What you can trade in

What are stocks and shares?

Stocks, shares and equities are all words used to describe the same thing. A share is a small part of a company and when you buy shares you're essentially buying a stake in that company - making you a shareholder. When the value of the company goes up or down, so does the value of your shares.

Shares are usually bought and sold on a stock exchange, the main one in the UK being the London Stock Exchange. But the general public can't do this directly - which is why you need to use a stockbroker or a Sharedealing service like ours.

How risky are stocks and shares?

Share prices change based on what investors 'feel' a company is worth - it's quite a subjective thing, but it's loosely based on supply and demand. The more people who want the stocks, the more they cost - and visa versa. This means that stocks and shares can be pretty volatile and the price can change at the drop of a hat, going down as well as up.

Investing in Gilts

Gilts are bonds issues by the UK government and they pay a fixed interest (known as a coupon) and will pay back the nominal amount (original amount paid for the gilts) on maturity. Gilts are often seen as low risk.

They get their name from the original British government certificates, which had gilt edges.

Gilts are issued when the government needs to raise money - so when you buy Gilts, you're essentially lending that government cash. Gilts are usually issued at £100 each and you get it all back when they mature, plus interest at a fixed rate. So you'll know exactly what you get back, and when.

Gilts can be traded on the open market - and you don't have to wait until they mature either. The price depends on supply and demand and interest rates. Interestingly, Gilt prices generally are influenced by the change in interest rates.

How risky are Gilts?

Gilts are backed by the treasury - so they're often seen as low risk - but there is a chance, however unlikely, that the government can't honour the bonds.

Track a whole index or market with just a single share

ETFs are an investment fund traded on stock exchanges, much like stocks. ETFs hold assets such as stocks, commodities, bonds, or a basket of assets. Most ETFs track an index, such as a stock index, or bond index.

When you buy these shares, you're diversifying your investment without all the trouble and expense of buying the individual shares across the whole market. See it as spreading your risk without the fuss.

• the convenience of an index fund and the flexibility of traditional share dealing
• generally lower fees than traditional mutual funds
• stocks and shares in the fund are fully visible
• access to international markets with a single transaction
• ETFs experience price changes throughout the day as they are bought and sold.

How risky are ETFs?

ETFs can be backed by either physical securities or in some cases synthetic securities. Physically-backed ETFs hold the actual assets in the index they are tracking. Synthetically-backed ETFs, on the other hand, use complex instruments such as derivatives issued by a counter party to generate their performance. Physically-backed ETFs is the default approach taken by most ETF providers. We don't offer synthetically backed ETFs on the sharedealing website. Please be aware of the risks associated and that the value of ETFs may rise or fall.

To find out more please log on to Online Banking, select 'Sharedealing' and then 'Exchange traded funds' in the left hand menu.

Some ETFs only buy a representative sample of the assets in the index they are tracking. This may mean that the performance of the ETF will not exactly match the index they are tracking.

Some issuers of ETFs may be domiciled outside of Britain or the US where they may be subject to less regulation.

What are the costs?

ETFs only charge an annual management charge (AMC), which includes expenses - but there is no commission/rebate included.

Plus transfers of shares in ETFs don't attract stamp duty reserve tax (if they're incorporated outside the UK). You only pay your online trading fee and quarterly account fee.

What are the main differences between index mutual funds and exchange traded funds?

ETFs

• listed on stock exchange as single listed stocks
• can be bought and sold any time the stock exchanges are open through a broker (like us)
• price for ETF given at time of trading
• no commission is paid to the broker
• a full portfolio of what is in the ETF is published daily
• low minimum investment of one single share.

Index mutual funds

• can be bought through a fund promoter
• valued once a day - you don't know the price at the time of trading
• commission is paid out of the Annual Management Charge (AMC)
• typically the top 10 holdings are published in a monthly fact sheet
• a minimum investment limit will apply.

Both ETFs and index mutual funds are made up from mostly UCITS (Undertakings for Collective investments in Transferable Securities). This is the European regulatory framework for an investment vehicle that can be marketed within all countries that are part of the European Union.

It's also worth pointing out that most UK listed ETFs are incorporated in Dublin, including HSBC's. Because of this, you should know that they may not benefit from some of the protection provided under the UK's Financial Services and Markets Act 2000, including the Financial Services Compensation Scheme. Investors in ETFs should be comfortable investing for themselves and willing to take on the associated risks of this.