A guide to different types of investments

In a nutshell, investing is a way of setting aside money for the future. It involves buying assets that you think could rise in value over the long term. Here’s a rundown of some of what you may choose to invest in, how they work and the risks that can accompany them.

When it comes to the different ways you can invest, the best place to start is by doing some research yourself as well as contacting an expert. Generally, a financial adviser is well placed to give you valuable guidance that’s in line with your financial goals.

Investing your money does mean it will rise and fall over time and there’s a chance you could lose some or even all of your initial investment. Your adviser will help you explore the risks. Investing is best approached as a long-term endeavour that requires patience and diligence, so you’ll also need to be prepared to leave your money alone for at least five years.

Types of investments

Your main choices may include equities, bonds and property. These asset classes have different levels of risk and return. Typically, the safest assets offer the lowest returns, while the riskiest offer the potential for higher returns. Most importantly, a longer timeframe (at least five years) will give your assets more time to recover and potentially grow in value if there are any sudden market swings.

Equities

Also known as stocks and shares, one way is to buy equities issued by companies on a stock exchange. When you buy equities, you're acquiring a piece of a company and become a shareholder. Equities can make you money through increases in share price and you can receive income in the form of dividend payments.

What’s the risk? Returns aren't guaranteed and the share price could fall below the level that you invested. If you decide to sell when the company’s stock price is low, you could lose some of your initial investment – or all of it if the company goes bust.

Bonds

Sometimes called fixed income investments, bonds are issued by governments and companies looking to raise money. A bond is essentially a loan made to a company or a government by an investor for a set period – usually several years. In return, you receive a regular income in the form of a coupon payment over the life of the bond, after which the issuer must repay your loan.

What’s the risk? Although bonds typically offer stable returns and are often lower risk than equities, they tend to offer lower returns in the long term. Bonds come in many shapes and sizes, and are issued, bought and sold around the world. Bonds are given ratings according to how likely the issuer is to pay you back. Bonds with the highest ratings – like US government bonds – are thought to be the safest but have the lowest returns. Bonds with lower ratings are riskier, and offer higher returns to compensate investors for that risk. Like equities, bonds are also at risk from inflation, higher interest rates and currency movements.

Property

You could invest in a commercial property fund, which can be anything from student accommodation to offices, warehouses and shopping centres. Or you could buy a residential property if you're eligible for a buy-to-let mortgage and fancy being a landlord.

Property could make a good long-term investment and be an effective way to keep up with the pace of inflation. It also adds diversification to your portfolio as it tends to perform differently from equities and bonds in response to market conditions.

Property comes with its own risks, including a potential fall in value. Property is also illiquid – which means it can take a lot longer to sell your investment compared to other asset classes.

How to invest

Investing can take up a lot of time if you’re picking individual shares and bonds, which is why funds are so popular (and you’ll almost certainly need to invest in commercial property via a fund). When you invest in a fund, you pool your money with other people which is then invested in different assets. As an investor in the fund, you hold a portion of it and pay a fee to have it managed.

Funds tend to be managed actively or passively. Active funds are managed by a team who build and manage them according to a particular style, region or purpose, like income. Passive funds track an index – like the FTSE 100 or S&P 500 – and usually come with lower fees because they’re not actively managed. Key considerations for any new investor are how much risk you can tolerate, and how much appetite for risk you have. This will help you pick the right investments and how to blend them.

Whether you opt for one of the types discussed here or want to explore other options such as unit trusts or investment trusts, ISAs or pension funds, a financial adviser can keep you informed of everything you need to know beforehand to make your investment work for you.

Ready to go?

Introducing Nutmeg, the digital wealth manager that's part of the Chase family. Nutmeg is the UK's largest digital wealth manager and offers four investment styles. Its portfolios are built, managed and monitored by a team of investment experts and cater for a range of risk levels.

You can now open an account with Nutmeg (Opens in new window) and keep an eye on your investments from the Chase app (Opens in new window) – so you can see everything in one place.

Nutmeg is authorised and regulated by the FCA in relation to certain investment services and restricted advice only. Chase is a trading name of J.P. Morgan Europe Limited. Nutmeg and J.P. Morgan Europe Limited are J.P. Morgan companies. Products provided by Nutmeg are not guaranteed by Chase. Before applying, you should consider if a Nutmeg account and its features are suitable for you and your investment needs

Recommended reading

• Learn how to understand your relationship with money
• 5 golden rules of personal finance
• What is passive investing?

Disclaimer: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.