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Collectives

Which is why many people prefer collective investments such as unit trusts and investment trusts. In both cases an individual is able to invest in a basket of shares of different companies, that way spreading his or her equity investment risk.

In the case of unit trusts the investor buys a unit, or a part of a large fund which is it itself invested in a variety of companies. An investment trust is a company listed on the stock exchange and whose business is investing in other companies. In both cases the investor is trusting his or her money to the judgement and skill of the fund manager.

Collectives can also invest in fixed interest instruments

These include UK government stock, also known as gilt edged stock or "gilts" for short. Corporate bonds are also fixed interest instruments and both represent direct borrowing on the part of the issuer of the bonds. They are referred to as "fixed interest" because their cost of borrowing is fixed while the price of the bonds themselves may float up or down depending on supply and demand.

Traditionally fixed interest investments have been regarded as a safe option. But it is important to remember that not only do they fluctuate in price but that the investor also risks that the issuer may not pay the interest or coupon on the bonds and that it may not repay the principal when the bonds mature.

Armed with these explanations of what types of financial instruments there are to choose from, investors can now seek the advice of a financial adviser as to which ones the IFA recommends as best suiting their risk and reward profile.

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