It’s a bit of a minefield out there when it comes to investing and protecting your money. So what are the options for investing and what are the are the pros and cons of each.
1. Stocks and Shares ISA
No diverse investor should be without a stocks and shares ISA Account.
Advantages of stocks and shares ISA accounts:
- No tax on profits. You don’t have to pay any capital gains tax on profits made from share price increases. …
- No tax on interest earned on bonds. So you get to keep it all.
- No tax on dividend income. Inside an ISA, you don’t pay tax on dividends
Disadvantages of stocks and shares ISA accounts:
- Your investment can fall in value and are subject to stock market volatility
- Charges can be high. Make sure you compare stock brokers to keep fees low.
- Some ISA accounts have limits on what you can put in them
- There is max you can invest in a stocks and shares ISA
2. Equity Crowdfunding
Equity crowdfunding platforms enable private investors to invest in unlisted growth and start-up companies.
Advantages of equity crowdfunding:
- Invest from as little as £10 through an equity crowdfunding platform
- Potentially invest in the next faFacebookGoogle or Apple
- Substantial returns possible if a company successfully exits
Disadvantages of equity crowdfunding:
- Very high high-risk of investing as many companies are not profitable
- Difficult to sell shares as they are not listed on any public exchange
- Crowdfunding industry whilst regulated by the FCA is still in it’s infancy
3. Debt P2P Crowdfunding
Debt crowdfunding offer a type of exchange to pool funds and lend to a broad range of individuals and businesses.
Advantages of debt crowdfunding:
- Higher interest rate than bank savings accounts
- Some debt crowdfunding platforms offer a secondary market to exit loans early
- Lend money to a diverse range of borrowers
Disadvantages of debt crowdfunding:
- No equity offered in exchange for capital so returns are limited to interest payments
- Many loans are to start-up or growth companies who have a higher risk of default
- Funds are not protected by the FSCS
4. Social Trading
Social trading brokers allow investors to make money by automatically copying the trades made profitable traders.
Advantages of social trading:
- Earn money as either a trader or a follower
- Social trading platforms display performance tables of profitable traders to follow
- Trade on margin to increase the reach of your capital
Disadvantages of social trading
- If you follow an unprofitable trader you will lose money
- Trading on margin means you can lose all or more than your account balance
- Performance tables show past performance which is not a guarantee of future profits
5. Spread Betting/CFD/Forex Trading
Spread betting brokers allow customers to bet on the performance of stocks, indices, currencies, commodities and fixed income products.
Advantages of spread betting/CFD/Forex trading:
- Profits are free of capital gains tax through a spread betting broker
- The ability to go short can be used to hedge exposure of an existing portfolio
- Leverage trading means you can free up risk capital and trade on margin
Disadvantages of spread betting/CFD/Forex trading:
- You cannot offset losses against other capital gains
- It is possible to lose more than your account balance
- Trading on margin is a very high risk of investing
6. Currency Broker
At some point, all investors will have exposure to foreign exchange. Currency accounts allow customers to convert money and send it abroad at a fraction of the cost of using a bank account.
Advantages of a currency broker
- Save up to 4% on foreign exchange compare to your bank with better exchange rates
- Lock in an exchange rate for up to a year in advance
- Personal service and expert advice from experienced dealers
Disadvantages of a currency broker
- Funds not protected by the FSCS
- Currency brokers are registered with the FCA rather than authorised and regulated
7. SIPP Accounts
If you want to manage part of your pension yourself you can open a SIPP (Self Invested Personal Pension)
Advantages of SIPP accounts:
- Enables you to take control of part of your retirement pension
- Provide significant tax relief over standard investment accounts
- You can include an investment portfolio such as shares, trusts and property (excluding residential)
Disadvantages of SIPP accounts
- Standard pension early withdrawal limits
- You can potentially overtrade and take with products like CFDs
- If you trade a lot your costs could be potentially higher than a low turnover pension
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.