Ready to start investing but not sure where to begin? You’re not alone. There are literally thousands of different options to choose from.
In this second part of our investing for beginners series, we guide you through the various products, so you can make an informed decision and feel confident to begin your investing journey. This guide explains the main types of investments – shares, funds, and more – to help you feel more empowered to invest.
What’s on this page?
Understanding your investment options
A good starting point is working out which types of investment to hold. Would you like to invest in, say, shares, or funds that pool together different asset classes? If you’re leaning towards funds, which type of fund would be best for you?
Ilana Miller, investment expert at Royal London, says: “The key is not to get bogged down by the jargon but to focus on what suits your needs – what are your goals? What risks are you willing and able to take?”
Shares
You’ve probably heard of shares. These are little slices of companies that are listed on the stock market. When you buy shares, you effectively become a part-owner of the company.
Tesco, Rolls-Royce, Amazon, HSBC and BP are some examples of listed companies. There are lots of stock markets all over the world, so you could buy UK shares, or shares in companies overseas.
There are two ways you can make money from shares. First, if the share price goes up after you buy the shares, and you sell them for a profit. Second, while you are holding your shares, you may receive an income in the form of a dividend, which is when a company distributes some of its profits to shareholders.
Shares may feel familiar, if it’s a big household name or a business that you know or understand. However, that doesn’t necessarily mean they will be the best pick for a beginner investor – especially since prices of individual shares are liable to go down as well as up.
Alex Watts, investment fund analyst at Interactive Investor, explains: “As a general rule, less engaged investors without the time to meticulously research individual companies might lean towards funds, rather than shares.”
When you invest, it’s important to hold a diversified mix of investments, so that if one of them doesn’t perform well, you have other investments that can pick up the slack and still provide a positive return. So, if you only invest in shares, you’ll need a larger number of them to provide a decent level of diversification.
This means analysing company reports and spending a lot of time researching which ones to buy – and the best time to sell. It can also work out expensive buying lots of different shares.
You can buy shares on an online trading platform. You’ll usually be charged a platform fee, as well as a trading fee when you buy and sell the shares. The trading fee is often between £3.50 and £12, depending on the platform and how frequently you buy and sell shares. When purchasing UK shares, you’ll also pay 0.5% stamp duty.
Funds
A fund is a collection of investments, which could include shares, bonds, property and even gold.
It will either have a geographic focus, such as only investing in UK assets, or looking at Europe or Asia – or it’ll be a “global” fund, meaning it can invest anywhere. Some funds might focus on smaller companies, while others will have a more niche remit, like funds focused on pharmaceutical companies, or transport infrastructure. Or they might focus on sustainable or ethical investing.
A fund manager chooses which investments to buy, and the investor pays a fee for that service. The average annual fee for an actively-managed fund (this is where a fund manager picks the investments) is 0.71%, according to the analyst Morningstar Direct. You can buy funds on an online investment platform and you’ll need to pay any platform fees on top.
Ben Yearsley, director of Fairview Investing, says a fund could be a good option for a beginner investor as it “gives you a broad spread of underlying investments”. He adds: “You could start with a fund that holds say bonds and shares to dip your toe in. Or maybe a global tracker fund to give you broad exposure.”
Index funds
If you’re wondering what an index fund (also known as a tracker fund) is, this is a type of “passive fund”. In contrast to an “active fund”, where a manager actively looks after the fund, a passive fund literally tracks a market or index closely replicating its performance.
In Yearsley’s example, a global tracker fund will follow the biggest companies in the world, and if they go up in value, your investment will be worth more too. But if they go down in value, your fund holding will also go down.
A big benefit of passive funds is they are much cheaper than active funds – the average annual fee is 0.12%.
However, an active fund could beat the returns of a passive fund, because after all, that is what the manager is trying to do (and what you are paying for).
Just be aware that active funds do not always outperform passive funds, especially if the manager chose an asset that didn’t perform well. “If you have faith that a fund manager will be able to pick investments better than the index over the long term, then perhaps you don’t mind paying a premium for their expertise,” comments Watts.
You can use a mix-and-match approach. For example, you could buy a passive fund to track the FTSE 100 (the 100 biggest listed companies in the UK). You might also choose an active fund to invest in Asia, because perhaps an experienced fund manager might have a knack for finding small companies that are likely to become huge, profitable ones.