This is where collective investments such as unit trusts, investment trusts and open-ended investment companies (OEICs) come in. Buying part of a collective fund means you can spread your risk even with a small investment. Another advantage of collective investments is that because the fund manager buys in bulk, share dealing costs are lower.
Investment trusts were first on the scene. The Foreign & Colonial Investment Trust was launched in 1868 as the world's first collective investment vehicle, raising pounds 1m to invest in government stocks of foreign countries and colonial territories.
Unit trusts came later, with the first one launched in 1932. Both types of trust are based on a pool of shares or other investment instruments, such as bonds, cash deposits or property.
The main difference between the two is that investment trusts are incorporated as public companies, while unit trusts are simply funds. You invest in an investment trust by buying its shares. With a unit trust you buy units representing the value of the underlying investments.
Investment trusts have a fixed number of shares in issue, so the price of these shares rises if there is increased demand for them. Unit trusts, on the other hand, are open-ended funds and the fund grows according to the amount of units sold.
The fact that the price of its shares can fluctuate irrespective of the value of the underlying investments adds an extra layer of complexity to an investment trust.
And, in general, unit trusts are the easier type of collective investment to understand and have fewest variables. This is one reason why they tend to be more popular with smaller investors.
"[Investment trusts] are quite complicated for supposed experts, let alone a layman," says Philip Pennant-Jones of Pennant Independent Financial Services.
"Unit trusts tend to have been more widely sold to the retail market, while investment trusts sales have been more focused on institutional investors," says Anne McMeehan of Autif, the Association of Unit Trusts and Investment Funds.
Because investment trust shares can fluctuate in price in this way, the trusts may at any one time be trading at a discount to the net asset value (NAV) of the underlying investments, or at a premium. It all depends how the market views that investment trust's future performance, the quality of its management and other factors.
This may obscure the big picture for novices, but it can also present some great opportunities. If you buy shares in an investment trust which is at a discount to NAV, you could benefit from that discount narrowing, as well as gaining from any increase in the value of the underlying shares.
At the moment, investment trusts are trading at an average discount of 14 per cent to NAV. This varies enormously from sector to sector - emerging markets trusts are at a 21 per cent discount, while high income trusts trade at an average premium of 3 per cent, says Annabel Brodie-Smith of the Association of Investment Trust Companies (AITC).
Investment trusts are allowed to borrow money, but unit trusts only have a very limited right to do this. This means a good investment trust fund manager could borrow to buy more shares than they otherwise could. This is called gearing. "If they get it right it can give enhanced performance, but if it goes wrong they can lose money," says Kevin Minter of independent financial advisers the David Aaron Partnership.
But although there is slightly more risk involved in investing in an investment trust, the top investment trusts tend to perform better than unit trusts, he says. Because if the management gets the gearing right, results can be sparkling.
Investment trusts as a whole tend to be more focused on specialist investment areas than do unit trusts. And split-capital investment trusts add yet another dimension to this particular breed of collective investment vehicle. These trusts have a fixed life and issue different types of share.
Capital shares are more risky than zero-dividend preference shares, for example. The latter pays no dividend but holders are instead entitled to a fixed, but relatively cautious, return when the trust is wound up. This can help investors make the most of their capital gains tax allowance.
Unit trusts often appear to have higher fees and charges than investment trusts, but this can be an illusion. Unit trusts tend to make an initial charge of anything from less than 1 per cent to 5.5 per cent. Expect to pay an annual fee as well, of between 0.5 per cent and 1.5 per cent. There may be other fees too.
Investment trusts make an annual management charge, and there are buying and selling costs. Buying shares in an investment trust usually involves paying commission to a stockbroker. However, the investment group will often sell shares directly, cutting out this cost.
"If you go through a savings scheme, it is one of the cheapest ways into the stockmarket," says Annabel Brodie-Smith. "There are some trusts which don't have any charges," she adds.
Anne McMeehan points out that while unit trusts outline all the charges they make in their key features document, because an investment trust is a corporate trust, many of the running costs are deducted within the fund. But the investor still feels the impact.
Travel expenses for the investment management team, for example, would have an impact on the company's profits, and therefore the trust's dividend.
"They are not always as clear as they could be - some costs are quite hidden," says Ms McMeehan.
AITC - for factsheets call 0171 431 5222; AUTIF - for the unit trust information service call 0171 207 1361Reuse content