Jasmine Birtles
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8 Different Types of Investments: Which One Matches Your Goals?
Ruby Layram
22nd Jan 2025
A key starting point in any investing journey is to understand the different types of investments that are available to put your money into and how they work.
Because investing isn’t all about stocks! In fact, there are numerous ways that you can make your money work for you and each different type of investment will be better suited to different investors.
Although there are hundreds of ways to invest, I have whittled it down to a list of the 8 most popular types of investments. In this guide, I will share what these investments are and how they work.
1. Stocks
Starting off strong with the most popular type of investment, we have stocks.
Stocks are an asset that represents ownership of a company. When you buy a stock, you get a part of the company, called a share. This ownership lets you benefit from the company’s growth and success in the form of capital gains and dividends.
Stocks are traded on stock exchanges, and their prices fluctuate based on the company’s performance, market conditions, and investor sentiment (how positive or negative investors are feeling towards a company).
Factors such as earnings reports, industry trends, and economic indicators can influence stock prices, making them a dynamic and sometimes risky investment option.
Although stocks are the most popular type of investment, they aren’t always the most beginner friendly! Picking out stocks to invest in requires an understanding of market trends and a keen eye for analyzing company fundamentals.
If you don’t feel like spending hours on research but still want to gain exposure to the stock market, a passive stocks and shares ISA could be a better (and less risky!) option to consider.
2. Bonds
If you have a lower risk tolerance and want to build an investment portfolio that offers stability, Bonds could be a good type of investment for you.
The easiest way to explain bonds is to think of them as a loan that you make to a company or government in return for interest payments.
When you buy a bond, you’re lending money for a fixed period in exchange for regular interest payments, known as coupon payments.
Bonds are issued with a maturity date, at which point the initial amount is repaid to the investor. The interest payments provide a steady income stream, making bonds a popular choice for income-focused investors.
Bonds are considered to be more stable than stocks because they offer steady interest payments and lower volatility. This makes them appealing to risk-averse investors.
However, they are not entirely risk-free. Interest rate changes, inflation, and credit risk can impact bond prices and yields.
There are two main types of bonds available in the UK:
- Corporate bonds (these are issued by companies looking to raise money)
- Government bonds (these are issued by governments who want to fund public projects).
Bonds can be a great addition to your portfolio because they tend to hedge against stock market volatility. Fun fact, Warren Buffet recommends allocating around 10% of your portfolio to stable assets, such as bonds, to protect your investments against volatility.
And, if Warren Buffet has given his stamp of approval I’m definitely sold!
3. Mutual Funds
A Mutual Fund is a pool of money, contributed by Investors, which is managed by a professional fund manager and invested into the stock market.
You can think of it as chipping into the office leaving present. Except, instead of buying a gift card or bottle of wine, your money is put towards stocks, bonds and other types of investments.
The returns from the fund are divided between investors based on how much you have contributed. Mutual Funds can accumulate returns from capital gains or dividends.
As I mentioned above, Mutual Funds are managed by professionals, which takes away the need for you to worry about rebalancing your portfolio when the market fluctuates. Mutual funds are available in various categories, including equity funds, bond funds, and balanced funds, catering to different investment preferences and risk appetites.
The main advantage of investing in a mutual fund is diversification. These investment products allow you to gain exposure to a wide range of assets without the need for extensive research or a huge initial deposit.
The main drawback (because there usually is one!), is that mutual funds can come with fairly hefty fees – used to pay for fund managers.
If you want to keep fees low, you might like the next type of investment!
4. Exchange Traded Funds (or ETFs!)
Exchange-traded funds (often referred to as ETFs) are a type of fund that is traded on a stock exchange. They track an index, sector (fancy word for area of the market), commodity, or asset, and make it easy for investors to diversify their portfolio without needing to invest in multiple assets.
You might hear exchange-traded funds and mutual funds being talked about in the same context. However, they are different.
ETFs differ from mutual funds because you can buy and sell them anytime during the trading day on an exchange – just like a stock. This means they offer more liquidity and live pricing. Because of this, ETFs are a good choice if you’re looking for something a bit more flexible.
Another key difference between ETFs and mutual funds is that ETFs are often passively managed. This makes them a much more cost-efficient option compared to mutual funds because you don’t need to pay for a fund manager.
If you’re still a bit unclear, I like to think of ETFs as a pick-n-mix bag of sweets. You know that you want to buy some sweets (who doesn’t?) but you can’t decide which ones to pick. So, you buy a bag that contains a variety of different types. You get to eat all your favourite sweets without needing to buy more than one bag!
5. Real Estate
Real estate investing (sometimes called property investing) is probably one of the most common types of investments that you will find in the UK. Around 53% of UK adults own their own home (as of July 2024) and there are around 2.28 million landlords in the UK who rent out their homes for a profit.
Although most people think of houses or flats, real estate investing refers to buying any type of land or property that can increase in value over time. This includes residential, commercial, or industrial properties.
Real estate is one of the age-old types of investments that has been popular for decades. This is because real estate tends to offer steady returns over time. According to a report published by Statista, the UK real estate market is expected to see an annualized total return of 7.5% between 2024 and 2028.
