How and Where To Invest Your Money

investment picIf you have some spare cash sitting under the mattress you may want to consider investing it in a more secure and profitable way. There are many options for investing money and here we provide a brief introduction to some of the most popular ways to invest, and also give you a few ideas for less popular, and sometimes riskier, investment opportunities. There are many ways to invest in the stock market. Although many people still invest in individual stocks there are many ways to spread your risks.

Pay Off Your Mortgage

While paying money into your mortgage account is not generally considered an investment, with interest rates so low it is often better to pay off your mortgage which will likely have a higher rate of interest applied than any cash savings your can get. When paying extra into your mortgage request to have the monthly rate reduced (keep the term the same) so that each month you have more money in your pot. If you pay extra into your mortgage every month, within a few years you will make a significant dent in your outstanding balance. It is the best investment you can make. However, if you have extra money, or your mortgage does not allow over-payments without ludicrous charges, you may wish to invest your money elsewhere.

Pension Plan?

Why do we save and invest money? To secure our future. If you have not got a pension plan in place do not spend your spare money on stock investments. Instead put money into a pension plan. Once your pension fund is looking healthy you can then start to think about stock investments.

Cash Is King – Cash ISAs

Your first investment should be to use up your annual ISA allowance. ISA’s are tax free investments which can make them the highest performing funds, sometimes. Most providers now have online banking options and you can easily make regular payments into a cash ISA each month, or just invest a lump sum once a year. Each year you have an ISA allowance of £11520 (2013 figures) and you may invest half of this in cash – to £5,760. The remaining can be invested in a stocks/shares ISA.

Stocks & Shares ISAs

Once you have used your cash allowance you may want to consider investing in stocks and shares. Again, the advantage is in no tax on income. You may invest all of your annual ISA allowance in shares if you wish. Risk – there is ALWAYS a risk with share investments. Stock prices can go down as well as up! There are too many share ISA options available to discuss here. Speak to your bank or building society about investing your savings into a share ISA before hitting the Internet. There are good deals out there. Charges – as with any stock / shares investment, Share ISAs have additional fees which can make them more expensive to set up. With a cash ISA all of your money is your investment, with a stock ISA some of your money may be used in administration fees. Always read the small print and ask the salesperson. Examples of Annual Charges Most stock ISAs have an annual charge. For example, the Fidelity Moneybuilder UK Index has an annual charge of 0.10% (this fund tracks the FTSE 100 and FTSE250 indexes. Another tracker, the HSBC FTSE 100 Index charges a little more, 0.25% annually. The L&G International Index charges 0.7% a year.

Share Dealing

Once your mortgage is under control and your ISA funds are full, the next option is share dealing. Of course, there are many more ways to invest in shares today than there were when British Gas floated on the stock market in 1986 – who else remembers the “Tell Sid” adverts? Traditional share dealing comes with a lot of fees. If you only have a small amount of cash to invest then buying shares in a single company may be the most expensive option. If you do buy shares in a private company you can either do this yourself, of go via a fund manager who will manage your “private investment”. More accessible types of share investments include investment trusts and unit trusts / OEICs.

Private Investors

Private investors, known as retail clients in the investment industry, make relatively small investments into British companies, however the combined investment of private clients is significant. As with ISAs, your first step should be to talk to your bank about opening a share dealing account. Most banks today provide such accounts and online dealing is now the norm. However you purchase shares expect to pay a fee per transaction, an annual fee plus tax on your dividends and capital gains. Capital gains is the amount of money you make on the investment – the more you make, the more tax you pay.

Example: Halifax Share Dealing Account

The Halifax Share Dealing Account allows you to invest in shares in 7 different countries. Each trade has a fee of £11.95 (plus additional FX charges if you invest overseas). For a small investment (less than £250) this is a significant fee which will impact your returns – you need your investment to rise by 5% before you make a profit. If you invest £2500, you only need to see your investment rise by 0.5% before you make a profit (not counting account fees, tax etc.).

Stock Brokers and Fund Managers

The traditional route to purchasing shares directly in UK businesses is via a stock broker or a fund manager. The large banks have their own stockbrokers, e.g. Barclays Stockbrokers, but there are many smaller firms around the country. Do your research before investing, ask what their fees are. Most will charge a fee per transaction plus an annual account fee. Many fund managers now bundle share investments into more management investment vehicles for smaller investors. These are called investment trusts, unit trusts and OEICs. These allow you to spread risk and reduce account fees while still seeing a good return on investment. Plus you have the added advantage that each fund is managed by an expert who monitors market conditions and buys and sells shares accordingly.

