Investments and your Household Budget

Investments refer to money you may invest either directly or indirectly in stocks, bonds or property.

Investments in detail

Depending on your financial knowledge, your liquidity situation, your appetite for risk, and your long-term financial objectives, you can choose one or more of the several investment options such as stocks, unit trusts and OEICs, bonds, insurance company funds, REITS, art and collectibles, etc.

Let's look at two popular investment options in detail.

Stocks: By investing in stocks, or shares or equity, you purchase a portion of the company. As such your returns are linked to the company's growth, the performance of its industry, and general economic conditions.

Example 1:

Suppose you buy shares of Vodafone group at a price per share of £207. Depending on Vodafone's business performance and other economic factors, the share price may increase or decrease over a period. If the share price goes up you will make a profit, and if it goes down, you will make a loss. You can sell off stocks at any time. Stocks are a risky investment option with no fixed returns. Before investing in stocks, you should perform detailed research on the stock's performance, its company, its industry, among other factors.

Unit Trusts and OEICs: Under these investments you are investing money, along with several other people, in a common pool of funds. A unit trust or OEIC will then invest this collected pool of money in shares or other assets. Your investment will increase if the performance of this pool is good. These investment decisions are made by professional fund managers, who have more knowledge and access to more investment options than the average investor. A large pool of money gives the fund managers more flexibility in choosing investments. You can make investments in unit trusts and OEICs even with very low amounts.

Example 2:

Take the example of a fund named IMA North American smaller companies. As the name suggests, the entire pool of money in this trust will be invested in small companies based in North America. Each unit of this fund will cost, say, £203. The fund managers will regularly reorganize the portfolio of this fund to maximize returns. If a particular small North American company is not performing well, the fund managers will sell the stocks of that company. Similarly, if they feel a particular company's prospects are looking good, they will add the company to the fund.

For more investment options, you can check Money Advice Service, an independent service formed by the UK Government to advise people on money management.

Investments as part of your household budget

While investments may reduce the money available for household expenses, they are an excellent habit in the long term. You will be surprised to see how small investments, made on a regular basis, can turn out to be a sizeable amount over time.

Use our household budget calculator to see how investments affect your household budget.