What Are The Different Types Of Investing?

The UK stock market offers a variety investment instruments; some are more straightforward and suitable for the inexperienced investor, while others are inherently more complex and more suited to experienced investors. Each investment instrument offers a different level of risk/reward and investors should identify which type suits their investing strategy.

Here are some investment types or instruments popular with investors - Stocks, Crypto Currencies and Investment Funds & Tracker Funds:

Stocks

Stocks ,also known as shares or equities, are a small piece of a company. When you buy a stock, you’re buying an ownership stake in a publicly traded company. Many of the biggest companies in the country such as Unilever, Rio Tinto and Royal Dutch Shell, are publicly traded, meaning you can buy stocks in them.

When you buy a stock, you’re hoping both that it will pay a good dividend (share of the profits of the company) and that the price will go up, so it can be sold in the future for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money.

Stocks may be purchased from large brokerage firms (known as Brokers). You can either opt for online brokerage firm, which are increasingly popular, or work face-to-face with a broker.

Two Types of Stocks

Stocks are generally grouped into two categories; income and growth stocks.

Income stocks normally offer a steady income stream in the form of regular dividend payments. A dividend is a payment a company can make to shareholders that is a small share of the profits generated.

It makes sense to hold some income stocks in your portfolio, not only to accrue additional income, but also to protect your portfolio against volatility. It is an easy way for investors to regularly draw on the profits of their investments without the need to sell the underlying stock.

A growth stock is a company where the share price is expected to grow at a rate above the average growth for the market. These stocks generally do not pay dividends because the profits are likely being reinvested in order to accelerate the company’s growth. When investors invest in growth stocks, they expect that they will earn money through capital gains as the stock prices rises and then when they eventually sell their shares in the future.

Within a balanced portfolio a mix of both income and growth stocks is generally seen as a wise strategy.

Investment Funds

At an investment fund, a fund manager buys, holds and sells a portfolio of investments on your behalf. Buy buying a piece of the fund, you are buying a slice of the portfolio of investments and is hence a great way to gain diversification without having to invest in all the stocks individually. Investors choose a fund based on its goals, risk, fees and other factors, but do not have any control on the decisions of how a fund's assets are invested. When you invest in a fund, your and other investors' money is pooled together to buy the basket of investments and stocks. The downside of funds is that they typically charge annual management fees that can eat away at an investors profits.

There are many types of funds that can specialise in a range of investment products. They can be broad-based, such as an index fund that tracks the FTSE 350, or it can be tightly focused, such as an ETF that invests only in small technology stocks.

Tracker Funds

Tracker funds are a type of investment fund that aim to mirror the performance of a particular asset, often a stock index such as the FTSE 100 or S&P 500 etc.

The fund manager will buy a collective set of stocks, typically the constituents that make up the index, so that the performance follows the movement of a market index, such as the FTSE 100. So when an index rises, the value of your fund rises with it. However, when the index falls, your investment in the fund falls with it, too. Since they follow larger established indices who’s consituents don’t frequently change they are known as more “passive” funds and they typically charge a lower annual management fee and enable you to diversify your portfolio easily by spreading your investment over different asset types and countries.

Active Funds

Active funds try to outperform the market by more actively switching out the stocks and investments they hold to exploit changes in market pricing. While this strategy can results in higher returns, it always results in higher costs as buying and selling investment instruments incurs a fee. Active funds typically charge much higher annual management fees and sometimes an additional performance related fee.

Crypto Currencies

Cryptocurrencies are a relatively new investment option. A cryptocurrency, or crypto, is a digital asset designed to work as a medium of exchange. Bitcoin is the most famous cryptocurrency, but there are over 6,700 cryptocurrencies, such as Dogecoin, Litecoin and Ethereum. They can be bought and sold on cryptocurrency exchanges.

Cryptocurrencies, unlike stocks and other investment instruments, are not based on an underlying asset such as the products, real estate and assets that a company may hold. They have no intrinsic value and their value is dictated based purely on the market that people put on them. This can lead to large volatile swings in their value as markets can rapidly change their mind as to what they are worth.

Due to their nature, cryptocurrencies are not regulated, which carries increased risk of market volatility and loss for investors. Also, due to the highly secure nature of transactions, purchases cannot be traced.

New investors should be aware that crypto prices can be volatile and often fluctuate wildly, making them a very risky investment.

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