Equities are the shares of a company and anyone buying a share will take a stake in that company's business. This stake entitles that person to share in part of the company's profits that are distributed to shareholders (this is usually in the form of a dividend) and perhaps benefit from any growth in the share price when the shares are sold. Shares are traded on stock markets either in the UK or overseas.

The equity funds offered by most Defined Contribution pension plans will usually invest in a wide range of company shares, both in the UK and overseas. By investing in UK company shares, investors follow the prosperity of the UK economy and overseas company shares will provide diversification by spreading the risk among different markets and currencies. These factors can sometimes provide very different returns compared to those from UK investment

Over long-term periods, equities are expected to provide higher returns (historically) than other types of investment. Investors use equities to maximise investment growth potential over the long-term. However, it is important to note that equities can be volatile and experience dramatic loss in value. You may be more willing to invest in equities if, for example, you are younger, have other secure investments, or your IBM investment funds are only a small part of your retirement savings.

A bond is effectively a loan to a government, company or local authority. Bonds issued by the UK Government are often referred to as 'gilts' as they were originally printed on gilt-edged paper. In return for this loan, the issuer of the bond will agree to provide either a fixed amount of interest or an amount of interest that is linked to inflation, payable at regular intervals.

Investors use bonds to bring a greater element of security to their investments and to reduce the risk of short-term losses, but security comes at a cost. The downside of bond investments is that the total return is usually lower over the long-term than assets such as equities.

Bonds typically provide a regular income every six months, plus a lump sum payment on maturity. Since these payments are fixed in advance, the price of bonds will fall when interest rates rise - simply because investors can see better opportunities elsewhere.

Similarly, when interest rates fall, bonds are more in demand and the price will generally rise. In practice, investment managers tend not to hold bonds through to maturity. Instead, they buy and sell bonds so that the overall return is produced by the income received and the price of the bonds from time to time.

Bonds can also be used to follow the way in which annuity prices rise and fall. An annuity is a regular income for life, in the form of a pension at retirement; in this way, annuities provide similar payments to bonds. The cost of buying an annuity, from an insurance company, tends to vary in line with interest rates in the same way as the price of bonds rise and fall. If interest rates fall dramatically at the time an annuity is purchased, it could have a serious effect on the amount of pension that can be bought. This is because as interest rates fall, the price of the annuity rises. However, as bonds will also increase in value, this can help to offset the increase in the cost of the annuity. Index-linked bonds can be used to help match the possible effect of inflation on annuities.

Some types of bonds are referred to as 'fixed interest'. It is important to note that the interest rate for such bonds is fixed but the price of the underlying bond may vary.

Cash funds invest in a variety of money market instruments (such as treasury bills) as well as deposit accounts. The aim is to produce, in total, interest-rate like returns. Cash investments provide a reasonable level of protection against your capital value reducing but not necessarily against inflation in the long term. However, in certain extreme market conditions, investments in cash funds can fall in value.