Property

In recent years, investment in property has hit the headlines. Two sites that I use to keep up to date with property investment are:-

1. http://www.housepricecrash.co.uk which focuses on the UK property market, ostensibly highlighting news that would be negative on the market but covers all angles. It comes complete with charts showing how the property market has worked over the last 25 years (includes 2 cycles) and there is a link to the Nationwide site where property prices are recorded going back to 1952.

2. http://www.globalpropertyguide.com/ covers how well most of the world's property markets have done in the last few years as well as potential rental yields, legal issues, strength of the market etc.

The good things about property investment, as opposed to stock trading, for example, is that the market moves in cycles so at least you know if the market's frothy or bearish (at the moment, it's average but likely to drop further based on historical evidence). The bad things include:-

1. It's generally a leveraged investment i.e. most property is bought with a mortgage.

2. There are relatively high initial costs e.g. solicitor, estate agent.

3. You are taxed on your gains

4. It's an illiquid asset i.e. it's hard to shift when the market turns.

5. When buying abroad, you'll have to deal with different legal systems and planning laws, potentially more illiquid markets than the UK with less information available, you may also be reliant on airlines to take you to your property.

Foreign Exchange/Forex/FX

Foreign exchange trading refers to converting money in to other currencies on the basis that you expect that currency to strengthen against your original currency.
You can actively trade currencies using various forex brokers e.g. http://www.xe.com
Most forex traders generally trade in the mainstream floating exchange rate currencies e.g. Yen/Euro, Euro/USD, USD/Sterling etc. As these currencies are relatively stable, a lot of FX transactions are heavily leveraged to amplify the small changes.

The FX market is highly liquid with trillions of dollars being moved around the world on a daily basis. Due to the liquidity, there is no requirement for central market makers in FX, so trades are directly between 2 parties. The biggest players in the market are the investment banks with intra-bank bid-ask spreads on currency exchange rates having a razor sharp margin. Unfortunately, these rates are not available to retail investors. Most retail investors will exchange real money at foreign currency exchanges such as travelex. The bid-ask spreads on these exchanges are often very high.

Venture Capital

Anybody whose watched dragon's den should be familiar with the concept of venture capitalism. It essentially means that rich people take a punt in your startup company by pumping in cash in return for equity. Since investing in startup companies is high risk and the government wants to encourage startups by providing them with a means of obtaining cash, the UK government encourages venture capitalists by offering tax reliefs on venture capital trusts. Currently, you don't have to pay income tax on the dividends from your investment or capital gains tax when you dispose of your investment.

With the tax relief, you'd imagine that venture capitalism is a great idea. However, you need to bear in mind the failure rate of startup companies and also the length of time that it typically takes for a startup company to turn a profit. Most startup companies attract venture capital in rounds, with milestones set to conclude a round and go on to the next round of attracting captial. Dragon's den is example of the seed round (1st round of financing). At this stage, it's usually the inventor/entrepreneur presenting a viable business case and attracting no more than £3m of capital in return for 30-40% of the company.

Derivatives

Once upon a time, people just used to buy houses or shares in companies i.e. they were dealing with the real world. However, to reduce risk financial services companies started to create more exotic types of transactions called derivatives which are derived from the base financial instruments.

An example of a derivative is a futures contract. This is an agreement whereby the purchaser agrees to buy stock (a share in a company) at a future date. This is often used to purchase bonds which pay an income during the holding period in the full knowledge that you have a guaranteed selling price and can therefore calculate it's yield.

Trading on margin via contracts for differences (CFDs) is another example of a derivative. Here you can go long (make money if price goes up) or short (make money if price goes down) on a stock. If the price moves in the opposite direction to that which you expected e.g. you bought stock long at £1 with a leverage of 10:1 i.e. you only put 10p down and the stock price went down to 90p, then you'd lose your entire stake. The leveraged aspect of contract for differences magnifies your gains and your losses. Traders often use CFDs for hedging e.g. they go long at 10:1 and short at 9:1 on the same or related stocks, thereby being able to play with more money than they've personally got but also reducing their exposure.

Fixed Rate Bonds

Fixed Rate or Fixed Term bonds are debt lent to banks by investors. A bank (or building society) makes it's money from the difference in the interest rate offered to savers and the rate charged to borrowers. In order to have a guaranteed amount of capital over a particular period of time, the bank offers bonds, to de-risk a run on the bank and to improve the amount of capital that they can offer to investors.

A fixed rate bond offers an interest rate which the financial institution believes will be the mid-rate over the period of the bond. The bank takes the risk, therefore, that a lower rate will prevail and the investor takes the risk that a higher rate will prevail and they would have been better off putting their cash in to instant access or notice savings accounts. Normally, the longer the term of the bond, the lower the interest rate that will be offered. Bonds form an attractive investment for those who want a guaranteed income.

Fixed rate bonds are offered by all banks and building societies with varying lengths of terms, interest rates and terms and conditions attached.

Gilts - Treasury bonds

Gilts is the name given to Treasury bonds. The name alludes to a gold-edged investment on account of it's relatively low risk. Most annuities are compelled to invest in gilts, as they provide such a reliable return.

A gilt is effectively a loan to a government. As the UK hasn't defaulted on it's debts (all be it, they had to get a loan from the International Monetary Fund in the 70s), so it is a good investment. The price of a gilt generally goes up if interest rates are low and goes down if they're high.

A gilt is usually advertised as '£value nominal of interest Treasury Stock maturity date',

where value is the nominal value of sold debt, interest is the percentage interest you could expect per year if you paid the nominal value and maturity date is the date on which the government will pay back the nominal value. For example '£1000 nominal of 3pc Treasury Stock 2012' would pay back £1000 on 1 January 2012 and will pay £30 per year from when you buy that debt until the maturity date. The nominal value isn't necessarily the amount you pay. You may pay more or less. The yield is the interest returned per year divided by the amount you paid (rather than the nominal value). For example, if you paid £900 for £1000 nominal of 3pc Treasury Stock 2012, the interest rate would be 3% but the yield would be 30/900=3.3%.

You can buy gilts from the government's debt management office.

Alternatively, you can buy gilts via a stockbroker or at the post office.

Corporate bonds

Whilst shares, unit trusts & investment trusts are a share of the ownership of 1 or more companies, a corporate bond involves the lending of your money to a company for a fixed time length and for a fixed interest rate. At the end of the period covered by the bond, your capital will be returned. The amount of capital returned can vary, however, as the price of a corporate bond does change dependent on market demand.

An advantage of buying a corporate bond over buying equity in a company, is that you will be 1st in the line of creditors to be paid if a company fails. However, you still should anticipate the risk of default by the company, and higher interest rates generally indicate a higher risk of default. In general FTSE 100 companies will be at less risk and therefore pay less interest.

Buying individual corporate bonds is possible via most stockbrokers. However, it's easier to buy a fund rather than an individual bond. For example, the Jupiter corporate bond fund is investing ~90% in corporate bonds, 6% in gilts (treasury bonds) and the rest in cash. Hargreaves Lansdowne (http://www.h-l.co.uk) is one stockbroker currently allowing you to buy this fund. In terms of risk, corporate bonds are generally less risky than equities and more risky than cash & gilts. Typically, people who are approaching retirement and seek a steady income will sell some of their equity funds and buy corporate bond funds to reduce their risk.