1. Investing… and saving
Investing is putting your money into something like a financial product, stocks and shares, property or a business, to try and make a profit in the future. However, there’s no guarantee that you’ll make a profit, and you could get back less than was paid in.
Saving is where you put your money into a savings account, and you’ll normally get back what you’ve saved, plus interest on top of that.
You might not think you’re investing, but if you have a pension plan, for example through your employer, or some types of Individual Savings Account (ISA), you probably are. So it’s important to understand the difference.
2. Pension plan
Put simply, a pension plan lets you – and your employer if you have a workplace pension plan – put aside money for your retirement. With modern, flexible pensions, your money is invested, usually in funds, giving it a better chance to grow in value than if it was saved into a bank account. However, because a pension plan is invested, its value can go down as well as up and, as mentioned above, you could get back less than was paid in.
How and where it’s invested will affect how much it may move up and down in value, so it’s important to understand the investment choices you have. If you have a Standard Life pension plan, you can review and manage your investments through online services.
You also get tax relief on money you contribute to your pension plan, meaning it can be a very effective way to save for retirement. Listen to our Make the most of pension tax relief Q&A to find out more.
3. ISA (Individual Savings Account)
ISAs have now been around over 20 years, and by the end of 2018/19 there was more than £580 billion in ISA accounts in the UK*.
The two most common types of ISAs are Cash ISAs, which are a bit like bank savings account and give you tax-free interest, and ISAs you invest through, called Stocks and Shares ISAs. These let you put your money in different types of investments, often through funds.
4. Investment risk
When it comes to investing, risk isn’t always a negative, so this is a useful term to understand. In fact, taking a bit of risk when you invest your money could be crucial to help give it a better chance to grow more than inflation.
For example, if you take more risk with your investments, there’s the potential for higher long-term returns, although on the flip side, there’s also the potential for greater losses. And it’s important to remember that the value of all investments can go down as well as up, even lower risk investments, and you could get back less than was paid in.
The amount of risk you’re prepared and able to take with your investments might be very different to someone else, and may change with your circumstances. We have a questionnaire that can help you find out how you feel about investment risk.
5. Asset classes
Asset classes are categories of investments. The four main ones are equities (also known as stocks and shares), bonds, property and money market investments (including cash).
It’s generally considered a good idea to have a mix of assets, which is called diversification – more on this below.
You can find out more about the different asset classes in our What you can invest in guide.
Equities, or stocks and shares, are what many people think about when it comes to investing. When you buy shares, you effectively become a part owner of that company – a shareholder.
Historically, equities have generated higher returns over the longer term than most other types of investments, so they can play an important part in many investment portfolios. But please be aware that past performance isn’t a guide to future performance, so there’s no guarantee they’ll do so in the future.
Bonds are usually described as loans to institutions, such as governments and companies that need to raise money. So when you buy a bond, you’re giving your money to the government or company that’s issued it for an agreed period of time.
Bonds aren’t risk free, and unless you invest in a guaranteed bond, there’s a chance that you won’t get back what you paid in.
This simply means having a mix of investments – in other words, a diverse range.
Diversification can help to manage risk and means that the overall value of your investments should be less likely to change dramatically than if you were just invested in one type of investment. It’s a bit like not putting all your eggs in one basket.
If you’re invested through a workplace pension plan, particularly if you’re in your plan’s default investment option, it’s likely that your investments will already be diversified.
A fund is a way of pooling the money you invest with other people’s money. This allows you to invest in a wider range of options than if you invested directly yourself – and a professional fund manager will do the hard work of ongoing management for you.
There’s plenty of choice when it comes to funds, including options that help you diversify across different types of investments. You also have a choice of actively managed or passive funds, which we explain below
10. Active and passive
Fund managers usually set a benchmark against which they can assess how a fund is performing or make decisions on what it will invest in. There are different types of benchmarks depending on a fund’s individual objectives, for example if could be a financial market index such as the UK’s FTSE® 100 Index.
If a fund is actively managed, the fund manager decides which investments to select, in an active attempt to beat the performance of the benchmark.
In contrast, passive funds (also sometimes called tracker or index-tracking funds) aim to follow the movements of the benchmark (down as well as up) to give comparable returns.
11. Stock markets
These are where companies list their shares, and people can buy and sell them.
You may also hear people refer to a stock market index, such as the UK’s FTSE® 100 Index or the S&P 500 in the US. These give a measure of how the shares listed on stock markets are doing overall.
12. Bull and bear markets
This may sound a bit ‘Wall Street’, but bull and bear markets can affect any money you’re investing for the future, so it’s worth understanding what they are. A bull market is where financial markets are going up in value, while a bear market is when they’re falling. The substantial market falls we saw in March of this year are an example of a bear market. And you may have seen the value of your pension plan or other investments fall as a result.
What’s important to remember is that investing is a long-term commitment, so be careful not to base decisions on what markets are doing at any one moment. It could backfire, and history shows us that financial markets generally recover over time. Boring Money’s Holly Mackay explains more about this in Market crashes – what can we learn from history?
If you have a good mix of investments – in other words you’re diversified – you shouldn’t need to make changes every time you hear about rising or falling markets.
We hope that we’ve helped demystify some of the language around investments. You can learn more about pensions and investment basics in our guides or visit the Money Advice Service. Alternatively, you can speak to a financial adviser. If you don’t have an adviser, you can find one at unbiased.co.uk. There’s usually a charge for getting advice.
*Source: Individual Savings Account (ISA) Statistics, HM Revenue & Customs, June 2020.
FTSE International Limited (‘FTSE’) © FTSE 2020. ‘FTSE®’ is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence.
The value of investments can go down as well as up and may be worth less than was paid in. Tax and legislation may change. Your personal circumstances also have an impact on your tax treatment.
The information here is based on our understanding in August 2020 and shouldn’t be taken as financial advice.