Posted: Friday 14th December 2018
The world of investment is rich, dynamic, and certainly not simple. You may have read a ton of information on famous investors such as Warren Buffet or Benjamin Graham, their incomparable wealth and amusing investing projects. Names of the kind have absolutely made a brilliant success out of their investing endeavors but this surely does not mean that investing is a simple activity that will guarantee a profitable outcome.
In other articles, we have discussed the ways to establish how profitable an investment is likely to be based on its return. We have also looked at risk appetite as something to consider when evaluating the potential of your next investment project. Although we have looked at this terminology from the perspective of property investment, it is worth noting that this is by no means the only investment type available to investors.
Even if you are not an expert investor with a rich portfolio of projects but you are looking forward to learning more about the area and potentially getting started with investing, it may be worth looking into the full variety of investment types in the UK in order to make the best and most profitable decisions.
In this article, we will look at the different investment vehicles in the UK and explain why our primary focus is property.
Investment vehicle is not related to purchasing an automobile although it may sound similar due to the wording. The terminology is used to define an investment product offered and available to investors that open an opportunity for the investor to gain profit or earn a return on the acquired product.
Investment vehicle can be any method used for investment by separate individuals or whole companies in order to grow their profit.
If you regularly follow our blog, you may have come across a topic on risk tolerance that we examined. Risk tolerance was defined as “the degree of variability in investment returns that an investor is willing to withstand”. In other words, it is used to measure the risk of the investment and helps investors decide whether to dive in the investment or withstand the temptation.
Why are we reviewing this?
Going back to investment vehicles, they can be low risk or high risk, depending on their nature. For instance, an example of a low-risk investment vehicle is a certificate of deposit or bonds, while an example of a high-risk investment vehicle is stocks, options, and futures. There are a number of investment vehicles that you may want to familiarize yourself with before putting your foot on the road to investing.
Buckle up; here are the different investment vehicles that you should know about.
Before starting we would like to mention that most investors commonly use the tactic of diversifying their investment portfolio in order to minimize risk and increase the chance of earning higher returns from the investments. In other words, investors tend to choose to invest in a number of investment vehicles instead of only one. After all, putting all of your eggs in the same basket is surely a risky idea.
Keep in mind that even if a certain investment vehicle seems like the perfect one for you, there are a number of factors to keep in mind when deciding whether to invest. For example, how familiar are you with the market? Have you checked the regulations regarding this investment vehicle? How difficult is the investing method and will you be able to cope with the pressure using your investing skills? Have you thought about what the financial goal is for this investment? You get the idea.
If you follow investor news or read business magazines you may have come across the changes in stock prices for famous companies such as Apple or Samsung, for instance. Investing in shares of stock lets the investor take participation in the profitability and success of a given company and take advantage of the increase in stock price and dividends that the company may announce.
Owning stock in a company represents your ownership and can be used as a claim on part of the company’s assets and earnings, put simply. Trading on the stock market is a popular trend among investors and although it can be highly profitable, it is exceptionally risky, especially if you fail to diversify your portfolio.
In order to be successful in stock investing you must obtain a thorough understanding of the market that you will be investing in and regularly follow all external factors that may influence the price of the stock.
While stocks represent ownership, bonds represent debt. Investopedia defines the process of investing in bonds as the investor “loaning money to a company or agency (the issuer) in exchange for periodic interest payments plus the return of the bond’s face amount when the bond matures.” There are a number of institutions that have the authorization to issue bonds:
There is a difference between the types of bonds and their profitability for the investor. For instance, corporate and municipal bonds will differ in terms of applicable taxes. Bonds can be sold as new offerings or can be listed on the secondary market, in a similar way to stocks. The most influential factor that can drastically change the price of a bond is interest rate fluctuations. Bond prices and interest rates have an inverse relation, meaning that when interest rates fall, bond prices rise.
Bonds are often evaluated as safer than stocks to invest in but they do hold their specific risks including not knowing about bond spreads, bond duration, or the threats of investing in foreign bonds.
