Types of investment

What you'll learn

What you'll learn

  • The different investment types
  • The benefits of spreading risk across different investment types

Investment types

Investment types

There are many different investment types to choose from. Each investment type works in a different way and carries its own particular investment risk. 

The four main types are: 

Cash

Cash

Cash investments are not the same thing as money held in your bank account, but they have similar characteristics, such as a fixed rate of interest, quick access and a low risk of capital loss. They include 'cash-like' investments such as short-term loans to government and deposits. 

Cash funds are considered better at helping to protect the value of your investments in the short term compared to other types of investments. However, cash typically provides lower rates of return in the long term, might not keep up with price inflation and there is still a risk that cash investments can go down in value from time to time. When interest rates are low, any investment growth might not be enough to cover fund charges which would result in a loss overall.

Bonds

Bonds

Bonds are essentially loans to companies (know as corporate bonds), or governments (known as government bonds or gilts in the UK). They allow companies and governments to borrow money directly from the public. Investors typically receive a return or 'interest' on their loan. A fund will include many different bonds with different interest rates and terms.

Bonds typically produce lower returns over a longer period than shares, but they're generally less volatile - in other words, they're more predictable.

Property

Property

Investing directly in property can have risks related to the nature of buying and selling property, including the risk that their value can go up and down and that it may not be possible to sell properties quickly. An alternative way for investors to access property is through investing in property funds, which themselves invest in underlying properties. Investors in property can benefit from capital growth on the properties and rental income. 

Returns from property are generally higher than bonds but lower than shares. Like shares, they are also subject to short-term volatility.

 

Shares

Shares

These can be shares, also known as equities, in UK and overseas companies. Over time, shares are likely to offer greater potential for higher returns, but with it greater changes in value. This is because they are more volatile, meaning their value can rise and fall more quickly, more often.

The value of company shares is dependent on several factors including how well the companies perform and how much they pay out to shareholders in dividends. Dividends are payments that can be made from a company's profits.

Funds which invest in shares are generally higher risk and should be considered as a longer-term investment to give time to ride out rises and falls in the stock market. 

You can invest in these investment types directly or using a fund. If you invest using a fund, the fund manager will make the investment decisions for you.

Funds might be invested in one type of investment – known as a single asset fund – or mixture of different investment types, known as a multi-asset fund.

For further information about investments and the risks and benefits associated with each type, click this link (PDF, 310KB).

Spreading risk across different types of investment

Spreading risk across different types of investment

Investing in different types of  investment is a way to help balance the risk you’re taking when you invest. Think of it as not having all of your eggs in one basket. This can help spread risk because if one type of investment falls in value, others may rise in value. This can help reduce any potential losses.

Different types of investments can perform better or worse than others at different times depending on many factors, for example; the state of the economy, interest rates, and world events.

Generally speaking, the more risky the investment, the more potential for higher returns, but there may be more potential for losses, particularly in the shorter term. That’s why it’s important to consider spreading your money among different types of investments. 

Spreading your money among different types of investments is often called Diversification.

Learn more about diversification by reading our guide.

Multi-asset funds (PDF, 120KB) opens in a new tab

Take a few minutes to watch our video to learn how diversification can be a good way to reduce the overall level of investment risk to your money.

Diversification

What next?

We hope this information has helped, if you want to understand more go back to learn more about investing.

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