Bonds (Loan Stock)

A 'bond' is an undertaking to pay you a guaranteed 'fixed rate' of interest for a period of 1 - 5 years, with a heavy penalty for cashing in early. Bonds are are a good alternative to unpredictable dividends from shares, and are an attractive proposition from government, banks and building societies. The 'bond' that we are all familiar with is the National Savings premium bond and although you forgo the interest, you are entered into a monthly draw for prizes ranging from £50 to £1million: but don't hold your breath as the lottery gives you a 1 in 14 million chance, premium bonds give you a staggering 1 in 13 billion chance of a million pounds! If you can afford the maximum holding of £20,000 the premium bond should return over 5% interest in prizes, and the odds on winning a million drop to below 1 in 700,000.

'Corporate bonds' differ from a standard bond as they are issued by the larger company seeking funds, without issuing shares in the company. As the bond is issued by a company and not a bank, building society or the government you take the risk of the company trading well whilst you have the bond. The bond pays out a fixed interest rate and usually has a life of 7 - 10 years. The bond can be sold, or the interest taken until you redeem the bond for, hopefully, no less than the original purchase price: although the interest is guaranteed, your original capital is not. The Interest rate (our own UK bank base rate) can decide the worth of the bond: if rates go up, the bond selling price drops - as, with a drop in rates the bond selling price will rise (if interest rates fall to 3%, and you have a bond paying a fixed rate of 6%, you have a sellers market).

 

'With profits bonds' are a balanced return on investment over a period. In good years some profit is withheld, and in bad years that profit is returned to you. This means a pretty average return over the life of the bond and so ensures a more reliable annual income. A 'terminal bonus' is paid at the end of the term depending on the on the performance of the stock market. This bond is usually for those with over £10,000 to invest and therefore mitigating the fees, and for those who are willing to go the full term.

Gilts

Gilts are only issued by the government in £100 units and for periods between 1 - 30 years. The gilt pays two  fixed-interest percentage payments every year and promises to repay to you the face value - £100 - at the end of the period. Gilts are also traded on the stock market where their price can go up or down depending on what people think is going to happen with interest rates.  The Interest rate (our own UK bank base rate) can decide the worth of the gilt: if rates go up, the gilt selling price drops - as, with a drop in rates the gilt selling price will rise (if interest rates fall to 3%, and you have a gilt paying a fixed rate of 6%, you may want to keep hold of it is you see this as a continuing trend).

Unit Trust

This is a fund controlled by investment fund managers based at the higher end of the finance institutions. Anyone can buy into a fund (and are given 'units' in return), with the fund managers ultimately responsible for where the investments will go. Look to keep hold of your units for about 3 years to recoup a reasonable return. A top fund manager is like a top football player: well paid and in demand, and yes, they both still get lots of money whoever wins - or looses! 

A 'tracker fund' differs from above by the automated process of investing only in companies that are in, say, the FTSE All-Share (all listed UK companies) or the FTSE100 (the top 100 companies in the UK) and therefore almost guarantees a reasonable return by default. As companies drop in and out of the, say, FTSE100, tracker funds buy the new entrants shares, and sell the exiting companies shares: so if you hear that a company is about to enter the, say, FTSE100 it's share price is 'probably' about to rise.

Information & Warning

For information on which investment to back it is advisable to look at the many on-line investment portals (a few links can be found above) and any quality Sunday newspaper.

Taking the advise of anyone in this area has a certain amount of risk and there is usually little recourse with the advisor company: as they say, again, 'the price can go up as well as down', and if it was that easy for everyone to make lots of money don't you think there would be a lack of advisors (being that they would all be somewhere hot, sandy and with more fun than they could shake a stick at).

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