How to start investing in the UK

Starting out as a first-time investor can be daunting. Read on for everything you need to know to start investing.

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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Capital is at risk.
Savings rates are low, and have been low for a long time. This means that cash that’s just sitting in a bank account or cash ISA is hardly making anything at all.

To make matters worse, inflation has been ramping up in the run-up and time since the Brexit referendum. Inflation erodes the the buying power of your money. If inflation is higher than the interest you’re earning, then you are effectively losing money as your cash languishes in its account.

Instead, if you’re willing to take some risk and put your money away for at least five years, you could consider investing. When you invest, your money is at risk – prices rise and fall, and there is always the chance of getting back less than you put in. However, you could also reap inflation-beating financial rewards.

Three things to consider before investing

1. What is your goal?

Because of the risks involved, and the potential for loss if you are forced to sell your investments early in order to access cash, it is important to have a plan rather than simply throwing an arbitrary amount into the stock market because you happen to be able to afford it today. Think about what you will use the money for. Will you rely on it for retirement? To buy a house? Or is it for something lower-stakes such as a holiday, general savings, or even ‘fun money’?

2. What is your timeframe?

Investments can rise and fall, and if you are going to need the money within the next five years, it is possible that it is not time for you to start investing in stocks – unless of course you are just dipping your toe in the investment world with money you can afford to lose. Investing is a long-term thing, and the longer you can stay invested the more chance you have for returns to compound to grow your assets.

This isn’t to say that risk goes down over time – it doesn’t. But one of the reasons investing is so appealing is the chance to re-invest the interest you make through dividends and bond payments, which, coupled with any capital returns, make for a powerful engine of growth.

If you think about your goal and your timeframe, you might realise you don’t need to take much risk, and can reach your target in time with less risky assets such as government or investment-grade corporate bonds. If you are going to need significantly more money in less time, you may face having to take more risk to get it.

3. How much risk can you take?

There are five main asset classes, and each carries its own typical level of risk. In order from least- to most-risky, it generally goes: cash, government bonds, corporate bonds, shares. Property is the fifth main asset class but it is a bit of a wildcard, and its riskiness is hard to quantify.

Risk typically means unpredictability of returns. With cash, you know how much you have, you know how much interest you’ll get, and you know you won’t lose any of your capital. What you don’t know is a) how high inflation will be, and b) how likely your bank is to go bust, although the latter has historically been a rare thing.

On the other hand, with shares, you have no idea how much the price of shares will fluctuate, or how the dividend payout will change. This is why they are seen as the riskiest mainstream asset.

If you can’t afford to lose much money in a given year, you should put more of your money into government bonds and investment-grade corporate bonds (in other words, bonds from very stable companies).

If you could afford to lose more – say, 15% to 30% of your portfolio – in a bad year, and you would feel comfortable with that level of risk, then you could allocate more money to shares.

Your investment options

There are several ways to start investing in stocks or any other regulated type of investment.

  • Stocks and shares ISA: This might be your best bet. Not only will you have to chance to grow your money through dividends and share price increases, but you will also avoid having to pay tax on dividends or on capital gains when you sell. More on tax below. Despite the name, you don’t have to invest only in stocks and shares when you open a stocks and shares ISA. In fact, picking individual stocks is an extremely difficult thing for even seasoned professionals to do well, so as a first-time investor you might want to steer away from that for now. Instead, you could invest in funds, which are collections of shares curated by a fund manager and their research team. You’ll pay a fee for this, but you’ll get a diverse portfolio of shares monitored by a well-resourced professional team. You can also buy bonds and property this way.
  • General investment account or ISA: If for whatever reason you don’t want to use an ISA – maybe you’ve maxed out your ISA allowance in cash – you could invest using a plain investment account. Most only platforms such as Hargreaves Lansdown, AJ Bell Youinvest, or Interactive Investor, allow you to open a general investment account or ISA. This is just a place to keep your investments and offers none of the tax perks of an ISA, but unlike an ISA has now upper limit.
  • Self-invested personal pension (SIPP):Pensions offer great tax benefits, with the government effectively giving you back the tax you will have already paid on whatever contributions you make. If you’re a higher earner there might be some paperwork involved, but the potential benefits are huge. Most online platforms have Sipps available.

Other investment options

  • Residential property: This is a common investment as value tends to increase over time.
  • Exotic assets: These could include wine, art, cars or indeed anything that could increase in value over time.
  • Keep in cash: If you want a low-risk option and are happy earning a low rate of interest you could keep your money in cash, although inflation will erode its buying power over time.
  • Peer-to-peer lending: These are websites that allow you to loan money to individuals or businesses for a set rate of interest. It’s possible to earn more on these loans than you would make in cash, but some people are wary of this relatively new and untested financial product.
  • Cryptocurrency: Another new and exotic asset is cryptocurrency, with Bitcoin being the most well-known. Be wary of investing in crypto – it is an exceedingly volatile asset, and notoriously illiquid, meaning it could take a long time for you to get your money out if you decide to sell.

Tax on investments

When you invest outside of an ISA, you will also pay tax on any dividend income above £2,000 in a given tax year. Any dividends above this will be taxed at 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer, and 38.1% for additional rate taxpayers.

