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Wednesday, 3 October 2012

Shares, unit trusts, investment trusts

Shares, unit trusts and investment trusts are all medium to longer-term investment products. The returns are potentially higher than with savings, but they are not guaranteed. It's a good idea to get advice before investing in these sorts of products.

Shares

Shares are small stakes in a company. When you buy shares you become a joint-owner of the company along with all the other shareholders. You can buy:

  • existing shares which are already being traded on a stock market
  • new shares when a company first sells them to raise money for its business (for example a stock market flotation, or buying private shares in a small business start-up)

How do you make money out of shares?

The value of shares generally rises and falls in line with the performance of a business. If the company does well you may be able to sell your shares at a profit at a later date. If it doesn't your shares may fall in value or even lose their value altogether. 

A company doing well may also pay you dividends income taken from its profits. Dividends may rise and fall in line with how well the company is doing, but may not always be paid.

Buying and selling shares

You normally buy and sell shares through a stockbroker. You can ask a financial adviser or investment manager, but they will still deal through a stockbroker.

Stockbrokers offer three main types of service:

  • advisory (they give you advice on what to buy or sell)
  • discretionary (they make investment decisions on your behalf)
  • execution-only (you tell the stockbroker what to buy or sell for you)

You can deal with stockbrokers by phone, face to face, over the internet or by post.

You can find out more about shares, including how to buy and sell them and points to consider before investing, on the Financial Services Authority (FSA website).

Unit trusts

Unit trusts are a type of 'pooled investment'. A fund manager buys shares in a range of different companies and pools these in a fund; you then buy 'units' in the fund. Because the fund contains a range of shares the risk is spread. The fund is 'open ended' - the number of units rises and falls as investors buy and sell units.

The different types of funds

Each unit trust fund has a stated investment strategy, enabling you to invest according to your attitude to risk. Funds investing in 'emerging markets' or smaller companies, for example, would be considered to carry much higher risks than those investing in large UK companies.

Buying and selling units

You buy or sell unit trust units through the fund manager. Their value moves in line with the overall value of the fund, which in turn moves in line with changes to the underlying share prices in the fund.

In time you would hope that the value of your units will rise in line with the underlying share values. But if these perform badly the value of the units could fall. You may also get dividend income or interest distributions from your units, based on the dividends or interest paid by the underlying shares or other investments.

Investment trusts

Investment trusts invest in the shares of different companies, allowing investors to spread their risk. The main difference from unit trusts is that investment trusts are themselves companies in which you buy shares. So you're investing directly, rather than indirectly through an open-ended fund. Because investment trust share prices are affected in part by supply and demand, their value can fluctuate more often than units in unit trusts.

As with unit trusts, investment trusts differ in the kinds of companies they invest in - some being more 'high risk' than others. Some focus on capital growth with very little income from dividends, and others invest for a steady income from dividends with some chance of capital growth.

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