Who Needs Financial Investment Advice? By Sean Horton At Isnare.com Ezine Articles

One of the undisputed qualities of this country is the strength, vitality and diversity of its financial services sector. This is all very good for the economy at large, but for the individual investor the sheer diversity of the available avenues for investment can be a problem in itself. The market has grown so sophisticated and diverse that financial investment advice is practically indispensable, not only to manage the quite high costs of assembling your own portfolio of investments, but also to reduce the risk of making potentially very costly investment errors.

The basics

In order to make sense of the plethora of investment vehicles available it is perhaps useful to divide them into two basic categories: direct and indirect or collective forms of investment.

Individual securities

In the former category of direct investment there are the many hundreds of publicly quoted company shares or bonds, together with government-issued bonds or “gilt-edged” stock. These are traded on the stock market, where their price fluctuates according to the laws of supply and demand. Favoured securities will be for those companies that are performing successfully, in which case demand will be high, supply short and the price correspondingly high. Furthermore, the dividends to which owners of the relevant securities are entitled will also reflect the financial performance of the companies concerned.

Bonds are effectively corporate or government loans, with a predetermined rate of interest paid on the loan and a guaranteed return of the amount loaned once it reaches its maturity date. Generally speaking, therefore, bonds represent less of a risk for investors and the rate of return is correspondingly lower than investment in company shares.

Indirect investment

The financial investment advice to those investors who want to avoid exposure to the fortunes of particular, individual companies is to spread the risk by sharing it, together with other similarly-minded investors, in a whole basket of varied investments. In this form of collective investment, a portfolio of different investments is maintained and managed by a professional fund manager who chooses the range, mix and spread of the funds various investments. Individual investors in the fund then share in the spoils – or otherwise – of the fund’s overall performance.

Collective, indirect investments such as this might be organised as unit trusts, investment trusts or as so-called Open-Ended Investment Companies (OEIC).

Unit trusts and OEICs are, in fact, both open-ended investments in that investors can freely trade in the units or shares of the funds. The OEIC is frequently described as the modern day equivalent of the older unit trust; the unit trust trades on both an offer and a bid price, while the OEIC trades at a single price. A useful question to test the mettle of your chosen independent financial adviser is to ask about the relevance of this price distinction!

Financial investment advice

Although the individual investor might have his or her own preferences regarding the spread and risk of the investments he or she wants to make, few are knowledgeable (or rash) enough to take specific decisions without the support and guidance of professional financial investment advice.

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