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There are many types of investment, each of which has
different structures, different tax treatments and investor implications.
Some of these are Stocks & Shares, Deposit accounts,
Gilts, Insurance Bonds, PEPS, Tessas, ISAs, Endowments, OEICs, Annuities,
Unit Trusts, Investment Trusts, Zeros, Capital Units, Income Units, etc.
You need to give some thought to is what your objectives
are. This is an area in which compromise and self understanding are essential.
Everyone wants investments which are safe, in the sense
that they cannot fall in value and which offer reasonably high returns.
This combination is sadly not available and we recommend that you beware
of anyone who claims otherwise.
Sensible investment planning revolves around understanding
what your investment aims are, remembering that long-term investments
generally involve lower risk but the short-term speculative investment
may attract a much higher risk. If however the money is needed in full
in the near future then the short-term safety of a deposit account is
probably the most appropriate.
It is imperative that you understand this vital area, for sensible investing
and your adviser will help you determine an investment strategy appropriate
for your needs and the investments best-suited to your investment attitude
and tax position.
Most people understand the need for some element of investment
and funding for retirement, but due to changes in Government policies,
there it is now essential that individuals contribute to a Private or
Stakeholder Pension or at least create some funds from which an income
may be drawn in the future.
Let us look at the options for creating such a fund and
providing for your future.
There are a range of options available for the person
wishing to invest to generate additional income or build up a fund for
the future. In so doing, the investor may additionally provide for dependents
should you suffer an unexpected loss or reduction in your earnings.
This is generally dealing in shares, stocks, bonds and gilts and is conducted
through stockbrokers who will buy or sell shares on your behalf for
a commission. Terms will vary from one stockbroker to another but commission
will normally be charged as a flat fee or a set percentage. Although
the idea of share ownership has grown significantly in the last 20
years there is often an inadequate view of the risks and how to minimise
them and it is worth looking at the various options.
If you intend to actively manage your share portfolio
by regularly buying and selling different shares then the commissions
will start to stack up. The shares which offer the greatest potential
for high returns may also present the greatest risk to your capital.
So unless you intend to invest directly in a broad range of stocks and
shares, you should probably consider a collective investment scheme instead.
The price of a company's shares is determined by the value of its assets
and its potential to generate further revenue. If shareholders begin
to see the estimates of future revenue as unduly optimistic, or if
the value of the company's assets decline, they are likely to sell
their shares and this may cause the share price to fall. If the reverse
happens, demand from buyers will increase - thus pushing the share
price up. The trade in stocks and shares, facilitated by market makers
whose role is to quote both a buying and selling price for listed stocks
and shares, is known collectively as the stock market.
Public Limited Companies (plc's) in the UK are listed
on the FTSE All-Share index, with the 100 largest listed on the FTSE
100 which is usually just referred to as "the footsie". Companies
who want to issue shares to the public but are not able to go for market
flotation may choose the Alternative Investment Market (AIM) but these
shares carry higher risk than those listed on the main stock market.
The second principal form of direct investment is bonds and gilts. Bonds
are where the investor in real terms loans money to the bond's issuer,
knowing in advance the sort of return they will get on their investment.
Bonds are generally regarded as a low-risk investment, compared with
shares.
Gilts are bonds issued by the UK government so by buying
gilts the investor is lending money to the Government. As the UK is regarded
as a safe bet to honour its commitment to buyers of its stock, gilts
are thought to be the safest forms of investment. The issuer guarantees
to repay your capital at the end of the bond's term, and you get a guaranteed
income or return throughout the investment period.
Bonds pay a predetermined interest each year to the holder
and it important to note that the rate must be competitive with current
interest rate levels at the time of issue. However, it should be remembers
that if interest rates then rise, the return on your bond might not be
as much as a deposits in a Building Society. For this reason, bonds are
regularly traded in the market place.
However, it is always comforting to know that you will
get your original money back on redemption as, whatever your political
views, the Government is a fairly safe bet.
Corporate bonds work in rather the same way as Government bonds - they
are issued by companies as a way of raising money from investors. Again,
they pay an interest rate coupled to a promise to repay the capital on
maturity. Like Government gilts, they can be traded on the market open
if investors want their capital back before the maturity date.
However, with corporate bonds, the return of capital is
not guaranteed. They are therefore a higher risk option, but pay a interest
rate to attract buyers.
So you must assess the guaranteed return of your capital
with a Government bond against the potential for higher returns offered
by the stock market and your view of the stock market may be that prices
are erratic and investors cannot rely on all companies increasing the
value of their shares.
This is the major potential pitfall of direct share investment
- any company is at the mercy of conditions in its own particular business
sector, and even companies in generally profitable sectors can fall victim
to bad times. Correctly identifying which companies to invest in is therefore
vital for direct share investment. Warning against putting all your eggs
in one basket may seem a little obvious, but relevant in this context.
You should keep a close eye on how your investments are
doing. Potential investors often find the prospect of constantly keeping
tabs on their share portfolio too daunting and for this reason - as well
as those outlined previously - many opt to take their first step into
these markets via collective investment schemes rather than direct stocks
and shares investment.
In the UK there are three principal types of mainstream collective investment
schemes - Unit Trust, Investment Trust and Investment Company with
Variable Capital (ICVC). All three will take the pooled monies of a
large number of investors and put them in the hands of a professional
fund manager. He or she will choose a broad spread of instruments in
which to invest, depending on the relevant published investment remit.
