What can I invest in?

In this article we'll cover:

• Shares (or equities)
• Bonds
• Property
• Commodities
• Cash-type investments
• Multi asset investing
• Investing with Royal London

If you have a pension or a stocks and shares individual savings account (ISA), you probably already have your money in a range of investments. Read on to learn more about what you can invest your money in. 
 
Remember, the value of investments can go down as well as up, so you may get back less than you paid in. 

What are shares?

Shares in companies are known as equities, which you buy and sell on stock markets. Companies sell their shares to raise money, usually to improve or expand their business. Share prices go up or down based on how well a company is doing, its prospects or other external factors. 
 
Buying equities makes you a shareholder, owning part of the company and giving you a right to share in the company's assets and profits. This comes with the potential to make a return on your investment if the company does well or make a loss if the company does badly.  
 
Some companies may also pay you a part of any profits they make as dividends, which you can take as cash payments.  
 
Another option is to reinvest dividends to buy more shares, potentially helping your initial investment grow further. With Royal London's Stocks and Shares ISA, you invest in shares through funds. We automatically reinvest any returns you make, including dividends, into those funds.

What are the benefits of equities?

• May rise in value over time
  Shares can rise in value if the company does well, offering a potential profit if you sell them.
• Fairly easy to buy and sell 
  You buy and sell most shares on stock markets, so they’re more liquid than many other investments. (Liquidity measures how easy it is to sell an investment to turn it back into cash.)

What are the risks of equities?

• Can fall in value
  Shares can drop in line with a company’s performance, its prospects or various external factors. 
• Prices can fluctuate significantly
  Shares aren’t therefore typically ideal short-term investments. 
• Exchange rate risks
  When investing in shares of companies in different countries, changes in currency exchange rates could affect your investment’s value.
  

What are bonds?

Bonds are effectively a promise or an IOU from a company or government that needs to raise money. You loan them money and they promise to repay you – with interest – at a set future date. This is why bonds are sometimes also called ‘fixed interest’ or ‘fixed income’ investments. 
 
Here are some of the main types of bonds: 

• Government bonds 
  Usually considered the lowest-risk bonds as governments are unlikely to go bankrupt and be unable to repay the loan. They therefore typically offer lower returns than other bonds.
• Corporate bonds 
  Corporate bonds offer higher potential returns than government bonds but with slightly more risk as there’s more chance a company might go bankrupt than a government. The interest rate depends on the company issuing the bonds, its financial strength, trading prospects and other factors.
• High-yield bonds
  Issued by companies with lower credit ratings, these involve greater risk than other corporate bonds that the company will go bankrupt before repaying the investor. High-yield bonds therefore usually offer a higher interest rate.   
• Index-linked bonds
  Generally issued by governments, these pay interest linked to a specific index, like inflation. The return you get changes in line with that index. For example, bonds linked to inflation see the interest rate rise if inflation rises.

What are the benefits of bonds?

• Generally lower risk than equities 
  As bonds come with a promise to repay the loan, they’re generally considered to be lower risk than equities.
• Can provide regular and reliable income 
  Regular interest payments can generate reliable income for investors seeking steady cashflow.
• Can provide more predictable returns than equities 
  While returns on equities can fluctuate, often significantly and frequently, bonds offer more predictable interest payments, plus repayment of the original investment when the bond’s term ends.
• First type of company debt to be paid 
  Bonds are generally the first type of company debt to be paid if a company goes bankrupt so, even if the company fails, you may still get some of your investment back.

What are the risks of bond investments?

• Potentially lower growth than equities 
  Bonds may not offer the same growth potential as equities.   
• Credit risk 
  Bond issuers can go bankrupt before repaying the loan or default on their interest payments. Credit rating agencies grade companies and governments based on the likelihood of this happening, with AAA the highest rating for a bond.
• Inflation risk 
  Income certain bonds generate is based on the rate of inflation when they’re issued. Rising inflation could reduce the buying power of the bond’s income. Also, if central banks raise interest rates, new bonds issued afterwards will have higher interest rates, leaving older bonds with lower rates looking less attractive. 

Investing in property

When you invest in property through a pension or ISA, you'll generally invest through funds and in commercial property such as offices or retail spaces rather than residential property. You can do this in two main ways: 

• Direct property funds 
  These funds buy, sell and manage real, physical buildings like shopping centres, offices and factories.
• Indirect property funds 
  Rather than owning actual buildings, these funds invest in the shares of companies that buy, sell, construct, develop or manage properties and/or land. 

What are the benefits of property investment?

