INVESTING FOR BEGINNERS.
Choosing to invest can make your money work harder and help you achieve your financial goals, although there are risks to investing. Taking your first step can be daunting so that’s why we’ve created a simple guide for beginners.
This guide will help you to…
- Understand the basics of investing, including the risks associated
- Be confident with your investment decisions
- Know if investing could be right for your circumstances
- Learn how to get started with investing and how to make the most of your investments
Make your money work harder for you
There are lots of ways to invest, including stocks and shares and funds. Investing in these types of assets can have advantages over holding money in savings or your bank account.
You don’t need a large sum of money to start investing, you just need to be aware that when you invest there are risks and your investments can fall as well as rise in value and you may get back less than you originally invested.
This guide is to help you realise the opportunities you have to invest, and how to get started.
If you are in any doubt about making your own investment decisions we recommend you seek advice from a suitably qualified financial adviser.
Why do people choose to invest?
Investing money is important to people for different reasons. Are you wanting to generate additional income, or are you wanting the potential to save for the future? You may also wish to generate income to supplement your pension.
Saving in cash accounts is one way to save for the future, and the interest rate on offer is also a way to provide additional income. However, with inflation over 2% it significantly eats into your return and savings valuation with many cash savings accounts and current account tracking The Bank of England base rate.
See below table for examples of the potential effect of inflation. Investments also involve more risk to your money than a savings account.
|What £1,000 will be worth in real terms|
|After...||2.5% inflation||5.0% inflation||7.5% inflation||10.0% inflation|
What’s your financial goal?
Invest for income
Generating extra income through investing can potentially be achieved from investments that make regular payments, such as shares that pay dividends and bonds that pay interest.
An example of investing for income are retirees who are typically using the income to supplement any pensions they might receive.
Invest for growth
The goal for growth investors is to increase the value of the investment, known as capital gain. In stocks and shares for example, growth is the result of a rise in the price of the shares.
Did you know that re-investing dividends generates additional earnings over time? This growth occurs because the asset will accumulate growth from both the original investment and the accumulated earnings. This is known as compound interest.
Someone who has just started their first job and joined a pension scheme might be a growth investor. They are more likely to hold their investments for a long time with their goal to grow the overall value of their investments.
Most investors will combine a mixture of income and growth. An income investor might reinvest their income (hopefully resulting in capital growth), or a growth investor might gradually sell their holdings to take an income from their investment.
Your investment options
A share is simply a unit of ownership. If you own a share, you own a stake in a particular company. Shares are listed on a stock exchange and the price of all shares will fluctuate throughout the day.
- Pros: Capital gains
If you invest wisely, your stocks could increase in value. Shares have historically provided better returns than cash when investing for a longer term, although this isn't guaranteed.
- Cons: Capital losses
If the company you choose to invest in isn't doing well then the share price may fall - meaning you could lose money on your investment.
Funds are a form of collective investment where professional Fund Managers will pool together investors’ money and invest on their behalf. Since your investment can be spread over a range of different stock markets, sectors and investment types (without you having to buy lots of individual shares), the risk involved may be reduced.
- Pros: Diversification
Funds often spread their holdings across different stocks or markets which reduces the risk. So if one of their holdings is not doing well others in the fund may be doing better to make up for it.
- Cons: Liquidity
A fund manager may have to sell holdings to pay investors back who are exiting the fund. If the assets they hold are difficult to sell - such as property - then this can mean delays in getting your money back.
Exchange Traded Funds (ETFs)
Exchange Traded Funds (ETFs) trade on the stock exchange in a similar way to shares. ETFs are usually designed to replicate an index, sector, commodity or currency and will invest in a range of assets with the aim of closely tracking its performance.
- Pros: Lower fees
ETFs can offer lower fees than managed funds as they have lower operating costs.
- Cons: Performance
An ETF is designed to track a market, unlike funds which are actively managed to try and outperform it. This can impact the performance.
An investment trust is a company which invests in a number of different assets. Unlike funds, shares in investment trusts trade on the stock exchange just like shares.
- Pros: Liquidity
Investment Trusts don't have to sell assets when investors exit the fund. This means that investors should be able to sell their holding easily on the stock market - though the price could go down if more units are sold than bought.
- Cons: Potential Price Volatility
The price of an investment trust is partly based on the value of the assets it owns but can also be influenced by the demand for the share itself. If investors don't feel that the investment trust is being managed well then this can adversely affect the price as more people will want to sell than buy the share.
Bonds and Gilts
Bonds and gilts are created by companies or governments for investors as a way of raising money. When you invest in a bond or gilt you’re lending money to the company or government for a fixed period in return for a fixed rate of interest.
- Pros: Stability
Bonds and gilts are a more stable investment than stocks with a lower risk and steady returns.
- Cons: Growth Potential
Bonds and gilts don’t always offer the possibility of high long term returns which is a disadvantage compared to the performance of other stocks. Interest rate, currency fluctuations and economic uncertainty can impact the value of bonds and gilts.
For further information on your investment options explore our easy to read articles designed to help you on your investment journey.
Ready to invest?
Having reviewed the steps to investing, you may feel ready to invest. Before you go any further, please read the statements below and check that you agree with all of them:
- You have enough money (typically three months’ net income) in an easy access account to cover any emergencies, such as unexpected car or household repairs, and any major spending you have planned in the next five years.
- You’re happy to accept some risk on your investment.
- You’re prepared to invest for the medium to long-term (at least 5-10 years).
- You don’t have any significant short-term debts, as these are likely to cost you more in interest than the amount of any growth you may achieve on an investment.
- You’ve carried out your own research and you feel confident in making your own decisions.