With interest rates at record lows and rising inflation, investing is a chance for your savings to grow while you’re not using it, rather than lose value collecting dust in a savings account (or under your mattress). Poor interest rates are the main reason why people choose to invest, according to a Finder survey in 2020.
Investing might be suitable for you if you’re prepared to take on some risk and don’t need to access the money for a few years (preferably at least 5). This gives you the potential to make higher returns, although you’d need to be aware that the value of your investments could go down, as well as up.
An investment is something that you might buy with the hope of generating some sort of value. The term comes up in all walks of life — you might choose to “invest in yourself” by doing a degree or furthering your education, with the hope to have better earning potential in the future. A baker might decide to invest in a new type of mixer or oven, with the hope of increasing their output and selling more products, or saving time and reducing costs. You might also decide to invest in something with the hope of selling it for more later — this could be fine wine, art, classic cars, or some sort of financial instrument or asset, such as stocks, bonds and property.
The latter is the type of investment that we’re talking about. These instruments are typically bought and sold with stock brokers that can be accessed online and through mobile apps.
There are four main asset classes. These are:
When you invest in a company, you might purchase a number of shares of it. These are, often very small, portions of the company — kind of similar to going halves on a TV with your housemate. You can also invest in fractional shares, which are, as the name suggests, fractions of shares.
If the company does well, the share price might rise, which means you can sell the shares you bought for more money. If it doesn’t do well, it might fall.
As well as this, the companies you’re invested in might choose to pay dividends. This is where the company shares some of its profits with its shareholders. Some investors choose to invest in specific dividend stocks with the hope of making a regular dividend income.
Sometimes, a stock movement may have nothing to do with how the company is performing. In early 2021, we saw the share price of GameStop rise dramatically because of some talk on a Reddit forum.
There are a few different ways to invest. The most popular options are ready made portfolios and creating your own portfolio.
Ready made portfolios are often offered by robo-advisors, but some traditional investment platforms offer them too. These providers have a range of portfolios to choose between, typically organised by risk, although we’re commonly seeing specific portfolios for different categories, such as technology or sustainability.
The portfolios are made up of a range of investment types, such as company shares, bonds and often a certain holding of cash.
Creating your own portfolio is a lot more DIY. You would choose all of your own investments and decide what sorts of companies or investment types you fancy. This is more complicated, but it can give you plenty of control.
You can mix the two by investing in funds. Funds are sort of like ready made portfolios — they’re made up out of different types of investments. They often have a fund manager, which is a professional that changes the holdings based on the goals of the fund. You could choose to invest in some companies and some funds to diversify your portfolio.
Here’s how to get started:
There are some things you’ll want to consider before you get started — here are some of the key ones.
It is important to have a goal of why you are investing.
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 or general savings?
This will help determine your risk level and where you should be investing your money.
If you think you’ll need the money for a crucial event within the next few years, such as a new house or a wedding, then investing money in the stock market may not be wise.
This is because prices rise and fall on a daily basis. You may be forced to sell at a time when markets are down, leaving you at risk of getting out less than you put in.
The longer you invest, the more chance you have for returns to compound and your overall wealth to grow. Your investments will also have longer to ride out the ups and downs of the stock market.
Often, people think that you have to have a lot of money to consider investing, but there’s no real minimum amount. Some platforms allow you to start investing with just a few pounds.
But ideally you want to keep growing your investment pot so you can potentially make even more money.
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. However, inflation can cause it to fall in value.
On the other hand, with shares you have no idea how much their price will fluctuate. This is why they are seen as the riskiest mainstream asset.
Generally, the longer you are prepared to invest your money, the higher the risk you can afford to take.
So if you are expecting to retire in 30 years, you would want your money invested in a high proportion of shares.
Buying shares in one individual company is more risky than putting your money in a fund that invests in potentially hundreds of companies.
If you put all your savings in one company which later goes bust, you could lose everything. But if you invest in a diversified fund, the chances of you losing money are likely to be lower.
Different types of investment accounts have different benefits — for example, ISAs let you invest without having to pay tax on your profits. Personal pensions get you tax relief from the government (but have the downside of the money being locked away until you’re 55.
