Types of stocks explained

Stock market investing has never been more popular. Thanks to record-low interest rates and the increased allowance for stocks and shares ISAs, more and more people are turning to stocks and shares in search of inflation-busting returns.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
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There are a lot of different ways to get involved with the stock market, whether you want to invest in one specific company or split your money across a range of assets. But it’s never quite as simple as that. Stock investing is full of complex terms and variations which can make it hard to know where (and how) to place your money.

Whether you are a first-time investor or an experienced trader looking to create a bit more diversity in your stock portfolio, read on for a quick guide to different types of stocks available to UK investors.

Individual stocks

If you want to invest in one company in particular, you will usually buy a number of individual stocks. Every public company has a certain number of stocks which are traded daily on the stock market, and the price will vary each day according to the company’s performance. In order to buy individual stocks, you need to find out the relevant stock market and trading name of the company in question. For instance, Tesco PLC trades on the London Stock Exchange under TSCO. Then use a broker or an online trading platform to make your investment.

The benefit of investing in individual stocks is that you know exactly where your money is and you have a personal connection to it: every time you shop in Tesco, you are essentially helping to support your stock holding. However, you should never overlook the risk of putting all your eggs in one basket – if it goes badly, you could lose a lot of money, and a lot of confidence in stock market investing. Rather than putting all your money in one company, consider splitting it between a few companies from different sectors.  

Mutual funds

Funds are simply investment packages which allow investors to access a range of different stocks and bonds at the same time. Each fund is professionally managed by a financial expert, who will spend their time analysing stocks, visiting companies and investigating market trends in order to try and make the best investment decisions.

Mutual funds are a great way to gain access to an array of stocks with just one investment. However, bear in mind that most fund managers will charge a fee for their expertise, regardless of whether or not you make a return on your investment, as well as commission on your returns, so this should be factored in to any expected profits. Make sure that the returns you are getting are justifying those fees.

Index funds

An index is basically just a group of stocks which are grouped together by value (for instance, the top 100 London-listed stocks by market value will appear in the FTSE 100 index), or sector (for instance, the Dow Jones Commodities Index).

Like mutual funds, index funds will bundle similar stocks together, so investors can split their money across a number of different companies at once. Any returns will be calculated based on the overall performance of the index. For instance, if 40 companies in the FTSE 100 post negative annual returns, the positive performance of the other 60 will even things out. However, like mutual funds, index funds come with fees, so certain investors may be better off using an ETF instead.

ETFs

Exchange traded funds (ETFs) are funds which track the performance of a particular index of stocks. They have become incredibly popular in recent years as they are accessible, easy to trade, and cheap to buy.

ETFs will automatically mirror the performance of a stock market or index, and the investor will receive dividends in line with the market. Of course, like any stock investment, the value of an ETF can fall as well as rise. But one of the main benefits of the ETF is the fact that the investor has complete control over his/her money and, since there are no brokers or fund managers involved, the fees are minimal.

Fractional shares

As the name suggests, a fractional share is a portion of one full share. They are usually created during mergers and acquisitions, or as a result of a stock split within the company. They are relatively rare, and it can be difficult to trade them, unless you are able to bundle the fractional shares in with a larger offering.

Fractional shares are much more common within mutual fund investments, as many fund investors choose to automatically reinvest their dividends. Since it is extremely unlikely that any given dividend payment will be exactly equal to the price of one share, the mutual fund investor will usually end up with fractional shares. However, mutual fund managers are used to this and can simply compile all the fractional shares together at the end of each trading day.

Foreign stocks

Most investors prefer to stick with domestic stock investments in their local stock market, but interest in foreign stocks is growing, particularly in developed markets such as the US, Japan and Australia, and in fast-growing economies such as India. By buying foreign stocks, investors can take advantage of overseas industries and emerging sectors, while also diversifying their portfolio away from the local market.

However, every foreign stock exchange has different rules and regulations, so it is important to do as much research as possible before investing, or to hire an experienced broker to do this for you.

Currency fluctuations and exchange rates add another element of uncertainty to foreign stock investments, although expert investors could use these to their advantage.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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