Investment risk: An introduction

Here we look at the different types of investment, and the risks they carry.

Updated

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Capital is at risk.
Risk is an inherent part of investing, but it’s also a part of life. You don’t get anything done if you only worry about avoiding risk.

Just thinking about money, risk is inescapable. Take out your wallet and pour a few coins into your hand – you probably have an idea of what you can buy with them. Maybe a bar of chocolate, maybe a pint. But even those small metal disks are risky things that change in value. The price of goods changes, inflation reduces what your money can buy from year to year, and so on. A pound will always be worth a pound, but its buying power could diminish.

When you invest, you’re hoping that the value of your investments will rise over time and both outpace inflation and cover the fees you’ve paid to whoever handles your assets. But the only reason investment works is because it is inherently risky. Share prices vary over time, dividends grow and are cut, bond yields rise and fall, companies soar in value and go bust.

Types of risk

An inescapable part of investing is that you cannot reap any reward without taking a proportionate amount of risk. There are myriad different types of risk:

  • Capital risk is the risk that the value of your assets will fall.
  • Inflation risk is the risk of cash losing buying power.
  • Counterparty risk is the risk of an organisation defaulting on its debts.
  • Specific risk is the risk of something unforeseen happening to a specific company.
  • Shortfall risk is the risk you won’t have enough money (which could be because you didn’t take enough, er, risk).

Types of asset

Different asset types are generally perceived to carry different levels of risk – and correspondingly, different levels of potential reward. Let’s take a closer look at the main asset types below.

Cash

Cash is seen as the least risky asset, because although its value does change through inflation, or relative to other currencies, its buying power within the UK will tend stay fairly static. But remember the risk/reward trade-off – if you earn any interest on your cash it will be quite low, and likely not enough to outpace the erosive power of inflation.

Government bonds

Government bonds, also called gilts in the UK, are typically seen as the next-least risky asset class. A bond is essentially a loan you make to a government or company, on which it pays a set amount of interest over a set amount of time. Governments only very rarely default on their bond payments so gilts are seen as safe, although they will fluctuate in value more than cash.

Corporate bonds

Next up the risk-o-metre are corporate bonds. These are more risky than government bonds because companies are more likely to go bust and default. Bonds from larger more established companies are known as investment-grade bonds, while those issued by smaller, less established companies are known as high-yield bonds because they have to pay a higher rate of interest to attract buyers. The higher the yield, the riskier the bond.

Property

With property, usually commercial property if it’s held in a fund, you have the opportunity for two types of gain: capital gains, when the value of the properties rises; and income payments from the rent you get from tenants. The property market rises and falls unpredictably, but property is a bit of a wild card in terms of where in the risk scale it fits.

Shares

Shares – also known as equity – are the riskiest and most volatile of the mainstream types of asset. There are of course other assets you could buy – art, wine, cars – that would be riskier, but those are generally not for beginners. Share prices vary a lot, and there is a real chance you’ll lose money. But equally, equities provide the best chance, of all the assets we’ve covered here, of maximising your capital growth. UK shares in particular are also good at paying dividends – a share of the company’s profits paid out to the shareholders. Using dividends to buy more shares, a process called reinvesting, is a powerful tool for growing your portfolio.

Which investment is best?

Whenever you invest, you are taking on risk. The more risk you take on, the more you stand to gain – but the more you could also lose. More risk also means the value of your portfolio could change more dramatically and less predictably.

If you think you will need your money in less than five years or so then investing might not be a good idea for you. However, if you plan on locking your money away for a long time, you will have more time to gain back any losses you might make, and more chance of accumulating a greater amount of wealth than you would have if you’d kept it in cash, where it would be subject to the erosive effects of inflation.

