Investing For Beginners – Forbes Advisor UK

Capital at risk. All investments carry a varying degree of risk and it’s important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in. Where we promote an affiliate partner that provides investment products, our promotion is limited to that of their listed stocks & shares investment platform. We do not promote or encourage any other products such as contract for difference, spread betting or forex. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK. Accurate at the point of publication.

Investing might seem complex to beginners, but in reality it can be straightforward. 

Plus, over the long term – and here we’re talking about periods of several years – investing in assets such as stocks and shares has been shown to outperform the returns on cash deposits. 

If you’re looking to grow your money, which is particularly important when inflation is high and eroding the spending power of your cash, it might be worth considering your investment options. 

What are investments?

Investing is when you buy an asset such as shares or property in the hope of getting a profitable return. And that return can come in the form of income, such as rent or share dividends, as well as capital growth, such as when the value of a property increases or a share price rises.

Investment is not the same as saving, where you put money on deposit and receive interest. With an investment, your money is at risk if the investment performs badly.

Popular investments include:

• stocks and shares – investing in individual companies listed on the stock market
• equity funds – putting money into ‘pooled’ funds, such as unit trusts and investment trusts, that invest contributions from many investors into a range of shares (more on this below)
• property – either through direct ownership or via a pooled fund)
• bonds – fixed-interest investments where you receive a dividend back for effectively loaning money to the government or a company, with the face value of the bond subject to fluctuation according to demand.

As noted above, with most types of investment, such as equities (stocks and shares), funds, property and bonds, for example, there is a risk to your initial capital investment. 

This means you could end up with less than you put in. That’s why you need to be comfortable with the risks involved in investing before you start.

Why should I invest?

Investing is a matter of personal choice and your attitude to risk. But there are a number of reasons you might want to consider investing, rather than putting available funds in a savings account. 

For many people investing tends to mean putting money into equities, typically through a pooled investment fund, such as a unit trust or investment trust. The reason this is popular is because the entry level can be fairly low, many funds accept monthly contributions of £10 and upwards, and it can be tax efficient if you save in an ISA (more on this below).

Here are some of the advantages of investing in a fund:

• cash savings may not grow as fast – it’s important to have some cash savings put away for emergencies, but having all your money in cash could mean it might not grow as much over the years, compared to investing it

• compounding returns can significantly grow your investment – compounding – the process whereby dividends paid on your investments are ploughed back into your investment pot, so you then earn growth on the whole amount – can significantly increase the value of your investments over time

• Long-term growth – the longer you can leave your investments, the more you are likely to make in earnings as compounding will have more of an impact. Keeping money invested for longer also enables you to ride out the market dips that will inevitably happen over the duration of your investment.

Laura Suter, head of personal finance at investment platform AJ Bell, says: “While savings rates have risen recently, it’s important to see this as a small snapshot in time rather than the normal trend. History shows us that investing delivers higher returns than cash and inflation over long periods.”

What about the risks?

As mentioned already, investing is not without risk. The value of your investments can go down as well as up and you could get back less than you originally put in.

That said, investors can take steps to minimise the risks, which might include:

• drip-feeding money in – if you’re investing in pooled funds such as unit trusts, it can make sense to make regular investments, such as £25 or £50 a month, rather than putting in a lump sum. This is because, if you invest a lump sum just as the market drops, this could cause you to panic at the losses. By drip-feeding money you can smooth out the peaks and troughs in performance

• only invest if you won’t be spooked by market falls – think about your investment and savings goals and the timeframe you have to invest. It may not be the best option to invest money you’re saving for a house deposit in the stock market if you know you will need this money in the next few years and you can’t afford to see the cash value reduce

• invest for the long term: equity investments should be viewed as a medium to long-term investment. Over a longer time frame your investment can ride out the peaks and troughs of the market

• diversify your investments – spreading your money between different types of investment is one way to spread and reduce risk. 

