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Cheat Sheet

Investing For Dummies (UK Edition)

Considering investing? You need to be aware of some fundamental aspects before jumping in head-first. Avoid potential catastrophes and make the right investment choices by thinking ahead – take a look at the points and tips below.

Making Basic Investment Choices

All your money decisions involve making up your mind as to where to invest your hard-earned cash. Thousands of choices exist but you can cut that number down to just five basic investment opportunities:

  • Alternatives. This investment area covers a rag-bag of bits and pieces. For some people, alternative investments concentrate on items you can physically hold, such as works of art, fine wines, vintage cars, antiques and stamp collections. You’re taking a big bet on taste and fashion – and you probably won’t be able to cash in quickly.

    But for an increasing number of people, alternatives mean hedge funds, which are about as esoteric as investment gets. Put simply, you hand over your money to managers who, by hook or by crook, hope to increase it. You can also count commodities – natural resources ranging from wheat to copper – as alternatives. These are traded on specialist exchanges.

  • Bonds. A stock-market-quoted bond is basically an IOU issued by governments or companies. Bond issuers promise to pay a fixed income on stated dates and to repay the amount on the bond certificate in full on a fixed day in the future. In other words, you pay the government, say, UK£100, and the Treasury promises to give you UK£5 a year for the next five years and your UK£100 back in five years’ time. Bond prices can go up and down between issue and final payback.

  • Cash. The safest – your first UK£50,000 in any bank or building society is protected by a government-backed guarantee. You can invest in a branch, online, or by post or phone. In general, the longer you’re prepared to lock up your cash, the higher the interest you get on your deposit. So it’s often an access versus interest choice.

  • Property. The property you live in is probably your biggest financial project – assuming that you don’t rent it from someone. Property beyond your home can also be a worthwhile investment – but only if you can take a very long term view and factor in costs such as interest, insurance and repairs.

  • Shares. Shares are what they say they are – a small part of a bigger picture. Buying shares – also known as equities gives you partial and probably infinitesimal ownership of a company. Shares go up and down – often by big amounts in a short time. And if you back a bad company, you’ll almost certainly lose all your investment.

Knowing Your Bonds from Your Shares

You will often hear lots of investors mentioning both shares and bonds in the same breath, but there are plenty of differences. These differences include:

  • Shares are permanent, or until the company is taken over or goes bust. Bonds usually have a fixed life, shown on the paperwork you get.

  • Shares pay dividends, which can vary. Bonds pay interest, which should be fixed.

  • Shares give holders a say in the company proportional to their holding. Bondholders, in most circumstances, have no ownership or annual meeting voting rights.

  • Share prices can be very volatile. Bond prices vary less from day to day.

  • Share prices depend on profits. Bondholders have to worry more about credit risk.

Taking On Board Some Sound Tips for the Cautious Investor

Not everyone wants to jump in at the deep end. If you’re a cautious investor and you think the time is right, you may want to try one or some of the following:

  • A bond fund. Your money goes into fixed-interest securities tied either to governments or companies.

  • A distribution fund. This type of fund focuses on a mix of lower-risk shares, bonds, cash and property.

  • A no-lose fund. You put your money in a special fund, usually for five years. At the end of the specified time, you get your money back without any deduction or, if the index has risen, your original money enhanced by the percentage rise.

  • A tracker fund. This type of fund follows a stock market index such as the FTSE 100 – or the Footsie – up and down. This option is good if you want to invest in shares but have no idea which ones to buy or which fund manager to back. But don’t forget an index can be all over the place!

Being Aware of What Fund Managers Can Do for You

Not everybody has the time or inclination to actively manage their investments. Fund management companies perform a number of useful tasks if you’re a hands-off investor:

  • They carry out all the purchases and sales, dealing with stockbrokers, taking advantage of economies of scale.

  • They deal with all the paperwork associated with dividends.

  • They take care of taxation within the portfolio.

  • They offer access to a diversified portfolio for a small sum of money.

  • In some cases, they make asset allocation choices, such as moving from shares to bonds.

  • They provide you with the comfort factor of being able to blame someone else if your investments head nowhere.

Knowing What to Look At When Selecting a Stockbroker

Most investors in the UK don’t need a stockbroker, except occasionally when you can find a no-frills firm to buy or sell shares for you online. But if you’re more serious, then shop around to find a stockbroker who’s right for you.

Areas to research include:

  • Costs. This shouldn’t be your first consideration, but it’s essential all the same. Excessive costs can wipe out gains from a clever investment strategy. Very excessive costs can turn good decisions into instant losses.

  • Level of service. Consider the experience of your contact or account executive, as well as whether email alerts and regular newsletters or other forms of stock recommendation will be sent out. Find out whether the broker offers a portfolio based on unit trusts, investment trusts or exchange-traded funds.

  • Protection from churning. Unscrupulous brokers try to earn more from your investments by over-frequent buying and selling. You could agree to a limit on their trading activity.

  • Size of portfolio. Make sure that you’re well within the broker’s parameters. If the broker wants a minimum £25,000, then having £25,001 isn’t much help because you could easily fall below the line if markets turn against you. Ask what happens if your fortune shrinks through bad decisions or because you choose to spend some of your money.

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