The first steps to take when you think about investing money
Step 1: understanding risk
If you’re completely new to investing the first thing to do is to familiarise yourself with the basics, particularly with regard to risk.
- Investing in the stock market is risky. When you invest, directly or through investment companies, you could lose your money.
- You can choose your level of risk by investing in different types of asset – for example, shares or bonds – and different areas of the world (also called “markets”). If you use an investment company they’ll let you know how they will invest your money.
- Investing gives you a chance to make more profit than you’d get by putting your money in a bank. Savings in a bank often lose value over time due to inflation. However, they are very secure.
- More risky investments should be held for the long-term. This gives your investment time to recover if it performs badly. You might be advised to plan to invest for 5, 10, or 20 years, especially if the investment is very high risk.
Step 2: your current situation
- assets: things you own, such as property or stocks
- liabilities: debts, such as a business loan or mortgage
- income: money from your salary or any other source
- expenditure: what it takes to maintain the lifestyle you lead
A financial adviser can help you work out what you can afford.
Step 3: research
How your investments are split makes a big difference to the performance of your portfolio.
To make informed choices, you need to understand how different investments are performing now and what the outlook is. You should research types of assets (equities, bonds, cash, property, money markets, etc) and markets around the world (such as the UK, North America and Asia).
It's a good idea to:
- read a variety of financial publications, newspapers and websites
- get a feeling for investment choices, strengths and weaknesses of different sectors and the performance of the markets
- look at what different experts advise and how opinions differ
For more information on research, see Useful links
Tips for investment planning
- Don’t risk going further into debt
If you’re in debt, think carefully before you make a risky investment in stocks or shares. You might find it wiser to invest in cash or bonds, which are more secure. They can often offer you reliable returns to help with any interest payments you have. Remember, high risk investment is not suitable as a way to get out of debt.
- Have some secure savings
Before you invest, make sure you have some "rainy day" money. Keep a secure fund in a bank or building society you can access quickly for any unexpected outgoings or emergencies.
- Make sure you can survive losses
All investments involve risks. To be truly comfortable investing you should be able to survive any losses. You're after a profit, obviously, but your finances shouldn't be crippled if you make a loss. This is closely linked to your timeframe for investing. How long can you afford to have your money committed to an investment?
- Avoid the pitfalls