Investment trusts are most commonly bought through a stockbroker
but we are also in a position to advise on their purchase whereas Unit
trusts and ICVCs are normally acquired through an Independent Financial
Adviser like ourselves.
Details of funds and fund providers are published in a
range of specialist financial publications as well as sections of the
national broadsheet press but the coming of the Internet has opened up
another access route for investors. Many fund providers now offer their
products via websites. However, given the range of investments available
it is still a good idea to seek professional advice before proceeding.
However there are key differences between the three types
of scheme structure as shown below.
An investor in a unit trust 'buys' a number of units, while an investor
in an investment trust or ICVC 'buys' shares. Unit trusts are open-ended,
which means that units can be issued as demand requires. The price
of these units is dependent on the value of the underlying assets,
and they can be sold back to the fund managers by the investor. Most
UK collective investment schemes are authorised by the Financial Services
Authority (FSA), although this imposes certain restrictions on what
they can invest in.
Investment trusts are structured as companies so their shares are traded
in the same way as any other limited company's shares and they offer
a wide range of investments.
The ICVC is structured along similar lines to the unit trust, but it
differs as it has no bid/offer spread. This means buyers and sellers
get the same single price. Additionally, the ICVC has an "umbrella" structure
allowing numerous sub-funds investing in different types of assets,
so the investor can switch easily between different investment funds.
Given the range of options of unit trusts, investment
trusts or ICVCs, the choice can be confusing and we recommend that we
get together to discuss the options before you make your selection.
Through research and analysis an active manager will seek to identify
companies which he or she believes will perform better than their rivals,
or whose current share price makes them a bargain buy. Potential returns
depend on whether the manager gets it right or wrong.
An index tracker fund tracks a stock market index. Having
decided which recognised market index is most appropriate, the fund manager
will invest in such a way as to duplicate the make-up of that index.
In times of good stock market performance tracker funds are attractive.
But the critics of tracker funds point to two potential
drawbacks. Firstly, if the index falls, the fund must go with it. Secondly,
the cost of running the fund - administration fees, management fees,
etc. - can mean that tracker funds' performance is just below that of
the index itself.
Active managers should really produce better returns than
the market average as well as avoiding the worst of the falls in the
market by selling badly affected shares.
There are hundreds of collective investment schemes to
choose from which is where our services can assist you in negotiating
the investment market.
So why should the saver, who has hitherto been content
to build up a nest egg in a deposit account, move into the riskier field
of investment in equity or bond markets? Well, the main reason is the
chance of a higher return than can be obtained from deposit accounts.
If the potential investor is prepared to be patient - these types of
investment are not for the short term - then past performance suggests
that over time he or she can expect a higher return.
Investor must also consider the question of risk. In a
low interest rate environment the return on your deposit account may
decrease, but there is no threat to your capital. Investing in shares
is different. Potential returns can be much greater than those offered
by cash deposits. But if the shares in which you have invested were to
fall in price, there is a real threat to your capital itself. If you
are forced to sell your shares at a time when they are performing poorly,
you could actually end up with less money than you started with.
If you are looking to invest directly in shares or bonds or collective
investment schemes, a tax-efficient method of doing so is using an
ISA. This is actually not an investment in itself but is a tax-efficient
way which you can use to hold a number of investments.
As the UK's principal tax-efficient investment plan, an
ISA can incorporate a stocks and shares element within which each person
can invest up to £7,000 in each tax year. Alternatively, you can
set-up three mini ISAs, the components being cash, stocks & shares
and life assurance. The investment limits for mini ISAs are lower.
Within the stocks and shares element of an ISA you may
invest directly in shares or bonds or collective investment funds and
we will help you take full advantage of the existing tax allowances within
your investment portfolio.
In certain cases, offshore investment may be worth considering. From
the UK perspective, offshore funds have traditionally been used mainly
by expatriates. Because UK expatriates do not generally pay UK income
tax, it makes sense for them to invest in funds based in a low-tax
centre such as Luxembourg or the Channel Islands. However, some funds,
accumulation funds in particular, can offer a tax efficient use of
offshore funds to the UK resident.
If you are a UK expatriate intending to return only on
retirement when your tax status will be more favourable, there are benefits
in keeping your investments offshore.
Funds based in an offshore centre are generally not covered
by the regulations which govern their UK-based equivalents. This means
that you might not benefit from the same level of protection offered
in the UK. However funds based in several of the larger offshore centres
are deemed to meet UK regulatory standards where that centre has been
granted "designated territory" status by the UK.
As well as offering tax advantages, lighter regulation in offshore centres
means funds can invest in a much wider range of markets than most onshore
vehicles - a big attraction for the more adventurous investor.
But do remember that capital and income values may go
down as well as up and you may not get back the amount invested, also
exchange rate variations may cause the value of overseas investments
to increase or decrease. Past performance is no guarantee of future performance.
But the offshore sector presents all manner of pitfalls
for the unwary, so for investors considering a move in this direction,
getting specialist advice is of paramount importance.
Here our services with our specialist knowledge of the
offshore market can prove invaluable.
Whatever investments you are considering, you are strongly
advised to talk to a company such as ourselves so that we can help you
identify the best type of product for your requirements based on a consultation
to look at the interaction between risk and return.
Remember that all investments carry some degree of charges
which can vary fairly significantly so we will help you through this
potential minefield so that you can fully to understand to options.
It is also important to recognise that some investments
are designed to be long-term investments. It is therefore essential that
we understand your wishes clearly when it comes to short, medium and
long-term investments and ensure that you understand the risks of your
chosen products.
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