Search: The best performing stockmarket ISAs
The simplest way to invest in the stock market is through a pooled fund. As the name suggests, this type of fund pools together money from individuals and invests it in shares or fixed interest stock.
Funds are steered through the markets by a fund manager. Global market forces notwithstanding, it is the fund manager's level of investing talent that determines the success of the fund. Very successfull fund managers are commonly referred to as 'Star managers'.
Like footballers, their recent and past performance determines their worth in the market - the more highly regarded a manager is, the more people will be attracted into investing in his or her fund.
He or she will invest in a wide range of shares - in some cases up to 100. This spreads your risk, as all your money is not riding on the performance of one or two shares.
There are more than 2,000 such funds investing billions of pounds in various areas of the globe. Some suit income seekers, others those looking for capital growth.
You can buy into and sell out of the fund at any time but you should look to invest for at least five years. The minimum investment is typically £500 or £1,000 or regular savings of £50 a month.
There are three types of fund that you can wrap up in an Isa: unit trusts, Oeics (Open-ended Investment Companies) and investment trusts (of course, individual shares, and bonds issued by individual companies, can also be bought within your ISA).
Risk levels: investment trusts
Investment trusts are more risky than unit trusts and oeics as their prices climb more quickly in rising markets but drop more sharply in falling markets.
This is because share prices of investment trusts move up and down not just with the prices of their underlying assets (shares the manager has chosen), but also with the demand for the investment trust's own shares.
The number of shares in an investment trust is fixed. When demand is high, the price rises as more investors chase a limited number of shares. When demand is low there is a surplus so the price falls.
Unit trusts and Oeics
With unit trusts and Oeics, only the movement of the underlying assets moves the price. This is because the number of units or shares can change to suit demand and supply.
If demand is high, the manager simply issues more shares. If it is falling, he or she just cancels some.
Investment trusts are also riskier because they can hold a wider range of investments and they can borrow more freely.
Unit trusts and oeics can only borrow up to 10 per cent of their fund value. There is no such restriction on investment trusts.
They can borrow profusely (known as gearing) when markets are rising - using the money to buy more shares and thus make more profits. In theory, the rise in share prices more than covers the cost of the interest on the borrowings.
But when share prices fall, losses suffered by a heavily geared fund are made worse as it is still paying interest on the loan.
The main difference between unit trusts and oeics is simply their respective fee-chargin structures.
Older style unit trusts come with two prices - one for buying and one for selling.
Money off at the supermarket
More modern Oeics have just one price, but when you buy into an Oiec, you pay an initial charge. Many fund managers are changing their unit trusts into more straightforward Oeics.
Upfront charges can be as high as 6-7 per cent, but you should get a discount on an Isa and pay 3 per cent or less - so at least £97 of every £100 invested ends up in the fund.
If you buy over the internet through a fund supermarket such as Bestinvest or Fundsnetwork you can cut your costs further.
Investment trusts are cheaper at around 0.5 per cent, as long as you buy through a special savings scheme run by the companies.
There is also an annual management charge of 0.5-1.5 per cent depending on the type of fund.
Useful contacts:
www.itsonline.co.uk - Association of Investment Trusts
www.investmentfunds.org.uk - Association of Unit Trusts and Investment Funds
CommentsPlease login to leave a comment or report a post