Investment

Investment is the general term for purchasing an asset or depositing money in a bank, in the hope of getting a future return or interest from it. Regardless of what some politicians would have you believe, buying a new car or new clothes is not investing (this is called consumption).

We'll cover several types of investment here:

Contents

Property

When talking about property investment we normally mean anything other than the house you live in, although you will often hear people say that they bought their house as an investment and can be broken down again into several categories:

Commercial developers

Large corporates, often pension fund companies. They develop brown field or green field site and build mainly commercial office blocks or retail developments. They treat property as a long-term investment and concentrate mainly on yields rather that capital appreciation. This is sound property investment and goes hand in hand with the business that they are in which is providing long term pension investment for their clients.

The top end of the market in the UK is dominated by The Prudential, Morley Fund Management and Standard Life.

The downside here is that these companies are often forced into contributing to a property bubble as once an asset class such as property becomes a hot investment then everyone will want to change the mix of their investment and take money out of equities and fixed interest portion and switch into the property funds. The pension fund companies then have no choice but to go out and find property projects in which to invest in. This is also the case for property unit trusts, OEIC's and investment trusts. At the time of writing (April 2006), most of the large property funds are currently running and high cash levels of around 20% which is much higher than the long term average simply because there is too much money flowing into this asset class

If you move down the scale to the medium size companies then the range of property investment becomes more diverse with more of a reliance on turning projects around quickly for a profit. Many of these companies are looking for short to medium term returns on their investment rather that medium to long-term .

Private developers (Buy to Let)

This covers all the buy to let investors who either do this as a full-time job or do it in addition to having a full-time job and fit in developing around evenings, weekends and holidays.

This is the area which has seen the biggest growth with the number of buy to let mortgage increasing from 120,300 in 2001 to a staggering 701,900 in 2005. This is without doubt the biggest factor in the current housing bubble which has been fuelled by the availability of cheap credit and low interest rates.

Secondary property investment

It is also possible to invest in the housing market without getting your hands dirty. There are a range of Unit trusts, OEIC's, Investment Trusts and various other property investment schemes to choose from.

You can also invest directly in the shares of house builders, mortgage lenders or commercial developers.

Cash savings

Cash can be invested in a wide range of savings account ranging from Cash ISA's to instant access savings accounts and notice savings accounts.

Your returns on a cash account, although they vary, will generally be low which matches the amount of risk that you are taking which is also low. The first £35,000 is guaranteed by the FSCS.

The advice for those that wish to invest in a cash savings account is to use up you cash isa allowance first as this is tax free before looking at regular savings which are taxable (assuming that you are a tax payer).

It is worth also being aware that cash is often seen as the safe investment within stable countries although should rampant inflation or hyper inflation set in then this will erode away the value of your investment considerable.

Bonds

This is when you lend money to a company or government usually for a fixed period and during the period the company pays you interest and at the end of the period return your money. The risk is relativley low however, it is none the less higher than a savings account.

Stock/Shares

When you purchase a companies shares you then own part of the company. In return they often pay a dividend and the share price should go up. These are considered a high risk investment and one that is for long term i.e. greater than five years.

Pensions

Money put in to pensions is tax free and can be put in to several different types of investment e.g. cash, shares, property. However, the big difference between a pension and other investments is that you cannot get your money back until you retire.

See also

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