Example: Henderson Global Investors

Henderson are a well established British fund manager. They are based in London and have offices all around the world. Henderson provide a wide range of funds, such as;

  • Henderson All Stocks Credit Fund A Acc
  • Henderson Asia Pacific Capital Growth Fund A Acc
  • Henderson Cautious Managed Fund A Inc
  • Henderson Asian Dividend Income Unit Trust Acc
  • Henderson Fixed Interest Monthly Income Fund Inc
  • Henderson Gartmore Latin American Fund B€ Acc
  • Henderson Horizon European Growth Fund A2 Acc EUR
  • Henderson Institutional UK Gilt A Inc
  • Henderson UK Property Unit Trust Inc

This is a very limited list, but as you can see there are a wide variety of choices, with overseas investment, fixed interests (bonds), UK gilts (UK government bonds), property and “cautious managed funds”. You can spread your risk or just invest all your money in property without having to actually purchase another property of your own.

Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are a more popular vehicle for asset managers. We talked about them here a few years ago. The allow you to invest in equities, committees and currencies at reduced risk and often lower fees than OEICs and investment trusts. Most ETFs track an index.

For example, HSBC has ETF’s across most markets now, with Euro Stoxx. FTSE100 & 250, MSCI Brazil, China, Pacific and Mexico, and many others. They value daily and trade on the stock market, so are sort of like a combination of a Unit Trust and an Investment Trust. Each has an ISIN. The key is that you can buy and sell portfolio of stocks to spread your risk.

Investment Clubs

Investment clubs are groups of individuals who pool their money and meet to agree on future investments. The advantage is that they can reduce fees. The risk is that they rely on their own knowledge of the stock markets. A great idea if a few people in the club are working in the industry, but it still can get risky. Search the Internet for a local investment club and arrange to meet. There are some online services which will help you to set up a club, such as ProShare Investment Clubs. The Telegraph ran a piece about investment clubs in June 2013; Investment clubs go upmarket. The Telegraph reveals that some investment clubs require individuals to commit around £25,000 a year to the club, and the investments can be very risky and are sometimes in unquoted companies. Trust and knowledge is vital in this industry before parting with your cash.

Investment Trusts, OEICs and Stock ISAs Explained

For many people the best investment option is to chose an investment trust, OEIC or stock ISA. So let’s look a little deeper into the topic. If you chose to invest in companies you are relying on one or a few businesses to perform well to make a return on your investment. Individual shares do have the potential for a much greater increase in value and some companies declare very favourable dividend payments, but if a company has a very bad year you can see your stock investment plummet and your dividend income lost. So to spread risk without building a huge portfolio you can invest your cash in a variety of investment vehicles, of which there are really 2 main options, plus stock ISAs. Stock ISAs are not really any different from choosing an investment trust or OEIC, they just provide you the chance to receive income tax free.

Investment Trusts

Investment trusts are companies which themselves trade on the stock market. Their value is determined by the stock market just like normal equity but they include a wide range of stocks so that you spread your risk. Some Investment Trusts simply track the FTSE100 so that they always contain a balance of shares in line with current market trends. Investment trusts are “closed end” investment vehicles, which means that they have a set amount of capital and shares within them. The share price of an investment trust will not always reflect the changes in share price of the underlying shares. Investment Trusts are usually managed by a third party fund manager who specialises in managing equity portfolios. Many investment houses have their own investment trusts and fund managers. As investment trusts are trading as stocks on the stock exchange they also will generally pay a dividend. However, there are some investment trusts which do not, these are called Zero Dividend Preference shares. With these you are purely investing cash in groups of equities and rely in stock market growth.

Real Estate Investment Trusts (REIT)

In addition to standard investment trusts there are now also Real Estate Investment Trusts (REIT) in the UK. These specialise in the property market and trade on the stock exchange in the same way as investment trusts. However, as they invest in the property market they do not have to pay corporate income tax. They have to distribute at least 90% of their total income to shareholders. REITs have only been around since 2007 however there are already 5 REITs in the FTSE 100: British Land, Hammerson, Land Securities, Liberty International and Slough Estates. These 5 REITs are often referred to as SEGRO.

OEICs

OEICs (pronounced oiks) are Open Ended Investment Companies. Rather than trading on the stock exchange these are valued each day based on the stock value of the underlying shares. They are called “open ended” because the amount of shares held within them is determined by the amount of cash invested in “units”. OEICs are traded in units. Each unit represents a share of the company. As the value of units is determined by the value of the underlying stock, whenever an investor buys new units or sells units the fund manager must use that cash to buy new stocks for the OEIC, or sell some stocks, to maintain a relatively steady value for the other shareholders. OEICs do not just invest in stocks though, they can also invest in fixed interest (bonds) and properties. OEICs have mostly replaced Unit Trusts in the UK. With a Unit Trust the fund manager would manage a trust of funds to make as much profit as possible. Unit Trusts would have a bid and offer price and most of the money made by the fund manager would be in the dealing of units. OEICs have a single unit price.

