Investing for beginners
10 need-to-knows to get you started
Considering investing for the first time? Our comprehensive guide walks you through the essential 10 things to understand about investing. This includes insights on what to invest in, where to make your purchases, and how to gauge your risk tolerance.
There are no guarantees when you’re investing
Considering investing for the first time? Our comprehensive guide walks you through the essential 10 things to understand about investing. This includes insights on what to invest in, where to make your purchases, and how to gauge your risk tolerance.
The 10 need-to-knows
1 – What is an investment?
With investing, you’re taking a risk with your money. Investing differs significantly from simply depositing your money into a savings account, where it accrues interest passively. Rather than enjoying the safety of fixed returns, investing involves taking on risks. The aim is to achieve substantial gains, potentially earning much more than your initial investment, but there’s also a chance you could end up with less, resulting in a financial loss.
You can invest in almost anything, from the most mainstream popular targets…
- Shares
- Bonds
- Funds
- Government bonds (gilts)
- UK property market
… to the rather more exotic, such as…
- Farmland
- Vintage cars
- Wine
- Fledgling technology firms
- Fine art
For most, investing means putting money in the stock market
This guide primarily focuses on stock market investments, which are often people’s initial foray into investing. When you invest in the stock market, you’re essentially purchasing shares in one or multiple companies with the goal of earning a profit.
While there are various methods to invest, such as through funds (which will be discussed further), the fundamental principle remains consistent: you are taking a risk with your capital, as there’s no assurance of recovering your investment. In the worst-case scenario, you could end up losing everything.
This important message cannot be overstated:
Investing in the stock market carries inherent risks. While there’s potential to achieve modest gains or substantial profits, there’s also the possibility of minor or significant losses—leaving you with nothing at all.
While stock markets might evoke images of energetic young brokers shouting “Buy! Sell!”—with dramatic gestures of frustration one moment and triumph the next—the reality of long-term investing is quite different. It’s generally about selecting a few shares or funds, monitoring them periodically, and then redeeming them when necessary.
This is far from the high-stakes, glamorous thrill depicted in Hollywood movies where fortunes fluctuate rapidly. Thankfully, the actual process is more grounded.
For most people, successful investing involves maintaining a steady and composed approach to the stock market. The goal is to achieve solid returns that can endure market downturns and benefit from upward trends.
2 – How do stock markets work?
A stock market is like a supermarket where you can buy or sell shares. To put it simply for the sake of this guide, a stock market is a venue where buyers and sellers converge to trade shares—each representing a small ownership stake in a company that’s listed on an exchange (as explained below).
But why are shares created? To expand and ideally enhance profitability, companies provide investors with the opportunity to support them financially.
This is where the stock market comes in: in exchange for your investment, a company grants you a share in its future potential. This means you own a small portion of the company and become a ‘shareholder.’
Additionally, you can choose to trade your ownership stake with anyone interested in purchasing it.
Why does a company share price rise and fall?
The initial share price is determined by the company issuing them, but daily fluctuations can be influenced by various factors such as disappointing financial performance, the state of the UK’s economy, and investor ‘sentiment’. Sentiment reflects the overall mood or outlook of investors; for instance, if market players anticipate difficulties for a company, its share price might decrease. Conversely, if a company’s growth doubles within a year and future prospects appear bright, its share price is likely to increase.
In the UK, billions of pounds worth of shares are traded every day on the London Stock Exchange. Investors have the opportunity to trade in approximately 3,100 different companies. Shares are organized on an ‘index’, with the largest being the FTSE 100, which includes the 100 largest companies in the UK.
How does a company get listed on the stock exchange?
In industry terminology, ‘going public’ refers to the process of listing a company on a stock exchange, making its shares available for purchase by the general public. This step involves entering into an agreement.
In exchange for accessing investors’ funds, known as ‘capital,’ which are used for hiring staff, developing products, and expanding operations, a company assumes new obligations towards its investors, employees, and the market.
To achieve a public listing, a company must engage an advisor, typically an investment bank, to create an ‘admission document.’ This document outlines the company’s reasons for going public, its expansion goals, and its long-term strategy. Once there is sufficient interest from potential investors, an initial share price is determined, and trading begins.
3 – What returns should I expect?
You can make money, but you can also lose it all – there are no guarantees. What kind of growth should you anticipate from investing? This is a common question among investors—after all, the potential for growth is a key motivator for putting money into the stock market. To be straightforward, we can’t predict your exact returns (and anyone who claims they can is likely being dishonest). However, we can offer a glimpse into what is possible.
Fixed-rate savings bonds represent one of the most reliable methods to see growth on your savings. By committing your money for a predetermined period, banks will provide a fixed interest rate, set at the beginning and guaranteed until the bond matures. Despite this reliability, these bonds often struggle to keep up with inflation, regardless of whether interest rates are high or low. Consequently, there’s a strong incentive to explore other investment options for better returns.
