What are the main types of investments?

Authored on
19 Jun 2023



Once you’ve chosen the provider you’re going to invest with, and the account you’ll invest within, it’s time to choose your investments. This might feel a bit overwhelming at first, particularly if your provider offers lots of options, but you’ll soon get to grips with the different types of investments out there and the key details to look out for when deciding if they’re right for you. To help you get there even quicker, let’s walk through the main players together: shares, bonds and funds.

What are shares?

Shares represent a portion of a company, so buying shares in a company makes you a part owner of it. Depending on how well the company does, the value of your shares could go up or down, giving you either a capital gain or loss when you come to sell them (but we hope a gain!).

While you hold your shares you might also receive a portion of the company’s profits in payments known as ‘dividends’. You’ll also get certain rights as a shareholder and can cast your vote on some of the big company decisions.

Offering shares to investors is just one of the ways companies can raise money to grow their business. You can buy shares in big publicly traded companies via a stock market and the London Stock Exchange is just one of them – there are dozens of major stock exchanges all over the world. And many investment platforms and apps offer access to international stock exchanges, including AJ Bell and Dodl.

What to look out for when investing in shares

When it comes to choosing a company you want to buy shares in, you’ll be given key information about that company on your provider’s website or app. Make sure you read that information carefully so you know exactly what you’re putting your money into.

Check things like share price, performance, where the shares are traded, and any additional charges you might face for investing – like stamp duty for UK shares and foreign exchange charges for international shares.

Once you’ve swotted up on the company and are happy with your choice and the higher risks involved in investing in individual shares, turn your thoughts to the future and whether this investment will fit into a nicely diversified portfolio. Remember, diversification is key to reducing your overall risk of losing money.

What are bonds?

Bonds are effectively an IOU from a company or government. Unlike shares, when you buy a bond you’re not becoming a part owner of a company, but instead you’re lending your money in return for regular interest payments until an agreed end date (also called the maturity date). On the maturity date, you’ll get back the amount originally lent.

Bonds are generally lower risk than shares, but some bonds are riskier than others so it's always important to make sure you understand the risks with bonds. Those issued by companies (corporate bonds) tend to be higher risk and offer higher interest rates, than government bonds. This is because governments are usually a safer bet when it comes to paying their debts. Though they may offer fewer potential gains than shares, bonds can be a good option when you’re looking for something more reliable that offers a steady flow of income.

You can buy and sell bonds with an investment platform like AJ Bell. When you do this, you may not pay the initial value of the bond, but its current market value – which could have gone up or down since it was issued.

What to look out for when investing in bonds

If you’re thinking about building them into your investment portfolio, it’s worth reading up on bonds a little further to understand how they work in general and some of the (unfortunate) bond-related jargon you’ll come across.

As a start though, it’s important you know where the bond comes from – the company or government that originally issued it and how secure they are. Helpfully, companies that issue bonds are given a credit rating that lets you know how likely they are to keep up with interest payments and pay back the full amount of the loan when the time comes.

The lower the credit rating, the higher the risk and the greater the chance the company gets into financial trouble and subsequently defaults on its debt to you. However, these higher risk bonds are also often called ‘high yield’ and have the potential to bring you a bigger gain when sold.

There are lots of other things to look out for when buying bonds – things like interest rate (‘coupon rate’) and its maturity date. And as always, make sure you’re comfortable with the risk involved and how well the bond fits into your bigger investing goals.

If you’re liking the sound of bonds but would really rather not do the choosing yourself (or get too bogged down in all their jargon), you can leave that to a fund manager – which moves us on nicely to our next section.

What are funds?

When you invest in a fund, your money goes into a pot with lots of other investors’ money. A professional fund manager then uses that pot of money to buy lots of different investments – usually around 50-100 shares, bonds and other ‘underlying investments’ – that match the fund’s aims.

Funds come in all different shapes and sizes, with different aims, underlying investments and managers. A real plus of investing in funds is that you can invest in more than one thing all at once and leave it to a professional to choose what makes it into the line-up and what doesn’t.

Unlike shares, traditional funds aren’t bought and sold every minute of the day on a stock exchange but are traded more leisurely, once a working day, when the value of the fund is calculated and the price of one unit is set.

That professional fund manager we mentioned can either be a real human who has a team of people researching companies and picking which investments to buy or it can be a computer algorithm, that automatically buys investments based on a set of rules. The real humans are often referred to as ‘active’ funds and the computer-run ones are called ‘passives’. Because computers are cheaper than humans, passive funds tend to be much cheaper than active versions.

But wait, what’s an exchange traded fund?

Something between a fund and a share! A popular choice for new investors, exchange traded funds (‘ETFs’ for short) are a low-cost way to track the performance of a particular index (for example the FTSE 100 index of the largest 100 UK companies) without buying all of the companies or investments that make it up. When the index goes up or down in value, so will the price of the ETF.

Though they give you access to a range of underlying investments (whatever makes up the index it’s tracking) like regular funds do, they behave more like shares because they’re bought and sold on a stock exchange.

What to look out for when investing in funds

Your investment platform should set you up with all the information your chosen fund can offer. Though this information can feel a bit heavy and difficult to navigate, accessibility is improving. Required documents like fund fact sheets and the key investor information help explain all the most important points of the fund, and more managers are now writing in plain English rather than fund-speak (thank goodness).

One of the first things to locate when diving into the info is the fund’s charges. In exchange for managing the fund, the fund manager charges you a % of your investment in it. This is called the ‘ongoing charge’ and usually sits between 0.1%-1% of the value you’ve invested. There can be other charges related to investing in funds, but the ongoing charge is the main one.

It’s also super important to check whether the fund you’re looking at is the type of fund you’re actually after. Does it offer you regular cash payments from the profits made (an ‘income’ fund) or does it reinvest that income to grow the fund more quickly (‘accumulation’)? Is it invested in a wide range of sectors and world regions? Or is it something very specific – like a fund that invest exclusively in tech companies from the US? Know what you’re looking for and just make extra sure that’s what you’ve got in front of you.

Finally, like shares and bonds, you need to be sure you’re happy with the fund’s particular level of risk. A helpful feature of funds is that they are usually very clearly risk-rated. You can find a fund’s risk rating on their documents (factsheet and key investor information), and your investment platform should also highlight this for you on the fund’s info page.

Still there?

Phew. We’re there, you made it! This article is a lot to digest but hopefully it helps you get to grips with the differences between shares, bonds and funds, and to hit the ground running when choosing your own investments.

If you prefer to listen to information to let it sink in we’ve got a great podcast on the investing basics, as well as a lot of jargon busting. Check out "Taking investing back to basics".

These articles are for information purposes only and are not a personal recommendation or advice.