You will also pay capital gains tax when you sell shares outside of an ISA which have increased in value. If your shares have gained more than £11,700 when you sell them, you will pay capital gains tax. If you are a basic rate taxpayer, the rate of tax you will pay on capital gains depends on how much income you made in that tax year. If you are a higher or additional rate taxpayer you will pay 20%.

Compare trading options

Table: sorted by promoted deals first
Data indicated here is updated regularly
Name Product Price per trade Frequent trader rate Platform fees Brand description
Fineco
£2.95
£2.95
Zero platform fee
Your first 50 trades are free with Fineco, until 31/12/2020. T&Cs apply.
Fineco Bank is good for share traders and investors looking for a complete platform and wide offer. Capital at risk.
IG
0% commission on US shares, and £3 on UK shares
From £5
£0 - £24 per quarter
IG is good for experienced traders, and offers learning resources for beginners, all with wide access to shares, ETFs and funds. Capital at risk.
eToro Free Stocks
0% commission, no markup, no ticket fee, no management fee
N/A
Withdrawal fee & GDP to USD deposit conversion
Capital at risk. 0% commission but other fees may apply.
Hargreaves Lansdown Fund and Share Account
£11.95
£5.95
No fees
Cashback offer: Take control of your money and transfer investments to HL – get cashback as a thank you. Terms apply.
Hargreaves Lansdown is the UK's number one platform for private investors, with the depth of features you'd expect from an established platform. Capital at risk.
Interactive Investor
From £7.99 on the Investor Service Plan
From £7.99 on the Investor Service Plan
No transfer fees or exit fees. £9.99 a month on the Investor Service Plan
Open an ISA, Trading Account or SIPP you will get £100 of free trades to buy or sell any investment (new customers only).
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. Capital at risk.
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Compare up to 4 providers

Data indicated here is updated regularly
Name Product Minimum deposit Maximum annual fee Price per trade Brand description
Moneyfarm stocks and shares ISA
£1500
0.75%
£0
Hargreaves Lansdown stocks and shares ISA
£100
0.45%
£11.95
Hargreaves Lansdown is the UK's biggest wealth manager. It's got everything you'll need, from beginners to experienced investors. Capital at risk.
Interactive Investor stocks and shares ISA
Any lump sum or £25 a month
£119.88
£7.99
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. Capital at risk.
Saxo Markets stocks and shares ISA
No minimum deposit requirement
0.12%
£8.00
Saxo Markets offers a wide access to a range of stocks, ETFs and funds. Capital at risk.
AJ Bell stocks and shares ISA
£500
0.25%
£9.95
AJ Bell is a good all-rounder for people who to choose between shares, funds, ISAs and pensions. Capital at risk.
Fidelity stocks and shares ISA
£1000 or a regular savings plan from £50
0.35%
£10.00
Fidelity is another good all-rounder, offering a good package at a decent price. Not suited for trading shares. Capital at risk.
Nutmeg stocks and shares ISA
£100
0.75%
£0
Nutmeg offers three types of portfolios. Choose the one that goes with your investment style. Capital at risk.
Legal & General stocks and shares ISA
Legal & General stocks and shares ISA
£100 or £20 a month
0.61%
N/A
Legal & General is a big financial services company which offers insurance, lifetime mortgage, pensions and stocks and shares ISAs. Capital at risk.
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Compare up to 4 providers

Data indicated here is updated regularly
Name Product Minimum investment Choose from Annual fee Brand description
Moneyfarm Pension
£1,500 (initial investment)
7 funds
0.35%-0.75%
Moneyfarm has pensions that are matched against your risk appetite, goals and planned retirement date. Capital at risk.
AJ Bell Pension
£1,000
Over 2,000 funds
0.05-0.25%
AJ Bell has two different pension options, a self managed pension and one that is managed for you. Capital at risk.
PensionBee Pension
No minimum
7 funds
0.5% - 0.95%
Pension Bee is a newbie in the pension market. It helps consolidate your pension plans into one place. Capital at risk.
Hargreaves Lansdown Pension
£100 or £25 a month
2,500 funds
0-0.45%
Hargreaves Lansdown is the UK's biggest wealth manager. It's got three different retirement options. Capital at risk.
Interactive Investor Pension
Any lump sum or £25 a month
Over 3,000 funds
£10/month
interactive investor is a flat-fee platform, which makes it cost effective for larger portfolios. Capital at risk.
Saxo Markets Pension
Saxo Markets Pension
£10
Over 11,000 funds
No annual fee
Saxo Markets gives flexibility and control over your investment strategy. Capital at risk.
Moneybox Pension
£1
3 funds
0.15% - 0.45% charged monthly
Manage your money with an easy-to-use Moneybox app. Capital at risk.
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Compare up to 4 providers

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Capital is at risk.

Should you invest?

If you have money that you can afford to put at risk, and want to try to make it work harder than it would in a low-paying cash account, and you are prepared to ride the ups and downs of the market for at least five years, you might be ready to invest. Make sure to think about what you need the money for, when you’ll need it, and how much risk you are prepared to take, and diversify your holdings accordingly.

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