Investment Guide
The UCP has produced the following information to provide a general overview of investing and investments.
Investing is typically thought of as a way to increase the value of money and as a way of trying to protect the value of money against the impact of inflation over time.
All investments carry risks and are generally accepted as higher risk than simply depositing money with a bank.
Investments vary in terms of the degree of risk and also complexity and not all investment products are suitable for everyone.
COMMON TYPES OF INVESTMENTS
Equities, shares or stocks
Shares are traded on stock markets and the value of shares fluctuate, often even over the course of a day. Buying shares is generally considered one of the higher risk types of investment as it is a direct investment in a single company. Whilst there is the opportunity for the price of the shares to increase over time, producing capital growth, the value of the shares may fall and sale of the shares at that lower price will produce a loss on the original capital invested.
Equally dividends paid by companies are not guaranteed and there may be periods during which the company does not pay any dividend due to the underlying conditions in the business.
You can buy and sell shares through an adviser (broker or stockbroker) or direct through a share dealing account. The process of buying shares can be complex and you should ensure you fully understand your commitments and also research the company which you intend to buy shares in.
Funds, collective or pooled investments
Funds, collective or pooled investments offer an alternative to buying shares directly. A pooled investment allows an investor to participate in buying the shares of many different companies by combining with other investors. In such pooled investments the money of all the investors is aggregated and invested by a fund or investment manager. This allows the investment manager to spread the money invested across a range of different company shares or assets and may even allow investors access to different global markets within a single investment product.
Pooled investments are generally thought of as lower risk than direct equity or share investment because of this ability to diversify (spread) the risk. However, the value of the underlying investments is still dependent on the fluctuating market values of the investments held and may fall.
If you invest in pooled investments the dealing and administration related to the underlying investments is taken care of for you. However, charges are made by the managers of pooled investments for these services. Whilst they can be lower than the charges of direct investments, due to economies of scale, they will still impact on the level of investment return you may receive from these investments and you should always look into the charging structure of any investments you are offered.
Bonds
Bonds or fixed interest securities are a debt based investment where the investor loans money to an entity (company or a government) in return for a fixed rate of interest (yield). The bond will have a maturity date at which the sum loaned will be returned. Bonds can also be traded in what is commonly referred to as the bond market. Their value will depend on the yield or interest rate payable, the credit worthiness of the issuer of the bond comparative to the general economic conditions and the value and outlook of alternative investments, such as equities and cash deposits.
Bonds are generally thought of as lower risk investments to shares, although they are not without risk, which at worst could be default on the bond and loss of part or all of the sum loaned.
Structured Products and Complex Investments
Beyond cash deposits, equities, pooled investments and bonds there are a range of products that can be designed for specific investors or investment objectives. These will often combine different types of investments and will involve different levels of risk.
Such products can often be complex in nature and may offer potentially higher rates of return than more conventional investments. The potentially higher rates of return are often due to the greater levels of risk involved with such products. Anyone considering buying such products should understand the nature of the investment and the level of risk involved.
Frequently Asked Questions
1. What is an investment?
An investment involves allocating money with the expectation of generating income or profit over time. This can include various asset classes like stocks, bonds, real estate, and more.
2. What is the difference between stocks and bonds?
Stocks represent ownership in a company, while bonds are debt securities representing loans to entities, such as governments or corporations. Stocks offer potential for capital appreciation, while bonds provide fixed interest payments.
3. What is the risk-return tradeoff?
The risk-return tradeoff is the principle that higher potential returns are associated with higher levels of risk. Investors must balance their risk tolerance with their desired investment returns.
4. How do I determine my risk tolerance?
Risk tolerance depends on factors such as financial goals, time horizon, and personal comfort with volatility. Assessing how much risk you can emotionally and financially handle is crucial.
5. What is diversification?
Diversification involves spreading investments across different asset classes to reduce risk. A diversified portfolio may include stocks, bonds, real estate, and other assets.
6. How do I choose investments?
Consider your financial goals, risk tolerance, and investment horizon. Research different asset classes and investment options. Diversify your portfolio based on your risk profile.
7. What is the difference between active and passive investing?
Active investing involves frequent buying and selling of assets to outperform the market. Passive investing, often through index funds or ETFs, aims to replicate the performance of a specific market index.
Contact UCP for more information.
8. What is an ETF?
An Exchange-Traded Fund (ETF) is a type of investment fund that holds a diversified portfolio of assets and trades on stock exchanges. ETFs provide exposure to various markets and sectors.
9. How do dividends work?
Dividends are payments made by companies to shareholders. They are a portion of the company's profits distributed to investors. Dividend yield is calculated as the annual dividend per share divided by the stock price.
10. What is a mutual fund?
A mutual fund pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Investors own shares in the mutual fund.
11. How do I start investing?
Start by setting clear financial goals, establishing an emergency fund, and educating yourself about different investment options. Consider consulting with a financial advisor for personalized advice.
12. What is the importance of monitoring investments?
Regularly monitoring investments helps assess performance, rebalance portfolios, and make informed decisions based on changing market conditions. It ensures alignment with your financial goals.
13. Can I lose money on investments?
Might Yes, all investments come with some level of risk, and it's possible to incur losses. Understanding and managing risk is a crucial aspect of successful investing. But if you invest a company or business that are regulated by UCP, it's almost 99% risk free because of segregated fund.