• Potential for regular and long-term income 
  Income from rents is generally the main source of returns from commercial property. Commercial property leases tend to be longer than for residential property, offering the potential for a regular, long-term income stream. 
• Often more stable returns than equities 
  Property markets tend to move slower than stock markets, so they’re generally more stable. Plus, property investments are typically valued over longer timescales than equities (monthly, quarterly or annually, rather than daily), which can further smooth price fluctuations.
• May offer inflation protection 
  Rents are often subject to annual increases linked to inflation, which can help offset the negative impact of rising prices.
• Potential for value of underlying properties to grow 
  Property can increase in value over time, especially with skilful management like redevelopment or refurbishment. 
• Shares in property development companies may rise 
  For indirect property investment, if properties held or sold by a company you’ve bought shares in increase in value, this could boost the company’s share price, driving a return on your investment. 

What are the risks of property investment?

• Less liquidity compared to some other investments 
  Property generally takes longer to sell than other investments. Plus, its value is based on opinion of what it’s worth, so it may not always be sold at the price that’s wanted or needed. Some direct property funds may face liquidity problems if large numbers of investors want to take out money at the same time.
• Value of indirect property investments can fluctuate 
  While indirect property investment offers greater liquidity than direct property investment, values can rise and fall suddenly, like equities. 

Commodities

Commodities are physical goods and raw materials like coffee, metals, oil, sugar and wheat. 
 
There are several ways to invest in commodities. One is to physically buy them. But the most straightforward way is through financial contracts called commodity futures. These try to predict price movements of underlying commodities without you having to physically own the commodities themselves, avoiding the high costs of owning, storing and transporting physical goods.   
  
The aim is to profit by speculating where you believe the price of a particular commodity or commodity index is heading. So, for example, you may buy a futures contract on crude oil because you believe its price will be higher at an agreed future date.

What are the benefits of commodity investing?

• Spread and balance risk
  Commodities can spread or balance risk and offer additional opportunities to make a return. For example, when investments like equities or bonds aren't performing well, gold or other precious metals can hold their value better. 
• Not closely linked to value of equities and bonds 
  Commodities can produce strong returns when their prices spike and often outperform when equities and bonds stumble, helping offset losses.  
• Potential protection from inflation 
  Some metals (gold in particular) sometimes rise in value during economic uncertainty. And higher food prices are usually preceded by higher costs for raw ingredients such as wheat and sugar. 

What are the risks of investing in commodities?

• Potentially volatile 
  Commodities are subject to price fluctuations from events like natural disasters, extreme weather and political unrest interrupting production, supply and distribution.
• No income generation 
  Equities, bonds and direct property investments typically benefit from dividends, interest and rental income. But as commodities don’t generate income, price increases are the only potential source of returns.
• Exchange rate risks 
  The commodities market is global, so currency fluctuations in producer, supplier and distributor economies can affect returns. 

Cash-type investments

Cash-type investments include deposits with banks, building societies, governments and other organisations in return for interest payments. They also include things like short-term loans to governments, which carry more risk but also offer the potential for higher returns. These types of investments are generally accessed through funds, often known as money market funds. 

What are the benefits of cash-type investments?

• Low risk and easy access 
  Cash-type investments tend to be low risk and highly liquid, providing easy access to money when needed.
• Little value fluctuation 
  Unlike other investments, the value of cash investments shouldn’t fluctuate much. You'll generally know how much your money will grow thanks to fixed or predictable returns.
• Potential for higher returns 
  Money market funds include a spread of cash-type investments, so overall returns may be higher than the interest rate paid on some cash accounts. 

What are the risks of cash-type investments? 

• Lower returns 
  Cash-type investments typically offer lower returns than other investments.
• Interest rates can fall 
  If interest rates fall, the returns on cash-type investments are also likely to fall. And if you’re invested through a money market fund, investment growth during periods of low interest rates may not be enough to cover fund charges, meaning an overall loss.
• Inflation risk 
  Over the long term, returns on cash-type investments may not keep up with inflation.
• Low risk but not no risk 
  Although minimal, there is a risk that some cash-type investments, such as short-term loans, could go down in value. 

Multi asset investing

Multi-asset investment options are funds or portfolios that include a mix of different types of investments. Most pensions and ISAs will offer these.

What are the benefits of multi asset investing?

• Spread risk
  Different investments tend to perform differently at different times and under different conditions. Holding a variety of investments can mean that, when one type performs poorly, others may perform better, balancing this out and potentially providing smoother returns.

What are the risks of multi asset investing?

• Lower potential returns 
  While having a mix of investments can help reduce risk, it can also limit potential returns. For example, while one type of investment performs strongly, other investments may lag, limiting the overall return you could have received if you’d invested solely in the investment performing well.