How to invest

Ways to invest

Investment companies are listed on the stock exchange. Therefore, the buying and selling (trading) of investment company shares is done via the stock exchange. There are various ways to go about investing in an investment company.

This section will tell you about

• Investing with or without advice
• Direct investment
• Investing via a wrapper product
• Regular savings

You can go to a professional financial adviser, who will give you advice on what to invest in. Together you can work through all the factors that affect your decision, including your needs and available funds, the performance figures for different companies, and the outlook for different sectors. Your adviser can then advise you on whether investment companies are a suitable investment for you and how to make your investment.

If you are prepared to select your own investment company you can choose whether to go direct to a stockbroker or an execution only dealing service to buy the shares for you (the direct holdings route). Or you can approach a fund management group to invest via a wrapper product.

You can buy shares in an investment company through a stockbroker or execution only dealing service. They will buy shares in your chosen company on your behalf. You can hold the shares in your own name, or they are held for you by the stockbroker/dealing service on a "nominee basis".

Wrapper products are not a type of investment company but a way of accessing shares in investment companies. Wrapper products were introduced as a method of buying shares without having to use a stockbroker. You can put your money into an ISA, an investment scheme, a children's investment scheme or a pension scheme and the company running the product invests your money into your chosen investment. You can invest monthly or make a lump sum investment or a combination of both - perhaps topping up your investment occasionally with a windfall or bonus.

Wrapper products make it easy to use investment companies for a variety of purposes - such as investing for children or investing through an ISA (a tax-efficient individual savings account).

Most investment company shares are available through these schemes which are usually run by the management companies of the relevant investment company. With minimum monthly payments starting from £30 in some schemes and lump sums or occasional top-ups from £250, you can start to build your investment up from a low initial base.

A wrapper product manager will commonly collate the buying orders from all the monthly investors within a scheme for a given date and place the total as one bulk deal with a stockbroker. By pooling all the investors' money the manager is usually able to negotiate a discount on the dealing costs. These cost savings are passed on to you, making wrapper schemes a cost effective way to invest regularly in the stock market.

Each wrapper scheme may offer several investment companies that can be held within it, normally those under the management of the scheme operator. Some schemes may offer a wider range of investment companies and investments. You can hold more than one company's shares within a scheme and hold as many schemes as you want to help with your financial planning. For instance, if you are investing for income, you could invest in several different investment companies each paying dividends in different months to give you a regular income.

Once you have decided which scheme you want to invest in, the scheme managers will send you all the paperwork you need. You just fill in the forms and enclose a cheque or direct debit details and leave it to the scheme manager to do the rest.

You can increase or decrease your regular payments (subject to the minimum for the particular scheme you are in) and even stop investing and start again at a later date if you want to. There will be no penalty for how you choose to run your investment and the shares remain yours to hold or sell in amounts as you wish. Scheme providers usually make an additional charge to cover the costs of administering the scheme. These costs will be detailed in the providers literature, and you should investigate the total costs involved before investing.

All schemes will send you a statement of your account on an agreed time basis detailing the number of shares you have bought and any charges levied. To monitor your investment, share prices can be found on our website, in the major newspapers, on some investment companies' or management group websites and other financial websites.

Most schemes allow you to use any dividends you receive to buy more shares in your investment company. If you are a regular saver, your dividend payment will normally be held and added to your next monthly contribution. If you are a lump sum investor or have ceased contributing, the dividend payments will be held until they reach a minimum sum suitable for investment. Scheme managers do not usually pay interest on any cash amounts waiting to be invested.

If you already own a variety of shares, perhaps inherited, bought through government privatisation offers or through building society windfalls you could convert these into a managed portfolio by swapping them for investment company shares. A number of savings and investment schemes offer a facility whereby they will sell these holdings for you and use the proceeds to buy shares in the investment companies in their scheme. This is a cost effective way to transfer your holdings and much of the administration is taken out of your hands.

You can buy shares as a gift for other people within a savings and investment scheme - either for an adult or a child. You do however need to consider the tax implications of doing this - for both yourself and the recipient. Children cannot hold shares in their own right but you can designate them as beneficiaries or set up a bare trust.

All schemes have a sale facility should you wish to dispose of some or all of your shares. Sale arrangements vary between schemes and some require written notice of any changes to your instructions. These will be made clear in the brochure and the terms and conditions.

One of the advantages of regular saving is known as "pound-cost averaging". Buying your shares on a regular monthly basis smoothes out the highs and lows of the share price over time. This is because you buy fewer shares when the price is high and more when the price is low, taking away some of the risk of market timing that can occur when buying shares with a lump sum. The result of this is that, in a falling or volatile market, the average price you pay for your shares over a given period is lower than the average market price.

Here is a theoretical example where £50 a month is used to buy shares in a particularly volatile company. Because the number of shares bought goes up as the price goes down, the average cost of the shares is lower than the average share price. For the purposes of this illustration, a wide range of share price movement has been telescoped into six months. The example below is for illustration purposes only.

Because of pound cost averaging & market timing advantages, regular savings and investment schemes are an excellent way of reducing some of the risk of stock market investment. They are useful for small investors who want to put away a little each month and can also be used to feed large sums gradually into the market which can be comforting in times of stock market volatility. Investors with an established portfolio might use them to build exposure a little at a time to more risky areas of the market.

Individual savings accounts (ISAs)