A beginner’s guide to investing

If your savings goal is more than five years away, putting some of your cash into investments might make your money go further and help you keep up with rising prices.

What are investments?

Investments are something you buy or put your money into to get a profitable return.

Most people choose from four main types of investment, which are grouped according to characteristics they have in common. These are known as ‘asset classes’:

  • shares - you buy a stake in a company
  • cash – the savings you put in a bank or building society account
  • property – you invest in a physical building, whether commercial or residential
  • fixed interest securities (also called bonds) - IOUs given in return for loaning money to a company or government.

The various assets owned by an investor are called a portfolio.

As a general rule, spreading your money between the different types of asset classes helps lower the risk of your overall portfolio underperforming – more on this later.

There are several different ways of investing. Many people invest through collective or ‘pooled’ funds such as unit trusts.

Returns

Returns are the profit you earn from your investments.

Depending on where you put your money it could be paid in a number of different ways:

●     dividends (from shares)

●     rent (from properties)

●     interest (from cash deposits and fixed interest securities)

●     the difference between the price you pay and the price you sell for – capital gains or losses.

With an instant access cash account you can withdraw money whenever you like and it’s generally considered a secure investment. The same money put into fixed interest securities, shares or property is likely to go up and down in value but should grow more over the longer term, although each is likely to grow by different amounts.

How fees reduce investment returns

Managing investments takes time and money and service providers (such as fund management companies) will charge a fee.

This cost can eat into the returns you’ll receive and it’s something you can ask about before you invest.

Risks

None of us likes to gamble with our savings, but the truth is that there’s no such thing as a ‘no-risk’ investment.

At the heart of investing there is a simple trade-off: the more  risk you take, the more you can get back or lose (and the lower the risk you take, the less you’re likely to get back or lose).

But while you’re always taking on some risk when you invest, the amount varies between different types of investment.

Money you place in secure deposits such as savings accounts risks losing value in real terms (buying power) over time.

This is because the interest rate paid won’t always keep up with rising prices (inflation).

On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates.

This means that if inflation falls you could earn less in interest than you expected.

Stock market investments are generally expected to beat inflation and interest rates over time, but you run the risk that prices might be low at the time you need to sell.

This could result in a poor return or, if prices are lower than when you bought, losing money.

When you start investing, it’s usually a good idea to spread your risk by putting your money into a number of different products and asset classes.

That way, if one investment doesn’t work out as you hope, you’ve still got others to fall back on.

When should you start investing?

If you’ve got plenty of money in your cash savings account – enough to cover you for at least three to six months – and you want to see your money grow over the long term, then you should consider investing some of it.

The right savings or investments for you’ll depend on a range of different factors, such as your financial situation, life circumstances, risk appetite and your future goals.

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MoneyHelper is the new, easy way to get clear, free,
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Whatever your circumstances or plans, move forward with MoneyHelper.

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