There are many types of investment, each of which has a different structure, different tax treatment and investor implications.
Some of them are:-
Stocks & Shares (Equities)
and many combinations of the above.
Everyone wants a high return, no risk investment. It doesn’t exist.
All you can do is understand the potential risks and returns associated with each investment.
For example cash under the bed – you lose value through inflation – a guaranteed way to lose money. Deposit accounts at the bank – after tax they will often return less than inflation. There is also the (small but real) risk of a bank collapse.
At the other extreme, investing in options can lose your entire investment in days, or return a staggering profit.
The essence of understanding risk is to think of two key elements:-
How long is the investment for?
Is this money to be oriented towards maximising profits, or towards avoiding loss?
Each part of your money might have a different answer. For example the money in your pension fund is for the long term and aimed at maximising profits. But with regard to the money you have set aside as the deposit on a house, ensuring that there is no significant risk to capital is more important than maximising profits. It is also likely to be invested on a much shorter timescale – months or a couple of years.
One area of confusion in investments is to confuse the investment (its likely risk reward profile and behaviour) with the packaging (which is typically an investment product designed around various tax laws and legal issues).
For example an ISA is packaging. The fact that an investment is in an ISA tells you nothing about the risks or rewards you might run by buying it. You need to ensure that you understand how the ISA is invested.
Risk and Reward, Understanding this vital area
In short, we will help you to determine an investment strategy appropriate for your needs, and using the investments best suited to your investment attitude and tax position.
Last updated on April 06, 2012