Investing
Beginner's guide
Are you thinking about investing for the first time? Our guide takes you through some of the basics, then outlines how our tools can help along the way
TABLE OF CONTENTS
- What can I invest in?
- Am I ready to invest?
- What should I invest in?
- How do I invest?
Important Note
Our website offers information about investing and saving, but not personal advice. If you're not sure which investments are right for you, please speak to a qualified financial adviser.
The value of investments, and the income from them, can go down as well as up, so you may get back less than you invest.
What can I invest in?
You can invest in almost anything but the most common investments are:
- Shares
- Bonds (e.g. UK government bonds known as 'Gilts')
- Funds
- Residential property (i.e. Buy-to-let)
There are also more niche options which may require more analysis and technical knowledge, such as:
- Stock options
- Cryptocurrency
- Private companies
"Shares", "Stocks" and "Equities" are interchangeable terms for units of ownership of a company.
A share is simply a divided-up unit of the value of a company. For example, if a company is worth £1 billion, and there are 500 million shares, each share is worth £2. Those shares can, and do, go up and down in value for various reasons, including the performance of the company and the broader market health.
Shareholders have the opportunity to earn dividends, with profit distributions depending on the company’s performance and desire to either retain and reinvest profits into growing the business or distribute them to shareholders.
Shareholders typically have the right to vote on matters that directly affect the company such as executive compensation packages and other administrative issues.
Unlike shares, bonds don't give you ownership rights. They represent a loan from the buyer (you) to the issuer of the bond. The issuer agrees to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.
The market value of a bond changes over time as it becomes more or less attractive to potential buyers. The attractiveness can change if the financial health of the bond issuer (e.g. a government or corporation) increases or decreases, or if market conditions changes (e.g. if inflation rises or falls making a fixed bond interest payment less or more attractive).
A company has to make bond payments ahead of any distributions to shareholders, so you won't see as much impact when a company isn't doing as well, as long as it still has sufficient resources to make bond payments.
Bonds that are higher quality (more likely to be paid on time) generally offer a lower interest rate. Bonds issued by Governments tend to be higher quality than those issued by Corporations. Also, bonds that have shorter maturities (length until full repayment) tend to offer lower interest rates and more stable valuations.
A fund is another way to buy investments like bonds or shares but instead of buying bonds or shares directly, a fund pools together the money of lots of different investors, and a fund manager invests on their behalf.
Funds can be either active or passive:
- Active funds. An active fund is run by a fund manager who selects shares and/or bonds to include in the fund. Because you are paying for a specialist to actively select shares or bonds, these funds normally come with higher annual fees.
- Passive funds. A passive fund doesn't have a fund manager making decisions about what to buy. Instead, the fund invests according to a market index (e.g. the biggest 100 companies in the UK by market capitalisation - the FTSE 100) and hence aims to track the performance of the index.
Funds will often have a specific style or region which will guide how the underlying shares or bonds are selected for the fund. Here are some examples:
- UK companies, only invest in companies based in the UK
- Technology companies, only investing in technology companies
- Large-cap Growth, this is two limiting factors in one - only large companies which are also focused on growth rather than paying dividends
In the UK, there are two types of traditional funds - Open-Ended Investment Companies (OEICs) and Unit Trusts. The main difference investors should be aware of is that unit trusts have a different price for buying and selling the fund, whereas OEICs have one fixed price, this means investors incur effectively a small charge when buying and selling units of a unit trust, which should be taken into consideration when comparing fees (often OEICs will make up for this cost by increasing into other charges).
ETFs (Exchange Traded Funds) are similar to traditional funds, however, they are listed on an exchange and traded between investors during the day just like ordinary shares (which also means you can buy and sell them at any point the exchange in open, whereas with traditional funds you can only buy and sell once per day). Similar to unit trusts, ETFs have a differing purchase and sell price (bid-offer spread).
Am I ready to invest?
