How to start investing

How does investing work?

At its most simple, investing is basically buying something you believe will be worth more in future. If the value of your investment goes up and you choose to sell it, you’ll have made money. If the value of your investment falls and you choose to sell it, you’ll have lost money. It’s completely normal for the value of your investments to fluctuate from one day to the next.

You can invest in all sorts of things, from whiskey and wine to vintage cars and gold. But if you’re a new investor, you might want to stick to more mainstream assets such as shares, bonds and funds. 

These tend to be more accessible and affordable than more niche types of investment such as art and collectibles. They’re also less risky too. 

But what are shares, bonds and funds and how do they actually work?

Shares: A share is a piece of ownership in a company.

Bonds: A bond is when you lend money to a government or company and they (usually) pay you back with interest.

Funds: A fund is a collection of investments and can include shares, bonds, property, cash and commodities.

What are the pros and cons of investing?

👎 Con: Investing won’t help you get rich quick

If you spend any amount of time on social media, you’ve probably seen money influencers talking about how much money they’ve made in the stock market while promising to help you do the same — often for a fee. Even if a content creator’s claims are true, there’s no guarantee that you’ll have the same success. 

In fact, the most successful investors tend to be those who’ve consistently invested their money over a number of decades. For example, 99% of Warren Buffet’s net worth - one of the most well-known investors in the world - accumulated after he was 65 years old. His current worth is estimated to be $132 billion, but that wealth has been compounding over time because he’s been consistently putting money into investing since he was 11. 

Some will have had a lot of capital to begin with, making it easier to grow their money and take risks that the average person can’t. So if you start from scratch today and hope to have a Rolex in a year’s time, you may be setting yourself up for disappointment. But if you consistently invest, even a small amount of money, over a number of years, you are likely to see a return on your investments. 

Remember, investments can go up as well as down. Past performance is not necessarily a guide to the future. 

👍 Pro: You can build wealth over time

Although investing in the stock market won’t make you rich overnight, it’s one of the best ways to build wealth over a longer period of time. For example, if you 

If you start investing today, contributing £200 a month for 20 years, your portfolio could be worth £81,491 by 2044 if you have an annual growth rate of 5%. You’ll have invested just £48,000 of your own money during this time and you’ll have seen your portfolio grow by £33,491. And that’s with a modest investment growth - over the last 10 years the average return on Stocks and Shares ISAs has been 9.64% annually.

Make the same monthly contribution for 30 years and the results are even more impressive! If we assume the same 5% annual growth rate, your portfolio could be worth £163,739 at the end of this period, despite having contributed just £72,000 of your own money during this time frame. 

Learn more: Do I need a financial advisor?

👎 Con: There are no guarantees

Although investing can be a great way to build longer-term wealth, there are no guarantees. The value of your investments can go up and down over time and there’s no guarantee you’ll get back what you put in. Unlike a Cash ISA or Cash Lifetime ISA, stocks and shares are not authorised by the FCS, so are not covered by the Financial Services Compensation Scheme (FSCS). 

👍 Pro: You can reduce the risk with diversification

One of the biggest mistakes that new investors make is putting all their eggs in one basket aka investing all their money in just one or two companies. If the companies you’ve invest in go bust, you could lose everything.

Thankfully, you can reduce the risk by building a diversified portfolio made up of a wide variety of investments from multiple industries and countries. The most effective and affordable way to do this is by investing in funds, rather than individual stocks, as it helps to spread the risk of your investments across lots of companies. 

Learn more: Top 5 financial advisors in 2024.

👍 Pro: Investing can help you beat inflation 

Investing is much riskier than keeping all your money in cash, but over long periods of time it tends to be more effective at reducing the impact of inflation. 

When interest rates are low, the return you get on your savings is unlikely to keep up with the rising prices of goods and services. No matter how much money you save each month, your purchasing power will fall over time.

With the Bank of England’s base rate currently standing at 5.25%, savings accounts are currently more rewarding than they have been in previous years. Back in November 2008, the base rate fell to 3% as a result of the global financial crisis. It continued to fall below 1% for more than a decade, reaching lows of 0.10% in March 2020. It wasn’t until the end of 2022 that we finally saw the return of interest rates of 3.50% and above.

Unfortunately, the inflation rate can still outpace the interest rates we get on our savings. In April 2023, for example, the inflation rate stood at 8.7% — much higher than the BoE’s base rate at the time, 4.25%. 

Learn more: Are interest rates going down?

How to start investing

Now you know how investing works and the risks to be aware of, how do you actually start?

The good news is that you don’t need to get a degree in finance or a job in Canary Wharf. Investing can be as simple as opening a stocks and shares ISA, answering a few questions to determine how much risk you’re comfortable with, and automating payments to your account. 

There are a few different types of investment accounts to choose from:

Stocks and Shares ISA

A Stocks and Shares ISA lets you invest in the stock market without paying tax on your profits. You can invest up to £20,000 in your stocks and shares ISA each tax year or split your ISA allowance across different ISA types. 

Stocks and Shares Lifetime ISA

A stocks and shares Lifetime ISA (LISA) lets you invest up to £4,000 a year for your first home or retirement. The government will boost your own contributions by 25%, so you could benefit from up to £1,000 in bonuses each year that you max out your account. 

If you want to use your LISA to purchase your first home, remember that since the value of your LISA investments can fluctuate from one month to the next and there’s a chance you could lose money. So you might feel more comfortable saving a deposit in a Cash Lifetime ISA. 

Learn more: What is a Lifetime ISA?

General investment account

Stocks and Shares ISAs and LISAs aren’t the only way to invest. You could open a general investment account instead. You’ll still be able to invest in the stock market, but your investment gains may be taxed and this can affect your profits.

No matter which type of investment account you choose, ask yourself these questions before you get started:

• How much money are you able to invest now? It’s okay if the answer is zero! Read our tips on how to start saving money. 
• How much can you afford to invest on a monthly basis? Making regular contributions can help to reduce risk and turn investing into a habit.
• Can you afford to lose the money? Only invest money you can afford to lose (not your emergency fund, then). 
• How much risk are you comfortable with? The bigger the potential reward, the greater the possibility of losing money.