What are the different types of investment?

Esther Shaw / 16 November 2015

As an investor, it is important to understand the different types of investment. We look at some of the types you need to know about.



Ordinary shares

Ordinary shares, also known as equity shares, are the most common form of share in the UK.

If you hold ordinary shares, you, as the holder, are entitled to a share in the profits of the company (dividends).

The dividend on ordinary shares is uncertain and variable. Dividends can be high when the company performs well, but poor or non-existent when it does badly.

An ordinary share also entitles its owner to vote at general meetings of the company.

Read our guide to the basics of investing.

Preference shares

Preference shares are a hybrid of ordinary shares and corporate bonds. They offer solid income returns, and relative safety.

If you are seeking inflation-beating income with little risk of missed payment or default, preference shares could offer a good option.

Preference shares in a company give their holders an entitlement to a fixed dividend. The payment of this fixed dividend usually takes priority over that of ordinary share dividends.

Unlike ordinary shares, preference shares do not usually carry voting rights.

Investment trusts

Investment trusts are one of a number of collective investment vehicles available to investors.

As with unit trust and open-ended investment companies (Oeics), this type of investment allows you to pool your money with other investors to benefit from the many advantages of investing as part of a group.

Investing in this way allows you to spread your risk between many different companies, geographical areas and industries.

That said, as with any investment, your capital is at risk, as investments can go down as well as up. The level of risk involved will depend on where the trust invests.

Avoid the pitfalls with Annie Shaw's guide to common investment mistakes. 

Tracker funds

If you are looking to invest, but don’t want the hassle of picking shares, you might want to consider tracker funds instead.

Rather than trying to beat the market by cherry-picking a selection of shares, tracker funds are designed to follow a set index, such as the FTSE 100. Tracker funds give you immediate access to the entire range of companies or bonds in an index.

The idea is that while the funds won’t beat the market, they should also not fall too far behind it.

Tracker funds score highly for their simplicity and cost-effectiveness.

They should also be much cheaper than actively-managed funds because they require no management.

That said, on the downside, if an index is dominated by a particular type of company or sector and it takes a fall, your investment will do the same.

Confused by all the terms and acronyms? Read our investment jargon buster.

Exchange traded funds (ETFs)

ETFs aim to mirror the performance of a particular market or index, such as the FTSE 100. 

As with a traditional tracker, if the ETF is tied to the value of an index, its value will be determined by whether the index rises or falls.

Unlike unit-linked funds, ETFs can be traded like individual stocks, on an exchange, such as the London Stock Exchange.

Generally speaking, the management fees for ETFs are lower than standard charges for managing pooled funds.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.