New to investing?
Here's what you need to know to get your investment plans off to a flying start.
How to get started
Before you invest, it’s vital to know why you want to invest and what you hope to achieve – and get familiar with some useful investment dos and don’ts.
Your goal
One of the most important decisions when investing is to understand what you’re investing for – your goal. Is it to grow money over the long term for something like a pension, a house, or to pass on to your children? Or are you looking to get an income from your investments? Perhaps it’s a combination of the two?
Being clear about your goal, or goals, will help you know what to look for when choosing your investments.
Speaking to a financial adviser can help you define your investment goal.
There’s more on getting financial advice later in this guide.
Before you invest
Step 1
Understanding the risk
If you’re new to investing the first thing to do is to familiarise yourself with the basics. In particular, it’s important to get an idea of risk.
- Investing in the stock market is risky. When you invest you could lose 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 investments time to recover if they perform badly. You should plan to invest for five, ten, or even 20 years, especially if the investment is very high risk.
Step 2
Your current situation
Look carefully at your current financial situation. You need to work out how much you can afford to invest. To do this, you will need to consider your income and how much you spend.
You’ll also need to think about your assets (things you own, such as property, stocks or cash in the bank) and liabilities (debts or a mortgage).
A financial adviser can help you work out what you can afford.
Step 3
Research
What you invest in makes a big difference to the performance of your portfolio.
To make informed choices, you need to understand how different investments tend to perform over time. You should get a feel for the main types of assets: equities (also called stocks or shares), bonds, cash and property.
It’s a good idea to read a variety of financial publications, websites and books to get a feel for investing. Don’t rely on information on social media.
You may also want to make sure that any investments you make are in line with your principles, values or beliefs.
Top tips for investment planning
Don’t risk going further into debt. If you’re in debt, think carefully before you make an investment in stocks or shares.
You might find it wiser to pay off the debt first. Remember, investment is not suitable as a way to get out of debt.
Before you invest, make sure you have some “rainy day” money.
Keep an appropriate amount of cash in a bank or building society so you can access it quickly for any unexpected outgoings or emergencies.
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? The longer you can remain invested, the better the chance of a good return on your investment.
Dos and don’ts of investing
Many new investors end up making similar basic mistakes. To help you avoid some of the pitfalls of investing, here are some pointers to help you on your investing journey.
You may read tips on social media or hear recommendations from a friend. It is better to speak to a professional adviser or do your own research before acting.
If in any doubt, speak to a professional financial adviser who can guide you towards the best investments for your circumstances.
Just because the market is going up today does not mean it will last; stock markets can be volatile and different assets tend to perform differently depending on the prevailing economic conditions.
Investing in a collective investment fund such as an investment trust gives you access to a broad portfolio of shares, which spreads risk and minimises the impact of any one company going bust or performing badly.
One of the most common mistakes that novice investors make is to buy when markets are rising and sell when they fall. Professional investors know that you need to ride out these ups and downs, even though your instincts may be telling you to run for the hills.
Investing is for the long term. Be prepared to keep your money invested for five to ten years, or longer, and try to ignore the inevitable ups and downs along the way. If you get really worried, speak to a financial adviser before doing anything rash like selling out of your investments.
Stretching your finances to invest is not wise. You should only invest what you are comfortable keeping tied up in the stock market for the long term.
You can invest in investment trusts from as little as £50 a month. Not only can this make saving more affordable, it can smooth out the peaks and troughs in the market and make it less volatile.
The dividends paid by investment trusts and other companies can fluctuate. Be prepared to see your investment income vary, and plan accordingly.
Saving in a cash savings account is safe but interest rates often fail to keep pace with inflation, meaning that your cash is losing its purchasing power. In other words, it is losing its value. Investing in the stock market gives you a better chance of earning a big enough return to not only preserve the value of your wealth, but also make a profit on top.
Risk vs. reward
It’s a central principle of investing – the higher the risk, the higher the potential rewards
There is always a degree of risk in owning investments. In extreme circumstances you could even lose all your money, so it’s natural
to want to know exactly what the risks are, and which ones you should take.
How much risk should you accept?
Roughly speaking, the level of risk you might be prepared to accept depends on how long you can afford to tie up the money and how much you can afford to lose. If you’re planning to invest for ten years or more you may be able to take a bit more risk in exchange for the possibility of higher returns.
We’ve explained some of the risk factors you should look at lower down this page, but remember, it’s impossible to draw up hard and fast rules about the risk levels of a particular kind of investment. You need to look at the whole picture and might want to get an opinion from a financial adviser.
Where to get advice on risk
You can get general information about financial services from the Financial Conduct Authority (FCA).
The FCA is an independent watchdog set up by the government to regulate financial services and protect your rights. It provides free and independent information about financial matters. You can get free, unbiased money advice online and over the phone from Money Helper.
Understanding risk and reward can allow you to aim a little higher with your investments.
What are funds and why invest in them?
What are funds?
A way to invest in different assets and spread risk.
A fund is a collection of lots of different people’s money. The money is managed by a professional fund manager who invests it across a range of different assets, like shares, property or other assets depending on the fund.
There are many types of fund such as investment trusts, unit trusts and exchange traded funds (ETFs).
They make a profit by buying, holding and selling investments. When you invest in a fund your investment is spread across all the fund’s assets. It’s a simple way of expanding your portfolio and spreading your risk.
With a fund:
- you gain access to a wider range of investments than you could normally buy yourself
- your investment is managed by an expert fund manager
- your money is spread across a number of different investments, giving you a diversified portfolio and spreading risk
- you gain economies of scale as the fund management and admin costs are spread amongst the investors in the fund
- you can invest small amounts starting from around £50 a month
- depending on the fund you choose, you can invest in specific markets, industries or even small unlisted businesses which are at an early stage in their development
- you can choose a fund which invests in line with your personal values and beliefs
Put all these benefits together and you find that collective investments are a simple and convenient way to invest in a wide range of different assets.
