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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 £7,200 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.
Levels, bases of and
reliefs from taxation may be subject to change.
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