What is investing? A guide for beginners.
Discover the basics of investing, from stocks and shares to alternative investments. Learn how investing could help grow your savings, understand the risks involved, and find the right investment strategy to potentially achieve your financial goals.
At its simplest, an investment is when you buy something with the hope of it increasing in value. It might be a house, a car, stocks and shares, or even art or jewellery – all these things can be referred to as an investment.
Investing could be valuable because it may help your savings grow faster than leaving them in a standard savings account. Over time, inflation can erode the value of cash, so investing offers the potential for returns that keep pace with or even outstrip the cost of living. Investing always carries some level of risk – the value of an investment can go down as well as up and returns are not guaranteed.
Many people in the UK are already investors, even if they don’t realise it, through workplace pensions or similar schemes. That means it’s important to understand how investing works and whether further investment could help you potentially reach your financial goals.
Understanding stocks and shares
Stocks and shares are one of the most well-known types of investment. These terms are used to describe units of ownership in a company, which is why they’re also called ‘equities’.
When you buy shares, you’re essentially buying a piece of that company, and your investment’s value will rise or fall depending on how the company performs.
There are two main ways to make money from shares:
Capital appreciation: The share has increased in value over time. When the investor sells their share, they hope to make back what they invested, plus an extra ‘return’.
Dividends: Some companies distribute a portion of their profits, known as a dividend, in return for holding shares. Dividends are usually paid to shareholders each quarter or bi-annually.
Like any investment, stocks and shares come with risks. A company’s value can drop, meaning you may have to sell at a loss. Similarly, dividends are not guaranteed and depend on a company’s financial performance.
Types of investments
Investing isn’t limited to stocks and shares. There are many other options available, each with its own risks and rewards.
Here are some of the common types of investments:
Cash: Generally the safest and simplest kind of investment, where your savings are placed with a bank, which pays a small amount of interest in return.
Funds: A collective investment where your money is pooled with others’ to invest in a mix of assets. This helps spread your risk across multiple investments, which is known as diversification.
ETFs: Exchange-traded funds trade on stock exchanges, similarly to stocks and shares. Each ETF covers many different companies, such as the top performers in a region or sector.
Bonds and gilts: Fixed income investments where you lend money to a government or company in return for regular interest payments as well as the repayment of the initial amount.
Alternative investments, such as property, private equity, and commodities, may suit different investors depending on their needs. It’s important to remember that investments that have the potential for the highest returns also typically carry the highest risks. A financial adviser can help you understand these risks and invest according to your needs.
Finding the right investment for you
Every investment has its pros and cons, so it’s essential to choose assets that align with your financial goals, investment timeline, and your willingness and ability to accept risk. For example, are you saving for a long-term goal such as retirement, or do you need the flexibility to access your money in the short term? Your objectives will help guide your investment choices.
Pre-investment considerations
Before you begin investing, it’s important to ask yourself a few key questions:
What are my financial goals?
How much risk am I willing to take?
Do I need access to my money in the short term, or can I invest for the long term?
Am I comfortable with managing my investments, or do I need professional advice?
You don’t always need to start with a large sum; it’s all about what you feel comfortable committing.
If you're unsure and would feel more at ease discussing these questions with an adviser, we're here to help. Book an appointment with an adviser at our sister company, Schroders Personal Wealth. A financial adviser can help you answer these questions and create an investment plan tailored to your needs.
Important information
This article is for information purposes only. It is not intended as investment advice.
Fees and charges apply.