Daniel Liberto
Investing isn’t as complicated and inaccessible as you might think. All you need is an internet connection and money to spare to join the action.
What is investing?
Strip out all the jargon and investing is a relatively simple concept. You essentially buy something you believe can be sold for more in the future.
Everyone has at least one goal in life that requires more money than they currently have access to.
With a little patience, investing could reward us with a better chance of fulfilling our financial goals than squirrelling away everything in a savings account.
Investing does come with the risk of losing money.
Types of investments
It’s possible to pretty much invest in anything, from land and vintage cars to gold, wine, and paintings but the most common and accessible types of investments are:
- Shares: A piece of ownership in a company.
- Bonds: A loan you help make to a government or company and it’s paid back with interest.
- Funds: A professionally managed collective investment that pools together investors’ money to purchase a broad selection of carefully selected holdings such as shares and bonds.
How you earn money
The majority of investments earn money in one of the following ways:
- Appreciation:Investments rise (appreciate) and fall (depreciate) in value, depending on their performance. You buy an investment at one price with the aim to sell it at a higher one and pocket a capital gain: a fancy way to say a profit.
- Dividends: Some companies issue dividend payments, taking a portion of their earnings to distribute to their investors, typically twice a year.
- Interest payments:When you take out a loan, you are responsible for paying the sum back, as well as interest – the charge for the privilege of borrowing money. Buy a bond and you too can become a lender to a business or government, receiving regular interest payments until your initial outlay is returned.
Pros and cons of investing
If you’re able to save some of your earnings each month, or have a nice lump sum tucked away that you won’t need to spend in the foreseeable future, investing could be an option. Inflation, the rate at which prices rise, usually outpaces returns on savings accounts, so any money stashed away there is likely to lose value in real terms over the years.
Investing can make your money grow faster …
Imagine you invested £5,000 over 10 years, while your friend Lisa, who has the same amount, parked her money in a savings account. Lisa earns an annual interest rate of 1%, meaning that after a decade her savings are worth £5,525.62. Your investments, meanwhile, might have generated an average return of 5% each year, turning £5,000 into £8,144.47.
Now consider the impact of inflation. According to the Bank of England, the costs of goods and services rose annually by 3.1% from 2009 to 2019. That means to match the equivalent buying power of £5,000 a decade ago, you would now need £6,757.41. So although Lisa hasn’t lost any money, the spending power of her savings has been reduced, making her worse off in real terms. You, on the other hand, have a greater profit.
… but investments carry risks as well
The greater potential rewards associated with investing do come with risk. Unlike if your bank or building society should go bust, up to £85,000 of your savings is covered by the Financial Services Compensation Scheme (FSCS). Investments don’t offer such guarantees.
Investing your money can put your capital at risk and you may get back less than you originally invested.
A lot depends on the types of investment you choose and the strategy you pursue. If you put all your eggs into one basket, chase big rewards, blindly follow the advice of your friend down the pub, panic at the first sign of trouble and incur high fees, there’s a reasonable chance you’ll lose money. If, on the other hand, you do your research, spread your money across a range of investments (a process known as diversification), and make sure you have the time to ride out the ups and downs of the stock market, you’ll have reduced your risk and boosted your chances of enjoying long-term gains.
How to start investing
You’ve likely seen the stories about bitcoin millionaires, or maybe you’ve gotten a tip from a friend or been approached about a way to ‘get rich quick,’ but it’s important to remember that investment scams are common. As is often the case in life, if an investment seems too good to be true, it probably is.
Instead, sit down, put the kettle on and ask yourself some basic questions. Start by contemplating how much money you’re comfortable to tie up in investments over, say, five to 10 years. Then pick a strategy you like that matches your expectations and the amount of risk you’re willing to stomach. Be realistic and remember: the bigger the potential reward, the greater the possibility of losing some of your hard-earned cash .
Financial advisers can help you to answer these questions and identify the most suitable investments. Alternatively, you might prefer to go solo and choose a stocks and shares ISA platform: tax-free online shops for buying and managing investments.
» MORE: Investment platforms explained
Investing for beginners: What to choose?
Rather than investing in one or two individual companies or bonds, it could choose to to invest in a fund. Funds allow you to outsource the arduous task of crafting and nurturing an assortment of suitable investments to an expert and can reduce the risk of one poor performer bringing down your whole portfolio.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in
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