Naturally, everyone would like to achieve a 10% return on their investment, but this usually requires taking an appropriate level of risk. We’ve mentioned this before, but it bears repeating…
Caution: Investing carries risks, and there’s a possibility that the value of your investment may decrease. Simply put, you might lose everything you invest. The phrase ‘Past performance is no guarantee of future results’ is a reminder that there’s no assurance your investment will succeed.
To illustrate the market’s variability, consider the S&P 500, a prominent stock market index comprising 500 major US corporations. Globally renowned, it has delivered an average annual return of 10.7% since its inception in 1957.
Nonetheless, this return rate has not been consistent from year to year. For instance, 2019 saw a remarkable surge, with the S&P 500 achieving an annual return of 31.5%. Conversely, during the 2008 financial crisis, the index plummeted, resulting in a -43% return over the 12 months ending in February 2009.
These fluctuations underscore the importance of long-term investing and reinforce our fundamental principles…
ALWAYS remember the five golden rules of investing:
- The higher the potential return you seek, the more risk you’re likely to encounter.
- Avoid concentrating all your investments in a single area. Diversify across various companies, industries, and regions to mitigate your risk – this means spreading your investments widely.
- If you’re saving for the short term, it’s prudent to avoid high-risk investments. Ideally, aim to invest for a minimum of five years. If that’s not feasible, keeping your money in a savings account might be the better option.
- Regularly assess your portfolio. Some investments might underperform, or your risk tolerance might change over time. Without regular reviews, you might end up holding investments that are losing value.
- Stay calm and don’t act impulsively. Investment values fluctuate, and it’s important not to make buy or sell decisions based on market trends or peer pressure.
4 – Is investing right for me?
Only you can decide if investing is right for you. Whether you’re about to purchase your first share or select a stock market fund for the first time, it’s crucial to ask yourself why you’re considering an investment.
Historically, stocks and shares have generally yielded better returns compared to money kept in savings accounts over the long term.
However, this historical trend doesn’t guarantee future performance. Your decision to invest should be guided by your individual circumstances. For instance, if you’ve grown frustrated with how inflation diminishes the value of interest from savings accounts and are willing to accept some risk for potentially higher returns, investing might be a suitable path.
Alternatively, if you’ve carefully planned to save £10,000 over the next ten years to cover your children’s school fees, investing could help you reach that goal. In both scenarios, investment options could play a key role in achieving your financial objectives.
Be careful if somebody offers you advice
If a friend has recommended a stock tip at the pub, or a family member or acquaintance has advised you to “put a few quid” into a trending stock or fund that’s currently, in industry lingo, “doing exceptionally well,” it’s wise to reconsider unless you have extra money that you can afford to lose.
Take a good, honest look at your finances
If you’re finding it difficult to manage credit card payments or have taken on a costly remortgage with minimal savings, it might be time to reassess your financial strategy.
Although this advice may seem straightforward, the appeal of quick returns in the stock market can often obscure the reality of your financial situation.
If this resonates with you, it’s wiser to focus on addressing your personal debts rather than risking exacerbating them: consult our Debt Help guides for support. Alternatively, if you determine that a savings account would better suit your needs, explore our guides on investing in a cash ISA or top savings accounts.
5 – How much should I invest?
You should never invest more than you can afford to lose. A common misconception is that substantial wealth is necessary to invest in the stock market – this is not the case. In fact, smaller investors who regularly contribute modest amounts often see better results than those who invest a large sum all at once.
A good rule of thumb is to invest only what you can afford to lose. This caution is important because if the stock market experiences a downturn, you could risk losing a significant portion of your investment if you have too much money tied up. Financial experts typically recommend a minimum investment horizon of five years. This timeframe provides ample opportunity to weather market fluctuations and potentially recover from any losses.
It’s crucial to consider your financial situation before investing. If you have minimal savings and significant debt, stock market investments might not be suitable for your financial health. However, if you have a financial cushion and are disillusioned with low savings account interest rates being eroded by inflation, investing a portion of your savings (not needed for day-to-day expenses) in the stock market might be a viable option to seek higher returns.
Many investment funds offer the option to invest a small amount regularly – often around £25 a month. This approach not only helps to gradually build a larger investment over time but also fits more comfortably within your budget.
6 – How do I invest in stocks?
The cheapest way to invest in stocks is through a website, often called a platform. You can acquire shares or funds from a variety of providers, but for the best deals, you’ll typically want to go through an online platform.
This process involves two main steps. First, you need to select the platform where you’ll purchase your shares or funds. Next, you decide on the specific investments you want to make.
Think of it like buying bread. You first choose the bakery (the platform) and then select the type of bread you want to buy (your shares or funds).
Generally, you’ll incur costs for using the platform as well as for purchasing the investments. To extend the analogy, imagine each bakery charges different prices for its shopping bags.
Some bakeries offer cheaper bags, while others might have higher-priced bags but sell their bread at lower prices. To get the best value, you need to balance both factors—bakeries and their bag costs.
Remember, the platform fee is charged by the platform you select, while the company managing your shares or funds will also have its own service charges.
A stocks & shares ISA is a good place to start your investment journey.