Before deciding to invest, you’ll need to review your finances. Everyone’s situation is different but here are some key things to think about.
Do you have any debt other than a mortgage?
If you have any outstanding personal debt such as a personal loan, credit card, or car loan, you should work towards paying these off before you think about investing. Paying off a loan is like a risk-free investment – if you have a credit card debt which is charged at 17%, you are getting a guaranteed risk-free 17% return when paying it off, which any right minded investor would jump at!
If you have a mortgage and are on a higher interest rate, you should focus on paying off the loan until you can either re-finance at a lower rate or it is paid off entirely.
Do you have an emergency fund?
You want to always have some cash on hand for emergencies. A good rule of thumb is to have enough to cover between 3 and 6-months expenses assuming you have no income.
In terms of how much you can invest, it again comes down to your personal finances. You can invest with a lump sum, or by setting up a regular monthly plan. In general we prefer the latter, as it can help budgeting knowing that a portion of your monthly income is automatically being invested.
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Remember that when investing you should think of it as locking away the money for the longer term, in general at least a five-year period.
What should I invest in?
Everyone’s financial circumstances are unique and so there is no one-size fits all approach to investing.
We have developed tools which aim to demonstrate some key financial concepts and strategies to be aware of when investing.
The first is the Asset allocation tool – which shows you some of the key concepts involved in picking which types of investment (e.g. shares or bonds) should go into your portfolio and how much of each type (e.g. 50% shares 50% bonds).
Research has shown that, if you have a diversified portfolio, the vast majority of your performance (in terms of volatility and returns you earn) is traced back to your asset allocation, with the selection of individual shares or bonds within each category being secondary and having far less impact.
The tool demonstrates some well-established financial principles to be aware of when thinking about your asset allocation, they are:
- If you have big financial goals in the near term, a low risk tolerance, or a short investment horizon (e.g. if you are older) you should reduce the risk of your portfolio by investing more in high-quality bonds and cash rather than riskier share investments
- You should think holistically about your asset allocation – remember your home and any pensions schemes are investments too
- You can benefit by diversifying across asset classes, including both bonds and shares in your portfolio. Bonds and shares can in some cases react differently to changes in market conditions and so can offset each other reducing the volatility of your portfolio
Asset Allocation
Which investment types might be right for you
When it comes to investing in shares or bonds we think index tracker funds are the obvious choice for most people vs share selection or actively managed funds. They have generally outperformed their actively managed counterpart over the long term due to lower fund charges, and share selection is too lengthy a process with investors needing to decide on at least 20 different shares to diversify their portfolio in the way a fund can instantly.
Remember that even though differences in fund charges can seem small they have a huge impact on overall performance over long investment periods.
When it comes to picking index funds there are some things to consider:
- You can benefit by diversifying across multiple geographies, particularly if your income is linked to the health of the economy in which case you could be double hit if you are only invested in UK companies
- You can benefit from diversifying across multiple sectors and company types
Find share indexes
Search for ESG, geography and more
Find bond indexes
Search for bond type, geography and more
A lot of online investing platforms publish free research on market trends and specific shares (if you don't have a investing platform yet we cover that below).
How do I invest?
The easiest and cheapest way to invest is online via an online dealing platform.
A platform will set up the ‘nominee account’ and hold the shares on your behalf, so you do not have to deal with any additional paperwork. You are still the legal owner of any shares or bonds you buy, but your name will not appear on the company’s share register.
What is an ISA?
Everyone in the UK over 18 has an annual £20,000 tax free interest ISA allowance (for the 2020/21 tax year, ending 5 April 2021) meaning that any interest or gains are not subject to income tax. You can use all of this in an investment ISA, or you can split it across the range of different ISAs available (e.g. cash ISAs).
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If you've invested more than your annual ISA allowance you can use a share dealing account but remember this comes with no tax benefits.
Investment ISAs
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Share dealing accounts
Compare share dealing platform fees and features