INVESTMENT
For most individuals
the effective method of investing in the equity markets is through collective
investments: -
Collective
Investments
In order to manage the risk of investing in the stock market you can invest
in a "collective investment" sometimes called a "unitised investment". This
is usually a very large fund in which all investors' monies are pooled together.
The fund is managed by a fund
manager and invested in a range of different investments dependent
on the type of fund.
When you
invest, units are purchased at the Offer
price. When you dis-invest, units are sold at the Bid
price on that day or the day after (some funds deal on following day
prices). The difference between the Bid and Offer prices is called the
spread. The Offer and Bid prices are declared daily and published in the
financial press.
Unit
Trusts
A unit trust is a collective investment, which allows a diverse investment
across the UK and international stockmarkets. The volatility and "risk"
varies from trust to trust. The more specialised or focused the trust
(to a geographical area, industry sector or size of company), the greater
the potential for fluctuation in the value of the investment.
Income
Tax is payable on the dividends
from a
Unit Trust, whereas any Capital Gains can potentially be tax free
by utilising the annual Capital
Gains Tax allowances. There is no specific term and they can be sold
at anytime, however, due to the volatility of the underlying stocks it
is sensible to invest for a minimum of between 3 and 5 years.
OEICs
An OEIC (Open Ended Investment Company) is similar in operation to a unit
trust, however, there is no bid/offer spread. The units have a single
price and commission is taken on the initial investment into units.
ISAs
An ISA (Individual Savings Account) is a tax-free "wrapper" that can be
placed around a number of different saving/investment products and are
not constrained by "qualifying" time periods. They will offer individuals
the opportunity to save up to £7,000 during the tax year 1999/2000 and
£5,000 in each subsequent tax year.
Any growth
or income generated by ISA investments and savings will be completely
free from personal UK income and capital gains tax.
ISAs have
three component parts:
- A cash
component, a deposit based saving where interest is added and withdrawals
may be made at anytime.
- A Stocks
and Shares component, an investment, therefore appropriate if left untouched
for five years or more. As investments may go down in value as well
as up, they do not guarantee to make a profit.
- A Life
Assurance component also for long-term saving which may offer built-in
life cover.
You can have
a Mini ISA split between all parts above or just dipping into one of them
within certain limits. You can also have a Maxi ISA which will allow to
invest in all three parts together or invest the full £7,000 into Stocks
and Shares
Life Bonds
A single premium investment bond is a collective investment, which
exists in the "wrapper" of a life assurance policy. Any gains are treated
as income in the year of encashment and are tax-free to a basic rate taxpayer.
A higher rate taxpayer will pay (approximately) the difference between
higher rate and basic rate. You may also take up to 5% p.a. income without
paying any tax.
With-Profits
This is a very popular way of investing for the benefits of stock market
growth but without the volatility and risk of shares or unit trusts. It
is a way of "smoothing" out the movement of the markets into a steady
rate of growth.
You invest
in a unitised single premium investment bond, the insurance company gives
you an annual
bonus rate and, on encashment, you receive a terminal
bonus. The annual bonuses once given cannot be taken away and so your
investment grows steadily without dropping in value. The contract terms
typically encourage at least a 5-year investment. The insurance companies
all have a
Market Value Adjuster which is a variable penalty that they can apply
in extreme circumstances to stop a single investor taking advantage of
sudden adverse movements of the markets.
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