Megan Rimmer, a chartered financial planner at management Quilter, says: “Ideally, investors need to make sure they don’t have all their eggs in one basket and are invested in different asset classes and different sectors across the world. This helps spread the risk across an investor’s portfolio.”

How can I invest in the stock market?

If you’ve decided you want to invest in equities the next step is to consider what and how you’ll go about it.

There are lots of ways to invest in stocks and shares but for beginners, pooled investments offer a more diversified approach than individual stock-picking. 

For investment funds, think about whether or not you want an ‘active’ or ‘passive’ fund. There are pros and cons to each.

• Active versus passive funds

With active funds a manager picks the investments, often specialising and focusing on a particular geographic area or industry type and investing to fit a particular strategy to try to outperform the market. Fees on active funds tend to be higher than for passive funds.

A passive fund has no fund manager picking the stocks. Instead, passive funds use a computer to track a chosen index or indices, such as the UK FTSE 100. First-time investors often prefer passive index tracker funds due to their relative lower risk and lower fees, compared to actively managed funds.

• Will you put your investments in an ISA wrapper?

It can be tax efficient to invest within an ISA wrapper. That way you don’t have to worry about any tax liability on your investment income or gains. 

Everyone has an ISA limit of £20,000 each tax year, and this can be split across different types of ISA – so you could split your allowance across a cash ISA and a stocks and shares ISA, for example.

Pensions are another tax-efficient way to invest for the long term. The money you put into a pension will be boosted by tax relief at your highest rate of income tax, subject to certain limits. For example a basic rate taxpayer who puts £80 into a pension will get this increased to £100 through tax relief. But with pensions you can’t access your investments until at least age 55 (and this is rising to 57 in 2028).

• Pick an investment platform

Before you start investing you’ll need to pick the platform that is right for you. Some will offer a lot of hand-holding and will guide you towards investments based on your risk profile. These are so-called ‘robo-advisers’. But investors are charged more for this service. Other providers will offer a pared-down investment range at a cheaper price.

Most platforms will also offer a full range of investments. You’ll need to weigh up how much choice you require and the charges (both for buying and selling and annual fees) you’re going to face before working out what is right for you.

Finally, Ms Suter at AJ Bell, says all investors, not just beginners, should be wary of following trends or investing in something they’ve heard about on social media or from friends: “Investors need to make sure they understand what they’re buying, and why they think it will make money – whether it’s a fund or a share. 

“All too often investors are lured in by the promise of high returns or invest just because a friend has recommended it. But investors need to understand how the investment works and all the risks before committing their money.”

Investment charges

However you choose to invest there are likely to be fees charged by the investment platform or provider.

In addition, there are likely to be trading fees, when you buy or sell fund units or individual stocks and shares, as well as annual management fees on the investment funds you hold. These are applied by the investment manager.

Over time, investment fees and charges can significantly impact on your overall returns, so it can pay to compare investment providers before you invest to find those with the most competitive fees.

Passive funds, such as index trackers, tend to have lower annual fees compared to actively managed funds.

How can a beginner get started with investing?

Before investing there are a number of things to consider:

• have you paid off expensive consumer debts, such as credit cards or personal loans? It usually makes sense to use any spare cash to first pay off debt where you’re being charged high interest
• do you have a cash savings pot for emergencies? Most financial advisors recommend you have at least three month’s salary in an easy access account as a safety net (if you can afford it, of course).

Once these things have been addressed you can look to start investing. Ask yourself what are your Investment goals? Plus, decide on your budget, such as £50 or £100 a month, into a pooled investment fund. Some platforms allow you to invest as little as £10 a month.

You’ll then need to decide which investment funds suit your goals and which platform you will use, plus whether or not you’ll invest within an ISA wrapper.

Don’t forget to review your investments on a fairly regular basis, once or twice a year is probably sufficient for long-term investments. Remember your investments are likely to fall as well as rise over time so try not to be overly concerned about short-term fluctuations.