Compare trading options

Table: sorted by promoted deals first
Data indicated here is updated regularly
Name Product Price per trade Frequent trader rate Platform fees Brand description
Fineco
Fineco
£2.95
£2.95
Zero platform fee
Fineco Bank is good for share traders and investors looking for a complete platform and wide offer. Your first 50 trades are free with Fineco, until 30/09/2020. T&Cs apply. Capital at risk.
IG
0% commission on US shares, and £3 on UK shares
From £5
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IG is good for experienced traders, and offers learning resources for beginners, all with wide access to shares, ETFs and funds. Capital at risk.
Hargreaves Lansdown Fund & Share Account
£11.95
£5.95
Transfer out fee
Hargreaves Lansdown is the UK's biggest wealth manager, with the depth of features you'd expect from an established platform. Capital at risk.
eToro Free Stocks
0% commission, no markup, no ticket fee, no management fee
N/A
Withdrawal fee & GDP to USD deposit conversion
eToro is good for social trading - letting you mirror the portfolios of other traders. Capital at risk.
Interactive Investor
From £7.99 on the Investor Service Plan
From £7.99 on the Investor Service Plan
No transfer fees or exit fees. £9.99 a month on the Investor Service Plan
Capital at risk.
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Data indicated here is updated regularly
Name Product Minimum deposit Maximum annual fee Price per trade Brand description
Hargreaves Lansdown stocks and shares ISA
£100
0.45%
£11.95
Hargreaves Lansdown is the UK's biggest wealth manager. It's got everything you'll need, from beginners to experienced investors. Capital at risk.
Interactive Investor stocks and shares ISA
£100 or £25 a month
£119.88
£7.99
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. Capital at risk.
Legal & General stocks and shares ISA
Legal & General stocks and shares ISA
£100 or £20 a month
0.61%
N/A
Legal & General is a big financial services company which offers insurance, lifetime mortgage, pensions and stocks and shares ISAs. Capital at risk.
Saxo Markets stocks and shares ISA
No minimum deposit requirement
0.12%
£8.00
Saxo Markets offers a wide access to a range of stocks, ETFs and funds. Capital at risk.
AJ Bell stocks and shares ISA
£500
0.25%
£9.95
AJ Bell is a good all-rounder for people who to choose between shares, funds, ISAs and pensions. Capital at risk.
Fidelity stocks and shares ISA
£1000 or a regular savings plan from £50
0.35%
£10.00
Fidelity is another good all-rounder, offering a good package at a decent price. Not suited for trading shares. Capital at risk.
Moneybox stocks and shares ISA
Moneybox stocks and shares ISA
£1
0.45%
Fixed subscripction fee of £1 per month
Moneybox offers a general investment account, Lifetime ISA and Junior ISA and lets you manage your money with an easy-to-use app. Capital at risk.
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Data indicated here is updated regularly
Name Product Minimum investment Choose from Annual fee Brand description
PensionBee Pension
No minimum
7 funds
0.5% - 0.95%
Pension Bee is a newbie in the pension market. It helps consolidate your pension plans into one place. Capital at risk.
Hargreaves Lansdown Pension
£100
2,500 funds
0-0.45%
Hargreaves Lansdown is the UK's biggest wealth manager. It's got three different retirement options. Capital at risk.
Interactive Investor Pension
£25/month
Over 2,500 funds
£10/month
interactive investor is a flat-fee platform, which makes it cost effective for larger portfolios. Capital at risk.
Saxo Markets Pension
Saxo Markets Pension
£10
Over 11,000 funds
No annual fee
Saxo Markets gives flexibility and control over your investment strategy. Capital at risk.
AJ Bell Pension
£1,000
Over 2,000 funds
0.05-0.25%
AJ Bell has two different pension options, a self managed pension and one that is managed for you. Capital at risk.
Moneybox Pension
£1
3 funds
0.15% - 0.45% charged monthly
Manage your money with an easy-to-use Moneybox app. Capital at risk.
Moneyfarm Pension
Moneyfarm Pension
0.35%-0.75%
7 funds
£1,500 (initial investment)
Moneyfarm has pensions that are matched against your risk appetite, goals and planned retirement date. Capital at risk.
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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Capital is at risk.

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