Fund and Plan Managers

The companies which manage OEICs and Investment Trusts are generally known as Fund Managers or Plan Managers. There are many fund management companies in the UK, you have probably heard of many of them. Here are some of the most popular British fund managers: Schroders Asset Managers Schroders (www.schroders.com, tel: 0800 718 777) manage £201.4 billion of shareholder investments across their portfolio (March 2011 data). They manage a range of Investment Trusts and OEICs.

  • Schroders Investment Trusts – Schroder investment trusts are currently managed by some of the top rated fund managers in the UK, such as Andy Brough, Rosemary Banyard, Matthew Dobbs and Richard Buxton. There investment trusts include the Asia Pacific Fund, Income Growth Fund, Japan Growth Fund plc, Oriental Income Fund, UK Growth Fund and UK Mid Cap Fund plc
  • Schroders Unit Trusts – Schroders have many unit trusts, such as the European Fund, Global Emerging Markets Funds, Income Maximisers and UK Equity Funds.

Jupiter Asset Management Jupiter Asset Management (www.jupiteronline.co.uk, tel: 0844 620 7600) are another major UK asset management house which have a range of unit trusts, investment companies and also “funds of funds” which is another way to spread risk. Their funds of funds are called the Jupiter Merlin Portfolios. Their investment trusts include the popular Jupiter Dividend & Growth Trust PLC and Jupiter European Opportunities Trust PLC. They have a wide range of Unit Trusts also. They also have some environmental finds, such as the Global Fund manager Fund at a glance Jupiter Ecology Fund (UT) which is managed by Charlie Thomas and the Jupiter Environmental Income Fund, managed by Chris Watt. Invesco Perpetual Invesco (itinvestor.invescoperpetual.co.uk) are leaders in UK equity income funds. Their main investment trusts are the Perpetual Income and Growth Trust plc, The Edinburgh Investment Trust plc and Invesco Income Growth Trust plc. If you wish to invest in overseas markets then the Invesco Perpetual Select Trust plc – Global Equity Share Portfolio may be of interest. There are many other fund managers to chose from, these are provided to give you an idea of what is on offer.

The Riskier Investments

There are many risky ways to invest, and every year new ways are emerging. Here is a round up of some new, some popular, and some which are closer to gambling than investing.

Penny Shares

What are penny shares? Quite simply, they are shares that are only worth a few pennies. The idea is that you invest in a company early when its share price is just a few pence, buy a lot of stock, say around £500-£1000 worth, and then hope that the company does well and the shares rocket up into the the teens or twenty’s. Buy shares at 5p each and you can see your investment sky-rocket. Then again, the company may perform badly, go into administration and liquidate, leaving you with nothing but a few worthless share certificates.

Warning; Bid-offer spread is often large (usually over 10%), meaning the cost of buying is much higher than the sale value, so you need a big rise in share price to make a profit. Also, penny shares are cheap for good reason – very few people wish to buy them! Penny shares should be considered a very risky long-term investment.

If you are thinking about penny shares then you should take a look at the FTSE SmallCap Index which includes some very cheap shares.  The LSE lists the constituents of the FTSE Small Cap Index: http://www.lse.co.uk/index-constituents.asp?index=idx:smx&indexname=ftse_small_cap

FOREX Trading

I mention this for one reason only – I see adverts all over the web for it. It is a fact that the money markets are the biggest markets in the world. More cash is traded every day on the money markets than on the share markets. However, FX dealing is very dodgy, with high costs and great risk. While I cannot recommend any FOREX trading platforms (as I have never used any) I would always go with a reputable brand. Barclays have their own FOREX trading service – www.barclaysmarginfx.com – where you can set up an account and start trading.

Bitcoin

Bitcoin is a new form of digital currency which was developed in 2008 as a peer-to-peer money exchange. It was only in March 2013 that the Financial Crimes Enforcement Network (FinCEN) reported that these services were legal as “virtual currencies”. On 9th April 2013 the cost of Bitcoin reached $230, having risen from just $13 at the start of 2013. If you want a very risky investment which few people understand, then Bitcoin is certainly an option.

You can “buy” Bitcoins by cracking very complex algorithms in what are called mining operations. It is basically a way for maths geeks to reward each other. Now hackers are running botnets, apparently, to do their mining and the system is getting more complex and more competitive all the time. Not for the feint hearted. Also, there are no major retailers in the UK at present which accept them, so you have the dilemma of what to do with the investment.

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