“Stocks? Bonds? Funds? What are those?”
Asking these questions in some environments might raise an eyebrow or two. For those who invest, they're plain English. But to others, these words may as well be from an alien language.
Investment savvy individuals will continuously babble on about these terms, meaning that for some, it can be quite embarrassing to ask what they are. But there’s really no cause to be embarrassed. Remember, there are no simple or stupid questions when it comes to looking after your money.
In this blog, we hope to answer some of these ‘embarrassing’ questions and to help individuals who are new to investing understand this intriguing subject.
1. I hear a lot about investing in bonds, stocks and funds. How are these different?
When you hear “bond”, think about debt. A bond is simply debt issued by a company or government. In much the same way as if you borrowed money from a friend you would promise to pay it back; the bond is the promise to repay the amount, with interest, at a set date in the future. To learn more about bonds, read our blog “B is for Bond”.
A stock (also called an equity or share), on the other hand, is literally a share in a company. Let’s say you bought a stock issued by Facebook – you are now a partial owner, or shareholder, of Facebook (how exciting!) and can benefit from its financial success. When the company increases in value, so does your shareholding. In addition, many companies will also pay shareholders a quarterly or yearly sum of money known as a ‘dividend’.
So what about funds? Funds can invest in a huge range of different assets, such as stocks, bonds or even property, but can also be quite specific. For example, some funds may focus on buying shares in large companies in the UK, while another may just buy bonds issued by governments in developing countries.
We believe index funds are the most effective way to grow your wealth over time because it makes investing in different types of assets simpler (and a little less risky).
It is important to remember that stocks and bonds go up and down in value, so there are no guarantees. And while funds are less risky than investing directly in bonds or stocks, there are still risks, and the value of an investment can fall as well as rise over time.
2. How can I start investing?
You have a lot of options when it comes to buying funds. You can start investing by simply opening an investment account with a trusted and licensed firm. Once you have opened the account you can then choose one of these three options:
Do It Yourself – where you can pick your funds yourself
Guidance – where you can get direction from a qualified financial planner who will help determine how you invest your cash
Discretionary service – where you hand over full responsibility for the management of your investments to a trained professional
3. Should I buy funds or invest in stocks from one company, like Apple or Facebook?
You always have the last say on how you want to invest, but for inexperienced investors, we would not normally suggest investing directly into a company. We believe that using investment funds are the best way for the general public to invest their money. This way, the fund manager will make decisions like whether to invest in Apple or sell out of Facebook – something they are trained and paid to do.
4. I don’t want to invest because I’m afraid of market crashes. Can I just keep my money in cash, like in the bank? They have interest rates as well.
Of course you can! But there is risk in that as well. If you keep your money in the bank and with interest rates at historically low levels, your money can actually lose value over time because of inflation.
5. How much money should I have before I can start investing?
A lot of people think they can’t invest because they’re not wealthy. But what is ‘wealthy?’ Many brokerage firms offer investment accounts with no required minimum amount. It’s just a matter of choosing the best firm to start investing with.
For example, AES International requires a minimum amount of £50,000 to open an offshore bank account through which you can invest, and this already includes a wide range of services, such as integrated investment opportunities, multi-currency accounts, and access to flexible low lending rates for UK property purchases, among others.
Investing can be intimidating and complicated, but even today’s best investors asked the same questions when they started. If you have any investing questions you're too embarrassed to ask, we will gladly help you. Just click on the button below to ask us a question or get started with investing.