But unlike saving, you can’t be sure of what you’ll earn.
So if you’re thinking about investing, it’s important to learn the basics and work out whether it’s right for you.
This simple guide covers the main types of investments, what you can expect and some rules to remember.
Investing means setting some of your money aside for the future and putting it to work for you. When you invest, you’re buying into something you believe will increase in value over time.
Investing has the potential to generate a better return than a savings account. While your money’s not locked away, you should be prepared to set it aside for at least 5 years to give it the best chance to grow. And keep in mind the value of any investment can jump around so you could get back less than you put in.
What can you invest in? Well, from the more common types of investments – such as gold, property or shares, to the more specialist – such as art, wine or cryptocurrencies, the answer is almost anything.
Instead of overwhelming you with the entire investment universe, let’s focus on 2 well-known ways to invest: funds and shares.
Funds are a ready-made basket of investments. When you invest in funds, you’re buying into a mix of assets, which may include shares, property, government bonds and cash. Funds save you from trying to pick individual investments that you think will perform best.
The great thing about funds is you’re not putting all your eggs into one basket. Instead, your money goes into a range of investments. This is known as diversification and it can be an effective method for spreading your risk. That’s because if some of the investments in the fund perform badly over a certain period, others may perform well.
There are 2 main types of fund:
Funds vary in risk from ‘cautious’ funds at the lower-risk end of the scale to ‘adventurous’ at the higher-risk end.
If you’re younger, you may have more time on your side to ride out any turbulence so you might want to consider a more adventurous fund.
As you get closer to retirement, your investments could have less time to recover from any dips so a more conservative fund may be more appropriate.
Shares are units of ownership in a company. When you buy shares, you’re effectively buying a small stake in a company. Companies sell shares to raise money, which they then use to expand their business. Investors, known as shareholders, are then free to buy and sell some or all of those shares on the stock market at any time.
If the company performs well - or is expected to perform well - demand for its shares will generally increase, pushing its share price up. If the company does - or is expected to do - badly, its share price will generally drop. Interest rates and the wider economy can also have an impact on share prices.
As a shareholder, the value of your investment rises and falls with the share price. So while the money you invest has the potential to grow, it could also fall in value so you may get back less than you invest.
There are 2 main ways you might make money from an investment: via growth - also known as ‘accumulation’ - or via an income.
If you’re considering funds, this means choosing between an accumulation or income fund:
with an accumulation fund, the income generated is reinvested within the fund, meaning your investment would be more likely to grow in value over time
with an income fund, any income the fund generates will be paid directly to you
Investing for growth could be good if you‘re able to invest over a longer period, as accumulation funds may provide you with greater returns in the long term.
Whereas investing for income could be a good shorter-term strategy if you’re nearing or in retirement. By choosing funds that pay dividends, you could receive regular payments to boost your existing income or pension.
If you’re considering shares, you also need to decide whether you’re investing with the aim of achieving either growth or income.
Keep in mind, investing in shares can take a lot of research and you’d need to hold a balance of different stocks to mitigate the risk of losing money with one particular company.
To figure this out, start by asking yourself a few questions.
If you’ve got unsecured interest-bearing debts, such as credit cards and loans, you should pay them off – and build up some savings – before you start investing.
Ideally you’d have an emergency savings fund worth 3 to 6 months of your living costs first. This way, you’d have money available to cover unexpected costs, without needing to dip into your investments.
If you’re trying to build up enough money to cover the cost of a new car, a holiday or a wedding in the short term, then investing is probably not the right option.
But if you’re putting money away for something at least 5 years away – such as a child’s education or just more flexibility later in life – then investing may be right for you.
The sooner you start, and the longer you can leave your money invested, the more time it has to grow and recover from any bad periods along the way.
No investment is risk free. You’re putting your money into something you believe will go up in value but there are no guarantees. You’ll be exposed to the uncertainties of the markets, which means the value of your investment can and will jump around so you could get back less than you put in.
With investing, risk and reward go hand in hand. As a general rule of thumb, higher-risk investments, including shares, have the potential to give you higher rewards. Lower-risk investments tend to equal lower rewards. Find out more about the risks of investing.
You can start by investing very little. So starting small could be a good way to dip your toe in the water. Then you can watch what happens to your investment – and invest more later if you want to.
Ready to take the next step? Read how to start investing.
Investing is for the long term – ideally for 5 years or more.
The higher the potential rewards, the higher the risk of losses.
You don’t need to pick your own stocks – many first-timers start. investing in funds
Diversification can lessen the impact of one investment performing badly.
Start as early as you can so your money will have more time to grow.