By definition, mutual funds are a “pooled investment vehicle managed by an investment manager that allows investors to have their money invested in stocks, bonds or other investment vehicles as stated in the fund’s prospectus.” They are a great option for small investors who are looking to purchase a varied exposure to multiple investment holdings in the fund’s investment objective.
Mutual funds can be bought and sold as an investment and are a perfect option for diversifying the investor portfolio. In other words, mutual funds are investment programs backed by shareholders, which trade in diversified holding. What is specific about them is that they are professionally managed, reliving the end investor of stress and inability to make decisions.
Comparable to mutual funds in a number of ways, exchange-traded funds also referred to as ETFs, are available for purchase on the stock exchange, similar to stocks. The main difference between ETFs and mutual funds is that while mutual funds are valued at the end of every trading day, ETFs are valued non-stop, as long as the markets are open.
There are actively managed ETFs today and they have indexes based on quality, momentum, and low volatility.
The listed above investment types are the most popular and discussed ones among the investing societies across the world. As we already mentioned, it is common for investors to choose more than one investment type in order to maximize returns.
However, there are additional investment types available to investors, such as real estate, hedge funds, or private equity. For instance, real estate is an asset-based investment, which makes it so attractive. Seed Property Group specializes in property investment exactly because of the asset nature of the investment. Asset-based investments are often easier to understand and less risky to make from an investor point of view.
With real estate, the investment can be in commercial property or residential property, it can be buy-to-let, HMO, and more. Investing in property can also be made with the purpose of renovating or transforming the old property into new, modern, and more beneficial for society residential area. The possibilities are endless.
Hedge funds and private equity may be a bit more difficult to understand but they are in the same list of alternative investments like real estate. With these two investment types, an income and net worth minimum are required from the investor in order to have the authorization to invest. The difference between the two is that private equity is focused on businesses raising capital without the necessity to go public, while hedge funds can invest everywhere and are likely to perform better in risky or unsettled markets.
Now that we’ve looked at the different investment types it is time to make the distinction between the investment methods.
We will take a few terminologies above to categorize the different investment methods. Ownership investments are those which are related to the investment in stocks, real estate, business organizations, and precious objects. This investment method is asset-based and the goal is for that asset to grow in value and price.
When you hear the word lending you probably think of allowing other people to use your money. In the world of investment, this is typical for low-risk investments, with low returns. For instance, bonds, certificates of deposit, and a number of other investment types fall under this category.
Investing in bonds is, in fact, lending your money to a corporation under the condition that it will be repaid with an additional amount added to the original after a certain period of time.
As the name suggests, cash equivalents are equally as good as cash. For example, savings accounts or money market funds are an example of cash equivalent investments. There is not a great amount of return that an investor can expect from these investments but they have the advantage of being highly liquid.
This investment method is particularly interesting as it represents a number of investors coming together in order to receive advantages that they otherwise don’t have access to as independent investors.
Mutual funds, pension funds, private funds, unit investment trusts, and hedge funds all fall under the category of pooled investment vehicles. Pooled investments are usually a more complex endeavor and they require careful strategy making and execution in order to reduce risk and avoid financial loss.
There they are, now you have the most commonly seen investment methods and types available in the UK. The material may seem a bit scary at first with all the relevant terminology but worry not, professional consultants can be of significant help in clearing the area and helping you shape your future investment portfolio.
Investment is an extremely popular business activity around the world. A report from 2018 by Finder shows that the total value of all stocks traded in the world is $77.662 trillion – a number that is difficult to even comprehend! The London Stock Exchange alone is worth $3.61 trillion. Furthermore, 12.3 percent of UK shares are owned by individuals, with 8.62 million people in the UK subscribed to stocks & shares ISA account last year.
At Seed Property Consultants we solely focus on property investment, with the aim of guiding investors in building a sustainable and profitable portfolio. If you are interested in starting your journey as a property investor get in touch with one of our consultants and let us help you understand your strengths, weaknesses, and help you make the right decisions regarding your future investments!