The DFSA has produced the following information to provide a general overview of investing and investments.
Investing is typically thought of as a way to increase the value of money and as a way of trying to protect the value of money against the impact of inflation over time.
All investments carry risks and are generally accepted as higher risk than simply depositing money with a bank.
Investments vary in terms of the degree of risk and also complexity and not all investment products are suitable for everyone.
Common Types of investments
Equities, shares or stocks
Equities, shares or stocks describe direct investments in a single company with the aim that the value of the share will rise over time and/or produce income in the form of a dividend paid by the company you invest in.
Shares are traded on stock markets and the value of shares fluctuate, often even over the course of a day. Buying shares is generally considered one of the higher risk types of investment as it is a direct investment in a single company. Whilst there is the opportunity for the price of the shares to increase over time, producing capital growth, the value of the shares may fall and sale of the shares at that lower price will produce a loss on the original capital invested.
Equally dividends paid by companies are not guaranteed and there may be periods during which the company does not pay any dividend due to the underlying conditions in the business.
You can buy and sell shares through an adviser (broker or stockbroker) or direct through a share dealing account. The process of buying shares can be complex and you should ensure you fully understand your commitments and also research the company which you intend to buy shares in.
Funds, collective or pooled investments
Funds, collective or pooled investments offer an alternative to buying shares directly. A pooled investment allows an investor to participate in buying the shares of many different companies by combining with other investors. In such pooled investments the money of all the investors is aggregated and invested by a fund or investment manager. This allows the investment manager to spread the money invested across a range of different company shares or assets and may even allow investors access to different global markets within a single investment product.
Pooled investments are generally thought of as lower risk than direct equity or share investment because of this ability to diversify (spread) the risk. However, the value of the underlying investments is still dependent on the fluctuating market values of the investments held and may fall.
If you invest in pooled investments the dealing and administration related to the underlying investments is taken care of for you. However, charges are made by the managers of pooled investments for these services. Whilst they can be lower than the charges of direct investments, due to economies of scale, they will still impact on the level of investment return you may receive from these investments and you should always look into the charging structure of any investments you are offered.
Bonds or fixed interest securities are a debt based investment where the investor loans money to an entity (company or a government) in return for a fixed rate of interest (yield). The bond will have a maturity date at which the sum loaned will be returned. Bonds can also be traded in what is commonly referred to as the bond market. Their value will depend on the yield or interest rate payable, the credit worthiness of the issuer of the bond comparative to the general economic conditions and the value and outlook of alternative investments, such as equities and cash deposits.
Bonds are generally thought of as lower risk investments to shares, although they are not without risk, which at worst could be default on the bond and loss of part or all of the sum loaned.
Structured Products and Complex Investments
Beyond cash deposits, equities, pooled investments and bonds there are a range of products that can be designed for specific investors or investment objectives. These will often combine different types of investments and will involve different levels of risk.
Such products can often be complex in nature and may offer potentially higher rates of return than more conventional investments. The potentially higher rates of return are often due to the greater levels of risk involved with such products. Anyone considering buying such products should understand the nature of the investment and the level of risk involved.
Any investment involves risk and investors should consider their own attitude to such risk before they decide to invest and in selecting the type of investments to place their money into.
People approach risk in different ways. Some people are more comfortable than others in taking risks to potentially receive a higher return on their investments. For others security is more important, seeking to protect the underlying capital they have.
If you are going to invest you should consider how you would feel if you suffered a significant fall in the value of your investment. Would you view this as just a potential short term set back and be willing to leave the money invested or even add to the initial investment, in the hope that the value may rise over the longer term? Or would you feel uncomfortable that the value of the money you originally invested is falling and wish to get out before it falls further, realising your losses but potentially limiting them? There is no right answer, it depends on your own attitude to risk, how long a period of time you wish to invest over and how likely to you are to need the money in the short term.
You may also want to consider currency risk, the potential fluctuation in the relative values of the currency of your home country or the currencies in which your investments may be held.
Anyone thinking about investing should consider their decision carefully and may wish to keep the following factors in mind:
How much can you afford to invest? Generally investment funds should be surplus funds from your income or money saved, that you are unlikely to need in the short term. You may wish to ensure that all your protection needs, such as life insurance and provision for dependants have been met before investing.
What is your objective in investing? If you are saving for a specific goal, such as providing for your children’s education, you will have a specific sum in mind that you need to generate over a set term and you may have a different attitude to risk in considering potential investments for such a goal.Or are you investing to generate an income and do you need to ensure a minimum level of income from your investment?
How long do you wish to invest for? Investments are generally mid to long term commitments, five years and beyond. If you are likely to need the funds in the short term then it is probably not suitable to commit them to an investment. Having to access funds in the early years after investing could result in penalties or surrendering the investments in unfavourable market conditions and the money you get back may be less than you invested.
What level of risk are you willing to take? How comfortable would you be if the investment falls in value in the short term? Do you want the capital you invest to have some degree of protection? Are you willing to assume a greater level of risk in return for the potential that you may achieve higher rates of capital growth?
What is your level of knowledge and understanding of investments? Investments can be complex and you should ensure that you fully understand the nature of any investments, key features and charges associated with the investments and the risks involved. You may be comfortable selecting your own investments. Equally, you may want to seek the advice of a financial advisor to assist you.
There are plenty of high quality professional advisors in the market to assist you. In seeking advice you should ensure you are comfortable with the advisor, that he or she is acting in your best interests and has the requisite knowledge and expertise to assist you.
Avoiding scams Sadly we all see cases in the news of advisors who do not have their client’s best interests at heart or people who have fallen victim to investment scams.Be alert to any warning signs, including:
- Unsolicited calls offering you incredible investment opportunities that seem too good to be true, they usually are
- High pressure sales people – Don’t feel pressured into investing by limited offer only or once in a lifetime opportunities. You can always walk away if you don’t feel comfortable and find an alternative investment in your own time
- Complex investments or unclear charging structures. Feel comfortable in asking an advisor to explain the investment and the full extent of charges. If they can’t explain it to you in terms you can understand may be it is not the right investment for you.
- Any requests for payment via an email or telephone offer or direct to the advisor. There are many scams around, make sure you check out the credentials of any company or advisor before you hand over any money