Demystifying investing – your guide to the different places to put your money

Patrick Ross


3 min read

Despite what many people may think, you don’t need a degree in economics to be a good investor.

Doing your research

The investment industry tends to make relatively simple concepts seem impossibly complicated. Understandably, this can be off-putting for new investors.

But don’t despair. With a good grounding in the basics, you too can be on your way to a brighter financial future.

Below we have deciphered some of the most common investments to help you get started.

Shares

Buying shares is one of the most popular forms of investing.

Put simply, buying shares means you become part owner of a company such as Marks & Spencer or BP. As a result, you are entitled to a share of that company’s future profits and growth.

If you get it right, buying shares can be lucrative. Over the years, companies such as Apple, Amazon and Coca-Cola have made some investors a lot of money.

But it’s not all plain sailing – you can also lose a lot of money if you pick a dud. And it’s hard to know when it’s the right time to sell up.

Funds

If buying individual shares sounds too risky, another option is to put your money in a fund.

To begin with, it’s worth noting that there are two different types of fund: active and passive. Don’t worry, they are not as confusing as they sound.

In an active fund, your money is managed by an expert fund manager who will buy and sell investments on your behalf in order to make money.

In fact, many studies have shown that few managers outperform the stock market once their fees have been deducted, particularly since they tend to be expensive.

As a result, many investors opt for a cheaper type of fund known as a tracker or ‘passive’ fund.

Tracker funds are designed to move up and down with an investment index such as the FTSE 100.

They’re popular with investors who want to keep their costs down. Some experts argue that you make bigger gains investing in a tracker rather than an active fund as you don’t have to pay large fees which can eat away at your returns over time.

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Bonds

Bonds are essentially I-O-Us issued by governments and companies in order to borrow money at attractive rates.

They work in a fairly simple way: you buy a bond and after a set period you get back your investment with interest, much like a deposit with a bank where you put your money away for a set period.

However, they’re not totally risk-free. If you buy a bond from a company and it goes bust, you can lose money. Also, bond prices can move up and down before the end of the investment period.

Nonetheless, bonds are perceived as being less risky than shares and so are popular with people who don’t want to invest in the stock market, although the returns on offer are much lower than shares can potentially deliver.

Crowdfunding and peer-to-peer lending

These are the new kids on the block. Crowdfunding allows people to invest in start-ups in exchange for shares or bonds in new companies. One of the main draws of investing this way is you can get in early on a potential future success story.

However, investing in young or brand-new companies is very risky and if it goes bust, you can lose all the money you put in. Another drawback is that it can be difficult to sell your shares or bonds if you want out. This is because there are a limited number of people to sell your investments to, unlike with most shares or bonds.

Peer-to-peer lending is where you lend to an individual who has asked peers for money rather than borrow from a bank, for example.

In all, it’s important to note that crowdfunding and peer-to-peer lending carry much more risk than investing in ways that spread your money out across different types of companies, countries and investments.

Where does Nutmeg fit in?

We take the stress out of investing by building a portfolio for you based on how much risk you are willing to take.

To give you the best chance of achieving good returns, we spread your money out across thousands of different investments so that your eggs aren’t all in one basket.

Key to our approach is keeping down costs, so we invest in a range of high-quality passive funds known as exchange-traded funds (ETF) that operate like tracker funds.

Our expert investment managers will adjust your portfolio to adapt to market conditions, making sure your money keeps growing over time. But we do this at a fraction of the cost an active fund manager would charge you.

So, if you have always wanted to invest but have been unsure, one of our fully managed portfolios could be the answer.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

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Patrick Ross

Patrick Ross

Patrick is a copywriter at Nutmeg. He manages the Nutmegonomics blog and writes on a range of investing and lifestyle topics.


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