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Although there are no guarantees with investing, it can give your money the opportunity to grow over and above savings held in cash.
This guide covers some key things you need to understand before you start investing. This includes whether investing is right for you, how to get started and what you can invest in.
Who should (or should not) consider investing?
Although there are benefits to investing early, that doesn’t mean you should jump into investing before you’re ready.
The value of investments can go down as well as up, so you could get back less than you paid in. That makes it important to consider some key things before you start investing.
Do you have an emergency fund?
Do you have enough cash if something goes wrong? Whether it’s losing your job, falling ill, the car breaking down or the boiler giving up, life happens. But financial resilience is vital, with the independent, government-backed MoneyHelper service recommending having savings to cover between three and six months of expenses (opens in a new window).
You never know what’s around the corner. If an emergency means you need urgent access to your money but it’s all invested, there’s a chance you may have to sell your investments at a time when their value has gone down. This could mean you get back less than you paid for them.
Do you have high-interest debts?
Interest and charges on debts can mount up fast if you don’t pay off the balance. While we’re not suggesting you should pay off your mortgage entirely before you invest, it may be a good idea to clear high-interest debts such as credit cards and overdrafts before you do. Interest on these may well rise faster than any potential investment gains.
Your financial goals and timeline: short term or long term?
Generally, you should think about investing over a timescale of years rather than weeks or months – ideally at least five years. That gives your investments more time to ride out any short-term dips in performance. Many investments fluctuate up and down in a way that might seem erratic. Short-term investors may lose out by buying or selling at the wrong time. It also means you have longer to benefit from compound growth. That’s where any investment returns you achieve are reinvested, offering the opportunity for growth on those returns too.
Are you ready to invest?
Take a look at this checklist to see if investing might be right for you:
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You have an emergency fund to cover between three and six months of expenses.
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You have little to no short-term, high-interest debt.
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You have disposable income, particularly if you’ll be investing regularly.
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You understand how investments work and that they hold a degree of risk.
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You understand it’s typically better to invest for the long term (at least five years).
How to start investing
You may already be investing if you have a pension. Another way to start investing is through a stocks and shares individual savings account (ISA), a tax-efficient account where you don’t pay income tax or capital gains tax on your returns.
How much money do you need to start investing?
You don’t need a lot of money to start investing. Some companies let you invest just a small amount each month – anything from £1 upwards.
Is investing only for wealthy people?
No. Given you can invest from just a small amount each month, you don't have to be wealthy to invest. If you're comfortable with risks of investing, it can be for anyone.
Key questions before you start investing
Are you comfortable with risk?
Firstly, understand that investing is different from putting cash in a savings account. All investments involve some degree of risk, but some are riskier than others. Remember, investments can fall in value as well as rise, meaning you could get back less than you paid in, so never invest more money than you can afford to lose.
Generally, the more risk you take, the higher the potential reward – but also the higher potential for losses. Ultimately, if you’re uncomfortable taking any risk with your money, investing may not be for you.
What can you invest in?
- Equities
Also known as stocks or shares, these are shares of companies. Buying them means you own part of the company and along with it a share of its assets and profits. This offers the potential for a return on your investment.
- Bonds
You effectively ‘loan’ money to governments or companies by buying government or corporate bonds. In return, they agree to repay you with interest on a set future date.
- Property
Typically, you can invest in commercial property through funds – think shopping centres and offices, rather than houses. These investments can grow in value through rental income as well as the properties increasing in value. Indirect property investment involves investing in funds holding shares of companies that buy, sell, develop or manage property.
- Commodities
Goods and raw materials like coffee, metals, oil, sugar and wheat. The most straightforward way to invest in them is with financial contracts known as commodity futures, which try to predict price movements in underlying commodities to make a profit.
- Cash-type investments
Cash-type investments can include deposits with banks, building societies, governments and other organisations in return for interest payments, as well as things like short-term loans to governments.
Investing in funds
While you can invest in the above investments individually, you also have the option to invest in them through funds.
Funds pool your money with other people’s money and use it to buy a range of investments.
Some funds only include one type of investment, such as equities, while other funds hold a mix of investment types – you may see these referred to as ‘multi asset’ funds.
Funds can also be managed in various ways. Some funds specifically aim to track the performance of a particular index (such as the FTSE 100 Index in the UK), a commodity or a currency. These are known as 'passive' or 'tracker' funds. Other funds, known as 'actively managed' funds, aim to outperform a particular target, such as the FTSE 100 Index or the rate of inflation.