Discover the investment landscape

There are many ways you can invest in the stock market. It’s important that you have an overview of the different types of investment vehicles available for your portfolio. In this section, we’ll help you understand how some of them work, along with their benefits and drawbacks.

Example

Say you invested £10,000 into a ten-year government bond with a 5% annual coupon. Each year, the government would pay you 5% of your £10,000 as interest, and at the maturity date they would give you back your original £10,000.

If you invested the same amount in company shares, there’s no guarantee that you’ll receive a dividend – even if the company performs well. This is because some companies will instead reinvest profits into growing the business.

Additionally, when you sell your shares, the amount you get may be higher or lower than your initial investment depending on how the company’s worth has changed over time.

Bonds

Bonds behave more like savings accounts than traditional investments. The difference is that you take on a bit more risk when you lend money to a company or government.

That’s because if the borrower can’t pay you back, you could only get back a percentage of the money you lent them. But the reward for taking this risk is earning a higher interest rate than you would at a bank. Plus, you can choose bonds whose returns are linked to inflation to ensure your returns are always above it.

Bonds also have a maturity date, and your return is guaranteed if you hold them until that point. However, they can still be bought and sold along the way.

Equities

Equities are riskier than bonds, but both can have their place in an investment strategy depending on your goals and attitude to risk. The higher the proportion of equities in your portfolio, the higher up the risk ladder you’re going, but the potential for generating better returns should also theoretically increase.

However, you’ll also stand a greater chance of losing money on your investment. If you primarily invest in bonds, it’s a lower-risk strategy, but also one that’s likely to produce lower returns.

Property

Property is an asset class just like equities and bonds, but it’s a different kind of investment. It’s used to diversify holdings within a portfolio. With property, you’re investing in physical buildings such as office blocks, shopping malls and business parks. They produce a return from their rental income and may also grow in capital value.

Property is similar to equities in that it has potential for growth, and like bonds it promises a reliable income stream. But property can also be volatile depending on the state of the property market and the economic cycle.

Other asset classes

Other popular asset classes include infrastructure, where you invest in the debt used to build schools, hospitals and other public or private investments. You can also invest directly or indirectly into physical commodities like oil and gold.

Tax wrappers

Stocks and shares individual savings accounts (ISAs)

An ISA is an account that receives generous tax breaks from the government to encourage you to invest or save. It enables you to protect your savings and investments from tax on capital gains, dividends and interest.

A stocks and shares ISA therefore acts as a ‘tax wrapper’ for your investments. As the name suggests you can hold stocks and shares – and some other assets – within the ISA wrapper, without having to pay any tax on capital gains or dividends.

There’s a set ISA allowance for each tax year, which represents the maximum you’re able to invest in your ISA.

Self-invested personal pension (SIPP)