Investing is a way of putting your money to work, that allows you to potentially benefit from any profits that companies' make and any dividends they pay to their shareholders.
Most investments should be seen as a medium to long-term commitment, meaning you should be prepared to invest for at least 5 years. There is also a risk that you may not get back what you put in.
If you’re ready to invest, here's how you can make things happen.
Start by looking at your income and outgoings to work out how much money you could realistically afford to invest.
Ideally, you should keep at least 3 to 6 months' worth of living expenses in an emergency fund. So if your boiler breaks down or your income reduces, for example, you'll be less likely to have to sell your investments prematurely.
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Is it for a specific goal, or simply to grow your money? By assigning a specific goal, it can make it easier to stick to your strategy and make you less likely to dip into your investments.
The time needed to reach your goal will also affect the level of risk you can take. For example, if you're saving for your child's education in 5 to 10 years' time, you're saving for a fixed amount in a relatively short timeframe, so you may want to be more cautious.
Whereas, if you're saving for your retirement in 25 years' time, you could afford to take more risk – as your investments have more time to recover from any volatility in the market.
Risk and reward go hand in hand. The idea of higher returns may sound appealing, but they do come with a higher risk. No investment is without risk – there’s always a chance you could get back less than you put in.
Is investing money worth the risk? Think carefully about your goals, timeframes and the relationship between your need for returns and how much you can afford to lose.
How would you feel if you noticed your investment had dropped £100 in value since you last checked? If this would send you into a panic, you'd be more comfortable opting for less risky investments and accepting that your returns are likely to be lower.
There are several ways to invest in the markets. Your answers to the following questions will help you decide whether you want to:
Shares could be a good option for you. When you buy a share, you're buying a stake in a company. It can feel good to be part of something big and it can be hugely rewarding to see the value of your holdings increase.
Of course, shares don't only go up – and this means you could get back less than you put in. Their value can also decrease for many different reasons. It's best to invest in companies that you know and understand. Even then, investing in shares usually carries a higher risk than investing in funds.
Shares can pay you an income in the form of a dividend, which is typically paid twice a year. You can either withdraw the cash or use this to buy more shares. You can sell your shares at any time.
Funds can be an attractive way to invest for beginners. Instead of buying a share of a company yourself, you pool your money with that of other investors to buy units in a ready-made basket of investments. Investing in funds is way to spread your risk without having to buy lots of individual shares yourself.
There are 2 main types of fund:
With an active fund, you pay for the fund manager's expertise with the aim of receiving returns which outperform the market. Passive funds generally charge less in fees.
Funds are all assigned to different risk profiles, so you can choose funds to fit your appetite for risk.
You can manage investment risk to a degree by spreading your money across different investments, sectors and regions. This is called diversifying and it's one of the golden rules of investing.
Spreading your money in this way means you won't be overly dependent on one kind of investment or region. So if one of your investments perform badly, hopefully the others might make up for the loss.
Diversifying can reduce the overall risk in your portfolio by smoothing out the returns, while still helping you to achieve growth. Although, there are no guarantees.
Fees for buying funds or shares can vary, depending on the provider or platform you choose. The fees you pay will have an impact on your returns, so you need to consider these carefully when choosing your investments.
Common types of fees include:
A yearly cost that a provider will charge to look after your funds or shares, giving you access to the tools and resources on their investment platform.
If you're buying shares, you normally pay a fee every time you buy or sell shares.
If you're buying funds, this can be a useful comparison tool as it gives you a breakdown of the charges that are deducted directly from the fund, including the fund managers' annual management charge and other expenses. You see a breakdown of a fund's charges in the relevant cost and charges disclosure document.
The cost of receiving a personalised recommendation based on your circumstances. If you choose your own investments, you won't pay any advice fee.
For many self-investors, a stocks & shares ISA is the first place to start.
This is simply a wrapper in which to hold your investment, so you won't have to pay any UK income tax or capital gains tax on any income and capital gains. And contrary to the name, you can use it for funds too.
Investing in an ISA also makes your finances simpler, as you won't need to detail the income and capital gains on your tax return.
The overall annual subscription allowance is currently £20,000 for the 2022 to 2023 tax year. This covers subscriptions made to stock & shares ISAs, as well as the other types of ISA.
Invest outside an ISA and the returns on your investments could face income tax and capital gains tax. There are annual tax-free allowances for both capital gains (£12,300) and dividends (£2,000) for the 2022 to 2023 tax year.
Keep in mind – the value of any tax benefits depend on your individual circumstances, and tax rules may change in the future.
Investing a lump sum can be a good way to start investing. Alternatively, you can invest little and often. You may not miss any spare money you move into your investment account each month. Yet over time, you'd be surprised at how quickly the value of your holdings can add up. It's a good idea to set up a Direct Debit for just after payday before you can spend it.
With regular investing, you also don't have to worry about trying to time the market. If the market falls, your money will simply buy more shares or units at a cheaper price the following month.
Once you've invested, you should check your investments from time to time to make sure they're performing as you'd hoped. Regular reviews allow you to invest more if necessary to reach your goals.
With most fund platforms and share dealing services, you can check the value of your investments online whenever you want to. However, avoid watching too much and don't feel you need to act every time prices move in an unexpected direction.
Markets rise and fall all the time. Long-term investors know they can often sit back and wait out these fluctuations. Over time, you'll become familiar with the natural ups and downs of market prices.
If you'd like start your investing journey with us, here's where you can find out more:
You can buy and sell shares of any amount using our online sharedealing service. Get market insight, set up share price alerts and test your trading strategies in a virtual portfolio.
You can start investing with £50 using our online fund platform. Use research tools to help you choose from a wide range of funds – all available through online banking.