What are the different types of investments?

You don’t need to know absolutely everything about investing before you get started, but learning a few key phrases and bits of lingo is a good idea.

It’s important to know what you’re investing in and whether you’re picking the right type of investment for you.

But fear not, we’ve got all the info on the different types of investments, their pros and cons and things you need to consider before buying them – and we’ve done it in a jargon-free way.

Let’s go over the main options: shares, bonds and funds.

What are shares?

Shares are a slice of a company, meaning you become a partial business owner when you invest.

The value of your shares will go up and down depending on how the company performs and also what the broader investment market is doing.

The hope is that over time the company delivers positive results, and the share price rises, meaning you make a gain on your money. Of course, the opposite could happen, and the share price could fall, meaning you lose some of your money – that's part of the risk of investing.

While you own the shares, the company might pay out some of its profits to its shareholders (you!), which is called a dividend. This can help to boost the returns that you make on investing, and it is a nice bit of income that drops into your investment account. As a shareholder, you also get certain rights, like voting on significant company decisions.

Selling shares is one way that companies raise funds to expand their business. You can buy shares in large companies through stock markets like the London Stock Exchange, among others. Many investment platforms, including AJ Bell and Dodl, also provide access to international stock markets – with the US being one of the most popular for UK investors.

What to consider when investing in shares

Before buying shares, make sure you look at all the key information about the company, which your investment platform will have on their website or app.

You’ll want to consider things like what the share price has done previously, what the outlook is for that market, where the shares are traded, and any potential charges, such as UK stamp duty or foreign exchange fees for international shares.

Once you’ve done your research and feel comfortable with the company and the higher risks associated with individual shares, think about how this investment will fit into your overall portfolio.

You don’t want to put all your eggs in one basket, so you’re aiming for a 'diversified’ portfolio – which is a mix of different investment types.

What are bonds?

Let’s move on to the next investment type: bonds. Bonds are essentially loans that you provide to a company or government. Unlike shares, bonds don’t give you ownership; instead, you’re lending your money in return for regular interest payments until a set date (called the maturity date), when you’ll get back the face value of the bond when it was originally issued.

Bonds tend to be lower risk compared to shares, but the level of risk can vary. Bonds issued by companies, called corporate bonds, typically offer higher returns but come with more risk than bonds issued by governments (unsurprisingly called government bonds), which are generally safer. Although bonds might not provide the same potential returns as shares, they can be a reliable option for steady income.

You can buy and sell bonds via investment platforms like AJ Bell. Keep in mind that the price of the bond may have changed since it was first issued.

What to consider when investing in bonds

If you’re thinking about adding bonds to your portfolio, it’s important to understand the basics. Start by looking at the bond issuer, which could be a company or government. Bonds come with credit ratings that indicate how likely the issuer is to make regular payments and repay the loan in full.

Higher-risk bonds may come with the potential for greater returns but also a higher chance that the issuer could fail to return your money (also called default). Factors like interest rates (also called ‘coupon rates’) and maturity dates should also be considered.

If you prefer not to deal with the details yourself, you can opt for a bond fund managed by a professional, which brings us to the next topic.

What are funds?

Funds allow you to pool your money with other investors, so you don’t have to do the individual picking of investments. Instead, a fund manager uses this combined amount to invest in a range of assets, including shares, bonds, or other investments. Funds can have different objectives and strategies, but the main advantage is that you get to own a variety of investments with less effort.

Unlike shares, traditional funds don’t trade constantly throughout the day. Instead, they are traded once daily, and their value is updated accordingly.

The fund can either be run by a person (these are called ‘active’ funds) who researches and selects investments, or they can be run by an algorithm that follows a predetermined strategy (called ‘passive’ funds). Passive funds tend to have lower fees since computers are cheaper than human fund managers.

One option for beginners is multi-asset funds, which are often referred to as ‘all-in-one funds’, because they invest in a good spread of investments that hands you a diversified portfolio in a neat little package. It means you can pick just one fund and get a balanced portfolio.

These funds usually vary how much they have in stock markets versus other assets – so if you wanted a higher risk option, you’d pick a bigger allocation to stock markets and if you wanted a more cautious approach you’d select a fund with a lower allocation. AJ Bell has its own version of these funds.

See the AJ Bell funds

What about exchange-traded funds (ETFs)?

Exchange-traded funds (often just called ETFs) are a popular choice for beginners. They combine features of both shares and funds by tracking the performance of a specific index (like the FTSE 100 index of the largest UK companies) and are traded on a stock exchange like shares. They give you access to a variety of investments in one package and can be a cost-effective way to diversify your portfolio.

What to consider when investing in funds

Your provider will give you access to key documents about any fund you’re interested in. These documents can be a bit jargon-filled and complex, but they’re getting easier to understand. Fund fact sheets and key investor information will help you assess the important details.

The first thing to seek is the fund’s charges. Fund managers usually charge an annual ‘ongoing charge’, typically between 0.1% and 1% of the amount you’ve invested. There may be other fees, but this is the primary one.

It’s also important to ensure the fund aligns with your goals. Does it offer regular income (an ‘income’ fund) or reinvest earnings to grow faster (an ‘accumulation’ fund)? Is it diversified across sectors and regions, or is it focused on a specific area, like tech companies in the US?

Lastly, consider the level of risk. Funds usually come with a clear risk rating, which you can find in the fund’s documentation. Make sure it aligns with your risk tolerance and overall investment strategy.

If you want more help narrowing down the range of funds out there, you can check out AJ Bell’s Favourite funds, which is a slimmed down shortlist of funds that you can filter by what they invest in and how they invest.

See our Favourite funds list

Not sure where to get started?

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