What are collective investments?
Collective Investments are often referred to as pooled investments. This is where your money is pooled with many other people's and it is then invested into one or more different asset classes (described in detail in our Investment Guide). The beauty of a collective investment scheme is that you can spread your money across a wide range of investments. This can soften the blow if one particular area or asset class does badly. The majority of collective (pooled) investments are managed by a fund manager. The fund manager handles the buying, selling, collecting of dividends and income for you. They understand the markets and so try to buy and sell assets at the right time to maximise the return for you, the investor. Of course, there is a cost to take in to account here - the cost of the fund manager doing the hard work for you. The alternative is to invest with a 'tracker' which is designed to track the market in which it is in. This may have a lower cost attached to it although there is never any guarantee which will perform better for you.
There are a great variety of CIS (collective investment schemes) sold; A regulated CIS is one which has been authorised by the Financial Services Authority (if it's a UK Collective Investment Scheme) or, if it's not withhin the UK, it can simply be 'recognised' by the FSA - which basically means that it has to meet certain criteria before it is allowed on the market. It is always worth checking whether a CIS is recognised or authorised by selecting the CIS Search tab on the FSA Register on the FSA website.
Investment funds
Unit trusts
Unit Trusts are a type of 'collective investment'. Collective Investments are often referred to as pooled investments. This is where your money is pooled with many other people's and it is then invested into one or more of the asset classes; cash, bonds, shares and/or property. There are a great variety of CIS (collective investment schemes) sold. A fund manager buys shares in a range of different companies and pools these in a fund; you then buy 'units' in the fund. Because the fund contains a range of shares the risk is spread. The price of units in unit trusts directly reflect the value of the underlying assets. So, if the fund invests in UK shares and the shares go up in value then you will see that the fund will go up in value at the same level. The assets of the unit trust are held by a body that is responsible for ensuring that the fund manager is acting within the rules of the Financial Standards Authority and the specific rules of the fund itself. Charges for these funds are invariably higher than similar investment trusts. Each unit trust has a stated investment strategy, enabling you to invest according to your view of risk. Funds investing in such things as 'emerging markets' or small business would typically carry much higher risks than those investing in large UK companies.
For more information on unit trusts... click here.
OEICS - Open ended investment companies
Similar to that of unit trusts above - the price directly reflects the value of the asset. It's simply the underlying structure that is different but otherwise they operate in the same way. Both pool your money with other peoples' to invest in a spread of shares or bonds, other investments or a combination of both.
Investment trusts
The main difference between investment trusts and unit trusts is that investment trusts are actually themselves companies with a fixed number of shares of it's own and which is traded on the stock exchange. So you are investing directly, rather than indirectly through an open-ended fund. The price of shares in investment trusts depends not only on the value of the actual investment but, in addition, because investment trusts are listed on the stock market - the popularity or in other words the market demand of it. What this means is that the actual price does not necessarily reflect the value that the investment holds. So sometimes you'll buy at a premium to the asset value and at other times you'll buy at a 'discount' or in other words pay less than the underlying value. Investment trust charges tend to be lower than Unit Trusts or OEICS. Investment trusts can borrow money that can be used to buy further investments - gearing. If the money that is borrowed is used to buy soemthing that then grows in value this results in more than you may have expected. The flipside of course, is that if the investment bought with the borrowed money does less well - you have the potential of losing more than you original investment as you will still be obliged to pay back the original loan. Not all investment trusts use gearing as this technique can make investment trusts more risky than Unit Trusts or OEICS. As with unit trusts, investment trusts differ in the kinds of companies they invest in - some being of a higher risk. Some focus on capital growth with very little income from dividends.
More information on Investment trusts... click here.
Structured investment plans
Structured investment products offer an assortment of ways to invest in the stock market and make potentially superior returns than investing in cash deposits. The structured investment products you choose will really depend on your risk/returns balance - from capital protected, which have no exposure to risk, to capital-at-risk products, which will offer potentially better returns for putting some of your capital at risk, there is a vast range to pick from.
Structured investment products might not be right for you if you are looking for guaranteed returns on your investment. They also may not be what you are looking for it you don't want an investment linked to the stock market. But they are suited if you do not need immediate access to your money. With structured investment plans you can:
- Expose your capital to higher risk for potentially enhanced returns
- Protect some or all of your capital (with capital protected products)
- Choose from income or growth.
Want to see more on Investment Plans we offer? Click here.
Investment ISAs - tax wrappers
Pooled investments can be held in a tax wrapper - by doing this it means that you are paying less or no tax. An Investment ISA is one of the main tax wrappers available but what you have to understand is that an Investment ISA is not actually a product of it's own. It's quite literally a wrapper around an investment product which protects your investment in it from being taxed. Your investment could be in individual shares or bonds or collective investments such as open-ended investment funds, investment trusts or life-assurance investments. For more information on Investments ISAs click here to be taken to our ISA guide OR if you want to take a look at the Investment ISAs we have available on the market right now then please click here.
CFDs - contracts for difference
Contracts for Difference (CFD) is a contract between buyer and seller to pay the difference between opening and closing value of share prices. They have the advantage of allowing people to make money on movements without actually buying the shares. CFDs are far more complex than some other form of investments (unit trusts, OEICS, investment trusts) and as such hold a higher level of risk to your money.
More information on contracts for difference... click here.
Financial spread betting
These days spread betting can be almost on anything you like - including sports & reality TV but originally, when the market started in the 1970s it was used as a way of speculating on the financial markets where the gain is by getting the accuracy of the gamble, rather than a simple "win or lose" outcome, such as the more typical fixed-odds betting. A spread is simply a range of outcomes, and the bet is whether the outcome will be over or under the spread. Spread betting has been a major growth market in the UK in recent years. Spread betting does carry a high level of risk, with potential losses or gains far in excess of the original money wagered.
For more information on financial spread betting... click here.
Forex
Currency trading is about speculating on the value of one currency versus another. Major currency pairs are the US Dollar, the Euro, Japanese Yen, British Sterling and Swiss Franc. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. Before deciding to participate in the Forex Market, you should carefully consider your investment objectives, level of experience, and risk appetite. Most important - don't invest many you can't afford to lose.
More information on forex trading... click here.
Want to read more on investments?
Investment Guide | What Kind of Risk Taker are You? | | Contracts for Difference | Share Trading | Unit Trusts Explained | Online Forex Trading
Author: KYM Editor
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