Which is why many people prefer collective investments such as unit trusts and investment trusts. In both cases an individual is able to invest in a basket of shares of different companies, that way spreading his or her equity investment risk.
In the case of unit trusts the investor buys a unit, or a part of a large fund which is it itself invested in a variety of companies. An investment trust is a company listed on the stock exchange and whose business is investing in other companies. In both cases the investor is trusting his or her money to the judgement and skill of the fund manager.
These include UK government stock, also known as gilt edged stock or "gilts" for short. Corporate bonds are also fixed interest instruments and both represent direct borrowing on the part of the issuer of the bonds. They are referred to as "fixed interest" because their cost of borrowing is fixed while the price of the bonds themselves may float up or down depending on supply and demand.
Traditionally fixed interest investments have been regarded as a safe option. But it is important to remember that not only do they fluctuate in price but that the investor also risks that the issuer may not pay the interest or coupon on the bonds and that it may not repay the principal when the bonds mature.
Armed with these explanations of what types of financial instruments there are to choose from, investors can now seek the advice of a financial adviser as to which ones the IFA recommends as best suiting their risk and reward profile.
There are so many different types of savings and financial investments that it is wise to seek advice as to which ones to choose.
The least risky of investment options are those offered by National Savings, which raises money on behalf of the UK Government.
While investment returns are not spectacular and some involve tying your money up for long periods of time they are nevertheless stable and in some cases tax-free.
They include National Savings Bank accounts and Savings Certificates and various forms of savings and Income Bonds. We are based near Portsmouth.
ISAs represent a tax-free container into which to place cash savings and investments in equities, bonds, collectives (see below) and insurance policies.
The cash portion, currently up to £3000 per year is usually a deposit with a bank or building society and because it is an ISA, interest is not taxable.
Both cash ISAs and National Savings products are certainly much less risky than buying equities, that is to say investing in the shares of companies listed on a stock exchange. However equities do offer an upside possibility that National Savings products do not.
You have the possibility of gaining not only a dividend - a proportion of the company's after tax profits distributed to shareholders - but also a capital appreciation. If the price of the shares goes up after you buy them then you have made, on paper at least, a capital gain.
The bad news though is that the value of shares can go down as well as up, which means you risk losing your investment if the price of the shares falls.