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Below we look at the different types of investments which are traded on the stock exchange.
Shares give you a stake in a company that is listed on the stock exchange (for example Tesco or HSBC). When you buy a share, you become a part-owner of that company and you’re entitled to share in its profits.
Individual shares are traded on the London Stock Exchange as well as other UK and international stock markets. The price of a share will fluctuate throughout the day when the stock exchange is open. Share prices can be very volatile as market and economic conditions as well as the company’s results directly impact how much people are willing to buy and sell shares for. You usually pay trade fees when buying or selling shares.
Holding a small number of individual shares can be a high risk strategy because companies can, and do, fail, even well-known ones. In contrast, when you hold a fund, investment trust or ETF you are spreading the risk more widely because the fund will normally hold a range of shares in different companies.
It can be quite time consuming to keep on top of the frequent updates and financial statements released by companies, and in-depth analysis can require considerable expertise. Hence, many investors opt to rely on professional fund managers and their teams of analysts to do this research by investing using funds, investment trusts or ETFs.
Like funds, investment trusts can invest in a range of assets classes globally. Trusts differ from funds in that they are public companies usually listed on the London Stock Exchange and can be bought or sold at any time during stock market hours. They have a board of directors who look after shareholder interests, and professional fund managers who look after the investments day to day.
Unlike funds, investment trusts issue a fixed number of shares at launch and buyers and sellers are matched through the market. Management charges also apply and there is usually a trade fee for buying or selling investment trust shares.
Depending on whether a trust is in or out of favour, shares in investment trusts can trade at a premium (more than) or discount (less than) the value of the trust’s underlying assets. This makes them a little more complex than funds. Investment trusts are useful for investing in less liquid markets, such as direct property or private equity, because the manager is not forced to sell holdings when investors wish to sell.
ETFs are a low cost way to broaden your investment portfolio. They are passive investments that seek to replicate the returns of a chosen index but offer a high level of transparency as they declare their holdings daily.
As with investment trusts, management charges apply and they trade on the stock exchange which means you’ll incur a trade fee when you buy or sell. ETFs are quick and cheap to set up and as such are used to provide exposure to specialist themes, such as gold, wheat or clean energy. ETFs may buy the underlying asset or use tools, called derivatives, to replicate exposure. As such ETFs can be complex and potentially high risk.
Equity investments are priced throughout the day during market trading hours of 8am and 4.30pm. When buying or selling during this time, investors are presented with a live quote to accept before the trade is placed. Trades placed outside of these hours can be dealt 'at best' which means at the next available opportunity when the market next opens.
Typically, there are three types of costs associated with trading in equity investments:
These taxes and levies do not apply if you buy or sell ETFs. We explain in detail the fees and charges associated with investing with Willis Owen later on.