Shares, the Stock Market and Property Investing advice

Stock Market Advice

The next step is to look at suitable products, such as investing in bonds or investing in shares, and seek appropriate expert financial advice.

There are four main asset classes common to all forms of investment: shares (equities), bonds, property and cash.

Shares

Investing in shares means you are buying a stake in a company. By doing so you are hoping to earn a return in the form of income (from the payment of dividends), capital growth in your investment when you come to sell your shares or a mixture of the two.

Bonds

You are loaning money – to either a government or a corporation – in exchange for a fixed rate of interest over a predetermined period, as well as having your original investment returned on a specified future date.

Property

This is generally classified as commercial property, such as shops and retail parks. The class is usually divided into direct investment – the purchase of an actual property – and indirect, such as an investment in property-related shares. Some people prefer to invest in residential property or buy to let but as recent house price falls have shown, this comes with high risks attached.

Cash

This is money deposited with an institution in return for an agreed rate of interest.

How to invest in the different asset classes:

Shares

You can trade shares in a number of different ways. Firstly, you can buy shares in individual companies through a stockbroker, online, over the phone or sometimes face to face. If the company you invest in does well you will not only benefit from the fact that the share price rises, but also be in line for “bonuses” known as dividends which can be paid quarterly, half yearly or annually but are not guaranteed.

Conversely, if the company goes through a tough time the share price may fall dramatically, which means your initial investment will be worth less than your original investment. Even though investing in shares – or equities as they are also known – can be potentially rewarding, they do come with risk attached.

See the section entitled Different types of investment products for other ways of getting access to equities. Bonds (fixed interest)

Someone who ties up all of their money in equities could end up losing a huge amount if the market suddenly falls by, say, 30%.

The main reason for holding bonds, therefore, is to reduce the overall risk of a portfolio and to produce a decent level of income since most bonds pay a regular income.

It also makes sense that people have more of their portfolio in bonds the nearer they get to retirement as there will be less time to replenish savings after a crash.

So what are your bond options?

Government bonds

The safest type of bonds are those issued by governments, particularly stable administrations like the UK which can be relied upon to pay the money back. However, this reliability can be a double-edged sword. While risk to your capital is relatively low, these bonds offer a poorer rate of return than “riskier” products.

In the UK, bonds issued by the government are known as gilts – the name being a shortened version of gilt-edged securities and referring to the fact that certificates used to be gilt-edged. There are two ways for investors to obtain gilts. The first is “new” through a government department called the UK Debt Management Office and the other is “second hand” via the stock market, usually through a stockbroker.

The gilt market can be broadly split into two distinct areas - conventional gilts and index-liked gilts. Conventional.

The government agrees to pay the holder a fixed cash payment – known as a coupon – every six months until the maturity date, at which point the initial sum invested (also known as the principal) is returned.

Gilts are denoted by a combination of the coupon rate and maturity date, such as 4% Treasury gilt 2016, and there are always plenty of gilts in the market at any one time. In most cases the Treasury issues gilts with maturity dates that are five, 10 or 30 years into the future.

Index linked.

The difference between these and conventional gilts is that both the coupon and the principal are adjusted in line with the UK Retail Prices Index (RPI). This means that both will take into account inflation since the gilt was first issued.

Corporate bonds

Instead of the government wanting to borrow money from you, this time it’s companies that want your cash. There is no guarantee that your investment will be repaid in full as the company issuing the bond may end up going bust or encountering problems but most investors consider them less risky than direct equity investment.

To help you form a judgment about a company’s prospects, specialist credit agencies look at each one and apply a rating based on their assessment of a firm’s ability to pay back the sum borrowed. The most trusted will be given a triple A (written as AAA) ranking, then it goes down on a sliding scale through AA, A and BBB. Anything rated BBB or above will be classed as investment grade; anything below is known as high-yield or junk bonds.

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