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What are stocks and how do they work?

Stocks (not directly available with Chip) — often referred to as shares or equities – are a share of a particular company, issued by a company, on a stock market, in order to raise capital or a market valuation. 

If you purchase a company’s stock, this represents partial ownership in the business. The value of this stock, like any investment, can move up or down. 

If the value goes up, you can sell your shares for a profit, or the company can pay back the increased valuation as a ‘dividend’ — a cash payment to investors.

What are bonds and how do they work?

Corporate Bonds, Fixed Interest Securities and Gilts (not directly available with Chip) are loans that you pay to a company, or government, and they agree to pay you back, with interest, after a fixed time period. 

The returns you earn are fixed, and are usually made in regular interest payments, if you own the bond directly. They offer greater stability to a portfolio, as they are less volatile than owning stocks, where the value can dramatically go up or down. 

The downside risk to bonds is that if interest rates go up, the value of the bond will decrease, because newly issued bonds with better returns become more attractive to investors. 

If they run into financial difficulty, there is a small risk that a company or government is unable to pay you back, but this is more associated with lower quality, or ‘junk’ bonds. So do your research carefully. 

What are ETFs and how do they work?

Exchange-traded funds (ETFs) are collections of assets that can be bought and sold on a stock exchange. They can hold a variety of different asset classes, from company equities to commodities, bonds and currencies – under one variable market value. 

ETFs can track everything from a varied market index, to a specific commodity or thematic. Each fund comes with its own risk profile, and it's always important to consider the holdings when selecting your investments. Learn about ethical and thematic investing.

What’s the difference between stocks, bonds and ETFs?

Stocks give you ownership in a single company. They can deliver high returns, but they also carry more risk – if that company underperforms, your investment might lose value.

Bonds are loans to companies or governments. They usually offer lower, more stable returns and are less volatile, but they’re not immune to risk, especially if inflation or interest rates rise.

ETFs, on the other hand, are a way to invest in lots of stocks (or bonds) at once. Think of them as a shortcut to diversification – helping you reduce risk while still aiming for solid long-term returns. They combine the trading flexibility of stocks with the diversification benefits of a fund.

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What is an index fund and how does it work?

Index funds passively track the price of a specific market index, automatically investing in all the companies within it. This provides broad market exposure rather than focusing solely on top-performing stocks. 

A stock market index is simply a representation of the performance of a particular section of the market. Understand stock market basics here.

You may have heard of names like the FTSE 100 for the UK market, the S&P 500 in the US, and the Nikkei 225 in Japan. For example, the FTSE 100 index represents the performance of a grouping of the 100 largest companies in the UK by value. 

As the market prices of the indexed companies move, so does the overall price of the index. Investors tend to use these indices as a benchmark, for the overall performance of a particular market.

These indexes are then tracked by fund managers, in an index fund. This facilitates investment into these top performing companies. 

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What are commodities and how do they work?

Commodities (not directly available with Chip) are physical goods that can be bought or sold – typically raw materials or natural resources. Think gold, silver, oil, coffee, wheat… even livestock. 

These goods are traded on commodity markets – rather than a stock market – where their prices are driven by global supply and demand. For example, if there’s a drought affecting wheat crops, wheat prices might go up. If oil supply increases, prices might fall.

There are two main ways investors can access commodities:

• Directly – by buying the physical asset, like a gold bar (though – let’s face it – this can be impractical for most people).
  
  
• Indirectly – through ETFs, ETCs (Exchange Traded Commodities — structured as debt security), funds or shares in companies that produce the commodity (like oil companies or mining firms).

What are cryptocurrencies and how do they work?

Cryptocurrencies (not directly available with Chip) are digital currencies that operate independently of central banks or governments. The most well-known is Bitcoin, but there are thousands of others, like Ethereum and Solana.

They work using a technology called blockchain: a secure, decentralised digital ledger that records all transactions. This makes crypto hard to counterfeit and, in theory, more transparent.

You can invest in cryptocurrency by:

• Buying coins or tokens directly via crypto exchanges.
  
  
• Investing in crypto funds or companies involved in blockchain technology.
  
  

Crypto markets are known for being highly volatile – prices can rise or fall quickly, often influenced by news, regulation changes, or market sentiment. While some see crypto as a long-term investment or a future form of money, others view it as extremely speculative and high risk.

Because of this, it's important to approach cryptocurrency with caution and only invest what you're prepared to lose. Learn about investing risks.
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What is diversification & why does it matter?

Diversification is a fancy word for ‘not putting all your eggs in one basket’. It’s a way of managing risk by spreading your investments across different types of assets, sectors, or even countries.

Why is it important? Because not all investments move in the same direction at the same time. When one part of your portfolio dips, another might rise. Diversifying helps to smooth out your overall returns over time.

For example, if stocks are struggling but bonds are holding steady, a diversified portfolio will usually perform better than one with just stocks. It’s all about balance, and protecting yourself from the unexpected. Learn about managing your investment portfolio.

Understanding risks, returns and investment strategies

All investing involves some level of risk – that’s what sets it apart from saving. But understanding the relationship between risk and return helps you make better decisions for your goals and investing timeline.

The next guide in our series takes a look at understanding risk, calculating returns, and different investing strategies in more detail. 

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation. Diversifying means spreading your investments across different sectors, countries and asset classes.

Direct investment into individual stocks, bonds and cryptocurrencies are not available via the Chip platform. Chip offers investment funds that invest in different assets as a collective investment.