UK Investment Types - Essay Example

Personal Investment in the UK– is it merely just a question of risk and return?" Part I: Speech Perhaps everybody in here has had of the phrase "the things, you pay attention to or do today, defines your future” (Murphy, 2010). This phrase makes us stop and think for a while at the things we are currently doing. For example if you are an entrepreneur, the things to think about will include the critical activities that you believe will boost your business forward. However, today our focus will shift on personal investment and to be specific we will talk about personal investment in the UK. The basic idea that runs in our mind when we mention personal investment is about the risks and returns, but in reality we ask ourselves are this really the main concerns we ought to look at? In order to understand well this question I undertook a comprehensive look into the factors that affect personal investment in the UK., Personal investment To begin with, we need to understand what personal investment entails. Personal investing is one of the important components that one needs to understand while undertaking personal finance. Personal investment and personal finance are two terms that in many occasions are used interchangeably. However, it is worth noting that as much as one could use them to mean the same thing, in reality they have a slight difference. Personal finance is the broader term that describes the process of effective organization or management of assets that are in the possession of the family or an individual (Tatum, 2006). Therefore, the basic definition for personal investment will be a component of personal finance that involves taking investment activities such as undertaking a secure financial cushion that will cater for later years. One can also put it as, a long-term personal commitment that involves inherent risks and accrues regular income or leads to capital growth (Hargreaves Lansdown, 2009). The relationship between risk and return The key question in this symposium is whether personal investment only revolves around risks and returns. From my own opinion, I will agree with the question. The main reason we would be all want to carryout personal investment is for the returns, which determine how our future will turn out (My Wealth Guide, 2008). On the other hand, we cannot talk about returns and leave out risks because the two go hand in hand. Therefore, to be able to answer this question comprehensively we first need to understand what the relationship between risk and returns. This is because, for anyone who wishes to put his money in an investment, the primary concept they need to understand is the relationship between the risks involved and the returns of the investment. It is worth noting that, in investment, the basic trick that an investor has to be aware of is that the more risk an investment has, the higher the chances of having a better return (TD Direct Investing Ltd., 2010). Therefore, before taking the risk one should have an idea of which risks as an individual one would be willing to take in order to generate more returns with the hope that the risk does not occur. This is why in order to formulate a good investment plan; you will need to asses each available risk that you are willing to undertake. There are many risks in the field of investment and when we look at each risk in detail can take a very long time. However, I have compiled a few of the major risks that tend to affect personal investment in the UK that are as following. We have the: Inflationary risk One think we can all agree on is that the past few years have not been some of the best for UK and the world in terms of the economy. Moreover, this is where the inflationary risk comes in to play. The risk means that the value of an asset becomes lesser as inflation reduces the value of the country’s currency. Liquidity risk It refers to the risk that you as an investor may encounter when you have a need for liquid assets but are unable to sell or buy an investment because of the limited opportunities. Interest rate risk Another common risk most likely to affect majority is the interest rate risk. This type of risk refers to the chance of a fixed rate debt instrument declining in value because of an increase in the interest rate. Other forms of risks likely to affect personal investment that I will not get into detail include the credit risk, taxability risk, call risk, business risk and reinvestment risk. Personal investment opportunities available in the UK with their associated risks. The list of risks that one could encounter while making an investment is endless, this is because the risks vary with each type of investment an individual will take. However, in my research I was able to map some of this risks with the available investment plans as follows. I have highlighted the examples basing on the available types of personal investment opportunities in the UK economy. The personal investment opportunities one can venture in include property, securities, retirement accounts, banks and collectibles one needs to understand his objectives and risks involved before making a decision (Miranda, 2012). We have the: Stocks and shares These are the individual ownerships that a person has over a company. Once a person becomes a shareholder they are entitled to a share of the fortune whether good or bad (London South East Limited, 2012). Shares have a high risk because they respond to most of the macroeconomic or economic factors of the industry. REITs Another available personal investment opportunity available in the UK is the “Real Estate Investment Trust” known as the REIT. Through a REIT, a person is able to invest in property without necessarily having to pay for the property at ago. Taking personal investment in REITs is advantageous in various ways, for example, one is able to buy and sell shares rather than having to buy the property as a whole. Variation brings remunerations over direct property investment. Value, however, is determined in terms of demand and supply, in addition to the worth of the underlying investments. They can decrease in worth – to zero if the REIT goes ruined. Just like procuring shares in a regular company no security, should this occur? Risk is further heightened if the REIT appropriates money, gearing earnings. Unit Trusts and OEICs The other form of personal investment opportunities that one can take advantage of in UK is the Unit Trusts and OEICs. OEIC refers to “Open Ended Investment Companies” together with Unit Trusts are mutual funds by a large number of investors to which their pooled money is invested in the stock market. The investment is the monitored and controlled by an appointed fund manager. The difference between unit trust and OEIC is that, for unit trust, they have an ‘offer price’ and a ‘bid price’ while the OEIC only have a single price. Spread Betting and CFDs This is a rather risky venture when it comes to personal investment. In a real sense spread, betting is similar to gambling, therefore just as gambling has its high risks it can also have high returns if things turn in the favour of the