Just like an artist who has a portfolio of all their best work, an Investment Portfolio is a collection of everything you’ve invested in over time.
Instead of watercolours, it’s made up of financial assets which you’ve invested in. A portfolio can include common investments like pensions, as well as a variety of other asset classes from property to stocks.
The most common asset classes are bonds and stocks, but commodities, cash or cash equivalents, and real estate are other examples.
Investment portfolios are made up of different asset classes. But these asset classes don’t have to be from the same provider, they come from a variety of places, like a fintech app or a bank. Each provider will have different financial products with different conditions (like interest rates or lock-in periods) depending on how they’ve been built.
There are several types of Investment Funds, including mutual funds, exchange-traded funds (ETFs), money market funds, and hedge funds.
Investment funds work differently to other kinds of investments.
Each investor’s shares are proportionate to the amount of money they invested. Usually, the more money the investor puts in, the more shares they have. However, a higher number of shares doesn’t equate to more power when it comes to decision making.
When investing in a fund, the investor’s role is to decide:
- Which fund they want to invest in based on its theme, performance or another deciding factor
- What their goal is
- Their risk appetite
- How much they want to invest
- When they want to sell the investment (unless there’s an agreed upon maturity date).
This is a simplified list, as each fund has their own conditions. People often use a financial advisor to help them decide what kind of investment fund to choose.
Investment managers do what they say on the tin: they manage investments.
They can manage the buying and selling on the market, or they can help investors find the right investment to add to their portfolio, or they can do both.
The main aim of an investment manager is to increase the value of an investor’s investments by making informed investment decisions on their behalf.
When an investor has an investment manager, they hand over their decision making to the manager and are no longer involved in deciding which securities should be bought, held or sold.
This is the name for an investment in which the decision maker for the investment (whether that’s the investor or an investment manager) follows the moves of an index. This dictates how many securities they should trade in order to make a good return, rather than simply following their intuition.
Nearly all ETFs (the most common Investment Fund) are passive investments.
Securities are types of financial assets that can be traded. There are two principle types of securities: Equities and Debts.
Equity can mean a few different things depending on the context. But essentially, it means ownership.
In accounting terms, equity is what a company owes their shareholders. These shareholders usually make money in two ways.
1. When shareholders sell their shares, they may receive the amount they bought the shares for, plus an agreed upon percentage if their shares increased in value over time. (If the value of the shares decreases, payment is not guaranteed.)
2. The second is by receiving ‘dividends’. These are discretionary and generally consist of a yearly payment gathered from profits.
A debt security is an investment where money is lent by the investor on the basis that the money borrowed will be repaid in full with interest. Debt securities are considered to be a lower risk investment because repayment is often guaranteed.
However, that doesn't mean there isn’t any risk involved. A key consideration for debt securities is the creditworthiness of the provider. If they were to default, they may not be able to pay the investor back.
An example of a debt security is a bond. The bond owner essentially lends money to the bond provider until an agreed upon date when the loaned money, plus interest, will be repaid.
Every type of debt security is different, as they each come with specific conditions. These could be the interest rate, the frequency of interest payments, the maturity date (the date it has to be paid back by) and so on.
Here’s an easy way to remember the difference between equity and debt securities:
Dividend is a type of payment. But more specifically, the money shareholders receive from the investment providers when the investment has received a profit. Like we mentioned in the ‘Equity securities’ section above, dividends aren’t paid regularly. The company could pay dividends annually when they have received substantial profit. Or they can choose to reinvest the value of the dividends back into the investment to help boost the overall value of the shares.
Who decides which happens? It depends on the investment terms but usually the company decides what’s best for the investor.
Bonds are a type of debt security. They’re a bit like an IOU from a borrower to a lender. Bonds are most commonly used by the government or companies which issue them as a way to get funding.
The lender and the borrower create an agreement that sets out how much is to be lent, the rate of interest (and whether it’s fixed or variable) and the frequency of payments.
An ETF is a type of investment fund.
ETFs can be made up of three main types: bonds, cash and equity. A single asset ETF is just one of the above. A Multi-asset ETF combines a few assets together.
ETFs follow a chosen index, such as the FTSE 100, and are traded throughout the day just like the stock market.
ETF investors aren’t responsible for buying or selling on the market exchange. All they decide is which ETF they want to invest in and when they want to sell it, the rest is up to the Investment Manager or the Investment Fund provider.
An index is how investment managers combine and track the performance of a group of stocks. They’re created and used in a few different ways depending on what they measure. The point of an index is that it’s relative. It wouldn’t make sense to measure how well an investment in gold is doing by comparing it to milk prices. Instead, a specific index will replicate a certain area of the market and be used as a benchmark for changes in that specific market over time.
The FTSE 100 is an example of an index commonly used in the UK. If an investment is based on the FTSE 100 Index it means that the performance (the value increasing or decreasing) of the investment is calculated depending on the performance of the 100 companies listed on the London Stock Exchange.
To diversify your investments means you have strategically invested in different assets and/or themes so that your investment portfolio is diverse. This strategy aims to reduce risk because what may affect one investment shouldn’t affect the other.
Capital at risk.
When you invest your money is at risk, as the value of your investment may go down as well as up and you may not get back the amount you originally invested.
We are not a bank. We are authorised by the Financial Conduct Authority as an e-money institution (FRN 900894) and also as an investment firm (FRN 814281).
Dozens does not provide financial or tax advice of any kind. If you have any questions with respect to financial or tax matters relevant to your interactions with Dozens and our investment products, or you are unsure about investing, you should consult a professional adviser.