7 – A share is a small unit of the value of a company
A share represents a fractional ownership of a company’s value. For instance, if a company is valued at £100 million and has issued 50 million shares, each share would be valued at £2. The value of these shares can fluctuate for a range of reasons.
Companies release shares to generate funds, and investors (like yourself) purchase shares because they have confidence in the company’s potential and wish to benefit from its success. For a comprehensive overview, check out our Shares guide, and keep in mind that your choices will depend on your risk tolerance.
Shares can pay dividends too
You can earn money from investing in two primary ways. The first is through capital gains, where you make a profit when you sell shares that have appreciated in value. The second is by receiving dividends, which are similar to the interest earned on a savings account. When a company earns a profit, it may distribute a portion of that profit to shareholders, either regularly or as a one-time payment. Additionally, like interest on savings, dividends come with a tax-free allowance. Each tax year, the first £1,000 of dividends you receive is tax-free, although this allowance will decrease to £500 annually starting April 2024. For more details, refer to our comprehensive guide.
8 – What is a fund?
A fund is where lots of investors pool their money together to invest in lots of different shares. A fund offers an alternative approach to purchasing shares. Rather than directly acquiring a portion of a company yourself, you entrust your money to a professional manager. This manager combines your funds with those from other investors to acquire a bulk of shares in the stock market.
Funds are structured into ‘units,’ so to invest, you’ll need to purchase these units, which fluctuate in price daily.
The price of each unit depends on market demand for the fund. For example, if you invest £1,000 in a fund where each unit costs £2, you’ll obtain 500 units. If, after six months, the value of each unit increases to £2.50, your investment would grow to £1,250.
Funds can invest in almost anything – countries, energy, gold, oil, even debt
Every investment fund revolves around a specific theme, which could encompass anything from geographical regions (such as European or Japanese markets, or emerging economies) to sectors (like green technologies, utilities, or industrial firms), or even investment types (such as stocks, corporate bonds, or government securities). The choice you make will largely depend on your risk tolerance.
For instance, if a fund targets “early-stage biotech firms in emerging markets,” it involves a high level of uncertainty. This means you could potentially experience significant gains if the investments perform well, but conversely, you could face substantial losses if they don’t.
On the other hand, a fund that tracks the FTSE 100 would be quite different. It invests in the top 100 companies in the UK, making it a more conventional option. Although there can still be notable fluctuations, they are generally less dramatic compared to more specialized or high-risk funds. For a detailed overview, refer to our Funds guide.
9 – Investing in an ISA should ALWAYS be your first port of call
In the UK, every adult over 18 is entitled to an annual ISA allowance of £20,000, allowing you to enjoy tax-free gains from the stock market.
You have the flexibility to allocate the entire £20,000 allowance to a stocks & shares ISA, or you can divide it between a cash ISA and a stocks & shares ISA.
For a comprehensive understanding of how this works, check out our complete guide. Additionally, if you’re saving for your first home, be sure to explore our Lifetime ISA guide.
10 – How do I research what to invest in?
If you’re uncertain about which investment option to choose or worried about potentially assuming excessive risk, there are numerous free websites offering comprehensive details on funds and the stock market.
Below are our recommended resources for obtaining current, thorough, and accessible information on stocks and funds, along with tools to monitor their performance.
The website offers a wealth of free resources about funds and is designed for easy navigation. Whether you choose to purchase funds or not, you can still take full advantage of the information available.
You can search for shares or funds based on their name, the company, or sector to get more details. Alternatively, you might start by exploring information on the investment sector that piques your interest, such as Asia, the US, smaller UK companies, or the ‘Equity Income’ sector.
For each sector, you can access summaries of its performance over various time frames, read reviews of specific funds within that sector, and understand how the sector functions.
Its research team have compiled the Wealth Shortlist – a collection of funds selected for their performance potential – a great place to get started.
Interactive Investor offers a comprehensive array of resources, including introductory guides on various investments and a glossary of terms to assist with your investment research.
Notably, their research team compiles and displays monthly tables featuring the top 10 performing funds, the bottom 10 performers, and the 10 most traded funds on their website.
By creating an account, you’ll gain access to a more detailed technical insights section. Once logged in, you can select particular funds to analyze their performance and identify any trends that have developed over time.
Bestinvest’s research team evaluates over 85,000 funds and produces monthly reports on their findings.
The website offers an extensive array of free downloadable guides, covering topics from identifying underperforming funds to discovering highly-rated funds and understanding how stocks & shares ISAs and other investment products function.
The Premier Guide by Bestinvest provides a comprehensive overview of what they consider the top funds. It explains their selection and rating process and includes detailed information on leading performers.
Additionally, the site features stock market news and a tool to search for fund managers based on their performance and track record.
The market data section on this website provides detailed lists of FTSE companies and enables you to track performance over various timeframes, from a single day to three years.
You can examine which companies have experienced gains or losses, or review changes across entire industry sectors. The data is refreshed every 15 minutes, ensuring you receive the most current market insights.
Additionally, the website features a news section categorized into news, commentary, and fund research, offering ample reading material to help you get well-acquainted with the market before diving in.