investor. The investor in this situation relies on two possibilities either an upward movement or a downward movement of the investment component. This can be either a stock index such as the FTSE 100, commodity, share or a currency (London South East Limited, 2012). The basic idea is that, as an investor you are offered two prices, these are the buying price and the selling price. Therefore, when you buy the security, as an investor you have the hope that the security is selling price will increase at which you get a commission when you sell it. The difference between these two prices is what we call the spread and the firms offering the service are referred to as spread betting firms. In a similar category is the CFD, which refers to Contract for Difference. This simply refers to the situation where one would get into an agreement with a broker and a trader. The agreement involves the investor benefiting from a mirror transaction that the CFD trader or broker undertakes instead of the investor selling or buying the underlying asset. It is an investment venture because an individual subjected to the risk of either getting a loss or profit. Listed CFDs This type of CFDs work in a similar way as the unlisted CFDs, however, with the type they are listed on the London Stock Exchange meaning there is more transparency with pricing unlike in unlisted CFDs (London South East Limited, 2012). Other forms that are not very common among people in the UK include Bank savings They are among the simplest and most popular personal investments available today. The reason why most people adopt this type of saving is that it is usually liquid and can be used for emergency purposes. The rates are usually adjusted, and they are not guaranteed. Money markets are also in this category but have higher restrictions (Miranda, 2012). Property Real estate is another practical investment for those for people who do not want to keep on paying rent. Real estate, however unlike savings, it is difficult to liquidate. The other advantage is it provides equity ownership after time. Securities and commodities Securities and commodities are a good personal investment that can be used later as funds for retirement accounts or generally as personal savings. However, this form of investment has various levels of risk involved. For example, securities such as bonds, stocks, and commodities such as metals and crude oil all have different levels of risks (Miranda, 2012). Part II Personal development “The portfolio game” has been a great exercise for me as a student in developing my personal skills and preparing myself into the world of employment. During the game, I was able to learn through first-hand experience the various skills that I would not have been able to acquire in a classroom environment. The fact that we were working in a group setting also contributed a lot in terms of associating with colleagues in a working environment. I enjoyed the way we organized ourselves and into various positions and dividing tasks amongst ourselves. It was inspiring to realise that even if it was just a game the feeling of actually being in a working environment cannot be ignored. We were able to understand the elements involved in investing such as risks and returns (TD Direct Investing Ltd., 2010). From a personal point of view, here are the various competencies that I was able to acquire through the exercise. I acquired numeracy and quantitative skills that include handling data analysis, extrapolation and interpretation (Rees, et al., 2007). The competency I acquired it after having to do our own investment through the mock organisation that we created. We actually derived fun out of it and as much as we encountered errors, we took it as learning step to better our skills. The next competency I gained from the game is the ability to carry out research into a business in order to understand its operation and be able to deal with management issues. The game required us to make manage the investment of a client, therefore we had to understand our objectives and analyse a potential investment opportunity well before we took any commitment. The result is I ended up sharpening my skills in management, which I think I will be more than willing to try in my employment. In the requirements, we were supposed to of 300 and minimum of 1 trade per week. This requirement helped me in my personal development because I was able to gain competencies in self-management in terms of time initiative, motivation and behaviour (Rees, et al., 2007). It was our personal initiative to make sure that we make the highest trade count, and I was able to understand how to control my behaviour so that I could encourage and motivate my colleagues as we strived to achieve set targets and objectives. To achieve the targets we were required to understand the most viable markets to invest in, therefore, need to carry out research leading us to sites such as UK trade and Investment (UKTI DSO, 2012). The other competency that I gained from the exercise is to be effective at decision-making, putting into effect the appropriate qualitative and quantitative skills and most importantly problem solving (Rees, et al., 2007). We were able to solve the differences that occurred within our group in time when they appeared. On a personal note, I took the initiative to read a handbook by Joan van Aken about problem solving in organisations which I found very educative in sharpening my readiness to join the corporate world (Van Aken , et al., 2007). References Hargreaves Lansdown, 2009. Types of investment and their risks. [Online] Available at: http://www.hl.co.uk/news/risk-and-reward/types-of-investment-and-their-risks [Accessed 11 December 2012]. London South East Limited, 2012. UK invetsment Types Explained. [Online] Available at: http://shareprices.com/investments [Accessed 12 December 2012]. Miranda, K., 2012. Types of Personal Investment. [Online] Available at: http://www.ehow.com/list_7199137_types-personal-investments.html [Accessed 11 December 2012]. Murphy, J., 2010. What you pay attention to today determines your future. [Online] Available at: http://johnmurphyinternational.com/awareness/pay-attention-to/ [Accessed 11 December 2012]. My Wealth Guide, 2008. Personal Financial Planning. [Online] Available at: http://www.mywealthguide.com/persnl.htm [Accessed 12 December 2012]. Rees, C., Forbes , P. & Kubler, B., 2007. Student Employability Guide: Aguide for higher education practitioners. 2nd ed. Helsington, UK: The Higher Education Academmy Innovation Way. Tatum, M., 2006. WiseGeek: What is Personal Finance?. [Online] Available at: http://www.wisegeek.com/what-is-personal-finance.htm [Accessed 12 December 2012]. TD Direct Investing Ltd., 2010. Understanding Risk. [Online] Available at: http://www.tddirectinvesting.co.uk/get-started/understanding-risk/risk-and-return/ [Accessed 11 December 2012]. UKTI DSO, 2012. Investing in the UK. [Online] Available at: http://www.ukti.gov.uk/invest.html?guid=none [Accessed 12 December 2012]. Van Aken , J. E., Van Der Bij, H. & Berends, H., 2007. Problem Solving in Organisation. 1 ed. London: Cambridge University Press. Read More