Investment return is the gains (or losses) made on an investment. It can come from
two sources, capital growth and income. Capital growth occurs when the market value
of the investment asset increases. Income is the cash flow paid by an asset such
as rent and dividends. The level of return is therefore shown expressed in terms
of the performance of the assets.
Shares are issued by companies to raise money and each share represents a proportion
of the company. The value of the share will increase and decrease according to the
demand for them.
You might also hear the term 'stock' - although the two terms have become interchangeable,
'stock' is actually an umbrella term that also includes bonds and fixed-interest
securities.
People invest in shares in the hope of making money over the long term and they
are generally happy to take some risk with their investment as a result.
Bonds are basically loans which you would make either to companies, in the case
of corporate bonds, or to the government, in the case of government bonds (or gilts).
During the term of the loan, the company or government pays you interest at a fixed
rate before repaying the original loan at the end of the term – this final repayment
is sometimes referred to as 'redemption'. The amount of interest you’ll receive
depends on the likelihood of the company repaying it. Government bonds are seen
as the safest bet, but generate the lowest level of interest. You can invest in
bonds individually or via a fund,such as a unit trust.
Bonds usually pay a 'coupon' which is simply another name for the fixed rate of
interest that the bond will pay before tax. Typically, interest is paid out every
six months. The rate of interest is a percentage of the bonds 'nominal' value. The
nominal value is the value used to calculate the interest payments and also the
amount that is paid out on any redemption. The market price of the bond may be above
or below the nominal value at any time.
The 'yield' is the interest paid before tax, calculated as a percentage of the bond’s
market price. Sometimes called the 'running yield' of the bond.
Diversification is simply spreading your investments across different asset sectors
such as:
- Property
- Shares
- Bonds
- Cash
You can also diversify by using different investment managers. This can potentially
reduce risk and improve consistency of returns.
Different asset sectors rarely rise and fall at the same time. If one investment
performs poorly, diversification helps cushion the effect on your total portfolio.
A unit trust is an investment fund shared by lots of different investors. It is
an 'open-ended' fund which means the fund gets bigger as more people invest and
gets smaller as people withdraw their money. The fund is run by a fund manager who
makes the investment decisions.
For further information please see Investment Funds.
The short answer is that they are like unit trusts. They invest in shares (and other
types of investments). The main similarities and differences between OEICs and unit
trusts are:
- OEICs package their investments into shares - not units
- The number of shares issued can rise and fall as shares are bought and sold (similar
to units in a unit trust)
- OEIC units have a single price - there is no bid/offer spread
- Initial charges are not built into the share price but are set out separately
This tells you how much income is currently being paid from a fund as a percentage
of the capital value. Therefore, this yield can give an estimate of income that
you may earn over the next year if the investments in the fund continues to pay income
at that rate.