Several investment vehicles are open to individual investors and traders in today’s world of finance. Below we look at these various investment options.
Equities (Stocks and Shares to you and me)
An equity holding is commonly known as a share – a unit of ownership in a corporate that usually delivers an even distribution of profits (if any are made). These profits are usually paid as dividends.
There are two types of shares; common shares and preferred shares. Common stock (as the name suggests) is the most common type of stock. The benefits to the stockholder come from dividends and appreciation. Owning stock also gives the holder voting rights, which means some control. Preferred shares (or stocks) are less risky than common stock as they do not encompass appreciation (and thereby the risk of depreciation). They also do not offer voting rights. If the corporate moves to bankruptcy, preferred shareholders collect payment ahead of common stock holders. Examples of companies that offer preferred stock are Apple (AAPL), BMW (BMW), and British Petroleum (BP).
Equity Indices (AKA Stock Averages)
An equity index or stock average is a gauge of the worth of a segment of a stock market or sometimes an entire stock market. It is usually a weighted average calculated from the prices of individual stocks. A stock index is often used as a comparison tool between different investments.
Although it is generally not possible to trade an index directly, many Exchange-Traded Funds (ETFs) and Unit Trusts/Funds try to follow or track indices. Investors can invest in these Unit Trusts and ETFs directly (see below).
Funds (Unit Trusts and OEICs)
In the UK, Funds are also commonly referred to as Unit Trusts or even Open-Ended Investment Companies (OEICs).
A Unit Trust is a collection of funds, each of which comprises investments made by investors to participate in the ownership of various investment types. These would include shares (or stocks), government or corporate bonds, commodities, and various other money market instruments.
Different investment companies or money managers then trade or invest the funds in the Unit Trust pool, with the aim of achieving maximum capital appreciation and/or income. A primary attraction of Unit Trusts is that they allow smaller investors the opportunity to have a diversified, professionally managed portfolio. An Open-Ended Investment Company (OEIC) is like a Unit Trust, but the fund is operated as a company and creates and cancels shares rather than units.
Investment Trusts are like Funds or Unit Trusts in that they are pooled or collective investment vehicles. However, whereas Unit Trusts are open ended, and new units are created as the fund grows with new investors, Investment Trusts differ in that there are a fixed number of shares in issue. Investment Trusts are quoted on the stock market as companies; for an investor to buy shares, another investor must sell.
Furthermore, Investment Trusts do not have to pay out all income as dividends, but can choose to reinvest a portion in the fund. Also, Investment Trusts can leverage or “gear” by borrowing to increases returns; a Unit Trust cannot do this.
Exchange-Traded Funds (ETFs)
An Exchange-Traded Fund (ETF) is an investment vehicle that usually tracks or follows an index or “average”. This could be a stock index, a commodity index, a bond index or any other financial market index. An ETF is traded like a normal stock or share (unlike a Fund) and generally has high liquidity, intraday volatility and generally lower fees than a Fund or Unit Trust.
The price of an ETF goes up and down with the level of the underlying assets, but is also subject to demand and supply for the ETF. Owners of ETFs do not own the underlying assets, although ETF holders do have rights on profits or dividends paid.
Gilts (UK Government Bonds) and Corporate Bonds
A bond is an investment in which the investor loans capital (cash) to a body, usually a national government or corporate. The funds are loaned to the entity for a fixed period and for a fixed interest rate. The bond markets are also known as Fixed Income, or Rates markets.
Governments and corporations use bonds to raise capital and finance for various objectives. In the UK, Government Bonds are commonly known as Gilts, whereas in the US, they called Treasury Bonds or Notes.
Venture Capital Trust (VCT)
A Venture Capital Trust or VCT is a UK closed-end collective investment scheme that is tax efficient. The aim of a VCT is to deliver equity capital for small companies, and in turn, capital gains and/or income (usually as dividends) for investors. VCTs are publicly traded private equities listed on the London Stock Exchange. They are like business development companies in the USA.