From shares to funds: How different investments work

Introduction

Starting to think about investing but not sure where to begin? Whether you want to grow your money for the long term or build a pot for something specific, understanding the different types of investments is a good place to start. Here’s a simple overview of the main options and how they work.

Investing is about putting your money to work with the goal of growing it over time. Rather than keeping it in a savings account earning interest, you’re buying assets – such as shares, bonds or property – that you believe will increase in value or generate income. It comes with risks, but for long-term goals, investing can give your money more potential to grow than leaving it in cash.

Cash vs investing

Cash savings are important – they’re low risk, easy to access and useful for day-to-day spending or emergency funds. But they may not keep up with inflation, meaning your money could lose purchasing power over time.

On the other hand, investing gives your money the chance to grow faster, though values can go down as well as up. A common approach is to keep enough cash to cover short-term needs and invest the rest for your medium-to-long-term goals, such as buying a home, starting a business or retiring comfortably. Here’s a closer look at some of the main investment options:

Shares (also called equities)

Buying shares means you own a small part of a company. If that company does well, the share price may go up, and you might receive dividends – regular payments from the company’s profits.

Shares can be volatile – they go up and down in value depending on how the company performs and what’s happening in the economy. But over long periods, they’ve historically delivered better returns than cash or bonds.

Example: If you buy shares in a UK bank and the bank performs well, its share price might rise, but if it faces challenges, the value could fall.

Funds

Funds pool money from lots of investors to buy a broad mix of assets, making it easier to diversify your investment. Some funds are actively managed, meaning a professional chooses what to invest in. Others, called index funds or trackers, aim to copy the performance of a market like the FTSE 100.

Funds can be a good starting point for new investors, as they spread risk across multiple companies or bonds. They’re also available through stocks and shares ISAs, so you can invest tax-efficiently (please note that tax treatment does depend on your individual circumstances and may be subject to change in future).

Example: A global equity fund might hold shares in hundreds of companies across the world, reducing the impact if one company or region performs badly.

Bonds

When you invest in a bond, you’re lending money to a government or company in return for regular interest payments and the return of your capital after a set period.

Government bonds (called gilts when issued by the UK government) tend to be lower risk but lower return. Corporate bonds offer higher yields but can be riskier, especially if the issuing company is less stable.

Bond prices can also fluctuate, especially when interest rates change – but they’re often used in a portfolio to balance the ups and downs of shares.

Example: A portfolio might include 60% shares and 40% bonds to aim for growth while limiting potential losses.

Property

Property is a tangible investment, such as buying a flat or house to rent out. It can offer a mix of income (rent) and long-term growth (if property values rise).

However, it’s not without challenges. There can be gaps between tenants, unexpected costs for repairs and property prices can fall. Plus, you may need a mortgage, which comes with its own risks if interest rates rise.

Example: Buying a flat and renting it out may seem attractive, but you would need to consider maintenance costs, taxes and how easy it is to sell if your plans change.

Other investments

There are also niche or more speculative options, such as:

• Commodities like gold, oil or agricultural goods

Often used as a hedge against inflation or during market uncertainty.

• Cryptocurrencies

Highly volatile and not regulated in the same way as traditional investments.

• Peer-to-peer lending

Where you lend money directly to individuals or small businesses online.

These options can play a role in a more advanced portfolio, but they carry higher risk and may not be suitable for beginners.

What about risk?

All investments involve some level of risk – including the risk of getting back less than you put in. The key is understanding how much risk you’re willing to take and how long you’re investing for.

Generally, the longer you can leave your money invested, the more time it has to recover from dips in the market. Risk isn’t something to fear – it’s something to manage. A balanced portfolio and a clear goal can help.

Why diversification matters

Diversification means spreading your investments across different types of assets, industries or regions. That way, if one area performs badly, others may do better and help smooth out your returns.

Example: If you only invest in UK bank shares and they fall in value, your whole portfolio could be affected. But if you also hold international shares, government bonds and property, your risk is more spread out.

You can diversify by:

• Investing in funds that hold a mix of assets
• Spreading your investments across different countries and sectors
• Including a blend of higher and lower risk investments

The next step

Everyone starts somewhere, and getting to grips with the basics is a smart move. Whether you’re saving for the long term, planning for a future goal or just curious about how to grow your money, investing could be part of the picture. Understanding the different options is the first step.

Ready to learn more? A financial adviser can help you find investments that fit your goals and appetite for risk – and show you how to get started.

Please remember the value of investments, and any income, can go down as well as up and you may get back less than you invest.