Types of investments

WHAT IS A SHARE?

A share represents a fraction of a company that an investor can buy. If you own one, then you literally own a share of the business. You can make a profit if the value of your share rises. You may also receive an income from your share in the form of a dividend (which is a bit like interest on a savings account).

WHAT IS A BOND?

Put simply, a bond is an IOU from a government or company. If you buy a bond, you are lending money to that firm. In return, you will get a promise that your money will be repaid at a set time with interest. However, you could lose your money if the company goes bust. Bonds issued by the UK government are known as gilts.

WHAT IS AN INVESTMENT FUND?

A fund is a collective investment. Your money is pooled with that of other investors to buy a job lot of shares. Each fund is made up of units. Actively managed funds are overseen by a fund manager, who chooses what to invest in. Alternatively, you could invest in a tracker fund, which tracks a set index such as the FTSE 100 (the UK’S 100 biggest companies). If the value of the funds’ underlying units rise, so will the value of your investment in the fund. But if they fall, your investment’s value does, too. You may also receive a regular income from your fund if its assets pay dividends.

WHAT IS AN INVESTMENT TRUST?

An investment trust is a company. It sells shares in itself to investors and then uses the money raised to buy and sell shares and other assets. Unlike a fund, an investment trust can borrow money to buy shares, known as gearing. This can mean a trust can make bigger gains in rising markets, but it can also magnify losses.