Investments
Investing for the future
Click on the area you are interested in for a brief description.
For further details of all schemes please contact KLSA .
Available from most high street Banks and Building Societies, these types of
account offer a high level of security. Normally used for short term saving and
to provide a ready supply of liquid assets, these accounts offer very low risk
to the capital value of the money invested but, the returns may not always keep
pace with inflation.
To many people this is the main type of investment that they will make and
although one account may look much like another the variation in return can be
dramatic and costly if the wrong decision is made.
Deposit account investment has historically been made very much on the basis
of locality with people opting to invest at their local Bank of Building
Society. Today however, investors have a very wide range of options that are
just as easily accessible with many of the best accounts being available via the
Internet or by telephone only.
KLSA Financial Services Ltd can easily carry out a health check on the
savings rates you are receiving and point out where a better return may be made.
To those of you who think that the benefit will be marginal, consider this ; For
an investment of £5000 the interest received from some deposit account may be
as low as £37.50 per annum. Some of the best deposit accounts pay as much as
£250.00 per annum for the same amount of money. The difference is £212.50 per
year. Maybe it's time to check the rate you are receiving on your own
savings account.
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Guilt-edged securities, more commonly known as "Guilts" represent
borrowing by the British government and as such carry an excellent security
(hence the term guilt-edged).
Guilts are categorised normally by the length of time until maturity.
The categories are as follows :
- Short dated guilts
Issues with five years or less to run until maturity.
- Medium-dated guilts
Issues with between five and fifteen years until maturity.
- Long-dated guilts
Issues with more than fifteen years until maturity.
- Undated guilts
Issues with no set redemption date. The government may repay these at any time
at their discretion.
- Index-linked Guilts
Interest payments and capital values of these issues move in line with the RPI.
These guilts will carry an interest rate (coupon) on 2% or 2.5% above the RPI.
Clearly because interest rates of guilts are fixed and general interest rates
vary over time, the price at which the guilt is traded will change depending on
the rate of interest that the issue attracts, the term remaining until
redemption and prevailing interest rates at the time in the market.
Guilt-edged securities offer a high degree of security for the investor and
KLSA Financial Services Ltd are able to advise on every aspect of this type of
investment.
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An investment trust is a public company which invests in stocks and
shares of other companies.
In many ways investment trusts are similar to unit trusts but there is clear
difference between the two. Investment trusts invest their own share capital
which consists of a fixed number of shares. A unit trust is open-ended in that
the manager can issue or repurchase units depending on demand.
In the same way as unit trusts, investment trusts offer more security than
the direct purchase of individual shares because the investor will benefit from
a wide spread of shares and expect management, however in a general market
downturn, because these funds are based on the value of shares, the values will
suffer accordingly.
In the same way as unit trusts, investment trusts can specialise in different
specific areas which obviously increases or decreases the relative risk or
possible return accordingly.
There are many investment trusts available today and Template Financial
Service can guide you to the best investment trust to suit your requirements.
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Individual Savings Accounts (ISA's)
Introduced in April 1999 ISA's were designed to bring a range of tax free
savings vehicles to the public and replaced the two previous schemes known as
TESSA's and PEP's.
The main eligibility criteria of ISA's are as follows :
- Applicants must be aged 18 or over and be resident or
ordinarily resident in the UK for tax purposes.
- There are contribution limits each year that must not be
exceeded.
- It is not possible to open an ISA on behalf of another
person.
The government has decided that ISA's will be available until at least 2009
but the maximum contribution to an ISA account can be varied each year (normally
at budget time).
ISA's can be based on Cash deposits, shares and life assurance so offering a
wider range of investments for the public to choose from.
ISA's can be taken in two forms, the Maxi ISA or the Mini ISA.
The Maxi ISA allows for the maximum contribution in all the three possible
areas (cash, shares & life assurance) to be made and this is administered by
one manager. The limits set for a Maxi ISA are higher than for a Mini ISA and as
such the main advantage of the "Maxi" scheme is that a greater amount
can be invested.
A Mini ISA allows a person it again invest in each of the three available
areas but in this case they can select a different manager for each area. The
limits set for a Mini ISA are lower than those for a Maxi ISA's.
Taxation
As far as personal taxation is concerned the income produced by an ISA an any
capital gains made on the encashment are completely free of personal income tax
or capital gains tax. This is the single biggest advantage of ISA investment
since the returns in the form of income or capital gain made on all shares, unit
trusts or investment trusts outside of an ISA are liable to tax.
An ISA is seen as an excellent way to increase the return made on savings and
medium term investment but the choice available is very wide with different
companies offering a wide variety of schemes and areas to invest. Picking the
right ISA to suit your needs is vital in any investment planning exercise and
KLSA Financial Services Ltd are able to advise you on all the options available
to you, making sure that you are aware of all the options available in this new
and exciting area.
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Loan Capital & Debentures
The most common way for a company to raise funds is by the issue of shares to
the general public. As well as this method of raising funds companies can issue
what are known as "Loan Stock" or "Debentures".
These issues are essentially loans to the company and differ from normal
share issues in that the rate of return interest paid and the time at which the
interest will be paid is determined at the issue (with normal shares the holder
is reliant on a profit being achieved in order to receive a dividend).
Holders of these types of issue could expect to receive a return on their
investment by way of interest even if the company does not make a profit in the
period.
The difference between Loan stock and Debentures is that Debentures are
normally issued with the benefit of some sort of security whereas Loan Capital
is not secured. Although there is normally security with Debentures and a stated
rate of interest with Loan Capital, the security of both is dependant on the existence
of the company and as such there is still a degree of risk associated with this
form of investment.
The interest on loan stock is paid net of lower rate tax. Higher rate
taxpayers have a further liability and non-taxpayers can reclaim tax deducted.
