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[F211]Financial And Investment Management

by Sean Horton, Sea

One of the undisputed qualities of this country is the strength, vitality and diversity of its financial services sector. This is all very good for the economy at large, but for the individual investor the sheer diversity of the available avenues for investment can be a problem in itself. The market has grown so sophisticated and diverse that financial investment advice is practically indispensable, not only to manage the quite high costs of assembling your own portfolio of investments, but also to reduce the risk of making potentially very costly investment errors.

The basics

In order to make sense of the plethora of investment vehicles available it is perhaps useful to divide them into two basic categories: direct and indirect or collective forms of investment.

Individual securities

In the former category of direct investment there are the many hundreds of publicly quoted company shares or bonds, together with government-issued bonds or “gilt-edged” stock. These are traded on the stock market, where their price fluctuates according to the laws of supply and demand. Favoured securities will be for those companies that are performing successfully, in which case demand will be high, supply short and the price correspondingly high. Furthermore, the dividends to which owners of the relevant securities are entitled will also reflect the financial performance of the companies concerned.

Bonds are effectively corporate or government loans, with a predetermined rate of interest paid on the loan and a guaranteed return of the amount loaned once it reaches its maturity date. Generally speaking, therefore, bonds represent less of a risk for investors and the rate of return is correspondingly lower than investment in company shares.

Indirect investment

The financial investment advice to those investors who want to avoid exposure to the fortunes of particular, individual companies is to spread the risk by sharing it, together with other similarly-minded investors, in a whole basket of varied investments. In this form of collective investment, a portfolio of different investments is maintained and managed by a professional fund manager who chooses the range, mix and spread of the funds various investments. Individual investors in the fund then share in the spoils – or otherwise – of the fund's overall performance.

Collective, indirect investments such as this might be organised as unit trusts, investment trusts or as so-called Open-Ended Investment Companies (OEIC).

Unit trusts and OEICs are, in fact, both open-ended investments in that investors can freely trade in the units or shares of the funds. The OEIC is frequently described as the modern day equivalent of the older unit trust; the unit trust trades on both an offer and a bid price, while the OEIC trades at a single price. A useful question to test the mettle of your chosen independent financial adviser is to ask about the relevance of this price distinction!

Financial investment advice

Although the individual investor might have his or her own preferences regarding the spread and risk of the investments he or she wants to make, few are knowledgeable (or rash) enough to take specific decisions without the support and guidance of professional financial investment advice.

If you know more or less all there is to know about investing directly in stocks and shares, or in collective forms of investment, or the management of your investments, or the tax implications, or the pros and cons of offshore investing, then you might not need much more in the way of financial investment advice. Unless you happen to be one of those very rare individuals, however, you will almost certainly benefit from the sound and impartial financial investment advice of a professional, independent financial adviser.

Types of Investment

Direct Investment

Your choice of investment types fall into two basic categories ? direct investment in the shares of a particular company or its issued bonds or, in the case of government-issued bonds, its "gilt-edged stock". The price of company shares, of course, will fluctuate as they are traded on the stock market and the dividends to which you are entitled as an owner of those shares will be determined by the performance of that particular company.

In the case of bonds issued by a company, or gilts issued by the government, however, you will be assured of the rate of interest on what is effectively your loan to that company or the government, and you will be assured of the full return on your investment once the bond or government stock reaches its maturity date. Because of these in-built certainties, there is a lower risk inherent in the investment in corporate bonds or government gilts, and the returns, therefore, tend to be lower than in the more volatile market for shares.

Both corporate and government bonds can be traded in the market, however, before they reach their maturity date. During this time, their price will be determined by the prevailing rates of interest in the stick market, compared to the rate attached to the bond itself.

"Collective" Investment

If you want to avoid putting all your eggs in the one basket of a particular company's shares, it is possible instead to spread the risk of your investment by pooling it (with other investors) into a range of different investments. In this case, the pooled investment is managed by a professional fund manager, who makes decisions on the range and types of investment. Such collective schemes fall ? again, broadly ? into three different types: unit trusts, investment trusts and Open-ended Investment Companies (OEICs).

Once you have reached this level of investment decision-making, however, the vast range of unit trusts, investment trusts and OEICs available can open up a veritable Pandora's Box of choices. In order to avoid making potentially very costly mistakes or rash investment decisions, therefore, this is the stage at which ? if you have not done so before ? you should consult an independent financial adviser.

Summary

Financial investment advice is wisely taken because of the sheer range of investment vehicles available:

?These fall into the two broad categories of direct investment or ?collective? (pooled) investment;

?Direct investments include the purchase of stocks and shares or corporate or government (so-called "gilt-edged" stock);

?The principal types of collective investment are in unit trusts, investment trusts or Open-ended Investment Companies (OEICs);

?Whatever your personal intuition regarding the best investment type for you, however, the best financial investment advice is going to come from an independent financial adviser.

Article Source : Pg. 102

About Author

Both Sean Horton & Steve A Wright are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Sean Horton has sinced written about articles on various topics from Finances, Mesothelioma Lawyer and Finances. Sean Horton is a Director of Enhanced Wealth, a whole of market mortgage broker and IFA specialising in mortgage advice and the associated areas of. Sean Horton's top article generates over 90500 views. to your Favourites.

Steve A Wright has sinced written about articles on various topics from Finances, Portugal Holiday and Finances. Steve Wright is Managing Director of Wrightway Financial Consultants, Independent Financial Advisers specialising in Pensions, Investments, Mortgages and Insurance. One of their major areas is. Steve A Wright's top article generates over 33100 views. to your Favourites.