As I want to go through things carefully, I’ve split all the details into several different parts, starting with thinking about yourself and what you want with the money, and moving into what there is available, and the nuts and bolts of products and investments. This is part 3 of the basic guide to Stocks and Shares ISAs.
Previously on the basic guide to Stocks and Shares ISAs:
- introduction – what is the basic guide to Stocks and Shares ISAs about
- part 1: all about you – why you want to invest, and how much money you have to play with
- part 2: all about risk – successful investing means always being able to sleep at night
why you need to know about investment types
Unfortunately, investing is a bit more involved than saving. Different types of investments are suitable for different people at different times, and it’s important to understand some of the basics about investments so that you can make a more informed choice about your Stocks and Shares ISA.
We’ll be looking at basic types of assets, and I’m hoping that by the end of this part of the guide, you’ll understand the basic asset classes that you might want to invest in.
basic asset classes
There are five main types of assets:
If you are invested in equities, stocks or shares, this means that you own a small piece of the companies that you are invested in. You can buy shares in individual companies directly, or you can pool your money with lots of other investors and invest in equity funds.
Equities tend to be quite volatile (they go up and down in price a lot), with overseas investments – particularly in developing countries – being more volatile than home investments.
Some key terms that baffled me for ages, are small-cap and mid-cap and large-cap. Cap is short for capitalisation, which is how much money a company is worth, so effectively small-cap means small companies, mid-cap means medium sized companies, and large-cap mean large companies (sometimes called blue chip companies). It’s normally perceived that smaller companies are riskier than larger companies, although this isn’t always the case.
Bonds are loans to companies, and gilts are loans to the British goverment (you can also lend money to overseas goverments). These are sometimes also called fixed interest securities, as you lend the money out at a fixed rate of interest.
Bonds and gilts are usually used as a diversification to equities as they are less volatile and often move in the opposite direction (so when shares are up bonds are down, and vice versa). Similarly to equities, you can invest directly in bonds, or pool your money and invest in a bond fund.
Bonds are backed by the entity that issues them, so directly depends on how likely you think they are to default – gilts have never defaulted, whereas Argentina defaulted on part of it’s bonds in 2002.
Commodities are stuff. Examples are coffee, oil, tin, copper, gold, etc. Each commodity market tends to be extremely volatile, and periodically prices will crash in one or more commodity. You can buy directly into commodities, but (aside possibly from gold) you definitely don’t want to, you can also invest in commodity funds.
Fortunately, it isn’t considered necessary to invest directly in commodities or commodity funds, as you get some exposure through investing in companies that make money from then. For example, if you have any investment in, say, BP then you have some exposure to the oil market.
Property is the British obsession. Ok, property is essentially land plus buildings. The main way of investing in property that you can do through an ISA, is to invest in a property or real estate fund which usually invest in commercial property (offices buildings and the like). If you own a home, you may have more than enough exposure to the property market.
Cash is money which is put into money market funds or savings accounts. If you think that you should have some cash in your asset allocation, your Stocks and Shares ISA is probably not the best place for it. Better suggestions are either to use a mini cash ISA, or an ordinary savings account as they tend to pay the best rates of interest.
still to come…
Coming up in the basic guide to Stocks and Shares ISAs:
- part 4: all about asset allocation – how to decide which mix of investments is right for your ISA
- part 5: all about funds – narrowing down your choices
- part 6: all about providers – getting the best deal for the money
- conclusions – what’s been covered, and what to do next
- basic guide to Stocks and Shares ISAs part 4: all about allocation
- basic guide to Stocks and Shares ISAs part 5: all about funds
- basic guide to Stocks and Shares ISAs: introduction