A general investment account is effectively a standard account without any tax benefits. These are usually chosen by investors that have already used their ISA allowance (see below). Unlike an ISA, general investment accounts have no upper limits.
ISAs allow you to invest up to a certain amount in each tax year known as the annual allowance) without having to pay anything in capital gains tax. The ISA allowance for the 2024/2025 tax year is £20,000.
ISAs are really just tax wrappers for investment accounts, so you can choose a whole range of different investment types, including shares, bonds, ready made portfolios and funds.
If you’re interested in investing in this type of account, you can compare stocks and shares ISAs with our guide.
Pensions offer great tax benefits, with the government effectively boosting your contributions by 20%. If you’re a higher earner, you can also claim further tax relief through your tax return.
Most online platforms offer SIPPs.
There is a wide range of investment choices in a SIPP. Like with a stocks and shares ISA or general dealing account, you can invest in funds or individual public companies.
The best way is to get started. Once you start investing, you’ll learn more about the process and what works for you – and what doesn’t. You don’t have to start with real money — loads of providers offer demo accounts which let you invest with virtual money.
Once you do dive in, you’re likely to make a mistake somewhere along the line, but that’s all part of the learning process. The key is to make sure any money you invest is money you can afford to lose.
There are some great resources for investors — Twitter can be helpful to read about other people’s thoughts, as well as Reddit (although the latter is a lot more anonymous). You can keep an eye on the news to see which companies are performing well, and set up alerts. You can also have a look at our best shares to buy now page.
Your chosen provider might also have news and research available. Make use of these to see which stocks are rising or falling and whether any companies have dividends or earnings reports coming up.
If you’re looking for a more varied range of investments beyond funds and shares, you could consider the below. Some of these can be considered riskier than others— for example, property investments can make good returns, but you’d need to consider that a large chunk of your investments are in that one asset. Cryptocurrencies have become more popular in recent years, but aren’t yet regulated in the UK.
You may choose to become a buy-to-let landlord. You would earn an income from rent, and would make money if you sell the property for more than you paid for it.
These could include wine, art, cars, handbags or indeed anything that could increase in value over time.
If you want a low-risk option and are happy earning a low rate of interest, you could keep your money in cash. However, inflation will erode its buying power over time.
Peer-to-peer platforms allow you to loan money to individuals or businesses for an expected rate of interest. But returns are not guaranteed as the borrower may not be able to pay back the money. The market is also not covered by the Financial Services Compensation Scheme (FSCS).
Cryptocurrencies have boomed over the past few years, with Bitcoin being the most well-known digital currency. But be wary of investing in crypto – it is an exceedingly volatile asset and prices fluctuate enormously. Regulators around the world have been clamping down on crypto, and you may also find it difficult to sell your crypto.
You’ll pay a fee when you invest money.
Fees will include:
Fees vary by providers and the type of investment. Fund charges can be as low as 0.1%, so if you are paying more than 1% look carefully to see if you are getting value for money.
You might have to pay tax on your profits, here are some of the key charges.
Dividends are the way companies distribute profits to shareholders. When you invest outside an ISA, you will pay tax on any dividend income above £500 per tax year.
Any dividend payouts above this will be taxed at:
You will pay capital gains tax when you sell shares outside an ISA which have increased in value.
If you have made more than £3,000 when you sell your investments, you will pay capital gains tax.
If you are a basic rate taxpayer, you’ll pay 10% on gains above £3,000.
If you are a higher or additional rate taxpayer, you will pay 20%.
Find out more about capital gains tax rates.
If you have money that you are setting aside for long-term plans, then it might make sense to consider investing. With cash interest rates so low, saving money in a bank account is unlikely to get you a decent return over time.
But if you need the money in the next few years, then investing your money might not be worth the risk and a cash savings account may be a more suitable option.
Investing can be a great way to get engaged with your savings. You don’t need a financial advisor to get started – you can do your own research and pick your own investments.
There are thousands of investments to choose from, and this can sound overwhelming, but you can pick ready-made portfolios where investment choices are made for you.
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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. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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