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Local Authority Bonds
These are similar to Government stock (guilt-edged
securities) in that the Local Authority issues bonds to raise money.
These sorts of investments are considered to be less secure than government
stock but still carry the backing of a large body (in this case the local
authority) and are issued with fixed terms and interest rates.
Minimum investments for these bonds are usually £500 or £1000.
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Set up in 1969 the National Savings Office offers a range of savings plans on
behalf of the government. The risk offered by these investments is very low
because the government guarantee the return of any capital invested in any of
the savings plans offered.
The plans offered are varied and your adviser at KLSA Financial Services Ltd
can talk you through the benefits that any of these schemes offer you. In brief,
the investment products available are as follows :
- National Savings Ordinary Accounts
- National Savings Investment Account
- National Savings Pensioners' Guaranteed Income Bonds
- National Savings Income Bonds
- National Savings Capital Bonds
- First Option Bonds
- National Savings Certificates
- National Savings Childrens Bonus Bond
- National Savings Premium Bonds
- Individual Savings Accounts
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Open-ended Investment Companies (OEICs)
Having been popular in Europe for a number of years, this form of investment
is now becoming more popular in the UK.
An OEIC is a company which invests it's capital and shares in other
investments. Features of OEICs are as follows :
- In a similar way to which a unit trust is run by a fund
manager an OEIC is looked after by a "Corporate Director".
- OEIC's are set up under company law, and not trust. A
"Depositary" oversees the operation to ensure investor protection in
much the same way as a unit trust trustee would act for a unit trust.
- OEIC's are unable to borrow money to make investments.
- OEIC's are priced in line with the value of the assets held
so, unlike investment trusts the shares will not trade at a premium or a
discount.
- An Annual General Meeting of shareholders must be arranged as
is required of normal companies.
- Investors may purchase redeemable participating preference
shares in the OEIC. The number of shares that are issued is variable in that
the Corporate Director may issue more shares on demand. Because the number of
shares in the OEIC may change the fund is "open-ended" in the same
way as a unit trust.
- Shares are traded at a single price with no bid / offer
spread. However initial charges are still made for purchases.
- Taxation on dividends from an OEIC is the same as that for
unit trusts and investment trusts.
- An "umbrella fund" may be used. This means that
separate companies may be used to specialise in different types of share. This
offers the investor greater flexibility for their investment. By using a share
exchange facility the investors are able to switch funds if required.
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Many of us are familiar with the purchase of shares in quoted companies. It
is important to remember that these shares essentially represent loans made to
the companies involved to fund their activities or expansion.
Very careful consideration must be given before any investment in shares is
made since the risks involved can be substantial. The return on this form of
investment can be either from any dividends received from the profits of the
company or from the increase in the capital value of the share in the market. It
is important to note that the value of these sorts of investment can fall as
well as rise and as such a capital loss can be made.
There are three main types of shares issued :
- Ordinary Shares
The most common form of share and the best known to the general public. Return
is derived from dividends and any increase in the capital value of the share
upon sale.
- Preference Shares
Representing part of the share capital of a company, this type of share ranks
ahead of an ordinary share in respect of dividend payment and on the
winding-up of the company. There are various types of preference share, the
most common being being cumulative, redeemable and convertible.
- Warrants
Warrants give the holder the right to subscribe for a given number of shares
in the issuing company at some stage in the future. There is not normally the
right to receive any dividends and the only right is to subscribe for shares
at some stage in the future.
The hope is clearly that the share price will rise so making the price at
which the warrant is issued attractive enough to justify the purchase. If the
share price falls and the shares are not worth buying at the price determined
by the warrant then the warrant itself is worthless.
Share ownership is becoming more and more common these days but it is
important to have a clear understanding of the risks involved before making any
investment decision. Shares can certainly be classed as a high-risk investment
since the potential return can be substantial but the potential for significant
(or even total) loss is also very possible.
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Unit Trusts
A unit trust can be termed as a collective investment company.
Money invested into the trust is used to buy shares and other investments.
Investments in the fund go towards buying units which represent a fraction of
the total value of the fund.
Because of the trust nature of the investments the unit manager is obliged to
buy back the units from investors at any time although the value of these units
will depend on the value of the trust as a whole and therefore the individual
units at that time.
In the same way as investment trusts, unit trusts can be chosen that invest
in specific areas that may aim to produce, for instance, capital growth, income
or both. Some funds specialise in investing in overseas areas where the
perceived risk is greater (in some areas of the world) while others specialise
in the purchase of only "blue chip" stocks.
It is important to note that, in the same way as shares, unit trusts operate
a bid and offer price system. In simple terms this means that at any given
price, you will pay slightly more to purchase (offer price) and you will receive
slightly less (bid price) if you wish to sell.
The unit trust manager who is responsible for managing the fund and valuing
the assets held will derive his / her profit from the fees charged and profit
made from dealing in the units in issue. Control of the trust assets and
approval of advertising for the fund is controlled by the trustees who also
ensure that the Manager complies with the terms of the trust deed.
Investment into a unit trust can be made either by a lump sum investment or
by monthly investment, usually by a standing order or direct debit. Many people
select to invest on a regular basis rather than with a lump sum in order to
smooth out and sudden movements in the price of the units, which is often
reflected by sudden changes in the value of equities. This type of benefit is
called "pound cost averaging".
Taxation
The important points for potential investors to be aware of are that income
from dividends or capital gains in the fund are treated in the same way as the
same type of income from shares. (See current taxation levels for more details
of current thresholds).
Unit trusts have become very popular over the years and offer a wide variety
of sectors to invest in. With the option of either lump sum investments or
monthly contributions this type of investment has come within the reach of even
the most modest sums of investment capital.
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