DIY investing

Time to read: 10 minutes

Savings rates have remained stubbornly low for years. If you're considering turning your hand to investing to give your money greater potential to grow, this no-nonsense guide takes you through what you need to get started.

Whether you're saving for a specific goal, you've become frustrated with poor interest returns, or if you're simply motivated to grow a nest egg, investing has the potential to give you a better future than keeping your savings in cash.

It's a way of putting your money to work that allows you to benefit from any profits that companies' make and any dividends they pay to their shareholders. Over time, it also lets you harness the power of compound interest where you earn returns on your returns so your money can potentially grow and grow.

Sounds great, right? 

Before you start choosing your own investments, you need to be aware that all investments carry a risk that you may not get back what you put in. And most investments should be seen as medium-to-long-term commitments, meaning you should be prepared to invest for at least 5 years.

Assuming you're comfortable with this, here's how you can make things happen.

Start by looking at your income and outgoings to work out how much money you could realistically afford to invest in the markets. You don't need a lot of spare cash to get started. With HSBC, you can start investing in funds with a lump sum of just £100, and in shares for as little as you like. 

You might want to keep at least 3 months' worth of living costs in a rainy-day fund to cover life's unexpected expenses like a broken boiler, or if your income suddenly stops or falls. The idea is if you have money to hand to cover any emergencies, you'll be less likely to have to sell your investments prematurely.

Think about why you're investing. Is it for a specific goal, or simply to grow your money? By assigning a specific goal, it can make it easier to stick to your strategy and make you less likely to dip into your investments.

You may have a number of different reasons why you want to invest. If so, write them down, with a hoped-for amount and a timeframe for when you'll want your money back. 

Timeframes will vary for different goals and this will affect the type of risks you can take on. For example, if you're saving for your child's education in 5 to 10 years' time, you're saving for a fixed amount in a relatively short timeframe so you may want to be cautious with the amount of risk you take.

Whereas if you're saving for your retirement in 25 years' time, you could afford to take more risk. This is because you'll have more time to recover from any short-term falls in the value of your investments.

Risk and reward go hand in hand. The prospect of higher returns may sound appealing but remember they come with a higher risk. 

To work out what's right for you, think carefully about your goals, timeframes and the relationship between your need for returns and your capacity for loss. 

How would you feel if you noticed that your investment had dropped £100 in value since you last checked? If this would send you into a panic, you'd be more comfortable opting for less risky investments and accepting that your returns are likely to be lower. 

Remember though, no investment is without risk. And depending on when you want to access your money, there's always a chance you could get back less than you put in.

There are several ways to invest in the markets. Your answers to the following questions will help you decide whether you want to invest directly in shares, choose your own funds, or ask a professional to help you work out what's right for you.

Are you interested in making investing something of a hobby? 

Shares could be great for you. When you buy a share, you're buying a stake in a company. It can feel good to be part of something big and it can be hugely rewarding to see the value of your holdings increase.

Of course, shares don't only go up – and this means you could get back less than you put in. Their value can also decrease for many different reasons. It's best to invest in companies that you know and understand. Even then, investing in shares usually carries a higher risk than investing in funds.

Shares can pay you an income in the form of a dividend, which is typically paid twice a year. You can either withdraw the cash or use this to buy more shares – reinvesting your dividends can be a great way to increase your returns as the years go by. You can sell your shares at any time.

Want to have your investments take up as little time as possible?

Funds can be an attractive way to invest for beginners. Instead of buying a share of a company yourself, you pool your money with that of other investors to buy units in a ready-made basket of investments. It's a way to spread your risk without having to buy lots of individual shares yourself.

There are 2 main types of fund. An active fund is run by a professional fund manager who chooses which shares, bonds or other assets to hold based on the kind of fund it is, whereas a passive fund will simply follow or track a given index.

With an active fund, you pay for the fund manager's expertise with the aim of receiving returns which outperform the market. Passive funds generally charge less in fees. 

Funds are all assigned to different risk profiles so you can choose funds to fit your appetite for risk.

Want someone else to recommend an investment for you?

If all the above sounds too technical for you, you might prefer to pay for personalised advice from a professional as a way to get started. You can always come back to DIY investing later, once you've got the hang of things.

