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Key Investment terms explained

New to investing? Explore the key terms to know

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What is investment risk?

Risk is the extent to which the value of your investments is likely to rise or fall.

All investments carry some degree of risk. A higher level of risk could bring the potential for greater return on your money, but there is also a greater chance the value of your investment could go down.

Before investing, you need to consider not only what you want to gain and how long you want to invest for, but also how much you can afford to lose if the markets were to drop significantly.

How do I decide on my appetite for risk?

A higher level of risk could bring the potential for greater growth, but there’s also more chance that your investment could go down in value.

When choosing an investment, you should consider the level of risk you’re willing to take and your capacity for loss. How comfortable would you feel if your investments fell in value? How would a loss impact your finances in the short term and in the long term?

Investments should be considered as a medium to long-term commitment, meaning you should be prepared to hold them for at least five years.

If you’re not sure about investing or how much risk is appropriate for you, please seek financial advice. To find out about getting investment advice from HSBC, read our advice options.

What is a fund?

A fund is a collective investment scheme which pools your money with that of other investors to give you a stake in a ready-made basket of investments.

With the money pooled together from many individuals, fund managers invest in a broad range of assets, such as bonds, shares and property. Their aim is to meet the objective of the fund while staying within its predetermined risk profile. 

An investment fund allows you to invest in lots of different assets without the need to invest in individual stocks and shares.

What is a fund platform?

A fund platform is a service that allows you to research, buy, hold, monitor, sell and repurchase funds. 

You could think of it like an investment supermarket. It allows you to shop around for funds that match your objectives and risk profile. 

Once you’ve bought your funds, the platform allows you to track their performance, sell and repurchase them if you need to.

What is an asset?

An asset, or asset class, is the term for a group of investments that have similar financial characteristics.

For example there are 4 broad types of asset class: cash, equities – which are shares or stakes in other companies, fixed income – which are government bonds, and alternatives – such as property.

Each asset class has a different level of risk and return.

Combining different asset classes in a fund is known as diversification. It helps you spread the amount of risk you take with your investment.

What are shares/equities?

Equities, stocks and shares are all words used to describe owning a stake in a company.

When you buy shares, you’re effectively taking ownership of a small part of a particular company.

Investors buy and sell equity in the form of 'shares'. If a company’s value increases, their value of the shares in that company also increase. And of course, if a company’s value decreases, the value of their shares decrease.

What is diversification?

Diversification is the practice of spreading your investments around so that you limit your exposure to any one type of asset class. It’s the opposite of putting all your eggs in one basket.

To manage your exposure to risk, fund managers hand-pick a range of assets to go into their funds, which can include a diverse range of geographies and currencies.

What is an index tracker?

An index tracker, also known as a tracker fund or index fund, is a fund that aims to closely track the performance of an index – such as a stock exchange – by investing in companies within that index. 

Trackers are known as passive investments because the fund manager isn’t actively managing the investment. Tracker funds are designed to offer investors exposure to an entire index at a relatively low cost. 

The drawback of investing in a tracker is the index could be dominated by a particular sector which would leave you vulnerable if that sector were to experience losses.

What are unit trusts and open-ended investment companies?

Unit trusts and open-ended investment companies (OEICs) are both types of professionally managed collective investment schemes, known as funds. 

When you invest in a unit trust, you buy units. When you invest in an OEIC, you buy shares. Either way, you’re effectively buying a share in the fund – which is why we refer to your individual investments as 'fund shares'.

If the value of your fund’s underlying assets rises, the value of your fund shares will rise. Likewise, if the value of the underlying assets falls, the value of your fund shares will fall.

Remember, the value of investments is not guaranteed - you may not get back the amount you invested, and any income received from them can fall as well as rise. This could also result from changes in currency exchange rates, particularly where overseas securities are held or where investments are converted from one currency to another. We always recommend that any investments should be considered as medium to long-term holdings of at least 5 years.

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