One of the biggest barriers to entry for traditional property investing is startup costs (the average deposit needed to buy your first home in the UK is £53,414!). However, there is a way to invest in real estate without forking out your life savings.
REITS: The low-cost way to buy property
If you want to invest in real estate but don’t have 50 grand to spend, you’re in luck! REITs (real estate investment trusts) are a type of business that you can invest in to gain exposure to the real estate market without needing to own any property yourself.
REITS represent a portfolio of real estate investments that are managed by a company. When you invest in REITs, you can exposure to each of the properties that make up the company’s portfolio.
6. Commodities
Commodities are raw materials that can be bought, sold and traded. Most of these materials can be used in one way or another, which gives them their value! Popular types of commodities include Gold, Oil, Wheat, and Copper.
Commodities are the basic materials used to make goods and services. These items are bought and sold on exchanges, and their prices are affected by supply and demand, political events, and larger economic trends.
Commodities are often used as a hedge against inflation as their prices often rise when inflation goes up. This makes them an attract option for long-term investors who are looking for stability.
However, commodities don’t come without risk. Their prices can fluctuate quickly due to weather conditions, geopolitical events and technological advancements.
7. Cryptocurrencies
Cryptocurrencies are one of the newest and most exciting (yet wildly volatile!) types of investments.
To keep things simple, a cryptocurrency is a type of digital money that is powered by blockchain technology – you can think of this as a gigantic Excel spreadsheet that keeps tabs on every single transaction that takes place in the crypto space!
Unlike traditional fiat money, you cannot hold crypto in your hands. It lives entirely on the internet and is decentralized which means that it isn’t controlled by a single entity or organization (unlike fiat currency which is controlled by banks and governments).
Cryptocurrency as an investment
Although cryptocurrency was created as a decentralized payment method, it has grown to become a popular investment.
People invest in cryptocurrency for several reasons. Firstly, many cryptocurrencies have a limited supply which means that the value of each coin rises alongside demand. For this reason, cryptos such as Bitcoin are sometimes referred to as ‘digital gold’.
Secondly, by investing in cryptocurrency, you are investing in the future of finance. Networks such as Ethereum and Ripple are transforming the way that money can be moved around the globe.
Another reason that some people choose to buy crypto is volatility. Cryptocurrencies are known for seeing huge spikes – and dips – that can provide lucky investors with significant returns. This type of trading is very risky and requires a lot of industry expertise!
For new investors, cryptocurrency might be a little out of reach. However, if you are curious about getting involved, I recommend looking into Bitcoin or Ethereum ETFs. These funds allow you to gain exposure to the crypto market without owning crypto directly.
8. Startups (EISs and and VCTs)
For our more advanced investors, startups provide an excellent opportunity to put your money behind a new company and profit from its future growth (just like Deborah Meaden on Dragon’s Den!).
Despite popular belief, you do not have to be a multi-millionaire to invest in startups. In fact, anyone can invest in UK startups through EIS and VCT investments.
Enterprise Investment Schemes (EIS)
An Enterprise Investment Scheme is a government-backed program that allows UK startups to raise capital from investors.
When you invest in an Enterprise Investment Scheme, you put your money behind new companies that have met the eligibility criteria to be included in the scheme.
For UK investors, investing in these schemes comes with some pretty appealing benefits. For starters, the government offers a 30% income tax relief on money that is invested into an Enterprise Investment Scheme. Furthermore, any returns that you make from these investments are free from capital gains tax (although, individual circumstances do apply!).
For this reason, Enterprise Investment Schemes are an appealing option for people who are looking for tax efficient investments.
Venture Capital Trusts (VCTs)
Venture Capital Trusts come under the same umbrella as Enterprise Investment Schemes – they are designed to help small companies raise money from investors.
The main difference between the two is that VCTs are a type of fund which means that money is put into a pool and then distributed between different companies. Similar to a mutual fund, VCTs allow you to diversify your portfolio without needing to buy multiple assets.
Another notable difference is that VCTs sometimes pay dividends – whereas EIS investments do not (because they a growth stocks).
Both EISs and VCTs come with tax benefits for UK investors, which makes them an appealing option to consider.
However, it is important to understand that investing in startups comes with significant risk. There is no guarantee that the companies you invest in will succeed!
Which Type of Investment is the Best For You?
There you have it! 8 different types of investments that are available to UK investors.
After reading this guide, I recommend taking some time to evaluate your long-term investing goals and risk tolerance. This will help you to decide which type of investment is best for you.
For example, if you’re looking to invest for the long haul and have a bit of wiggle room when it comes to risk, you could consider stocks, real estate or startups.
Whereas, if you’re a more risk-averse investor and don’t have time to hold your investments long enough to benefit from capital appreciation, Bonds, ETFs and commodities might be a better path to go down.
The best type of investment for you depends on your individual circumstances and it’s important not to rush yourself into making a decision!
Take time to conduct thorough research and maybe even consider speaking to a financial advisor who could point you in the right direction.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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