Before you jump in, consider the alternatives
Collective Funds
They include:
- Investment Trusts
- Unit Trusts
- Open Ended Investment Companies
Collective investments are run by fund managers - professional investors who plough our savings into all manner of companies and markets.
If you are on a budget, or you are a naturally risk averse, it may be worth finding out more about these pooled investment schemes.
We have included a list of people who provide help and advice at the end of this chapter (link). Collective funds will invest in sectors rather than just one individual firm.
A fund might buy a number of shares in say FTSE 100 companies - in fact it will probably buy shares in all 100 if it is what is called a tracker fund. It does so to spread the risk.
Through this system of pooling, customers are able to buy into a wide variety of investments - small-cap firms as well as large companies.
Collective funds will also invest in companies in different regions of the world.
There will be funds invested in Japan, emerging economies such as Brazil, India and Russia and there are those whose expertise is buying shares in new, emerging technology, or drugs companies.
Investment trusts
They raise their money by listing on the stock market and plough the cash into buying shares in other companies. You buy shares in an investment trust in the same way that you buy shares in any other listed company.
The price of your share is determined by the demand for shares in this specific investment trust company, as well as the underlying value of its investments.
Unit trusts
They are slightly different to investment trusts. You invest in units of a pooled fund offered by one of the big fund management companies.
The price of the units, rather than being governed by the whim of the market, reflects the value of fund.
Open ended investment companies
They are a fairly new form of collective investment for UK investors.
Changes in the law in the UK now make it possible for investment companies to create OEIC's, which have operated for several years in the USA and Europe.
An OEIC is similar to a unit trust in that the number of units increase or decrease according to demand. However, like an investment trust, the investment is held in a company and units are purchased or sold at a single price.
Units can be brought direct from the OEIC manager, or through a third party such as your stockbroker or IFA. Many unit trust managers are, in fact, now converting their original unit trusts into OEIC's.
Gilts
They are government debt sold as bonds with a face value of £100 per unit.
As the government has never welched on one of its IOU's, gilts are a safe investment and offer a regular income stream in the form of interest payments.
Gilts are bought and sold in the market and are currently very popular with pension funds looking for safe forms of investment.
This high demand and lack of supply has, however, rendered gilts very expensive and driven down the rate of interest investors receive.
So it is possibly worth waiting until the gilt market returns normality before making a purchase.