What types of investments is there?

When it comes to building wealth, there are many options. An investment or pension portfolio can include several different types of investments. To help you decide what to choose, we have written a quick guide to look at some of the main options. You can then use our service to find independent financial advisers to help you.

Cash

This is one everyone will be familiar with. You can save cash in a savings account and it will gain interest over time. The growth here is typically low, even at the best of times. However, there is very little risk. For example, there is no chance of losses because the money is simply sitting. The only way it can lose value is if inflation rises making it more expensive to buy goods and services.

Most people only include cash in investment portfolios as a safe space for the funds they earn from other investments. What this does is help to protect the gains.

Securities

A security is a financial asset or instrument that has some level of value and can then be traded. There are three main types of investments here: equities, bonds, and derivatives.

Equities

An equity is a stake in a company. It can be represented as different types of stocks and shares. Each of these is a small portion of the company. You can buy and sell equities on stock exchanges like the FTSE100 or NYSE.

The thing to keep in mind is that the value of equities can fluctuate, either gaining or losing value on a daily basis. As a result, they are quite high risk in the short term. Typically people will invest in them for the long term instead.

Bonds

A bond is essentially a loan where you give your money to a government or a corporation. They will pay interest on this over time and ultimately return the money you paid in.

There are different types of bond depending on who is issuing them. The risk can also vary depending on who this is. For example, bonds from the UK Government tend to be quite low risk. However, corporate bonds have higher risk as they depend on the health of the company.

Overall, some investors favour bonds over equities because they can offer steady returns over time. They also tend to have small fluctuations in value.

Derivatives

A derivative is by far the most complex of the three and one of the trickiest types of investments. The value here comes from the performance of an underlying entity, whether it is an asset, index, or security. It is important to approach these with caution as the risk is higher.

Commodities

A commodity is a physical asset that you can invest in. There are lots of potential commodities to invest in, including everything from oil to corn and gold bullion.

The thing to remember here is that there can be a huge amount of risk here. A number of things can affect the market value of different commodities, potentially harming your investment. The level of growth here also tends to be lower than securities.

The advantage of a commodity is they are separate from securities. The fact they are independent means that investors can use them to help balance a portfolio and reduce the risk or impact of potential losses.

Collective investments

All of the options above are examples of individual investment products. However, there is an alternative to building your own portfolio. What you may want to do instead is invest in a collective. Here several investors pool their money and it is invested in different classes of assets. There are two main types:

Open-Ended Investment Company (OEIC)

This is a company that issues and sells shares in itself. It then uses this money to buy different types of assets on behalf of the shareholders. The performance of these assets affects the share price and ROI.

There are different levels of risk with OEICs. This all depends on what the company invests in; it could be securities or commodities with higher risks or more stable assets.

Unit trusts

You can buy funds in different unit trusts. What happens here is a fund manager will decide which assets to buy, using their knowledge to decide which are likely to perform the best. You then earn a return based on the performance of these assets and the amount of units you own.

Newer options

Above are the traditional types of investments people typically choose. However, there are some newer ones that are also worth considering. This includes things like cryptocurrency and NFTs.

Get help from expert independent financial advisers

Whether you are new to investing or already have assets, it is always worthwhile to speak to an IFA. They can help you to set goals and ensure you are making the right types of investments. Paying for financial advice can also often help improve your returns and reduce risk. If you want to speak to someone, Find it Near Me can help.