Foreword:
For the reader / client this section in particular contains many interesting headings and sections, and to make this section as interesting as possible, we have chosen to cover the most important topics regarding the basic principals of the more commonly used investment terms.

Definition of the Term 'Investment'
An investment is generally a type of asset into which a person or an entity has placed cash or other funds, in return for which they hope to receive an increase in the value of their assets, a return to their assets or security. Some investors hope for all three but realistically, only one, or possibly two can be achieved for a particular investor.

Types of Investments
A number of common types of investments which the reader / client will encounter are covered below. The list is not exhaustive and from time to time the reader / client may encounter different types of investment vehicles which the reader / client may need to research or investigate further.

Liquid investments
These are investments which can be quickly sold or closed to receive the underlying funds on demand. They include bank deposits (such as fixed term accounts which could be closed on demand but with a loss interest)

Gilts / government bonds
These are investments which have been issued or guaranteed by a government. In the UK such investments are called gilts whereas in other countries, such as the USA and in most European countries, they are called bonds.

These gilts or bonds are sold to the public or institutions for a number of reasons but perhaps the most common is to raise the necessary funds required to meet the cost of a particular project or government scheme.

They will be secured (or guaranteed) by the government which has issued then and will usually be issued for a fixed term (such as 5 years) after which time the investment will be repaid and cash returned to the investors. The date on which the funds are repaid as referred to as the maturity date. The rate of interest which is paid is referred to as the coupon and payment will be guaranteed and made on fixed dates (often 6 months apart).

On maturity, the investor will receive the 'par value' which will be the face value of the gilt or bond and not the amount which was invested. For example, a UK gilt will have a par value of GBP 1.00 but it might be quoted at 0.95 pence. If 10.000 units (sometimes referred t as 'stock') where purchased and the holding matured in 5 years' time, the cash which will return to the investor on maturity will be GBP10,000.00 but it only cost him GBP 9,500.00. Similarly, if the cost of the stock on acquisition was 105pence, the investor would still only receive GBP10, 000.00 on maturity oven though the holding cost him GBP10, 500.00.

Gilts and bonds will pay a fixed rate of interest to the holders. In addition some of these types of investments are index-linked which means that the value will be adjusted in line with the prevailing rate of inflation in the country concerned.

UK gilts are presently exempt form UK capital gains tax and some are also exempt from UK income tax.

Although gilts and bonds can achieve capital appreciation, they are usually purchased because of their security and the fact that income is guaranteed.

Equities
These are basically investments in quoted companies and can either be ordinary shares or preference shares.

Ordinary shares enable the investor to share in the profits of the company and gives them right or receive a divided (income payment out of realised profits of the company) if one is declared. Preference shares give the holder the right to receive a fixed rate of dividend which may be payable to the ordinary shareholders. Although preference shares have certain advantages, the entitlement of their holder to participate in the profits of the company will generally be less than those of the ordinary shareholders.

As equities provide the opportunity to participate in the profits of a company, they are usually purchased for capital appreciation purposes, although they do also provide some income return by way of dividends.

Dividend income from equities usually has tax (withholding tax) deducted at source by the company and the tax position of the shareholder will decide whether this tax can be reclaimed. Usually, the withholding tax on dividend income paid to an offshore vehicle (such as a company or to the trustees of a trust) cannot be reclaimed, unless the offshore centre where the vehicle is based has a double taxation treaty in place with the remitting country.

Loan stocks
Companies often raise cash by way of loans and a loan stock is basically a loan which an investor has made to the company, in return for which they will receive interest and on maturity of the loan they will receive back the par value of the stock.

They are similar to gilts and bonds but there is a greater risk ad they are not backed by a government. There are different types of loan stock such ad debentures (which are usually secured against assets of the company), guaranteed stock (which are often secured by an outside guarantee) and unsecured stock (whish offer more risk and therefore sometimes potential for higher return).

Collective investment schemes
These schemes acquire a basket of underlying investments in different gilts, equities and loan stock. Investors can then buy a share in the basked of the underlying assets (which is usually referred to as a unit).

Such schemes provide investors with the opportunity to hold a wide variety of different investments whilst at the same time having no direct investment in any of those different types as all they own will be a share of the total basket. They are therefore a popular method to achieve diversification.

Other, More Speculative Types on Investment

Convertibles
These are usually loan stocks which can be converted by the investor to ordinary shares.

Warrants
If an investor purchases a warrant he is in effect buying the right to purchase shares in a company in the future at a fixed or agreed price.
Options (otherwise known as 'derivatives')
An option creates an opportunity to buy or sell shares (depending on the type of option acquired) at a fixed price in the future. The reader / client may remember these were at the centre of the Barings Bank collapse but although they are very risky forms of investment, they can also achieve excellent returns.

Commonly Used Investment Terms

Book value
This is the value of an investment based on its current marked price. If you were to sell it, the market value would be what you would receive for it.

Yield
The yield is the return which you can expect from a fixed interest security (such as gilt or a bond). It will be determined by the price of the stock and the coupon, and in some cases the period of time before the stock reaches maturity.

The basic yield is known as the flat yield which is calculated by dividing the coupon by the market price and multiplying the total by 100. The redemption yield takes onto account the time to maturity.