also a share of profits earned in the stock market. Beware of income bonds that offer 'guaranteed income'.

In some cases the capital is not guaranteed and if they perform badly, you could simply be paying yourself income out of your own money.

Investment Trusts

These are public limited companies which invest in the shares of other companies to make profits for their shareholders.

They work like unit trusts, in that they pool savers' money together. This collective pool of money is then invested in a broad spread of shares and managed by a professional fund manager.

They differ from unit trusts in that the share price is determined not only by the value of the underlying assets, but also by stock market sentiment.

It can be cheaper to buy investment trusts when compared with the charges levied by unit trusts, but it is also important to weigh up the potential risks before making a decision to invest.

This guide was written by Christine Ross, Managing Director of SG Hambros Financial Services Ltd., which is an Independent Financial Adviser (IFA).