As we've seen in step 3, if you want to improve your chances of getting better returns than cash, you have to accept a level of risk. However, you can manage this risk to a degree by spreading your money across different investments, sectors and regions. This is called diversifying and it's one of the golden rules of investing. 

Spreading your money in this way means you won't be overly dependent on one kind of investment or region. That means if one of them performs badly, hopefully some of your other investments might make up for these losses.

Diversifying can reduce the overall risk in your portfolio by smoothing out the returns while still helping you to achieve growth. Although, as ever with investing, there are no guarantees.

The fees for buying funds or shares can vary widely depending on the provider or platform you choose. Remember that the fees you pay will have an impact on your returns so you need to consider these carefully when choosing your investments.

Here are some of the more common types of fees you'll come across:

Account or platform fee: A yearly cost that a provider will charge to look after your funds or shares, giving you access to the tools and resources on their investment platform. 

Trading or transaction fee: If you're buying shares, you normally pay a fee every time you buy or sell shares. 

Ongoing charge: If you're buying funds, this can be a useful comparison tool as it gives you a breakdown of the charges that are deducted directly from the fund, including the fund managers' annual management charge and other expenses. You see a breakdown of a fund's charges in the relevant Cost and Charges Disclosure document. 

Advice fee: This is the cost of receiving a personalised recommendation based on your circumstances. Of course, if you choose your own investments you won't pay any advice fee.

For many self-investors, a stocks & shares ISA is the first place to start. This is simply a wrapper in which to hold your investment that means you won't have to pay any personal tax on the income and profits you generate. And contrary to the name, you can use it for funds too.

The annual allowance for all types of ISA is currently £20,000 for the 2021-2022 tax year.

Invest outside an ISA and your investments could face capital gains tax and dividend tax. There are annual tax-free allowances for both capital gains and dividends, which are currently £12,300 and £2,000 respectively for the 2021-2022 tax year.

When you first start investing, you may think it unlikely that you'd ever make more profit each year than the capital gains tax allowance, or earn more than the dividend allowance.

However, if you invest regularly those investments could add up nicely over time. Therefore, it makes sense to hold them in a tax-free wrapper from day one.

As well as having no tax to pay, the other benefit of investing in an ISA is it also makes your finances simpler as you won't need to detail the income and capital gains on your tax return.

Remember, the value of any tax benefits described depends on your individual circumstances, and tax rules may change in the future.

Investing a lump sum can be a good way to dip your toe in the water. The alternative is to invest little and often.

When you move spare cash from your bank account and into your investment account each month, you may not miss it. Yet over time, you'd be surprised at how quickly the value of your holdings can add up. It's a good idea to set up a direct debit for just after payday before you can spend it.

Another advantage of regular investing is that you don't have to worry about trying to time the market. If the market falls, your money will simply buy more shares or units at a cheaper price the following month.

Once you've invested, you should check your investments from time to time making sure they're performing as you'd hoped. 

Regular reviews allow you to keep track of how your investments are performing and allow you to invest more if necessary to reach your goals. With most fund platforms and share dealing services, you can check the value of your investments online whenever you want to.

However, don't watch obsessively. And don't feel you need to act every time prices move in an unexpected direction. 

Markets rise and fall all the time and long-term investors know they can often just need to sit back and wait out these fluctuations. Over time, you'll become familiar with the natural ebb and flow of market prices.

By now, you should have a pretty good understanding of the basics. Are you ready to take the next step and decide which type of investor you'd like to be?

If you'd like start your investing journey with us, here's where you can find out more:

I want to pick and choose my own shares

You can buy and sell shares of any amount using our online sharedealing service. Get market insight, set up share price alerts and test your trading strategies in a virtual portfolio.

I'd like to research and buy from a wide range of funds

You can start investing with just £100 using our online fund platform. Use research tools to help you choose from nearly 400 funds – all available via your online banking.

I'd like to choose one of 5 HSBC portfolios

For a quick and easy way to start investing via our online fund platform, choose one of 5 HSBC portfolios. All you need to do is choose the one that meets your preferred level of risk.

I want someone else to decide for me

If you're not yet confident enough to make your own investment decisions, we offer a range of services that can recommend an investment for you when you start investing with as little as £50 per month. Take a look at our personalised advice options (fees apply).

To invest with us, you need to have an HSBC current account and eligibility criteria apply.