Despite going through periods of disfavour in adverse conditions, shares in UK companies have been a perennial investment destination for UK investors. The broad range of businesses on offer, and the familiarity of many of the companies that comprise it, makes the UK market an attractive option for novices and sophisticated investors alike.
Timing is a key consideration when investing in the short term, as markets can quickly go down as well as up; but seasoned investors would allow that getting it right is more a matter of luck than judgment. While short-term conditions all too often affect inexperienced investors’ appetite for equities, professional commentators agree that investing in the stockmarket with a long-term view is the way to secure superior returns.
Income is derived from the dividends that companies pay to their shareholders, and the UK market is an established home to enterprises that distribute a higher proportion of their profits than elsewhere.
The ability to deliver profits – and hence dividends – took a knock between 2007-2009 as key sectors such as banking got hit by the global credit crisis. And because of the historic commitment to paying dividends by the UK market this was acutely felt by investors. However, many of the bigger UK firms make considerable returns from overseas, where more rapid economic recovery has assisted their ability to return to paying increasing dividends.
Ways to invest in UK equities
Investors can choose to invest directly into shares themselves or to use collective investment vehicles - funds - such as unit trusts or OEICs (open-ended investment company).
There are thousands of funds available, spanning the full spectrum of markets and risk profiles. For example, within the UK equity market there are funds aiming to provide regular income, capital growth or a mixture of both. Equally, some funds are focused on blue-chip multinational companies while others target the opportunities among smaller companies.
Whatever your own circumstances, attitudes and objectives, there is likely to be a fund with similar aims.
Fixed income securities
Fixed income – or fixed interest – investments are suitable for investors who want a more secure and constant return on their money. They are particularly attractive to investors who want to generate additional income on investments, and supplement existing income.
Any investment which yields a regular payment – in interest, for example – is classed as fixed income. If you lend money to a borrower, and that borrower pays you monthly interest, this is a fixed income security.
With a fixed income security the coupon, or the amount of interest which the issuer has to pay, is known in advance, and is paid out at regular intervals. Government and company bonds - a form of debt which is funded by the investor - are classed as fixed income.
Fixed income is an alternative to stock investments, and other variable return securities. But the bond market can fluctuate too. When demand is high, the price of a bond goes up and interest rates fall, and vice versa.
The risks involved with fixed income are credit risk, where the issuer could default on the payments, and interest rates, which could hit the return on the investment. A change in interest rate will see the value of a fixed income security rise or fall, but will not change the income stream it pays.
The amount by which a fixed interest security will be affected by interest rates depends on its duration – or the amount of time it takes an investor to get a return on his investment.
Investors can alternatively choose inflation-indexed bonds, for example UK Index Linked Gilts. These are fixed-income securities linked to price indices. The UK Index Linked Gilt is adjusted to the Consumer Price Index, and then a real yield is applied to the re-based principal. This means that the bonds are guaranteed to outperform the inflation rate, and that investors will not lose the purchasing power of their money due to inflation.
Floating rate securities
Floating rate securities are not as liable to interest rate changes as fixed rate securities.
With a security that pays interest at a floating rate, the value of the coupon will not change as much as a fixed rate, should interest rates rise or fall. However, income stream on the investment will change. This is because coupon payments rise alongside discount rates.
Investors should note that there are different types of floating rate securities – including synthetic variations obtained by combining fixed rate bonds with interest rate swaps. And, while less sensitive to interest rate changes than fixed income securities, they are still sensitive to credit risk – in other words, the likelihood that the debtor will not be able to pay back the money owed.